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After Two Dead Years, Construction Executives In Puerto Rico Hope Election Year Will Bring Some Life To Their Beleaguered Industry
By JOSE L. CARMONA
April 3, 2003
Still No Progress: Government foot dragging continues to bog down the islands economic recovery; infrastructure projects wait in limbo for bids to be awarded and construction permits granted
As any local construction-industry insider will tell you the sector has been virtually stagnant and the big culprit is the lack of government infrastructure construction activity.
Even the local governments own figures, reported by the Puerto Rico Planning Board, indicate that investment in infrastructure projects by main government agencies declined significantly in the first two years of the Calderon administration.
Fiscal year (FY) 2002 figures--the latest ones available--are significantly down from the high of FY 1999. Industry sources, however, privately question the reliability of the Planning Boards figures. "Theres no way the islands economy, and the construction industry in particular, could be as stagnant as it is if the government is investing what it claims in construction activity," said one source.
Often the government offers a projection for total investment in infrastructure construction for a particular year that isnt met, or perhaps doesnt happen in the timeframe originally announced. The reasons include permitting red tape and even projects being stopped to move them closer to elections.
The most significant government infrastructure projects two-and-a-half years into the Calderon administration were actually all started by the previous administration--and all are way behind schedule. In fact, industry sources wonder whether these will be completed even in 2004.
Just last week, Elpidio Rivera, local chapter president of the Associated General Contractors of America (AGC), complained that dozens of public-sector construction projects--especially those of the Highway & Transportation Authority, the Public Buildings Authority, and Ondeo--were behind schedule. Other industry representatives have been echoing Riveras remarks to CARIBBEAN BUSINESS since late 2001.
A new administration takes over
The islands construction industry has remained alive during the past two years, but hasnt been experiencing the boom of the 1990s. According to Planning Board numbers, annual investment in government infrastructure projects grew by an average of 13.8% between fiscal years 1993 and 1999. (The investments in FY 1993 and FY 1999 were $1.2 billion and $2.4 billion, respectively.) Thats not all government construction, only construction of major infrastructure works by main government agencies.
By contrast, government infrastructure investment during the Calderon administration has dropped 25% to $1.8 billion (FY 2001 and FY 2002). During the first couple of years of the Calderon administration, almost all existing government infrastructure projects were put on hold to be re-evaluated, and no significant new ones were announced.
Industry sources agree the arrival of the new government administration and the uncertainty it caused regarding the validity of government-issued construction permits have had a negative effect on Puerto Ricos construction industry and economy.
"Once permits are issued, they should be final. How can you obtain financing if financial institutions lose faith in the approved permits a developer presents? Its bad not only for the industry but also for the islands economy in general," said Jose Gonzalez Nolla, president of Nogama Construction and past president of the AGC.
According to the Puerto Rico Planning Board, the total value of the islands public construction activity (not only infrastructure projects but all government construction, including that by municipalities) declined in FY 2001. The same numbers also show that municipalities have been picking up a greater part of the tab for public construction. Its clear then that the central government has cut down on construction investment.
It has been the large number of private-sector construction projects (mostly housing), together with low interest rates, that has sustained the construction industry. Even so, the value of the islands total construction activity (public and private put together) has remained flat--and even decreased, if adjusted for inflation--in the past two years.
Government wakes up
In August 2001, Gov. Sila Calderon announced 215 projects worth $1.2 billion that would go to bid as part of several initiatives to jump-start the islands construction industry and economy through government-sponsored projects. Again, most of the projects had been initiated by the previous administration but had been stopped by the Calderon administration for re-evaluation in early 2001. Gov. Calderon also granted tax incentives to the private sector and created an Express Processing Center to speed up the permitting process.
According to Jose Martinez, the governors adviser on infrastructure, transportation, and public works, construction on 376 public-sector projects worth $1.8 billion plus 191 projects worth $207.7 million started during FY 2002. Some of these projects are still underway.
As reported by CARIBBEAN BUSINESS (May 30, 2002; Aug. 15, 2002; and Jan. 23, 2003), however, the much-anticipated economic recovery from this government construction investment hasnt materialized. The progress of most government infrastructure projects has been slow at best. Whats more, some of the announced projects havent even begun construction.
Industry struggles with red tape and permitting delays
Housing and tourism projects fueled the private sector in FY 2001, while projects involving commercial and industrial buildings experienced a decline. In real terms, private projects represented 63.3% of all construction activity in FY 2001, while public projects accounted for 36.7%.
Fueled by strong demand for housing and by low interest rates, the private sector basically carried the construction industry again in FY 2002, as the administration seemed unwilling or unable to move forward on nearly $1.9 billion in public-sector projects.
Again in 2002, the private sector continued to express concern over the alarming number of government-issued construction permits that were being revoked, contending the uncertainty was scaring away investors and making it much more difficult to secure construction financing.
"There are many social interest housing projects and nonsocial interest housing projects that didnt get the required agency endorsements and their permits are behind," said Jose Vizcarrondo, vice president of Desarrollos Metropolitanos and former president of the AGC. "In the commercial construction sector, investors are holding back projects for the same reason."
Route 66, Condado Trio, Princesa del Mar in Punta Las Marias, Madeira Condominium in Ocean Park, the Golden Triangle convention center, and the Millennium Condominium in Puerta de Tierra are just a few examples of the more than 40 construction projects whose permits were stalled, questioned, or challenged either by communities or by the government in local courts and in other forums. These stalled projects represent as much as $1 billion of stalled construction throughout the island.
"The government should make sure that the technical, administrative, and managerial personnel responsible for the permits process in all pertinent agencies have the necessary resources and the authority to be able to process these in an expeditious and responsible way," said Bird Construction CEO Miguel Sabater. Unfortunately, this hasnt been happening.
Nonetheless, historically low interest rates and high demand for housing caused construction projects to become more feasible and more attractive for developers and consumers. In fact, the only construction sector that grew in 2002 was housing, although not as vigorously as in previous years.
"Developers wont admit it, but many had to reduce the number of home units they planned to build because the ones they had built already werent selling as expected," said Vizcarrondo. "There were projects with many home-closing cancellations because of the slow economy."
Delays in major infrastructure projects from the Rossello administration
Major infrastructure projects begun during the Rossello administration and taken over by the Calderon administration have faced numerous delays since the latter took over in 2001. These include the Urban Train, the Americas World Trade District, the Transshipment Port, Route 66, and the Puerto Rico Coliseum.
Construction of the first phase of the Urban Train, running from Bayamon to Santurce, started in 1995 at an estimated cost of $1.4 billion. Contract disputes with the main contractors and constant construction delays have placed the Calderon administrations September 2003 completion date in jeopardy, though the local government has insisted the train will be ready by Sept. 29. Federal inspectors, however, have expressed skepticism, saying it wont be ready until 2004. The projects construction slowed down considerably during all of 2001. Consequently, the cost of the heavy-rail mass-transit system, which was originally slated for completion in July 2001, has increased to $2.3 billion.
Initially designed under the Rossello administration, the $372 million Americas World Trade District began construction in 2001 with the $190 million Puerto Rico Convention Center. In an effort to reduce costs, the Calderon administration slashed $135 million from the Americas World Trade District project. The 580,000-square-foot convention center was originally scheduled to be open by December 2004, but a local court injunction in June 2002 delayed construction for three months. The convention center is now scheduled to open in March 2005.
Envisioned by the Rossello administration in Guayanilla, the Transshipment Port, since renamed the Port of the Americas, will now use Ponce as its main port. Dredging of the Ponce bay is expected to begin early in 2004, with construction starting by that summer. The projects cost now stands at $625 million. In February, the Puerto Rico Industrial Development Co. announced the appointment of Virginia-based CB Richard Ellis to promote and market the value-added activity & real estate surrounding the port.
The Route 66 expressway, which went up for bid under the Hernandez Colon administration but began construction under the Rossello administration, was stalled by the Supreme Court in October 1999 over objections to the projects environmental impact statement. After mulling over what to do with the project, the Calderon administration announced in 2001 that it would continue the project with no changes to its route between Carolina and Rio Grande. The projects cost now stands at $372 million, of which $130 million has already been spent on land expropriation and partial construction. Construction is set to restart this summer and to be completed by the end of 2004.
The 20,000-seat Puerto Rico Coliseum began construction in 1998 and, according to its original contract, was to have been completed in about 29 months at a $122 million price tag. But Hurricane Georges and improvements to the projects foundation pushed back the completion date to April 2001. The financial problems of contractor ICA Construction prevented the firm from providing the necessary funds to support a significant speed-up that would have allowed it to complete construction of the 400,000-square-foot sports complex by the April 2001 deadline. The projects cost has increased to $230 million and its completion date has now been pushed to fall 2003.
Second half of 2003 and beyond
With fiscal year 2003 almost gone (ends June 30, 2003), construction industry sources can only hope that the election-year cycle will make the government start pouring money into construction.
"If the government does what it has said it is going to do, we can expect an improvement over last year," said RB Construction Corp. President Manuel Suarez. "Government projects, which were practically dead last year, are expected to rebound, which will bring an improvement to the construction industry."
According to governors Adviser Jose Martinez, the Calderon administration had earmarked $3.3 billion in the general budget for the governments capital improvements program, of which nearly $2.5 billion was for infrastructure projects. Of course, there are still no numbers to confirm how much of that has actually been spent.
The agencies with the largest budgets for capital improvements in FY 2003 include the Highway & Transportation Authority, the Public Buildings Authority, the Puerto Rico Electric Power Authority, the Infrastructure Finance Authority, and the Puerto Rico Ports Authority.
For local AGC President Rivera, private-sector projects are stalled because of delays in the permitting process.
"Despite the governments best efforts to streamline and speed the permits process, it hasnt had much success," said Rivera. "On the bright side, the industry is in one of its best moments because of the prevailing low interest rates and the many public works projects expected to come out, which will foster construction activity."
According to Jose Martinez, some $800 million in public works projects were contracted or awarded during the last three months of 2002, while another 126 projects worth $680.9 million started construction between January and March of this year.
"The outlook for public-sector projects looks phenomenal, in the sense that the government is taking these projects to bid and is awarding them," said Vizcarrondo. "Contractors I have spoken to confirm it, but not everyone has been lucky. When you see many contractors bidding for projects, it means they dont have much work on their hands."
For FY 2004 (beginning July 1, 2003), Gov. Sila Calderon has proposed a record $3.9 billion in capital improvements and infrastructure investment, involving 1,633 new infrastructure projects with a potential to create 58,000 jobs, according to the budget proposal.
Based on the governments recent track record, though, construction industry representatives are skeptical that the Calderon administration will be able to move forward such an ambitious agenda. They note the government is still contending with delays, bids, and permits challenges for FY 2002 and FY 2003 projects, not to mention for large infrastructure projects from the Rossello administration.
"The key here will be how fast the government awards the bids and issues the construction permits, as well as the validity it gives to them," said AGCs Rivera. "Uncertainty over the validity of government-issued construction permits has caused banks to become more selective about which projects to finance."
The permitting process has been a challenge for the past 25 or 30 years and it wont be solved overnight, said developer Joel Katz.
"Its a challenging process. As much as we want to make it a simpler and more uniform process, the permitting process is complex," said Katz, who is also chairman of the Governors Construction Industry Advisory Council. "However, there is a public policy, directed by the governor herself, to simplify it and make it more uniform, to reduce all the red tape that goes with the permitting process. We have to improve; theres no question about it."
Capital improvement funding drives much of GDBs agenda
Prevailing low interest rates also make refinancing common
By KEN OLIVER-MENDEZ
Securing funding for capital improvement programs has driven a hefty portion of the Government Development Banks activities in structuring bond issues during the past two years.
A $410 million Commonwealth of Puerto Rico bond issue in June 2001 for the governments capital improvement program, for example, was one of the first issues structured by the new administration, followed by a $455 million issue for the same purpose in October 2001.
Other major infrastructure-related action by the GDB in 2001 included $390 million in Public Finance Corp. bond issues for the North Coast Superaqueduct along with more than $927 million in bond issues for the administrations direct mortgage-lending (Law 124) and secure-home social assistance housing programs.
The pace picked up considerably in 2002, with the Puerto Rico Electric Power Authority (Prepa) issuing $613 million in two separate bond issues and the Public Buildings Authority (PBA) issuing $665 million in three separate bond issues for their respective capital improvement programs.
In February 2002, the Puerto Rico Highway & Transit Authority (HTA) issued $700 million in bond issues for its capital improvement program. A $460 million Commonwealth of Puerto Rico issue in August 2002 was also slated for the governments capital improvement program.
GDB President Hector Mendez told CARIBBEAN BUSINESS that much of the $736 million in new money raised through a Childrens Trust bond issue in October 2002 is also going toward various government capital improvement projects. The previous administration had limited the use of trust-fund money to projects related to children.
At the same time, much of the GDBs activity on the bond markets last year--to the tune of more than $2.4 billion--entailed debt refinancing by various public corporations, including Prepa, the HTA, the PBA, as well as the commonwealth itself and the Childrens Trust.
Thanks to the many refinancing opportunities last year, Mendez said the government has achieved more than $600 million in savings. All together, during 2001 and 2002, the GDB structured some $10.9 billion in bond issues involving new money, while more than $3.2 billion in issues involved refinancing.
Over the next six months, the GDB is projected to structure some $1.7 billion in bond issues, with a $200 million upcoming issue for the Puerto Rico Industrial Development Co.s capital improvement program expected to be among the largest.
Government betting on election year to turn around construction industry, economy
By JOSE L. CARMONA
Gov. Sila Calderon has proposed a record $3.9 billion in capital improvements and infrastructure investment for fiscal year 2004, which begins July 1, 2003. The investment involves 1,633 new infrastructure projects with a potential to create 58,000 jobs, according to the budget proposal.
The monies for these projects will come from the Capital Improvements Fund, from federal funds, and from the revenue of public corporations.
The government agencies with the largest capital improvements investments include the Highway & Transportation Authority ($556.9 million), the Puerto Rico Aqueduct & Sewer Authority ($477 million), the Puerto Rico Electric Power Authority ($456.9 million), the Perpetual Trust for Special Communities ($450 million), the Public Buildings Authority ($49.7 million), the Infrastructure Finance Authority ($321.5), and the Public Housing Authority (153.2 million).
Significant infrastructure investments planned by the government in FY 2004 include:
Water for Everyone:
The "Agua Para Todos" (Water for Everyone) program is aimed at improving the reliability, pressure, and quality of potable water in 586 communities. Some 762 projects are planned under the program. As of January 2003, 276 projects have been completed, 145 are under construction, and 257 are in the design stage.
The Special Communities program, which officially began in February 2002, entails $1 billion in infrastructure investment during a five-year period for 686 special communities and their one million low-income residents. An additional $200 million was invested in these special communities in fiscal years 2001 and 2002, with $250 million budgeted for 2003 and $450 million for 2004.
Revitalization of Santurce:
The revitalization of Santurce calls for $900 million in public- and private-sector investment and the creation of 9,000 jobs. It involves the development of new housing, and commercial, and parking structures. Construction of several new housing and parking structures is slated to begin this year and to be completed in 2004.
The urban centers rehabilitation program involves 61 projects by the Department of Transportation & Public Works in 18 urban centers at a $231.6 million investment. Another 26 projects by other agencies will involve improvements to potable water and sewerage systems. A number of projects started construction in 2002 and 2003.
Martin Peña Channel:
The Martin Peña channel project involves the cleanup and dredging of the channel as well as housing and infrastructure improvements, affecting 27,000 residents. The projects cost is estimated at $630 million, $110 million of which the local government has said will come from local funds. The government is in the process of securing $130 million in federal funds.
Some $540 million has been allocated in the FY 2004 budget for a variety of projects involving housing, road construction, channeling of rivers, electricity infrastructure, and other improvements. Despite the prevailing skepticism in the construction industry concerning the governments poor track record when it comes to awarding bids, granting permits, and moving projects, many have expressed privately that because 2004 is an election year, the government is likely to make every effort to push the proposed infrastructure investment.
This Caribbean Business article appears courtesy of Casiano Communications.