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Special Communities Fund Initiative Raises Concerns

Some observers question project’s financing, while others question its focus


August 29, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Gov. Sila Calderon’s announcement of a massive effort to transform the communities where one million of Puerto Rico’s poorest residents live has received wide-ranging support, in principle, from private-sector leaders and economists.

However, a number of prominent private-sector leaders and economists–as well as the comptroller of Puerto Rico, Manuel Diaz Saldaña–have also expressed serious concerns about the financial structuring of the Perpetual Fund for Special Communities that’s being created to carry out the initiative.

The governor has proposed legislation authorizing the Government Development Bank (GDB) to transfer $500 million (approximately 25%) of its current capital to the fund. "It would have been better not to use the bank’s capital for this purpose," said Puerto Rico Chamber of Commerce President Jose Joaquin Villamil, though he made it clear that he supports the special-communities project conceptually.

The use of such a major chunk of the GDB’s capital is a source of apprehension because a bank’s capital level is directly related to its capacity to provide financing. With the loss of $500 million of its capital, the GDB has estimated that its equity capital level will suddenly drop down to $1.516 billion.

In contrast, the GDB’s equity capital increased every year during the Rossello administration. From $846 million in June 1993, the GDB’s capital more than doubled to $1.732 billion in June 2001. The Calderon administration’s action will reduce the bank to just above its 1998 capital level of $1.438 billion.

"They’re tying their hands," said one high-ranking financial industry insider, who indicated that the Calderon administration is effectively limiting its ability to handle any challenges to the government’s solvency or any major unforeseen economic situations that may loom on the horizon.

The insider noted that the government’s finances are by their very nature fragile every year, and that only the solvency of the GDB provides the government with both the financial flexibility and stability it needs.

Moreover, as other financial industry observers also pointed out, the use of the bank’s capital as essentially a donation with no repayment mechanism–as is being contemplated with the creation of the new fund–breaks with a long-standing tradition respected by previous administrations.

"Never before has the GDB used its capital like this," pointed out University of Puerto Rico professor Carlos Colon de Armas, a former GDB executive vice president. For example, both the Hernandez Colon administration’s use of $100 million of the GDB’s capital to create a Puerto Rico Capital Fund as well as the Rossello administration’s use of $50 million to create the Tourism Development Fund included repayment mechanisms and subsequently contributed to the bank’s growth.

In recent years, the GDB also participated in the $55 million construction of the Puerto Rico Museum of Art–including the museum’s parking facility–but investments related to the project were charged to operating expenses, not the bank’s capital. Additionally, the GDB retained ownership and operational control of the museum’s parking facility, which generates income.

It is feared that the Calderon administration’s proposed use of the GDB’s capital sets an ominous precedent for the future. "The bank’s capital was respected before; it wasn’t seen as a box of money that can be dipped into for any project that comes along," another highly respected interviewee commented off the record. "The bank is in the business of using its capital to support economic development; it’s not there to just be given away," concurred Colon de Armas.

The comptroller of the commonwealth, Manuel Diaz Saldaña, has also stated that the government’s proposed action raises a red flag, since it would be the first time the GDB’s capital is used in such a manner.

Meanwhile, GDB President Hector Mendez has assured that the bank’s leverage–the measurement of equity capital to total assets–will stand at an estimated 19.2% despite the hit. He indicated the ratio would still be more than double that of leading mainland U.S. commercial banking institutions.

This Caribbean Business article appears courtesy of Casiano Communications.
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