Puerto Rico Public-Private Partnerships Authority will present 25+ new projects—worth $5 billion and create a potential 120,000 jobs

Caribbean Business JOSÉ L. CARMONA *Gearing up to roll out PPPs The recently created Public-Private Partnerships Authority (PPPA), the government entity responsible for implementing public policy regarding public-private partnerships (PPPs), will hold its first Puerto Rico PPP Projects Conference Oct. 15-16 to showcase investment opportunities to potential investors for specific local projects. International companies and investors with experience and interest in establishing PPPs are expected to attend the conference at the Puerto Rico Convention Center to learn about the island, the main government-proposed PPP projects and the new law guiding the establishment of PPPs in Puerto Rico. The PPPA currently has some 32 projects submitted by government entities (agencies and public corporations). These don’t constitute the official PPP project inventory but have the potential to become PPPs provided they pass the PPPA’s evaluation process. The goal of the PPPA, a Government Development Bank (GDB) entity, is to move at least 25 of the top-priority projects, with an estimated investment of at least $5 billion and the potential to create 120,000 jobs (over a period of several years), to the request for qualifications (RFQ) and request for proposals (RFP) phases by year-end. Priority projects submitted by government entities to the PPPA include: landfills; reservoirs; powerplants that use alternative or renewable sources of energy; transportation systems; health, security, education, correctional and rehabilitation facilities; low-income housing projects; facilities for sports, recreation, tourism and cultural activities; ground and wireless communication systems; and high-technology information and mechanical systems. *PPP legislation is key Just three months ago, Gov. Luis Fortuño signed into law Act 29 of June 8, 2009, more commonly known as the PPP Act. The law is the cornerstone of the Fortuño administration’s efforts to spearhead much-needed infrastructure and public works projects that the central government, its agencies and public corporations simply can’t afford to undertake alone. “There are a lot of public-works projects that we want to do, but there’s a reality about the government’s availability of funds. We all know the fiscal situation the island is going through, and this law allows us to do some of these projects in partnership with the private sector, which will bring capital and expertise to the table. This law is not only important as a financing mechanism, but also as an element of economic development and job creation to reactivate the island’s economy,” GDB Executive Vice President Fernando Batlle told CARIBBEAN BUSINESS. “I firmly believe PPPs are going to be a very useful tool for everyone.” Batlle downplayed criticism the law is too restrictive or elaborate to the point it could hinder the establishment of PPPs, indicating so far feedback from investors and financial institutions has been extremely positive. “Our PPP law is the most far-reaching legislation in the nation right now. When I say far-reaching, we must bear in mind the public interest must be protected. In that sense, this law has all the necessary elements to protect the public interest, which gives investors what other jurisdictions can’t provide—security and transparency in the process,” Batlle said. “That’s something we didn’t have before to foster PPPs. The law is very clear on what can and can’t be done, what resources are required from the investor and the time these transactions can cover. People who look at the process could say it has a lot of steps, but at least there’s a clear process that establishes the steps to take,” he said. Batlle left the door open to making improvements to the law during the implementation process. “There’s room for improvement. During the implementation process, we will pay attention to what the private sector is looking for to do good for both the private and the public sectors. Again, safeguarding the public interest is paramount, and that’s how we will do things to make them functional,” Batlle said. *The role of the PPP Authority Among other things, the law established the PPPA as the sole government entity authorized and responsible for implementing the public policy on PPPs and for determining the functions, services or facilities for which such partnerships are to be established. The PPPA is a public corporation attached to the GDB. The duties and powers of the PPPA are to be discharged by a board of directors constituted by five members and chaired by GDB President Carlos García. Gov. Luis Fortuño announced the selection of the new board members last week and they were slated to hold their first meeting last Wednesday. The governor accepted the nominations of attorney Luis Berríos Amadeo and Dr. Hernán Padilla to represent the public interest, which were made by Senate President Thomas Rivera Schatz and House Speaker Jenniffer González, respectively. The other PPPA Board members are García, Treasury Secretary Juan Carlos Puig and Planning Board President Héctor Morales Vargas. *PPPA to pick up speed David Álvarez, PPPA executive director, senior adviser & assistant to García, is the point man for the Fortuño administration’s efforts on the PPP front. “This first board meeting is pivotal because all directors will be briefed on the progress and guidelines moving forward in terms of the projects we want to present to prepare for our first Puerto Rico PPP Projects Conference next month,” Álvarez said. “Things will pick up speed pretty quickly.” The PPPA has already conducted an initial evaluation of the submitted projects to be presented at the conference. “The purpose of this conference is to showcase the opportunities available in Puerto Rico for local and nonlocal investors, bank executives, consultants and others. The goal is to make this event open to the local public as well as people from the U.S. mainland interested in PPPs. The idea isn’t to make the event a conference strictly on what we would like to do, but rather showcase all these projects, show what we visualize happening and have attendees understand the ramifications and magnitude of these projects,” Álvarez said. Álvarez noted the submitted projects cover the island’s main basic infrastructure needs in areas such as energy, transportation, health, water, communications, security and education. “I believe there are interesting infrastructure projects in all areas,” Álvarez said. The PPPA Board will conduct further analysis on each of the projects to determine whether it is advisable to carry them out in terms of serving the public interest, their financial viability and ultimately whether to establish a PPP. The list of submitted projects is available on the PPPA’s website at www.p3gov.pr. *Layers of protection To further ensure transparency throughout the PPP evaluation process, the PPPA will create a partnership committee for each PPP project that will be responsible for selecting proponents and negotiating contracts. “What this means is that each PPP opportunity, each PPP project will have its own partnership committee with a dedicated group of people structuring the PPP contract. In a sense, it is much more reliable because this group will be working with the PPP project from start to finish,” Álvarez explained. “It isn’t the same when a particular government agency has to do everything on its own because the dedication wouldn’t be there.” Each partnership committee will have five members: the GDB president or a delegate; an official from the partnering government entity with direct authority in the project; a member of the board of directors of the partnering government entity or, in the case of government entities with no board of directors, the head of the partnering government entity; and two officials from any government entity chosen by the PPPA Board for their knowledge and experience in the type of project under consideration. Under the new PPP law, the Legislature will also convene a Joint Committee on Public-Private Partnerships. It will be composed of four senators and four representatives, with one minority lawmaker from each chamber. The joint panel will have jurisdiction to examine, investigate, evaluate and study all matters related to PPPs. *RFQS and RFPs by year-end As for a timetable for these projects becoming full-fledged PPPs, Álvarez said the PPPA and the GDB were aiming to have the first RFQs and RFPs before the end of this year. “Our interest and aim is to speed up the projects and move them to the construction phase as soon as possible. However, first, we need to run the structure and test it in all its capacities to see how efficient it can be in accelerating infrastructure investment,” Álvarez said. When PPP projects enter the construction phase will depend on each project, Batlle said. There are projects that due to their complexity and size will take more time to get started, perhaps eight months or more (such as the PR22 extension), while others (such as a desalinization plant) could take less time getting off the ground, he said. People often tend to focus PPPs on large, complex projects, but there are many opportunities for smaller PPP projects as well, Batlle said, adding the varying sizes of the submitted PPP projects make them even more appealing to investors. Taxpayers could see the first PPP projects come online by late 2010 or early 2011. Batlle highlighted the fact that both the PPP law and the PPPA are fundamentally geared toward speeding up projects and ensuring infrastructure investment can begin. “There are steps we need to take, but the main objective is execution. We are ready to execute, we are ready to go,” Batlle said. “Of course, we would like to see things move faster, but I believe we are moving at a very good pace.” *P.R.’s standing in the PPP world Asked how the island compares with other jurisdictions that rely on PPPs such as France, Brazil, Canada, Australia, England, the U.S. mainland and Chile, Batlle stated emphatically: “Very favorably.” “Because our framework, the law, is very clear and specific and removes much of the uncertainty that sometimes occurs in the process, and that’s very important. It clearly establishes the process in terms of how you negotiate and the steps to follow,” Batlle said. “That’s something that doesn’t exist in many jurisdictions.” Also, the island is a legal and politically stable jurisdiction with a stable currency (dollar), which provides investors with a level of certainty not seen in many international jurisdictions, he said. “At a time when there’s so much uncertainty in the world, I think PPP investors will see Puerto Rico in a good light,” Batlle said. Héctor del Río, president of the local chapter of the Associated General Contractors of America (AGC), agreed, adding government credibility is vital to attracting high-caliber PPP investors to the island. “When you are going to invest $500 million or $1 billion in a project, you want to make sure the investment is safe and you expect a process where the project will have continuity no matter who is in charge of government. Also, it’s very important to have a process where all your questions are answered,” Del Río said. “Fortunately, Puerto Rico enjoys advantages not found in other Latin American countries, because investors will be investing in a U.S. territory with U.S. dollars. The same stability and continuity we enjoy every election has to be projected to PPP investors,” he said. As a small Caribbean island of 3,400 square miles, Del Río said Puerto Rico enjoys unique market opportunities not found anywhere else, which could be very attractive for PPP investors. He cited the fact that few islands have four international airports within its boundaries: San Juan, Aguadilla, Ponce and Ceiba, which also holds the potential as a major seaport. The island also boasts already developed seaports in San Juan and Guayanilla and the Port of the Americas transshipment hub in Ponce, which has been in the making for years and is nearing completion. These, too, could be turned into PPPs, he said. In fact, negotiations are already underway between the GDB and a South Korean conglomerate to complete and manage the Port of the Americas. “If the government isn’t financially capable of developing these airports and seaports as needed, then it should seek investors willing to do it, because the end benefit will always be for Puerto Rico,” Del Río said. Del Río said the government should push transportation PPPs first. He cited proposed light-rail projects to Old San Juan, Carolina and Caguas, and the expansion of the island’s toll-roads, including the extension of PR22 between Hatillo and Mayagüez, the second phase of PR66 between Canóvanas and Fajardo and converting PR30 into a toll-road between Caguas and Humacao. That could also open the door for the establishment of concessions (convenience stores, retail shops and gas stations) throughout the island’s expressway system, creating jobs and economic activity in the process, he said. “Even the Urban Train is a candidate for a PPP, as the Highway Authority is running a $110 million deficit each year. If you can find someone who can run it for half that, it could be viewed a success,” Del Río said. Del Río said the fact contractors in a partnership established under the PPP law will be subject to a fixed 10% income-tax rate over net income during the life of the contract is an added benefit to investors who want to do business here. *Misconceptions and models Álvarez noted misconceptions and ignorance of PPPs among island sectors that were often aired during the period prior to the passage of the PPP law. “That’s nobody’s fault, as Puerto Rico isn’t a jurisdiction with vast and solid experience with PPPs. This isn’t Canada, for example, which is very mature with PPPs,” Álvarez said. The biggest misconception about PPPs, according to Batlle, is that they are the same as privatization. “That’s a very unfounded stigma, because the concept of privatization is very far from a PPP. Basically, a PPP is how you pair up the best of the private sector with the financial limitations of the public sector and make it work to benefit both parties,” Batlle said. In a nutshell, a PPP is a contractual agreement between a government agency and a private sector or nongovernmental entity. It allows for greater participation of the private sector in the development and financing of infrastructure and provision of services; improves the fiscal condition of public corporations and the general fund; encourages innovation; and maximizes government assets. A PPP accelerates the design and build phases of a project, while the public entity keeps ownership of the asset. Contracts are usually long-term (50-99 years) to assure investors will receive a return on their investment. “Without exception, all the jurisdictions that use the PPP model experience faster construction of infrastructure projects at a lower cost. One of the beauties of PPPs is that several contract modalities can be used,” Álvarez said. The three basic types of PPP contracts are: design / build, design / build / maintain and design / build / maintain / operate. There are two methods of private-sector compensation: through user fees (such as tolls) and availability of payments (government makes periodic payments to the private-sector entity). “Another myth is that PPPs have no cost for the government, and that isn’t true. There’s an investment the government has to do to make PPPs viable for the investor, such as expropriations,” Del Río said. “To be a major player in the PPP leagues, the government entity must invest $10 million to $15 million in feasibility studies and statistics. For PPPs to work, we also need an agile planning and permits system so investors don’t get disappointed during the process,” he said. The local AGC president suggested the government should find a way to fund on its own those submitted projects that don’t make it as a PPP, as it shouldn’t place all its infrastructure projects into the PPP basket. Public-private partnerships gain ground around the globe As governments around the world face shrinking budgets, more are looking to PPPs to fund infrastructure development Public-Private Partnerships (PPPs) have long enjoyed significant popularity around the world, especially in Europe, Asia and Latin America. According to media reports, more than 1,000 such partnerships were signed in the European Union alone between 1990 and 2005 for a combined investment of more than $285 billion. While PPPs aren’t new to the U.S. and Puerto Rico, there has been heightened interest in their use for transportation and other infrastructure projects as federal, state and local governments face increasing budget limitations to fund vital capital works. In February, for example, California Gov. Arnold Schwarzenegger signed a law allowing the California Department of Transportation (Caltrans) and regional transportation authorities (RTAs) to enter into an unlimited number of PPPs for the construction, operation and maintenance of the state’s transportation infrastructure. In April, the North Carolina Turnpike Authority signed a PPP for a predevelopment study for that state’s first toll bridge. The American Society of Civil Engineers’ “Report Card for America’s Infrastructure” gives the overall condition of the nation’s infrastructure a "D" grade and calls for an investment of $1.6 trillion in infrastructure over the next five years. PPPs have emerged as one tool that may help states and other public entities address a portion of their infrastructure deficits. California became the first state to pass legislation allowing the creation of PPPs to build toll roads. In the 20 years since, more than 20 states have followed California’s example in passing transportation PPP laws, with Texas, Virginia and Florida joining the Golden State in the forefront of PPP-based infrastructure development. Several states have PPP toll projects currently in operation, such as the Chicago Skyway in Illinois and the Northwest Parkway in Colorado. Others have projects in the development stage, such as the I495 / Capital Beltway High Occupancy Toll (HOT) Lanes project in northern Virginia and the addition of 10.5 miles of variable toll express lanes to I595 in Broward County, Fla. Some states are negotiating projects, including a $2.7 billion project for the reconstruction of the I635 / LBJ Freeway and the $1.6 billion North Tarrant Express project, both in Texas. In the highway arena, increased tolling to expand capacity is spurring additional interest in PPPs in the U.S. According to the American Association of State Highway & Transportation Officials (AASHTO), between 2000 and 2006, 30% to 40% of the approximately 150 miles of new expressways built nationally each year were financed through tolls. By 2030, the percentage of new arterial roads in metropolitan areas financed through tolling may increase to nearly 50%. *Tapping private-sector expertise As federal, state and local governments struggle more economically, they are finding ways to involve the private sector to fund the money needed for infrastructure projects and PPPs are one such way. According to some economists, PPPs are also a way for people who use a certain highway, bridge or other PPP facility to pay for it through the use of tolls, instead of all taxpayers in a state paying for something they may never or very seldom use. “The private sector is usually more efficient and can get an asset built on a quality and performance level that is good for taxpayer dollars. So, with PPPs, it’s basically how you take advantage of the private-sector expertise and use it to get a public asset funded over a period of time through lease payments,” Doug Pruitt, national president of the Associated General Contractors of America (AGC), told CARIBBEAN BUSINESS. On a professional level, Pruitt’s general contracting company, Tempe, Ariz.-based Sundt Cos., has been involved in several PPPs, including a 600-unit family-housing complex for the military and a building facility for the Arizona Fish & Game Department. In the case of the building facility, Pruitt’s firm joined the developer to build the project, which was then leased to Arizona Fish & Game. “By using the facility, they get to stretch the payments over 20 to 30 years and ultimately will own the facility at the end of the lease versus having to pay upfront for the construction,” Pruitt explained. “It’s a way for them to use the funds for other things and ultimately own the facility anyway.” The national AGC president is convinced Puerto Rico and the rest of the world will see more PPPs as the public sector simply doesn’t have the money it used to and is now obligated to a host of other priorities, making it impossible to keep up with needed infrastructure. “PPPs aren’t just about highways anymore. We are talking about public buildings and support facilities in all sorts of ways that the government can tap into innovation that exists in the private sector. It’s a much better and more innovative way of procuring construction than 30 years ago,” Pruitt said. *Chile’s 20-year record of success with PPPs Just as with Puerto Rico, Chile tapped into PPPs amid a serious economic crisis during the 1980s as the South American country was looking to open its economy. “The circumstances at the time demanded Chile become an exporter. That required investment, and the only way was to open its economy to the markets,” Javier Hurtado, president of the Construction Chamber of Chile, the country’s leading construction industry trade organization, told CARIBBEAN BUSINESS. “The first thing that resulted from that was the creation of the private pension funds, followed by the complete privatization of Chile’s electrical and water systems and most of its seaports.” These events required legislation for the creation of PPPs by the late ’80s and early 1990s. According to Hurtado, the Chilean legislation, just as the recently enacted one in Puerto Rico, was extremely important as it established the legal framework and bylaws for participants in PPP investments. “From that point on, Chile engaged in numerous PPP projects, to the point that today, infrastructure investment in Chile through PPPs surpasses $11 billion. Highways were first, followed by penal institutions and, more recently, hospitals,” Hurtado said. Recent surveys among users of PPP projects in Chile rated the services provided very favorably, Hurtado said. “The main message here is that management and maintenance contracts for these facilities are long term, which in a way guarantees these PPP projects are financially viable as facilities have to be updated and kept in good condition during the life of the contract,” noted Hurtado, who was one of the keynote speakers during the annual local AGC convention last weekend..