November 17, 2017 Read More →

IEEFA Update: Betrayal in Puerto Rico

A Pyrrhic Victory by the Governor Undermines the Island’s Recovery

There were no real winners in the decision this week by a federal judge to deny the appointment of a “chief transformation officer” to take over Puerto Rico’s bankrupt and mismanaged electric utility.

The federal fiscal control board charged with overseeing Puerto Rico’s financial crisis had petitioned a federal judge to appoint Noel Zamot to run the utility on the board’s behalf. Gov. Ricardo Rossello had vigorously opposed the request, saying it would be stepping on his toes.

While the governor prevailed in court, his is a pyrrhic victory.

A self-inflicted wound that need not have been suffered.


The case for appointing a chief transformation officer is clear, and is much in line with my organization’s proposal for Puerto Rico Electric Power Authority (PREPA) supervision. PREPA’s history of mismanagement and ineffectiveness had brought it to bankruptcyby the time Hurricane Maria made devastating landfall in September.

The agency’s first move after the hurricane — to hire an unknown Montana company called Whitefish Energy to restore power to the island — turned into a contract scandal. The governor was forced to cancel the $300 million deal in the face of public outrage, but when he testified before Congress this week he took no responsibility, blaming instead PREPA’s executive director, Ricardo Ramos.

And he used the occasion to trumpet the sanctity of his “political independence,” fundamentally misconstruing the term. “Political independence” can be sustained in this framework only if those who wrap themselves in such authority exercise it in a nonpartisan, fact-based fashion.

Any observer to the history of PREPA — especially its recent history — can see that the governor’s disinterest in the integrity, objectivity and internal functioning of PREPA is compromised.

The truth will prevail, and the governor will find that his resistance to change at PREPA is a self-inflicted wound that he need not have suffered.

First, Rossello and Rossello alone owns PREPA, politically speaking, and he owns it without competent professional leadership in place. PREPA will continue to attract criticism from outside parties like the control board and the agency’s highly competent regulator, the Puerto Rico Energy Commission. Reviews will be undertaken with the knowledge that PREPA is hostile to scrutiny and likely to resist transparency, and one might reasonably expect that prosecutors are waiting in the wings.

Second, federal funding for recovery, and the terms of such funding, are now at risk. How willing is Congress to appropriate money to a governor who does not heed calls for corrective actions in the face of organizational failure?

Third, this episode weakens Puerto Rico’s economic recovery. The governor’s relationship with the federal control board and the Puerto Rico Energy Commission is fiscal. And while it involves public-sector forces it influences private investment. The governor’s behavior creates the appearance of protection for a failed, patronage-driven political apparatus that is not appealing to investors.

Fourth, the governor has made the mistake now of aligning himself now with bondholders, who are counting on the courts to take their side in debt litigation at the expense of Puerto Rico.

I do agree with the governor on one point: The history of Puerto Rico is one of exploitation by outside parties.

This truth, however, is that this outside influence has infected the political class that governs Puerto Rico. The governor betrays his fellow citizens by failing to embrace real change that can solve Puerto Rico’s problems.

Tom Sanzillo is IEEFA’s director of finance. This column appeared originally today on TheHill.com.

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