How Puerto Rico’s Fiscal Troubles are Impacting its Hurricane Recovery Effort

Rebecca Frost

October, 2017

The aftermath of hurricanes Irma and Maria has left the United States (U.S.) territory of Puerto Rico in shambles. Roads were flooded, houses were without roofs, and the island’s electrical grid had been severely damaged. As of November 4th, only 38% of the island’s residents had their power restored, despite the later of the two hurricanes – Maria - making landfall on September 20th.

Puerto Rico’s slow recovery is the result of a variety of problems; some pre-existing, others have emerged during the disaster relief process. The lengthy repair timeline for the island’s electrical grid is deeply rooted in the island’s existing financial troubles. The island is currently $74 billion in debt, mostly owed to Wall Street Banks.

The wide-spread poverty, a shrinkage in its tax base from migration the mainland United States, high Medicaid dependence, and debt from its public utility companies are commonly cited as main causes of the crisis.

The Puerto Rico Electric Power Authority (PREPA), has been a significant player in both Puerto Rico’s debt crisis and its recovery from the hurricanes. PREPA is currently $9 billion in debt and has filed for bankruptcy under PROMESA - the legislation passed in the twilight of the Obama administration that allows Puerto Rico’s government to file for forms of creditor protection similar to bankruptcy. Puerto Rico’s status a territory instead of state prevents it from filing for creditor protection in the way sub-national governments typically do.

PREPA’s situation is largely the result of a long-term pattern of poor management. A 2015 report by Synapse Energy Economics, a think-tank commissioned by the Commonwealth of Puerto Rico Energy Commission, found that PREPA’s grid was very fragile and becoming increasingly unreliable, PREPA was operating under significant cost constraints that impaired its ability to fulfill its mandate, and that its general financial management process was opaque, badly managed, and operated with little oversight.  

The issues described in this pre-hurricane review contributes to the slow recovery of Puerto Rico’s electrical system. 

The outdated nature of the grid has been a source of significant challenges and delays in its restoration. Prior to the hurricanes, PREPA needed $4 billion to overhaul its electrical system. The islands electrical grid was known to be fragile and outdated even before Hurricane Maria hit and wiped out the electrical transmission and distribution system. The lack of funds for repairs meant that most maintenance was reactionary, meaning few updates or regular maintenance activities were carried out. For example, the median age of a power generation station in Puerto Rico is 44 years; the U.S. industry standard is 18 years. This makes repairs difficult because it takes a long time to acquire replacement parts to repair the older facilities as most manufacturers consider them ‘specialty parts’.

PREPA’s questionable contract procurement methods have also played a role in delaying the restoration of the island’s power. Whitefish, a Montana-based firm hired by PREPA to conduct repairs to powerlines has been the subject of vast controversy over the past few weeks.

The contract was not awarded through a competitive bidding process, had terms that some viewed as illegal, charged rates considered by some commentators to be exorbitant, and was not approved by the Federal Emergency Management Agency (FEMA) of the U.S. - despite language in the contract that indicated FEMA had approved it.

There was some suspicion that cronyism was involved in the awarding of the contract, as Whitefish was based in the hometown of President Trump’s Interior Secretary Ryan Zinke and had once employed Zinke’s son as an intern. No concrete evidence has surfaced for this claim. Questions about why PREPA pursued this contract instead of asking for support from the electric authorities of other jurisdictions, as is common practice following a disaster, have also been raised.

 On October 29th, Puerto Rico Governor Ricardo Rosselló called for the cancellation for the Whitefish contract and reached out to the states of Florida and New York for support with repairs to the electrical system. The governors of both states have expressed a willingness to support Puerto Rico in is electricity restoration efforts. PREPA has now terminated its contract with Whitefish. The cancellation is expected to delay repairs another 10 to 12 weeks.

Prior to the onset of hurricanes Irma and Maria, a debt restructuring deal between PREPA and its creditors, primarily large mainland U.S. banks, although, Canadian-based Scotiabank is included, was rejected by the fiscal oversight created for Puerto Rico by PROMESA. In the aftermath of the hurricanes, a new deal that includes a new $1 billion loan to help with recovery efforts was proposed alongside the same conditions of the previously rejected deal. While the loan may be useful in the sense that it helps to enable recovery efforts, it should be noted that this deal is less generous and is of greater benefit to PREPA’s creditors than the previous. The deal was rejected by the island’s fiscal oversight committee.

There has been strong resistance to calls for leniency and debt forgiveness in light of the damage done by the hurricanes from Puerto Rico’s creditors. When contacted for statements on the matter by The Intercept, only four out of 51 creditors offered a statement and said that they had given money to hurricane relief in Puerto Rico and other Caribbean islands in the form of donations to disaster relief organizations.

The ongoing electricity crisis in Puerto Rico is a strong reminder of how fiscal difficulties may have a serious impact on the lives of citizens. While battles over contacts and debt restructuring play out, thousands of Puerto Ricans remain without power. Journalists have documented people who must bathe and wash clothing in local rivers and who are unable to contact with relatives living in other parts of the island to confirm their safety. Overwhelming reliance on generators, which can cost thousands of dollars has exposed an yawning gap between rich and poor households. While contracts must be allocated responsibly, and debt must be restructured in a way that is favourable to the island’s long-term fiscal health, the wellbeing of the Puerto Ricans must be prioritized as the island works toward rebuilding its embattled infrastructure.