A Better Method for the Federal Government to Support Puerto Rican Recovery and Resiliency
By Thomas King
September 27, 2018
This is National Clean Energy Week and one year from the tragedy of Hurricane Maria whose destructive effects are still in plain view. This is the perfect time to address smart policy that can accelerate Puerto Rico’s recovery while replacing dirty, aging, and expensive oil-fired power plants with sustainable and economical sources.
Puerto Rico is up and operating, but urgently needs to move to renew and transform its energy infrastructure to spur economic growth. Real progress is accelerating in distributed generation at local level, but these transformative achievements cannot move the needle in the short term. Puerto Rico requires $billions and it must start now — but the government and related entities who provide services are bankrupt, facilities remain devastated, planned privatization (while positive) adds uncertainty, and the return to the capital markets is beyond the visible horizon.
Potential investors and lenders to Puerto Rican Government-related entities, and projects that rely on payments from these entities, face significant challenges in raising and committing capital. Private investors are uneasy about unpredictable losses due to lack of credit associated with Puerto Rican entities and political risks, such as government interference, discriminatory changes in regulations, contract frustration, and performance obstructions.
Dozens of critical projects in energy, water, waste, transportation, housing, and more representing $billions in investment are sitting on the sidelines without any ability to move forward. Among them are over 1,600MW of contracts for renewable power generation dating back to 2011. All are sited, many are fully permitted, and several have interconnection agreements. All could be expeditiously renegotiated to reflect the steep reduction in the cost of renewable generation and brought online within 12–18 months if there was a clear path to financing — there is not.
A clear requirement exists for the federal government to play a catalytic role through transitional financial support. But, existing domestic federal programs are not sufficient to address the enormity and immediacy of the challenge. The crisis in Puerto Rico calls for the adoption of an altogether different structure for financial support that is also familiar to federal agencies.
The Overseas Private Investment Corporation (“OPIC”) already offers political risk insurance (“PRI”) to cover similar risks of loss faced by investors and lenders in Puerto Rico today. OPIC-supported PRI facilities can attract capital with long-term risk-mitigation coverage backed by the U.S. government’s Full Faith and Credit.
OPIC cannot insure or lend to borrowers or projects in the U.S. as its name implies. The result is that the U.S. Government will provide better risk management incentives to American companies to invest in, for example, Haiti, than in Puerto Rico. Within the U.S., Puerto Rico is indeed a unique case, but does that sound right to anyone?
I propose we address this discrepancy with the establishment of Puerto Rico Risk Insurance (“PRRI”) modeled on OPIC PRI cover.
PRRI coverage and eligibility would be broadly consistent with guidelines used in OPIC programs. Key terms would include: 1) up to $250 million per project for up to 20 years, 2) non-cancellable coverage and guaranteed rates for entire term of the insurance contract, 3) must demonstrate positive economic development impact and comply with federal policies, and 4) government of Puerto Rico and/or related entity must acknowledge and consent.
PRRI has advantages over other methods of transitional financial support including: 1) covering equity as well as debt while aligning interests, 2) covering risks of loss from contracts for services or goods where no debt exists, 3) avoiding the moral hazards for lenders and borrowers implicit in loan guarantees, 4) claims avoidance through advocacy by various U.S. government agencies, 5) providing greater operational and capital management flexibility to insured parties, and 6) incentivizing investors to relinquish coverage early when counterparty credit stabilizes (i.e., federal government risk exposure will tend to be in place for shorter periods).
Three things should begin immediately: 1) Congress should begin actively reviewing methods and means for additional transitional financial support for Puerto Rico including Puerto Rico Risk Insurance, 2) the Government and key institutions of Puerto Rico should similarly review and provide guidance on the most effective means of support, and 3) project developers, lenders, and investors should coalesce and make their requirements and preferences clear to members of both governments.
With some thoughtful, effective support, Puerto Rico will become a model of the resilient, distributed energy infrastructure system of the 21st century — the type of system that National Clean Energy Week is all about.
