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Puerto Rico needs reform, not bankruptcy protection

Puerto Rico's government needs to focus on reform, not on convincing Congress that it should have access to bankruptcy protection to discharge the island's debts.

Members of Congress like Senators Orrin Hatch and Chuck Grassley have expressed doubts over bankruptcy's efficacy. There's a good reason to be skeptical.

Chapter 9 bankruptcy isn't the panacea its supporters would like us all to believe. It's not fairer. It's not more orderly. It's not going to protect taxpayers on the mainland or on the island. And it's definitely not going help the island correct years of government mismanagement.

The Puerto Rican Capitol in San Juan
Getty Images
The Puerto Rican Capitol in San Juan

Proponents of Chapter 9 would have us believe that without it, chaos will rule. It won't. A well-defined process to address an entity's inability to pay already exists under contract law. In fact, Chapter 9 is more likely to produce chaos than prevent it.

Chapter 9 would take months, spur numerous lawsuits and cost hundreds of millions of dollars, given the island's complex debt structures. It would further erode investor confidence in Puerto Rico, exactly the opposite of what we need to begin improving the local economy and to reverse the severe migration trend. It also would force individual investors in Puerto Rico and the mainland to pay for the government's fiscal mismanagement without requiring immediate and credible reforms.

Making matters worse, there is no history for Chapter 9 cases this big. Puerto Rican bankruptcy judges don't have significant experience with Chapter 9, and there is not much precedent upon which they can rely. As a result, as we've seen in several U.S. municipalities, the proceedings are typically arbitrary and can become very politicized.

The only thing Chapter 9 would do is allow Puerto Rico's leaders to kick the can yet again, avoiding the policy and structural changes needed to improve and sustain long-term growth. With Chapter 9, we won't see substantive reforms from the Commonwealth government, and Puerto Rico's residents will be worse off.

If the Puerto Rican government were serious about improving the island's financial situation, there are a number of steps it could take today that would begin to address the island's liquidity constraints and send a positive signal to creditors and the federal government.

For example, Puerto Rico's leaders could privatize, through existing laws, certain public corporations that would otherwise be private on the mainland. It could use public-private partnerships (P3s) to build upon successful P3s implemented between 2010-2012. This would eliminate debt, pension liabilities and shift government expenditures to efficient private sector operators. Additionally, the government could implement procurement reform legislation that has been in place since 2011, saving hundreds of millions through necessary efficiencies. It also could change its very slow and bureaucratic permitting process via executive order, a step that would credibly and quickly reduce costs and encourage investment and growth.

At a recent Senate Finance Committee hearing, Senator Hatch told Puerto Rico that senators need "really well-audited figures" in order to better help the island.

Many people on the island share a concern over the Puerto Rican government's lack of transparency and credibility. The last two fiscal years closed without audited financial statements, which are required by law. In both years, the island's government saw operational deficits after claiming there would be none. During the same two-year period, it missed important revenue targets. Meanwhile, the government increased procurement spending dramatically.

Under these circumstances, how can anyone – local government officials included – know whether there actually is an inability to pay back the island's debt? More importantly, how can anyone responsibly assert that such inability exists, yet not be willing to defend it publicly with financial data?

It makes no sense to retroactively provide access to bankruptcy when the island's leaders have not demonstrated an interest in governing responsibly or dealing with creditors transparently.

For Puerto Rico to seriously request support from the federal government, it must first act seriously. Puerto Rico's leaders can take steps today that require no legislation, no restructuring and no Chapter 9. These steps only require implementation and execution. This is often referred to as "walking the talk." It is time to do more walking and less talking.

Commentary by Jorge San Miguel, a capital member of the law firm Ferraiuoli LLC in San Juan, Puerto Rico. He is also chair of the firm's energy and environmental law practice groups.