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IEEFA update: Puerto Rico at a crossroads

July 31, 2019
Tom Sanzillo and Cathy Kunkel

The series of political scandals that have rocked Puerto Rico over the last few weeks have created an opportunity for one of two outcomes: either a fundamental reform of Puerto Rico’s governance or the risk of more corruption in the ensuing chaos.

The rolling scandal – the arrests of former Cabinet officials and private contractors including the managing partner of an auditor with numerous government contracts, the firings of Governor Ricardo Rosselló’s closest associates over leaked communications that contained offensive statements and may suggest illegal activity, and the resignation of the Governor himself effective August 2nd – has created turmoil. The question now is who will take advantage of it and to what end? The future of Puerto Rico rests on the answer.

Here is the risk. Puerto Rico already has a long history of political interference and fixed contracts. The infamous Whitefish scandal for the rebuild of the electrical system after Hurricane Maria and a massive multi-billion-dollar oil sales scam are the subject of lawsuits, and a grand jury is investigating another hurricane reconstruction contract, to name a few.

The current power vacuum and lack of oversight could usher in more theft and bad contracts

The chaos of the last several weeks and the rushed transition to a new governor over the next week have created an institutional vacuum and lack of oversight that could allow more theft and bad contracts. Those who have already made their campaign contributions to Governor Rosselló in the expectation of receiving contracts will want to secure those contracts immediately so they do not have to pay off someone else. Those who are negotiating contracts can take advantage of the departure of senior officials and resulting institutional weakness to write contracts on terms that are likely to be unfavorable to the public interest.

IT IS DEEPLY DISTURBING THAT PUERTO RICAN GOVERNMENT AGENCIES ARE MOVING FORWARD WITH MAJOR CONTRACTS in spite of the present crisis. Earlier this month, in the midst of the unfolding scandal, the Puerto Rico Public-Private Partnerships Authority issued a request for qualifications for the construction of a new natural gas power plant in the San Juan area. News reports indicate that the Puerto Rico Electric Power Authority (PREPA) has already struck deals with federal agencies for the use of federal funds to pay for the plant, which would be privately operated.

This follows on the heels of PREPA awarding a huge contract to convert a power plant in San Juan from oil to natural gas and to supply the natural gas. The winner, New Fortress Energy, is a small, newly-formed company with no experience in Puerto Rico, but with one principal shareholder who is politically connected.

Now could also be the time for major and fundamental reform

But now could also be the time for major and fundamental reform, if the next governor of Puerto Rico or the Puerto Rico Financial Oversight and Management Board (FOMB) is willing to seize the opportunity.

THE NEXT GOVERNOR AND/OR THE FOMB SHOULD IMMEDIATELY HALT ALL OUTSTANDING CONTRACTING PROCESSES. All contracts entered into or initiated by the Rosselló administration are tainted by the recent scandals. All major contracting processes should be subject to an independent review to establish the degree to which companies now doing business with Puerto Rico’s government agencies received their contracts based on a fair process, are performing real services for fair compensation and are free from corrupt ties to government officials or others with influence in the government.

At the same time, an independent corruption monitor – an Independent Private Sector Inspector General – should be appointed in Puerto Rico to provide day-to-day monitoring and reporting on waste, fraud and abuse. This does not replace Puerto Rico’s elected leaders but gives those willing to reform a powerful tool. Such an entity could report to the FOMB, the bankruptcy court, the Puerto Rican legislature and the U.S. attorney for Puerto Rico. The ongoing monitoring and prosecution of corrupt activity in Puerto Rico would send a strong signal that the era of rampant pay-to-play contracting is finally over.

If these steps are not taken, the chaos in Puerto Rico will only serve the interests of those who seek to continue exploiting the people of Puerto Rico for private gain.

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

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

IEEFA Puerto Rico: What the corruption scandal means for the Puerto Rico Electric Power Authority (PREPA)


Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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Cathy Kunkel

Cathy Kunkel is an Energy Consultant at IEEFA.

Cathy also served as an IEEFA Energy Finance Analyst for 7 years, researching Appalachian natural gas pipelines and drilling; electric utility mergers, rates and resource planning; energy efficiency; and Puerto Rico’s electrical system. She has degrees in physics from Princeton and Cambridge.

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