IEEFA update: Collapse of Puerto Rico government necessitates anti-corruption reforms

In the last three weeks, the former Puerto Rico secretaries of the Department of Education and Health Insurance Administration have been indicted on corruption charges. The secretary of the Treasury was fired. The secretary of State and the Chief Financial Officer of the Commonwealth were fired for their participation in an extensive chat conversation between Governor Ricardo Rosselló and his closest advisors, in which they made inappropriate comments about other Puerto Rican leaders and discussed possibly corrupt activities. Governor Rosselló has been forced to resign, effective Friday August 2nd.

The managing partner of the auditing company BDO Puerto Rico was also indicted. In the last two years, BDO has had auditing and accounting contracts with more than 15 Puerto Rican agencies, including the Puerto Rico Electric Power Authority (PREPA). The financial statement of these agencies is the core document used to prepare budget documents and to gain renewed access to the bond markets.

This implosion of the Puerto Rico government is sudden and unexpected, but not entirely surprising. For years, IEEFA has pointed to the lack of internal controls for private contracts in Puerto Rico, which left the door wide open for exactly the types of contracting scandals that brought down the secretaries of education and health insurance administration and the managing partner of BDO. The governor’s chat also indicated possible corruption in the process for contracting out the operation and maintenance of PREPA’s electrical transmission and distribution system. IEEFA has previously commented on the apparent pay-to-play system of campaign contributions and government contracts, exemplified by Governor Rosselló’s Wall Street fundraiser in May.

The governor has been forced to promise major contracting and anti-corruption reforms, although with no detail yet as to what these might be. Such promises have been made before.

Since 2016, IEEFA has been calling for the installation of an Independent Private Sector Inspector General (IPSIG) to act as an independent corruption monitor within PREPA. THE IPSIG would work with the Governor and agency heads, it would not replace the legitimate leadership of Puerto Rico. An IPSIG would be empowered to investigate PREPA’s operations, implement reforms to eliminate wasteful and/or illegal activity, and report violations of law to enforcement authorities. While IEEFA has proposed this model for PREPA, an IPSIG could also be implemented to reform any of Puerto Rico’s other allegedly corrupt agencies.

The government of Puerto Rico and the Financial Oversight and Management Board (FOMB) are trying to preclude the PREPA bankruptcy court from hearing a motion to implement an IPSIG for PREPA. In testimony supporting the FOMB’s motion to the bankruptcy court, Christian Sobrino – the Chief Financial Officer for the Commonwealth, board member of PREPA and executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority, who was fired Saturday – made the dubious claim that PREPA’s management reforms are working and its contracting process has sufficient oversight.

If Puerto Rico’s leaders are really serious about showing that contracting and anti-corruption reforms are being implemented, they should immediately bring in an independent monitor – with reporting responsibilities to the Puerto Rico legislature, the FOMB, the bankruptcy court and the U.S. Congress – to undertake the reforms that should have taken place years ago.

Cathy Kunkel ([email protected]) is an IEEFA energy analyst.

Tom Sanzillo ([email protected]) is IEEFA’s director of finance.

Related items:

IEEFA Puerto Rico: The current unrest culminates a long history of debt and corruption

Puerto Rico update: IEEFA letter urges U.S. inspectors general to scrutinize PREPA contracting

IEEFA Puerto Rico: Despite the scandal, FOMB is still rushing through an unaffordable debt deal