Looming Water Crisis in Puerto Rico, Where Cash Has Run Dry

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By David Schultz

A public health crisis is imminent in Puerto Rico as its main provider of water and sewer services has lost the ability to borrow money, a consequence of the island’s still unfolding debt problems, a former water official and others familiar with the U.S. commonwealth told Bloomberg BNA.

Construction on pipes, filtration systems, and other water infrastructure projects in Puerto Rico is at a standstill. This may already be impacting the safety of drinking water for its 3.4 million residents: the credit problems have coincided with an increase in water quality violations, according to EPA enforcement data reviewed by Bloomberg BNA.

Amid the debt crisis, the Environmental Protection Agency has cut off Puerto Rico from accessing the water infrastructure loans it regularly provides to all 50 states. Peter Grevatt, head of the agency’s drinking water office, said the island may never be able to fully repay the hundreds of millions of dollars in loans it took out from the EPA to build up its water infrastructure.

The situation is also driving some companies off the island: consulting and engineering firms, including Black & Veatch, CH2M, and CDM Smith, have all but shut down operations there, according to the former head of the island’s primary water utility.

“At some point, something is going to give,” Alberto Lazaro, who ran the Puerto Rico Aqueduct and Sewer Authority, or PRASA, until last year, told Bloomberg BNA. “It’s impossible to run a water utility if you can’t have capital expenditures.”

Lazaro first brought the crisis to the EPA’s attention in a 2016 letter, obtained by Bloomberg BNA, which sounded the alarm that the island’s water infrastructure is “at risk of deteriorating and even failing.”

‘It’s Bleak’

One of the biggest effects of the construction slowdown had been to limit PRASA’s ability to respond to emergencies, according to Ruth Santiago, an environmental attorney and activist on the island.

She said the island underwent a severe drought in the summer of 2015 that caused one of its main aquifers to grow dangerously low.

Had PRASA been able to borrow money, it could have constructed new retention ponds that could replenish the aquifer by trapping stormwater more efficiently. But given the overwhelming nature of the utility’s financial problems, Santiago said, it seems unlikely the utility will be able to address the situation any time soon.

“It’s bleak,” she told Bloomberg BNA. “I don’t know that anyone is bringing this to the attention of the federal government.”

Borrowing Ability Gone

Across the country, the vast majority of water infrastructure projects are financed with borrowed money, coming either from the private bond market or from the federal government.

With investors spooked by the island’s crippling debt load, PRASA has effectively lost access to the bond market. And it’s lost access to the EPA’s State Revolving Fund loan program, the main source of federal assistance for water infrastructure projects. The territorial government has acknowledged to the EPA that it likely won’t be able to pay back any new loans and, furthermore, won’t be able to contribute required matching funds.

Stacey Isaac Berahzer, a water specialist at the University of North Carolina Environmental Finance Center, said Puerto Rico is in a nearly impossible situation: while taking on more debt could be ruinous, waiting for years or even decades to store away enough cash to build new infrastructure isn’t a viable solution either.

She said the latter option would, in essence, require the island’s ratepayers to fund infrastructure projects they may never get to benefit from in their lifetimes. The center works with decision makers to assess the effectiveness of environmental finance policies.

“Puerto Rico has been slowly going down this cliff,” Isaac Berahzer told Bloomberg BNA. “It’s a tough predicament.”

Violations on the Rise

Around the same time PRASA’s financial problems started, its performance began to deteriorate. From 2007 through 2012, health-based violations of drinking water standards declined by more than half, according to EPA enforcement data. These types of violations include excessive levels of contaminants in water samples or failure to properly disinfect.

That trend reversed starting in 2013.PRASA hasn’t been able to come to a restructuring agreement with the EPA that would extend the length of its existing loans or reduce the amount of interest it owes. The EPA hasn’t provided the authority with funding from the state revolving fund since April 2016.

However, the agency has pushed back the due dates on PRASA’s loans several times, preventing it from going into technical default. A six-month extension set to expire at the end of 2016 was extended by another six months. The EPA recently pushed the due date back yet another six months to the end of this year, EPA spokeswoman Amy Graham told Bloomberg BNA.

Graham said in an email that the agency is working to “develop a long-term restructuring agreement that will ... ensure continued protection of human health and the environment.”

However, the agency declined to provide on-the-record responses to questions about what will happen to water quality on the island until this agreement is reached and about whether it is taking any measures to prevent a similar crisis from arising in other states with large outstanding public debts.

The EPA’s request to Congress for funding for the upcoming fiscal year contained no new money dedicated to Puerto Rican water infrastructure, although money could be directed there as the budget is finalized.

Projects Halted

Lazaro, then the head of PRASA, first notified the EPA of his agency’s dire financial situation early last year. In the letter, Lazaro pleaded with the EPA to restructure the roughly $580 million-plus PRASA owes it and says it had to postpone or terminate virtually all of its active construction projects.

In his letter, Lazaro warned that, without a major restructuring, PRASA may not be able to comply with a federal consent decree it reached the year before with the agency and the Justice Department. The decree requires PRASA to reduce the amount of untreated sewage it discharges from its Puerto Novo wastewater plant and from other plants.

Additionally, Lazaro told Bloomberg BNA that PRASA had to put the brakes on an urban flood control project in the city of Dorado, a significant tourist destination.

The freezing of PRASA’s balances has had tangible impacts on the ground in Puerto Rico.

Lazaro named six different construction and engineering companies that work on water projects that have either reduced their operations on the island, left entirely or went out of business. Bloomberg BNA reached out to all of these firms but none responded. Both Black & Veatch and CH2M declined to comment, with CH2M citing a pending merger on the table. The others—CDM Smith, Prota Construction, BLDM Inc. and Jafer Construction—couldn’t be reached.

Where Did The Money Go?

The irony of the situation is that the finances of PRASA itself were managed relatively well before the debt crisis set in, according to a report from the EPA’s Inspector General earlier this year.

Before 2013, the authority had healthy reserves sitting in the island’s main infrastructure bank.

Then, Puerto Rico Gov. Alejandro Garcia Padilla transferred $245 million out of this bank into a special fund to cover the island’s widening budget shortfalls. In 2014, Garcia Padilla signed a law that restricted how much agencies like PRASA could withdraw from this government-run bank.

“We didn’t see this coming,” Lazaro told Bloomberg BNA. “We had sufficient income and revenues to maintain our financial plans. ... [But] the rating agencies said ‘Even though they have all this, they’re in Puerto Rico and it doesn’t look good there,’ and we got degraded.”

The bank has since entered a bankruptcy-like proceeding, although the island itself is legally prohibited from declaring itself bankrupt. It could take a decade or more for PRASA and other agencies to recover the funds they had deposited, according to the inspector general. Those funds include nearly $200 million in loans that had come from the EPA.

PRASA’s current leaders didn’t respond to Bloomberg BNA calls and emails.

Crisis a Long Time Coming

Barry Bosworth, an economist at the Brookings Institution who has researched Puerto Rico’s finances, said the island’s political leaders simply made too many promises to their constituents.

Over the past 10 to 15 years, the size of Puerto Rico’s economy steadily shrunk, he said. Its typical role as a source of cheap manufacturing labor for American companies was usurped by developing countries in Asia, Africa and elsewhere, where the cost of labor is far cheaper, Bosworth said. But despite this contracting economy, the island’s political leaders continued to spend.

“It has now reached an absolute crisis point,” he told Bloomberg BNA. “It can’t keep going on like this. Why investors continued to loan money to Puerto Rico over the last decade is beyond me.”

To contact the reporter on this story: David Schultz in Washington at dschultz@bna.com

To contact the editor responsible for this story: Rachael Daigle at rdaigle@bna.com

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