Well before Hurricanes Irma and Maria delivered a one-two punch to the U.S. territory of Puerto Rico and the wider Caribbean, Puerto Rico has had its fair share of dubious comparisons. From being likened to the Greece of the Caribbean, due to a decades-long financial tailspin yielding an eye-watering $73 billion public debt burden, to a colonial backwater, which like Washington, D.C., has a political voice but no vote on Capitol Hill, resulting in an enormous and persistent mass exodus of more than 600,000 people. There was one comparison, however, which offers a counter-factual analysis of the island’s long-range prospects. Could Puerto Rico become the Singapore of the Caribbean, as hedge fund investor John Paulson, who has invested more than $1 billion on the island, has asserted. If so, what foundations need to be in place in order to achieve this vision?
That the Singapore of the Caribbean vision has been drowned out by stagnant flood waters, debris and cries for help emanating from darkened houses and darkened hearts is not surprising. Puerto Ricans have endured nightmarish human suffering. Puerto Rico has played host to the longest running blackout in U.S. history, passing the 6-month mark with power generation now at 90% (and the next hurricane season is 3 months away). The official figures on power generation obfuscate the more important metrics of power distribution, in particular as it relates to “last-mile” reach in rural and mountainous communities, many of which are still largely cut off. Herein, lies the first cornerstone of turning Puerto Rico’s long-range fortunes around and building a Singapore-like economy in terms of competitiveness. Right-sizing the government’s balance sheet of non-core energy-related assets and activities is the key to economic recovery.
Bad things happen in the dark and Puerto Rico’s faltering energy grid and single-cylinder energy matrix, chiefly reliant on costly, dirty and aged diesel turbines, is no stranger to catastrophic failures. Indeed, in 2016 an island-wide blackout due to sub-system failures lasted 3 days. The island’s public utility PREPA, contributes approximately 15% of the island’s debt burden, or around $11 billion. Simply put, there is no investment more important to Puerto Rico’s future than diversifying, privatizing and strengthening the island’s energy infrastructure. Doing this is admittedly difficult as any private sector energy player (large or small) is in effect dealing with a functionally bankrupt counterparty. Despite the difficulties, a modern and resilient energy matrix is the cornerstone of a competitive Puerto Rico. Performing extractive surgery on PREPA, for which the island’s government has called for privatization efforts, begins to remove the cancer darkening Puerto Rico’s homes, and weighing down its economy.
Perhaps more urgent than performing laser-surgery on PREPA, is the wholesale clearance of the legal and regulatory underbrush that ranks Puerto Rico at 64 (down 13 places from 2016) in the World Bank’s ease of doing business rankings, where the U.S. ranks at number 6. While Puerto Rico’s government has made strides in attracting U.S. mainland capital, in large part by billing itself as a regional tax haven with Acts 20 and 22, it is hard to restart a failed economic engine, let alone rebuild a middle class, by shutting down sources of government revenue. Even in looking at John Paulson’s investments in Puerto Rico, which are in keeping with his established “special situations” investment thesis of capitalizing on financial distress, it is hard to see how buying high-end hotels on the cheap contributes to Puerto Rico’s economic mobility. While tourism is a vital sector across the Caribbean, Puerto Rico’s economy, one of the most diverse in the region, ought to create and absorb a highly-skilled, bi-lingual and future-proof workforce.
Reversing the brain drain of talented young Puerto Ricans and coaxing them to stay or return to the island, calls for a competitive industrial and services base with clear pathways to economic mobility. This includes the longstanding pharmaceutical industry, where Puerto Rico has ranked in the top 10 globally in terms of research, development and production, as well as other industries, like financial services, technology, manufacturing and logistics, to name a few. All of these sectors and the economic writ large rely on predictable and cost-effective energy, which Puerto Rico could not provide before the storms and cannot provide now. Setting a Singapore-like vision for workforce mobility and competitiveness, requires a long-term objective of achieving pay parity with the U.S. mainland. As the expression goes, when you are going through hell, keep going. Puerto Rico’s income per capita, about half of Mississippi’s, provides ample headroom for growth, provided it is backed by the right types of economic policies and social vision.
Will alone cannot break Puerto Rico’s downward spiral. Like Singapore, the island must endure a long road of tradeoffs, of which a good number will be painful, and nearly all point to Washington, D.C. If two record breaking Hurricanes where the nails, Puerto Rico’s economic coffin was built by clever, if one-sided financial engineering that assumed defaults were implausible and tax-efficient municipal debt was a safe asset class. Neither of these “truths” have withstood the tests of time nor Irma and Maria’s wrath. Now Puerto Rico and U.S. lawmakers are facing a $94 billion reconstruction effort, which when added to the public debt burden of $73 billion, exceeds the island’s GDP by 150%. This costly proposition can only be reframed in the context of a net positive investment for the U.S. government, institutional investors and insurers, which are the only entities with the balance sheet and an investment horizon long enough to realize a return.
If clever financial engineering and excessive debt-borrowing got the island into an economic trap in the first place, financial engineering can get the island back on track and on solid footing toward economic competitiveness. After all, as a part of a broad U.S. infrastructure modernization plan pooling public and private capital to improve U.S. economic commons, the money needed for Puerto Rico’s restart is a rounding error. Rather than viewing this capital as charity or a gift, it can form part of the investment in making Puerto Rico the Caribbean’s most competitive economy. The other half of this investment will be paid by Boricua sweat equity and business commitments to go long on the island and region’s future.
