04/2018: A New Privatization Model for PREPA

Competition can support Puerto Rico’s future

PrivatizationThe aftermath of hurricanes Irma and Maria essentially sealed PR Electric Power Authority’s (PREPA) fate, at least in its current legal form. The magnitude of the physical destruction experienced both by its generation capacity and its distribution networks renewed historical calls for its privatization. That possibility now seems irreversible, particularly given the Fiscal Oversight Board’s (FOB) drive to impose austerity across the public sector and the government’s market-friendliness inclination. However, not all privatization processes are the same and, by extension, not all lead to the same outcome. This issue of Pulse presents a novel approach to privatization—one based on the controlled introduction of competition in regional markets. The approach described herein has been successfully applied elsewhere. More importantly, it is designed to align electricity generation with PR’s changing socioeconomic landscape at zero cost to the government, consumers and businesses. Sometimes, privatization does work.

Puerto Rico Economic Pulse ©

02/2018: Out With the Old, In With the New – Part II

The Government’s Revised Fiscal Plan stumbles on assumptions

Out with the Old In with the NewEconomic modeling is both science and art. Failure to take this seriously leads to wrong decision-making scenarios in PR. If that was acceptable in the past, it is not at present. Old ways relied on a relatively stable population to forecast growth and fiscal revenues. As per the revised fiscal plan, this appears not to be the case. Old ways relied on government revenues forecasted, in many cases, as trend of past collections. Now, these revenues must be tied to demographics and economic growth in the aftermath of hurricane Maria. Old ways relied on GNP growth forecasts by the PR Planning Board. Now, the forecasts in the fiscal plan need to use a coherent economic model of PR’s economy rather than mere assumptions with irreconcilable results. This issue questions the assumptions and results of the most recently revised Central Government Fiscal Plan.

Puerto Rico Economic Pulse ©

01/2018: Out With the Old, In With the New – Part I

Elements of a much-needed economic plan
Out With The Old In With The NewOut with the old and in with the new is a two-part analysis of key strategic elements that Puerto Rico’s economic plan must outline and execute if we are to compete and regain our title of the “Shining Star of the Caribbean”. Infrastructure is a recurrent topic in economic growth and development strategies. Hurricane Maria devastated the Island’s electrical system, highways, ports, water facilities, and telecommunication systems. To this date, neither the Government nor the Supervisory Fiscal Board have communicated the outline of such a comprehensive Plan and instead, the Governor has announced the need to privatize the PR Electrical Power Authority and the Board has insisted on a revised Fiscal Plan. Meanwhile, government liquidity and credibility issues threaten the continuation of government services and timid recovery efforts. This Issue addresses what needs to change from the old to the new focus in strategy and execution if PR is to compete, worldwide.

Puerto Rico Economic Pulse ©

12/2017 The Perfect Storm in 2017

Irma, Maria, and the US Tax Reform
The Perfect StormOn Wednesday December 20th, 2017, the House of Representatives joined the Senate in passing the US Tax Cuts and Jobs Act. This is a major overhaul of the US tax code that will substantially cut corporate tax rates on a permanent basis and tax cuts to households that will expire over the next decade. It will also increase the Federal deficit by $1.5 trillion and adversely hits Puerto Rico as “collateral damage”. PR will remember 2017 as the year of the perfect storm with category 5 hurricanes Irma and Maria in September and the US tax reform. The latter threatens 50% of our GDP, 288,000 direct and indirect jobs, and 33% of the central government budget. The hurricanes destroyed PR’s electrical grid; uncovered the face of poverty; bankrupted many small and medium businesses; incentivized massive migration to the US, and further curtailed PR’s autonomy to govern itself as Congress mandated a Fiscal Supervisory Board. Will business and financiers gamble on PR?

 

Puerto Rico Economic Pulse ©

Sep/Oct 2017: Puerto Rico – Submerged and in Darkness

Highlights of Economic Impact of Hurricane Maria

More than a month has passed since hurricane Maria ravaged the island of PR. The recovery efforts have been slow and insufficient. As of today, 25% of households have no water service; 75% remain in darkness without electricity; 35% of Puerto Ricans do not have telecommunications services. Sensing this lack of progress, many Puerto Ricans have opted to leave the island in search of greener pastures in the mainland. Florida alone has received upwards of 67,000 “refugees” since the storm hit the island on September 20th. The situation is dire to say the least. With a destroyed infrastructure, lack of water and power, and an accelerated pace of emigration, businesses and government desperately need to perform a comprehensive assessment of economic damages, identify risks and opportunities, measure, manage, and minimize risks now and in next few years. This Pulse is a teaser of a comprehensive study HCCG is preparing regarding the impact of hurricane Maria and how it forges Puerto Rico’s economic future.

How Hurricane María forges PR's Economic Future
Click on the image to order the Full How Hurricane María forges Puerto Rico’s Economic Future Economic Impact Study
Puerto Rico Economic Pulse ©

Aug 2017: Time to Right a Wrong – Part I

Time to Right a Wrong – Part I Risks to the Puerto Rico health care system http://www.hcalero.com/aug-2017-time-to-right-a-wrong-part-i/Risks to the Puerto Rico health care system
Health is one of the essential services that the PR government provides to its resident population. Currently, the Puerto Rico health care system is facing a perfect storm. As if domestic headwinds were not enough, the political mess in Washington, DC is fueling more trouble for PR. All attempts to repeal and replace the Affordable Care Act (Obamacare) have failed and a bipartisan compromise to fix the US healthcare system may be in the works but it will take time. Failing repeal, President Trump has tweeted he prefers to implode Obamacare by eliminating the subsidies provided to health insurance companies in the exchanges. Puerto Rico did not participate in the insurance exchanges but will likely suffer anyway. Fiscal shortfalls, trimmed payments to health insurers, and growing uncertainty have inflicted damage to health providers and Mi Salud (the Puerto Rican version of Medicaid) is on the verge of collapse. This seems unfair to us, since the Island has managed its health needs with fewer funds than Mainland states. This issue highlights many health challenges ahead.

Puerto Rico Economic Pulse ©

Jul 2017: They Still Don’t Get It

An Analysis of PR’s Fiscal Plan & Budget
On June 30, 2016, President Obama signed into law the federal Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Section 1010 of PROMESA created the Financial Oversight and Management Board (FOMB) for Puerto Rico, a seven-member board appointed by the US President for terms of 3 years. The Board has omnipotent powers and neither the Governor nor the Legislature in PR may control the Board. Their charter is to enact fiscal plans and budgets so the Island can return to the financial markets. The question is how will this be achieved. A balanced fiscal budget alone will not rescue the PR economy from its long-term economic recession nor will it stop the outward migration of its residents. Bondholders of PR’s public debt want to be paid but without a growing and vibrant economy, there will not be enough revenues to service this debt and continue providing “essential” government services. This issue addresses the key question of economic policy to restore growth, something which appears “Many, Still Don’t Get It!”

Puerto Rico Compass ©

2Q-2017 Will Manufacturing Save Puerto Rico?

An analysis of 2nd Quarter 2017 economic indices

Historically, manufacturing was a growth engine in Puerto Rico. Manufacturing’s relevance started with operation Bootstrap and the implementation of Section 931 of the US Internal Revenue Code in the 50s and continued with the implementation of Section 936 in the 70s. Thus, the contribution of manufacturing to the nominal GDP growth grew from 25% in the 50s to 61% in the ‘00s. However, due to the end of Section 936 in 2006, international competition, the end of several drug patents, and the PR fiscal and debt crises, the contribution of manufacturing to the Island’s economic growth fell from 61% in the ‘00s to 46% this decade (2010-2016). Is this sustainable? Worldwide, manufacturing paints a gloomy picture. Although responsible for 8% of total jobs, manufacturing was responsible for 47% of PR’s GDP in 2016. This issue examines the performance of 2Q-2017 indices with emphasis on manufacturing.

Puerto Rico Economic Pulse ©

Jun 2017: So, what’s the Plan for Puerto Rico?

Assessment of Fiscal Plan’s questionable elements
Tensions seem to be flaring between the Fiscal Oversight Supervisory Board (Board), designated per PROMESA law, and the Government of PR as the reality of a steep decline in nominal GNP growth in the Island begins to materialize through the new budget’s fiscal discipline measures. The Fiscal Plan, submitted by the Governor of PR and approved by the Board, charts the route ahead. As more details became available, different groups have become more vocal in criticizing the approved Fiscal Plan (FP). Underlying these concerns are several questions, such as: Will the Fiscal Plan spur investment and economic growth? Are the measures included in the FP enough to restore fiscal discipline and return to a growth path? Are the FP’s assumptions correct? Does the FP adequately asses economic impact? This issue attempts to answer some of these questions from the standpoint of bondholders, renowned economists, government officials, and HCCG.

Puerto Rico Economic Pulse ©

May 2017: Entrepreneurship as a Way out for PR

The Legacy of Dr. William Baumol to US

This Pulse is a tribute to a great economist and a great man, as well as a friend, who recently passed away. For many years, Dr. William Baumol and his wife enjoyed spending time at their Luquillo beach apartment from December thru March. Most of all, I remember his common-sense explanations and the clarity with which he could explain a complex theory and write in impeccable style for all of us followers to learn. His insights, particularly those on innovative entrepreneurship, are at the heart of the solution to PR’s ongoing economic woes. William was also a man of action, being instrumental in obtaining a Mellon grant to fund “The Economics of Status in Puerto Rico” together with a group of local economists. To this day, this research is one of the best empirical and comprehensive works on the subject. Filling his void will be difficult and, yes, I will miss the conversations and enthusiasm that he never hesitated to share. Let this Pulse stand as testimony of one of his many great ideas, one that could definitely help shape a way out for PR. Hasta siempre.