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Jeanne’s Mess

Losses to the local economy from Tropical Storm Jeanne could top $1.5 billion, thanks to islandwide shutdown of electrical power system


September 23, 2004
Copyright © 2004 CARIBBEAN BUSINESS. All Rights Reserved.

Unlike with Hurricanes Hugo and Georges, Tropical Storm Jeanne’s boost to the local economy could be short-lived

By press time Monday, the impact of Tropical Storm Jeanne on Puerto Rico’s economy still could only be guessed.

A CARIBBEAN BUSINESS estimate based on interviews with business executives and economists, however, suggests the figure could surpass $1.5 billion.

The final tally will largely depend on the answer to the question that has sparked the most consternation and the harshest criticism of the outgoing Calderon administration’s management of the crisis: When will the electricity be fully restored?

Unlike Hurricanes Hugo (1989) and Georges (1998), which caused widespread damage to assets such as buildings, infrastructure, and crops, Jeanne—a tropical storm whose sustained winds never reached hurricane force—didn’t have nearly such severe effects. Perhaps with the exception of some flooding and lost crops, most of the damage as a direct result of the storm’s winds was minimal.

But in a controversial move that could hurt the ability of affected businesses to recover losses from insurance companies, the Puerto Rico Electric Power Authority (Prepa) turned off the system islandwide even before Jeanne’s winds had fully hit the island.

Since then, Prepa has struggled to turn the electrical system back on. As of press time Monday, service had been restored to slightly under 1.1 million customers, roughly 78% of the total. In some areas such as San Juan, however, more than 40% of users were still without electricity.

The lack of electricity has left large sectors of the economy paralyzed or hobbled for days. The income lost by such business interruption won’t be known until the electrical service is completely restored, but experts calculate it could be as much as $200 million a day.

"I can tell you it will cost plenty," said economist Heidie Calero, president of H. Calero Consulting Group Inc.

While it may be too early to calculate the losses, Calero did a quick-and-dirty statistical exercise that put Jeanne’s costs to the economy at $192 million daily—in terms of the island’s gross domestic product (GDP), a widely used economic measure of goods and services produced in Puerto Rico that includes the operations of multinationals such as pharmaceutical companies and other external capital on the island.

Most of the island was completely shut down for at least two full days because of the lack of electricity; that’s nearly $400 million. Thereafter, the restoration of electrical service has been gradual but slow. Although many large businesses have some sort of emergency power plant, most others don’t.

According to Calero, a full week without electricity would cost the island’s GDP a whopping $1.3 billion. Other economists reported similar estimates.

Jorge Freyre, president of Applied Research Inc., sees an economic boom in the wake of Jeanne’s watery trek through the island.

He recalls Georges, which effectively pumped billions in insurance payouts and federal funds into the island’s economy (CB Oct. 8, 1998). Large amounts of money started rolling in right after the hurricane hit in September 1998, which helped to lift the economy from its doldrums in time for the Christmas shopping season.

"A significant part of fiscal 1999’s growth was the result of funds from insurance companies and FEMA [the Federal Emergency Management Agency]," said Freyre. The activity generated during the second half of the fiscal year pushed economic growth up nearly one percentage point to 4.1%.

The situation was similar right after Hurricane Hugo (CB Sept. 28, 1989), when billions in federal aid and insurance payouts were pumped into businesses, homes, and the general economy.

"I think an assessment of Jeanne’s net impact will have to wait for the income to show up. Right now, we’re assessing the losses, but then transfer payments from the federal government, which in the past have been substantial, will start coming in," said economist Vicente Feliciano, managing partner of Advantage Business Consulting.

"Some things can be postponed," said Freyre. "Construction of a project might stop for two or three weeks, but it will be accelerated later. So, September might show negative growth in that sector, but this will be compensated for by increases in October and November."

Federal help an insurance payouts

While the aftermath of a natural disaster or other emergency generally results in upbeat increased activity, if not an outright economic boom, this time there is serious doubt whether federal aid and insurance money—the two most significant sources of new money for the economy—will be arriving at the levels they have in the past.

President George W. Bush has declared the entire island a disaster zone, making it eligible for immediate assistance from FEMA. Even before the declaration, FEMA teams had arrived in Puerto Rico to join state and municipal officials in assessing the damage to determine the level of assistance necessary.

It isn’t clear, however, how much money the declaration will represent, since Tropical Storm Jeanne, with sustained winds of 60 miles per hour (mph), resulted in relatively minor physical damage to the island’s infrastructure. By comparison, Hurricanes Hugo and Georges each had winds of about 130 mph.

As of press time Monday, Gov. Sila Calderon announced that FEMA had granted $1.1 million for families that lost their belongings in Jeanne’s wake. Other FEMA aid is expected to cover the government’s costs for removing debris and taking security measures during the storm. FEMA, however, doesn’t cover losses resulting from business interruption, clearly the big-ticket item in terms of the economic loss to the island.

Some observers in Washington and on the island caution, however, that the damage estimates and the subsequent appropriations of emergency assistance to Puerto Rico are likely to be monitored much more carefully in view of the somewhat dubious manner in which the island has managed FEMA funds in the past. "Puerto Ricans must realize that, as Americans, they are entitled to share in this bounty, but they must honor their obligation to manage it properly," said a congressional aide familiar with some past indiscretions.

More troublesome is the question of the extent to which insurance companies will cover damage arising from the interruption of electrical service since it was caused by the government’s decision to shut down the system, not by the storm.

If it is shown that the government shut down the water and electrical services to prevent damage during the storm, many insurance policies will be useless, causing millions of dollars in losses. The government has repeatedly said it deliberately shut down the electric grid to avoid damage to the system.

Jaime Gonzalez, president of Antilles Insurance, said insurance policies to protect property from storms and other acts of nature will be payable only if the damage occurred as a direct result of the storm. The same goes for business-interruption coverage. "If the interruption isn’t the result...of structural damage directly caused by winds, it won’t be covered," said Gonzalez.

In the case of a tropical storm such as Jeanne, its winds must knock the power out for the power-outage insurance to cover the damage. "If, for example, the storm’s winds caused a power plant to be damaged and that, in turn, caused a power outage at the client’s business, then it would be covered," said Gonzalez. "But if the power outage was a result of the government’s decision [to shut down plants], the coverage won’t apply."

Insurance companies have only just begun evaluating the damage and estimating claims. "We expect to receive about 2,000 to 3,000 claims," said Gonzalez.

Universal Insurance Communications Director Eira Pineiro said last week she still hadn’t seen many claims. "But we expect things to pick up next [this] week," she said.

Metro-area hospitals bear the brunt

While hospitals in the southern and western regions of Puerto Rico didn’t feel dramatic effects from Tropical Storm Jeanne, many in the north, especially in the San Juan metro area, suffered from the storm. Little damage was incurred, but the lack of electricity and water put some hospitals in a tough spot, a situation that threatened to turn critical if service wasn’t restored quickly.

Alfredo Volckers, regional executive director of Hospital Pavia, called the hospital’s situation urgent. The institution had to cancel a number of services, including elective surgeries and admissions, ambulatory and laboratory services, and more-specialized services such as magnetic resonance imaging scans. The hospital had some flooding, yet one of the biggest worries was the lack of air conditioning, except in intensive-care units.

"We have been greatly affected by the storm, so much so that in the first two or three days without electricity and water, we lost an estimated $500,000. If it had continued this way, we would have had to close within a week," said Volckers. "We have never been in a situation such as this; Jeanne caught us completely by surprise. Just to give an idea, after Hurricane Georges, we had electricity and water within a little over 24 hours."

Sources at the Department of Veterans Affairs Medical Center (and at other hospitals) said the San Juan Veterans Hospital was in a full-fledged crisis. Since it lacked electricity and water, it was calling other hospitals to see if they could accept its patients.

The medical center was also forced to cancel services scheduled for Sept. 20. Though it maintained its emergency room in full operation, patients with medical emergencies were asked to visit their nearest emergency room. Visits to hospitalized patients were also canceled until the state of emergency had ended.

Other hospitals were luckier. "We didn’t feel the effects of Jeanne; we had just invested in new systems to handle this type of situation," said Ivan E. Colon, administrator of Hospital Español Auxilio Mutuo. "Our generators can fully power the hospital for five days, and we have a huge cistern and two wells. We were even able to perform elective surgery during the storm."

Some retailers rake it in

As could be expected, fast-food restaurants as well as grocery and hardware stores did well in the immediate aftermath of Jeanne.

Pueblo Supermarkets had seven stores open as of Friday afternoon. "We opened at 6 a.m. on Thursday; stores that operate 24 hours a day had opened until 2 a.m. on Wednesday," said Chief Marketing Officer Melissa Lammers. "We establish a contingency plan every year and make sure we have additional water supplies and power generators to fulfill our consumers’ basic needs." She added that Pueblo’s staff is meeting three times a day to monitor the situation at the supermarkets.

Ponce Cash & Carry was also ready for the bad weather. "We made sure we had large supplies of the basic items that consumers need. This way, we were able to satisfy our shoppers," said President Johnny Luna, who noted that the company encouraged consumers to buy only basic items. Luna said he opened on Wednesday, the day of the storm, until 2 p.m. and on Thursday at 6 a.m.

Shopping malls were a little slower to open, which worried many of their retailer tenants. One retailer said, "Shopping malls never have any contingency plans and never give retailers any kind of help. Right now, many retailers are losing business and malls aren’t offering any help. But they’ll charge us rent on time, that’s for sure."

Some of the shopping malls that were open before week’s end were Plaza Cayey (including the Wal-Mart Supercenter), Plaza Guayama, and Plaza Las Americas. Others were opening only their anchor stores, banks, and food courts.

Rain or shine for tourism?

One of the most negative effects of Hurricane Georges was the shutdown of local hotels. "But that isn’t going to happen now," said Freyre of Applied Research. Jeanne has caused much less damage than Georges. Nonetheless, it has had a serious impact on the tourism industry.

"[Tropical Storm Jeanne] has been devastating for the hospitality industry," said Erin Benitez, executive vice president of the Puerto Rico Hotel & Tourism Association. "Hotels lost a lot of group business during the weekend."

Tourism Co. Executive Director Jose Suarez said damage has been minimal, but it is too soon to estimate Jeanne’s economic impact on the tourism industry. "Only some damage to the grounds and a few leaks have been reported," he said.

One of the properties to manage the crisis successfully was the Caribe Hilton. "Recently, we acquired two brand-new generators," said General Manager Jose Campo. "They provide energy to all the facilities, including air conditioning for the public areas and the guest rooms."

It cost the Caribe Hilton $6,000 per day to run its generators. "The lack of electricity places a burden on hotels because of the additional expenses we incur to serve our customers. These include paying overtime," said Campo.

Despite the delay in the restoration of electrical and water services, Puerto Rico’s main air and maritime ports were able to resume operations within a day of Jeanne hitting.

Ports Authority Executive Director Miguel Soto said 262 flights by major airlines serving Luis Muñoz Marin International Airport (LMMIA) were canceled Wednesday and Thursday and 15,200 passengers were stranded on the island.

Most of the airlines serving LMMIA had moved their fleet to safer locations and so didn’t suffer major damage from the storm. American Airlines, the island’s major carrier, was the first to resume flights, on Thursday. Other carriers such as Delta and Continental Airlines reinitiated service on Friday.

In Aguadilla, nine passenger flights and 20 cargo flights were canceled. Although operations there resumed Friday, the power outage limited the airport’s ability to serve travelers.

Soto said six ocean carriers had already docked in San Juan Bay by Friday. "Maritime operations were back in operation quite fast," he said.

Cruise lines had altered their itineraries to avoid Puerto Rico during the storm, but the cruise ports were open by Friday and three cruise ships had been expected to dock in San Juan over the weekend.

Beyond the short-term concerns, Feliciano of Advantage Business Consulting is worried about the cumulative, long-term effect that such an active hurricane season might have on Puerto Rico’s bread-and-butter tourism market. "After Charley, Frances, Jeanne, and Ivan, the whole U.S. Northeast market might be turned off the idea of a Caribbean vacation for quite some time," he said.

Agriculture always gets hit

Jeanne caused over $100 million in damage to the island’s agriculture industry. According to the Department of Agriculture, 25,500 cuerdas were affected by the storm’s strong winds. One cuerda equals 0.97 acres.

Plantains and bananas were the crops most affected. Approximately 16,000 cuerdas of them were destroyed, with an approximate value of $55 million.

Venancio Marti Jr. of Martex Farms in Santa Isabel said there was substantial damage to the company’s banana crops. "Fruit is one of the company’s main sectors. We estimate a 50% to 75% loss, compared with a 100% loss from Hurricane Georges," said Marti.

Other sectors of the agriculture industry suffered significant damage as well. The dairy sector reported a loss of over one million quarts of milk, said Juan Pedro, president of the Agriculture Department’s Dairy Industry Nucleus. "This is just what we’ve been able to confiscate. There is more that hasn’t been picked up," he said.

Approximately 36,000 quintals of coffee were affected, for an estimated $8.8 million loss; 5,500 cuerdas of produce were damaged, for an estimated loss of $8.8 million; and fruit and ornamental plants suffered losses to the tune of $2.4 million and $1.5 million, respectively.

As do telecoms

Jeanne left approximately 50,162 clients of Puerto Rico Telephone (PRT), or 4% of the company’s clients islandwide, without phone service. The company said it expected to finish repairs by Sept. 23.

According to PRT officials, the power outage caused most of the damage. The phone network for automated teller machines, however, continued to work at full capacity.

"So far, there have been no reports of telecommunications disruptions affecting Puerto Rico’s commercial activity," said a PRT spokesperson. "All PRT clients that provide essential services to the island have continued receiving phone service."

During the power outage, PRT turned on its 200 emergency generators, enabling the company to keep offering service. As of Saturday, the majority of the phone network was still relying on backup power.

Wireless telecommunications companies had only minimal damage to report as well. The lack of electricity, however, did affect cellular systems and fiber-optic networks, prompting companies to reroute calls through other wireless systems.

"Centennial was able to redistribute calls to phone cells in neighboring zones; it was also able to reroute calls within its fiber-optic network," said a Centennial spokesperson. Sprint and Cingular also rerouted calls through neighboring zones, though subscribers won’t have to pay extra charges for roaming.

Construction industry ready to move ahead

Preliminary reports indicate the construction industry survived Tropical Storm Jeanne with no major problems.

Jorge Jose Fuentes, president of the local chapter of the Associated General Contractors of America (AGC), told CARIBBEAN BUSINESS that some AGC members hadn’t reported the status of their projects after Jeanne’s visit last Wednesday, since they still had no water or electricity. In general, however, the construction industry was in relatively good shape despite the heavy rains and downtime from the storm.

As of press time Monday, no significant damage to equipment or structures had been reported by AGC members, noted Fuentes.

"We were operational at our projects Friday afternoon, but not everyone showed up; some inspectors, project managers, and other personnel might not have been able to leave their homes," said Fuentes. "We hope things will get back to normal early this week and our projects will be able proceed once power and water are restored throughout the island."

"The storm didn’t cause equipment or structural damage at the projects themselves, but the heavy rains saturated the terrain and caused flooding at some construction sites," said Jose Vizcarrondo, vice president of construction firm Desarrollos Metropolitanos & past president of the local AGC Chapter. "Basically, the greatest losses have been the downtime and the added delays caused by the heavy rains."

Fuentes noted that construction companies have contingency plans for situations such as storms and hurricanes. He believes the government, too, should have a contingency plan in place year-round.

"The government has already begun laying underground power lines in our urban centers. That’s important, but it takes time and is very costly," said Fuentes. "The government has to be more proactive about taking care of such things as trimming trees near power lines to further avoid dangers and inconveniences to businesses and taxpayers."

An optimistic note

Freyre believes the total cost of Jeanne will be hard to figure because all of the negatives can’t readily be accounted for. For instance, a family that has had to throw away the contents of a refrigerator has suffered a loss, but that loss won’t be reflected in the national accounts, which measure the production of goods and services of business enterprises. Households aren’t treated as enterprises.

"It’s as if you consumed it [the food]. The negative effect is disguised," said Freyre, who is optimistic nonetheless.

"I’m sure the final results [of Jeanne’s visit] won’t be negative," Freyre said of the current fiscal year, which ends June 30, 2005. For one, President Bush declared Puerto Rico a disaster zone last week, ushering the way for a small windfall. Such wouldn’t be the case if we were talking about the Dominican Republic or Nicaragua, he added.

Already, the government has announced monetary assistance is on its way. Farmers are expected to receive an estimated $100 million in federal insurance funds for loss of crops. Insurance payments also will kick in to boost the economy.

Economist Calero said some businesses will thrive after Jeanne, such as those that clean carpets or sell new ones, and manufacturers will put employees on overtime if there is demand for production.

"I don’t believe anyone expected a hit of this magnitude," said Calero. "Business will resurface, but it’s going to cost everyone."

CARIBBEAN BUSINESS Special Projects Editor Lorelei Albanese, Contributing Editor John Collins, Associate Editors Jose Carmona, and Taina Rosa, Staff Reporters Rossie Cortes and Joanisabel Gonzalez-Velazquez, and Supplements Writers Diego Corral and Iva Yates contributed to this story.

This Caribbean Business article appears courtesy of Casiano Communications.
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