In two short years, the administration of Governor Luis Fortuño has turned Puerto Rico into a privatization leader among its state peers. To address the territory's chronic deficits and unsustainable debt, the administration has advanced a range of reforms that include major spending reductions, optimization of government operations and the enactment of a new law in 2009 inviting private investors to modernize or develop new infrastructure across a variety of sectors.
That law, Act No. 29, is now bearing fruit. It authorized government agencies to enter into public- private partnerships (PPPs) with private firms for the design, construction, financing, maintenance or operation of public facilities, with a set of priority projects that include toll roads, transit, energy, water/wastewater facilities, solid waste management and ports. The law also established a new Public Private Partnership Authority (PPPA), a new center of excellence within the Puerto Rico Government Development Bank responsible for identifying, evaluating and selecting PPP projects and for monitoring and enforcing the terms of PPP contracts.
Despite its short life, the PPPA has built a world-class PPP program utilizing global best practices, and it has already seen some major successes advancing projects through the procurement pipeline:
- To help modernize K-12 school facilities and improve academic performance, the PPPA has launched the “Schools for the 21st Century” PPP program, under which Puerto Rico is contracting with private operators to design, build and maintain approximately 100 schools in 78 municipalities across Puerto Rico. A total of 47 contracts were in place by November 2011 covering the development of 76 K-12 schools for an aggregate total investment of $543 million, and 70 of those schools were already under construction. In an August Reason Foundation interview, PPPA Executive Director David Alvarez noted that the program is “an indirect way towards academic performance by providing and delivering better infrastructure, with the goal for students to perform better at school—to keep more people in school and to get better results.”27 The government of Puerto Rico is financing the project through the issuance of Qualified School Construction Bonds.
- In September 2011, the PPPA finalized its first major highway PPP when it reached financial close on a 40-year, $1.492 billion concession to operate the PR-22 and PR-5 toll roads. After initiating a yearlong procurement process in 2010, the agency pre-qualified potential bidders and ended up with two firm bids. The winner was Autopistas Metropolitanas de Puerto Rico, LLC—a consortium of Goldman Sachs Infrastructure Partners II (an infrastructure investment fund) and Abertis Infraestructuras (a Spanish toll concession company)—which will pay the Commonwealth an upfront payment of $1.136 billion, will invest $56 million in initial safety upgrades and will make an estimated $300 million in additional investment in highway maintenance over the life of the concession. Under the terms of the contract, the concessionaire may not increase tolls until 2014, after which any future increases will require government approval. In a June press release, Gov. Fortuño wrote that the concession “will benefit hundreds of thousands of drivers who will enjoy better paved, better lit, more secure toll roads on a daily basis, and will also have an extraordinarily positive effect on our economy,” citing economic benefits that include new jobs, new local tax revenues, contributions to local police, and enhanced services to drivers.
- PPPA officials made significant progress in 2011 advancing the privatization of San Juan’s Luis Muñoz Marin International Airport, the busiest airport in the Caribbean. After months of discussion, the airport’s leading carrier, American Airlines, agreed to the terms of a draft concession agreement, with other airlines following suit. In July 2011, the PPPA and the Puerto Rico Ports Authority issued a request for qualifications that yielded 12 responses from potential bidders. By September, the Authority had announced its short-list of six consortia eligible to bid on the project, including teams led by ASUR, Fraport, GMR and Zurich Airport. The PPPA plans to issue a formal request for proposals to the short- listed firms in the fall of 2011, with bids to be submitted by the end of the year. The PPPA anticipates awarding a 50-year lease by early 2012.
In a June 2011 press release announcing the winning bidder on the toll road lease, Gov. Fortuño noted that PPPs are just getting started in Puerto Rico: “We have come a long way in just 24 months since the enactment of our P3 legislation. We will continue to move forward with important projects and our commitment to P3s is stronger than ever.” At press time the PPPA had not announced the next round of potential PPPs in its project pipeline, but in August 2010 the authority's board of directors directed staff to begin an evaluation process and develop feasibility studies for several potential projects, including a new minimum custody correctional facility, a ferry between the municipality of Fajardo and the municipalities of Vieques and Culebra, a technology project for traffic control automation and traffic violation control, and redevelopment initiative targeting areas surrounding Tren Urbano (San Juan's regional rapid transit system) stations.
Leonard Gilroy is director of government reform at Reason Foundation. An earlier version of this article originally appeared in Reason Foundation's Annual Privatization Report 2011, released in April 2012.