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Este informe no está disponible en español. CARIBBEAN BUSINESSReady To RollMore than $9 billion in government bond issues in the last 10 months is setting in motion an islandwide wave of public works projectsBY KEN OLIVER-MENDEZ
March 7, 2002 You can get there from here: New roads and highways head list of government projects designed to spur island economy After a sluggish start in 2001, the pace of public works projects in Puerto Rico is beginning to pick up and should be at full steam by mid-2002, according to all indications. The new round of heavy infrastructure spending will follow on the heels of record-breaking government bond issues by key agencies whose activities directly impact the construction industry. The Calderon administration appears to be making good on its promise to spur economic recovery on the island through infrastructure development. Some agencies—like the Public Buildings Authority—are stretching their credit to the limit in order to push through a $1.3 billion capital improvement program for the construction of schools, government offices, police and fire stations over the next several years. Other agencies, like the Highway Authority, still have the capacity to seek even more funds on the bond market as it ploughs ahead with $2.7 billion in road projects that will reach all 78 of Puerto Rico’s municipalities. In exclusive interviews with CARIBBEAN BUSINESS, members of Gov. Sila Calderon’s economic team explained both the fiscal and economic development strategies behind the administration’s current infrastructure program, and detailed the major components of some of the biggest projects that are in the works. Starting from scratch When it comes to infrastructure spending on the island, no doubt the biggest change observed in 2002 compared to 2001 is on the highway construction front. Highway Authority Executive Director Dr. Fernando Fagundo said, the agency’s new Construction Improvement Program (HCIP) makes a commitment to include road projects for all 78 municipalities. Major changes in the authority’s new $2.7 billion HCIP include more than $80 million in projects in the Mayaguez area, including the conversion of PR-2 between Mayaguez and Ponce into an expressway. "Mayaguez is the only major city in Puerto Rico that isn’t connected to an expressway," Fagundo noted. Fagundo said his agency’s HCIP has its sights set on completing Puerto Rico’s strategic network, which will make it possible for individuals and businesses to circle the island on expressways, as well as cross from north to south on expressways at various points. Projects of all sizes The metropolitan San Juan-based Urban Train still takes up a big chunk of the HCIP, but that’s about to change, too. "We’re aiming to inaugurate the Urban Train on Sept. 29, 2003," Fagundo said. "We’ve budgeted $249 million in fiscal year 2003 for the completion of the train, and this will be the last year of major construction for it." With regard to the Urban Train, the Highway Authority executive director said his agency has just commissioned a study to determine the feasibility of a light train extension of the train from Stop 26 (Sagrado Corazon) at the entrance to Santurce to the Minillas Station, in the center of Santurce. "An over ground alternative like a light train would be an easier, more flexible and much less costly alternative than the original plan to extend the train into Minillas underground," said Fagundo. Altogether the Highway Authority has $530 million in projects under construction at present, and the total is climbing rapidly. Between March and July 2002, an additional $364 million in new projects will be announced. The heaviest spending is just ahead, with the authority projecting announcements of $21 million in construction work in May alone for the expressway conversion project on PR-2, between Mayaguez and Ponce. Additional bids on the project are scheduled to go out during the latter part of 2002, and the conversion is expected to be completed by mid-2004. Then in June, more than $200 million of the $364 million total will be announced, with most of the money going to the redesigned Eastern Corridor between San Juan and Canovanas. The long-awaited final stages of completion of PR-10 (to the tune of $76 million) between Utuado and Adjuntas will also be announced between June 2002 and July 2003, with the entire decades-long PR-10 project scheduled for completion by October 2006. Beginning this July, tens of millions in construction bids will also begin to go out on the even more ambitious completion of PR-53 between Yabucoa and Guayama. This project will include the construction of two tunnel sections in the municipalities of Maunabo and Patillas. Fagundo is especially upbeat on the potential of this project to benefit the up until now relatively isolated southeast region of the island. "When it is completed in 2007, it will open up access to a breathtakingly beautiful area with extraordinary potential for tourism and economic development," Fagundo enthused. Further down the road, so to speak, Fagundo also said that the authority will likely undertake construction of a new expressway between Hatillo and Aguadilla (connecting to PR-22), although the option of converting the existing PR-2 into an expressway between the two municipalities is also still under consideration. Along with these big projects, the authority has more than 50 smaller projects that will be announced before July. "They may not be big projects, but they’re priorities for the municipalities," Fagundo said. With the implementation of the new HCIP, the agency’s goal is for progress to be visible throughout the island. Government Bank Development (GDB) Vice President Jose Pagan said the authority has the capacity to issue at least $1.5 billion in additional bond financing in the future, should it be necessary during the course of implementing the new HCIP. In January, the Authority issued $1.1 billion in bonds—of which $700 million was new money, and about $400 million was refinancing. Hitting the ceiling One agency that has hit its debt limit as a result of its most recent bond issues ($800 million in January 2002) is the Public Buildings Authority (PBA). "The PBA now has $2.1 billion in outstanding bond issues, which is its current limit as stipulated by the Legislative Assembly," Pagan said. As to what the agency is doing with the money, Office and Management and Budget Director Melba Acosta provided a copy of the PBA’s latest Capital Improvement Program (CIP), which details the allocation of $927 million in construction projects slated to take place between fiscal year (FY) 2002 and FY 2005. As FY 2002 comes to a close, PBA is completing a record amount of $325 million in school construction projects, to be followed in FY 2003 by another hefty $271 million in school projects. Altogether, 70 new school construction projects—which are taking place in the majority of the island’s 78 municipalities—comprise 84% of the agency’s new CIP (See sidebar). In addition to school construction projects, the PBA is also investing heavily in new Police facilities, with $61 million in such construction scheduled to take place throughout the island between FY 2002 and FY 2005. Another major area where PBA is investing is in construction projects of new government office buildings. After years of minimal and even no activity in such projects, the agency will invest $22 million in this category of construction in FY 2003, to be followed by another $11 million in FY 2004. Electricity, education, and housing Along with the Highways and Public Buildings Authorities, the Puerto Rico Electric Power Authority (Prepa) has also been active in the bond market in recent months, coming out with a $720 million issue in December 2001 to help fund a new Capital Improvement Program (CIP) of its own. Prepa’s revised CIP for FY 2002 to FY 2006 calls for nearly $2 billion in new construction over the period. As reported by CARIBBEAN BUSINESS in its February 7 cover story, Prepa is currently spending an estimated $100 million to construct an underground transmission circuit line around the San Juan metropolitan area, designed to reduce the incidents of loss of power in the aftermath of major storms and hurricanes. Prepa’s CIP includes an additional $661 million in expenditures over the next five years to improve the reliability and efficiency of its system. Other major Puerto Rico bond activity in 2001 included $96.8 million in Qualified Zone Academy Bonds. This federally sponsored program allowed the Department of Education to issue the interest-free bonds, with bondholders receiving tax credits instead of interest dividends. Thanks to a $9.6 million partnership with Microsoft Corp. in this program, the Puerto Rico Department of Education will allocate the new funds for curriculum development, school refurbishing, equipment purchases, and teacher training. Another area that has seen intense financing activity is the government-subsidized housing sector. In 2001, the GDB’s Puerto Rico Housing Financing Corp. (PRHFC) subsidiary and the Puerto Rico Housing Bank (recently merged into the PRHFC) issued $527 million in bonds. These funds are being dedicated to the government’s aggressive low-income housing development and low-interest mortgage program, which is committed to developing 50,000 new low-cost homes by 2005. The bank’s role Behind much of the boom in infrastructure financing, of course, is the GDB. During 2001, the GDB shepherded a total of $7.1 billion in government bond issues, higher than the amounts issued in 1999 and 2000 combined. New financing comprised $5.2 billion of the 2001 total, while $1.9 billion in existing government debt was refinanced. January saw the GDB steer the Highway and Public Buildings Authorities through $1.9 billion in bond issues ($1.5 billion in new money, $400 million in refinancing), bringing the total amount of bond issues over the last 10 months to $9 billion. The GDB’s intense financing activity has been characterized by prominent participation by local financial institutions, in partnership with major stateside banks. "We’ve promoted more alliances than ever between U.S. and local banks," GDB President Juan Agosto-Alicea told CARIBBEAN BUSINESS. The GDB benefited significantly from a highly favorable low interest rate environment. "There’ll be considerably less bond issues this year, because we front-loaded several in the last couple of months to take advantage of the attractive interest rates," GDB Executive Vice President Jose Pagan said. Nevertheless, in addition to the expected Tax and Revenue Anticipation Notes (Trans) and General Obligation (GO) issues, Pagan said that in 2002, the GDB is also analyzing the possibility of new municipal financing bond issues, as well as the possibility of financing more savings for the government’s housing programs and long-term securitizations. After having posted profits for the past two years in a row, Agosto-Alicea said he expects the Ports Authority to also be in a position to enter the bond market again, after a decade-long absence. As a result of the historically low interest rates, $838 million of the Commonwealth’s $1.3 billion GO bond issue in October 2001 was for refinancing. The $800 million Trans of October 2001 was notable in capturing the lowest interest rate in GDB’s history (2.08%). In December, the GDB issued a $1.9 billion Public Financing Corp. (PFC) debt to finance what it identified as past deficit spending by the Commonwealth. Local buyers purchased a record $800 million of the issue. Pagan said through the PFC issue alone, the government would achieve over $300 million in savings over the next 30 years. Solid footing Thanks to the series of deft financing moves, the GDB’s net income experienced more than 50% growth within a six-month period, rising from $85 million on June 30, 2001 to $175 million on Dec. 31, 2001. More importantly, the bank’s liquid assets increased by 350%, from $612 million as of Dec. 31, 2000 to $2.7 billion as of Dec. 31, 2001. Likewise, GDB deposits rose by 24% between Dec. 31, 2000 and Dec. 31, 2001, from $2.5 billion to $3.1 billion. Despite difficulties on the budget front due to the weak economy (difficulties which Agosto-Alicea is quick to point out are also shared by most mainland U.S. states), both Standard and Poor’s and Moody’s have both maintained their credit ratings for the Commonwealth on four different occasions over the last year. This is better than several U.S. mainland states that saw their ratings downgraded in 2001. This month, Standard and Poor’s will review the Commonwealth’s rating once again, and Administration officials believe that the government’s latest actions aimed at assuring a structurally balanced budget will have a favorable impact on the outcome. CHART #1: 2001-2002 Major Commonwealth Bond Issues
Source: Government Development Bank CHART #2: Highway Authority Construction Improvement Program (in millions)
Source: Highway Authority Chart #3: Highway Authority Construction Improvement Program Highlights*
*The investment estimates are only for the specific phases of the projects being announced. Source: Highway Authority
Chart #4: Public Buildings Authority - Capital Improvement Program (in millions)
Source: Office of Management and Budget This Caribbean Business article appears courtesy of Casiano Communications.
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