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Investing In Puerto Ricos Future
by Daniel R. Garza
March 30, 2000
Lourdes Rovira, Puerto Ricos chief banker, answers critics who say Puerto Rico is diving deeper into debt. She shows how the islands economy and government revenues are growing faster than its debtallowing the Government Development Bank to invest in the Urban Train, the health reform, and a score of vital projects.
Eighteen months after she took charge of the Government Development Bank for Puerto Rico (GDB), Lourdes Rovira is still running full steam ahead.
Under her steady hand is a trainload of major economic development projects requiring massive amounts of public investmentmuch of it requiring GDB-issued debt. Among her important challenges is explaining to taxpayers how the government is borrowing proportionately less today than 25 years ago and how todays indebtedness will result in increased economic progress for the island tomorrow.
"Debt is a governmental investment," she told CARIBBEAN BUSINESS. "When we issue debt, what were doing over a period of time--ranging from 30 to 40 years--is paying off an investment whose magnitude would be impossible to pay in cash today. Were also saving taxpayer money by refinancing old debt."
Critics have charged the government is diving deeper into debt. Rovira explains thats not the case at all.
By the end of the fiscal year 1999 (June 30), total public debt had reached $22.7 billion. Often, central government debt is mistaken for total public debt. In fact, it is not even the largest share. Of the total debt, the central government owes only $5.1 billion, agencies and public corporations owe $16.3 billion, and municipalities owe $1.3 billion .
Central government debt, only one aspect of total public debt, has risen every year since 1975 (except for 1978, 1985, 1996), from $1.3 billion to $5.2 billion as of Dec. 31, 1999. And while debt has risen during the last 25 years, so has Puerto Ricos economy. As a matter of fact, during that period the ratio of total public debt (including central government, municipal, and public corporation debt) to gross national product has dropped from 74% in 1975 to only 59% today.
As the economy grows larger and generates more income and more government revenue, it increases the governments ability to borrow more money for economic development projects, in turn designed to make the economy even more productive in the future. Projects such as the Urban Train, the Superaqueduct, the privatization of money-losing, government-owned enterprises, and highway improvements are meant to make Puerto Rico more competitive in the global market.
Issuing new debt is also a sound strategy to save money when interest rates drop. By refinancing $7.8 billion in existing debt during the last six years, the GDB has saved government coffers a whopping $640 million on future interest payments.
Two weeks ago, the GDB went to the bond market and sold another $475 million of general obligation (GO) bonds to finance a variety of capital improvement projects. GO bonds are backed by the full faith and credit of the central government. This latest bond issue was the first ever in the U.S. municipal bond market in which all the elements of the transaction could be completed on the Internet (60% of the issue was sold via the Web).
Also two weeks ago, Moodys Investors Services-- one of two major bond raters--improved the government of Puerto Ricos credit outlook from stable to positive (CB Mar. 23).
The positive outlook, which could pave the way for an improved bond rating, is based on the sale of the telephone company and health care facilities, improved tax collection and revenue, and the islands better-than-expected adjustment to the phase-out of Section 936 of the U.S. Internal Revenue Code.
The governments bond rating remains Baa1, considered adequate but with some susceptibility to adverse conditions.
After 18 months as GDB president, Rovira seems to comfortably fill the big shoes left behind by Marcos Rodriguez-Ema, the former GDB president who led the privatization of government-owned enterprises, such as the telephone company, health facilities, hotels, agribusinesses, and a shipping line.
Today, Rovira grapples with the costly implementation of Gov. Pedro Rossellos massive health are program, which entails trying to get rid of hard-to-sell, government-owned hospitals and paying down the $650 million debt left behind by the Health Facilities and Services Administration (Afass by its Spanish acronym). That now-defunct government agency operated hospitals and clinics, now being closed or sold to the private sector.
Just as privatization marked Rodriguez-Emas tenure, the highly anticipated transshipment port may be Roviras legacy. She has enthusiastically embraced the project, ..which the GDB is guiding, and assures a site will be selected this summer.
She is also overseeing other key projects the government hopes will accelerate Puerto Ricos economic development, such as the privatization of Rafael Hernandez Airport in Aguadilla, the development of a cruise ship terminal for Royal Caribbean, and the Condado Beach Trio resort project. Another project that remains close to the former art students heart is the Puerto Rico Museum of Art, a project with obvious social and cultural value.
The financing of these projects has been helped by a strong U.S. economy (undergoing the longest expansion in U.S. history), low interest rates, and increased revenues pouring into government coffers, which have made a streak of borrowing by the GDB possible. Between 1993 and 1999, the GDB issued $18.9 billion in bonds.
"Were making responsible transactions by taking advantage of prevailing market conditions. Not taking advantage of them would be irresponsible," Rovira said.
The billions of dollars are paying for projects that are impossible to pay for in cash today.
"For example, were not going to pay for the Urban Train with the income tax we collect this year, because that would be a misuse of funds," Rovira said. "We use tax revenue to maximize the use of that money for a set period of time."
Rovira and her executives call it generational justice, requiring future generations to help shoulder the cost of projects they will use.
"If were investing in these infrastructure projects today--knowing that those who will benefit from them will be our children and grandchildren--its only fair that they share part of the cost of those infrastructure projects," she said.
Timothy Blake, the analyst, who watches Puerto Rico for Moodys Investor Services, likens the investment in infrastructure projects to buying a house.
"If you take out a mortgage to buy a home and youre repaying the mortgage over the useful life or expected life of the home, it makes good sense," said Blake, Moodys vice president and senior analyst. "Theres a match between the debt payments and the use that youre getting from the home. We like the matching we see between the debt payments and the use the Commonwealth is getting from the projects its building."
The debt incurred to pay for massive infrastructure investments is the product of Puerto Ricos strongly centralized government, which, in most cases, cannot be compared to U.S. state governments.
"Most functions assumed by the central government in Puerto Rico (such as public schools, police and fire services, and the ownership of public utilities) are not typically assumed by state governments on the mainland, but by local governments, such as counties and cities or by private companies," said GDB Executive Vice President Carlos Colon de Armas.
As a result, the current ratio of tax-supported debt to total personal income is about 20 times more than usually seen among the 50 states, and more than four times as high as the most heavily indebted states.
Tax-supported debt covers all government debt, except that issued by agencies and public corporations that support themselves with non-tax revenues, such as the Puerto Rico Electric and Power Authority, University of Puerto Rico, and the Puerto Rico Aqueduct and Sewer Authority.
"The ratio is affected by the low levels of income in Puerto Rico (per capita income is about one-third the U.S. average) and by the large absolute amount of debt. At $16.3 billion with this [latest bond] issue, the Commonwealth government has more outstanding tax-supported debt than all but three of the states," the Moodys report said. Outstanding tax-supported debt in the last five years has increased by more than $6 billion due to Rossellos campaign to improve the islands infrastructure. Debt has grown at a pace that is more than twice the pace of personal income growth, according to Moodys.
"The creation of a $1.2 billion infrastructure permanent fund, with proceeds from last year's sale of a majority stake in the telephone company, potentially reduces the need for future debt to fund crucially important water and sewer improvements," the report said. For the most part, the bonds the GDB has issued are used to pay for infrastructure projects, but some bonds are used to pay down operating debt. Between 1993 and 1999, the GDB issued $756 million in bonds for operational debt.
Financial analysts generally frown upon this type of debt because its not invested in capital projects that yield revenue.
In Puerto Ricos case, however, much of the operating debt in recent years has been incurred to privatize, often nearly bankrupt, government-owned enterprises, a move financial analysts view as positive.
"Operational debt is still a pretty modest proportion of the Commonwealths overall debt. We like to see long-term debt that is matched against long-term projects and generally thats what the Commonwealth has done," Blake said. Occasionally the government also uses debt for operating purposes. The big example is the Afass deficits that are being bonded out. Thats not good debt, and if that were to get out of control, we would have serious concerns. Thats what brought New York City problems in the 1970s."
However, Blake acknowledges the $650 million Afass debt was incurred to implement sweeping change in the islands healthcare system, which will produce greater cost savings for the government in the future and improve its financial standing. Remember, Moodys improved the governments debt outlook based, in part, on the merits of healthcare reform.
The argument for taking on more debt to get out of a bad situation can be made for Navieras NPR Inc., the formerly government-owned ocean shipping company that had been losing money for many years. Private investors bought it from the government in 1996. The government still owes $277.8 million in debt left behind by the company.
When it was being offered for sale, the shipping line carried some $350 million in debt and was losing more every year. No private investor would have acquired the company with that kind of debt burden. The government retained the debt because to keep Navieras would have cost taxpayers much more in the long run as it continued to bleed capital.
Refinancing old debt
Rovira and her team have saved more than a half billion dollars refinancing old debt. Between 1993 and 1999, the GDB re-financed $7.8 billion in existing debt, representing $640 million (in current dollars) in savings on future interest payments.
"If interest rates would have been at 10% or 12%, we wouldnt have issued bonds. Why are we issuing bonds? Because interest rate levels are at their lowest," she explained. "It would have been totally illogical, irresponsible, and negligent on our part as a fiscal institution, not to have re-financed existing debt."
The GDB has been prudent, Rovira says. She bristles at the notion that the bank is pushing the government deeper in the red. In one very basic sense, shes right. The GDB has kept debt within the limits outlined in the Commonwealth constitution.
The central government cannot carry debt that exceeds 15% of the average annual revenues for the two previous fiscal years. The latest $475 million bond issue technically brings the government up to 9.7%, well below the limit.
Since 1993, the GDBs policy has been to keep the margin of debt below 10%. This is in stark contrast to the period between the mid-1970s and mid-1980s when the debt margin fluctuated from more than 10% to more than 13%.
"We are at the second-lowest borrowing margin in the last 30 years. Thats why we dont understand the criticism that the GDB is indebting the government," Rovira said. "We are within the constitutional limit. There is not a problem with our level of debt. We are very healthy and stable."
Analysts are pleased that general fund net revenues are on the rise: $6.5 billion in 1999, $7 billion in 2000, and an estimated $7.5 billion in 2001. In fact, since 1993, revenue has grown increasingly faster than the rate of debt.
With elections just eight months away, Rovira may not be around next year to answer the recurring questions about government debt. If she is, Puerto Ricos chief banker is confident that she and her staff will be able to continue to say they have made the right investments for the island at the right time.