PUERTO RICO: An Introduction

The following Overview featured in Global 2023 and is awaiting update from the firm.

An Introduction to Puerto Rico 

Puerto Rico is undergoing important transformational changes that will continue to shape its legal, fiscal and socioeconomic landscapes for 2023 and the years to come.

The Puerto Rico Financial Oversight and Management Board (FOMB) continues to exercise its oversight role over the government’s finances, pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) enacted by the US Congress in 2016. The FOMB was created to provide a method for Puerto Rico to achieve fiscal responsibility and regain access to the capital markets. It has certified various fiscal plans outlining measures to streamline government structure, enhance the delivery of essential services and facilitate the ease doing business in Puerto Rico. Some of these measures have been implemented, but others have not. The FOMB also has final authority in the certification of budgets for Puerto Rico, and has sought to certify balanced budgets since 2017.

Since May 2017, the FOMB has commenced six proceedings under Title 3 of PROMESA, which provides for a bankruptcy-like process to restructure the debts of the government and several of its instrumentalities. The FOMB has obtained confirmation of three Plans of Adjustment to restructure the debts of the government, the Puerto Rico Highway and Transportation Authority, the government's Employee Retirement System, the Public Buildings Authority and the Puerto Rico Sales Tax Financing Corporation (COFINA). The FOMB has also certified qualified modifications to restructure the financial debts of the Government Development Bank, the Infrastructure Financing Authority, the Convention Center District Financing Authority and the Public Finance Corporation. It has also proposed a Plan of Adjustment for the Puerto Rico Electric Power Authority (PREPA), which is pending before the court.

Simultaneously, Puerto Rico is en route to economic recovery and reconstruction with the more than USD300 billion appropriated by the US Congress through the US Stafford Act, the CDBG-DR, the Federal Emergency Management Agency’s Public Assistance and Hazard Mitigation Assistance Programs, the CARES Act and the American Rescue Plan Act (ARPA), among other federal statutes and programmes, following the 2017 hurricanes, the 2020 earthquakes and the COVID-19 pandemic. The recovery funds are destined to strengthen Puerto Rico’s infrastructure (including approximately USD10 billion to improve the Island’s electric grid), promote affordable housing, broadband access, reliable energy service and community resiliency, and foster economic development initiatives and projects.

Since January 2021, Governor Pedro R Pierluisi’s administration has prioritised the allocation and disbursement of the aforementioned federal funds to accelerate Puerto Rico’s economic recovery and reconstruction. Likewise, it has been leading efforts to demonstrate to leaders of Congress and heads of US federal agencies that Puerto Rico needs to receive State-like treatment regarding the allocation of federal funds. These efforts have resulted in the flexibilisation of several requirements for the disbursement of funds managed by FEMA and the appropriation in December 2022 of more than USD19 billion in Medicaid funds for the next five years, which has allowed the government to begin the construction of multiple infrastructure projects throughout the Island. Many others, such as bridges, roads, schools, public housing complexes, dams, hospitals and hotels, are expected to begin construction during the next two years. This has also allowed the government to provide additional appropriations for the tourism sector, which has resulted in important increases across every tourism industry indicator.

In the energy sector, Puerto Rico has made a commitment to meet its electricity generation needs with 100% renewables by 2050, and to realise interim goals of 40% by 2025, 60% by 2040, the phaseout of coal-fired generation by 2028, and a 30% improvement in energy efficiency by 2040, as required by local law. In 2022, the Puerto Rico Energy Bureau (PREB) approved 800 MW in Power Purchase Agreements and 200 MW in energy storage agreements, submitted by PREPA as part of Tranche 1 of a process initiated to procure 1,000 MW of renewable generation resources and at least 500 MW of battery energy storage resources. During 2022, PREB also initiated Tranche 2 of the procurement process, which remains ongoing as of today.

To assist Puerto Rico in meeting its energy goals, the US Department of Energy’s Grid Development Office also initiated a two-year study to analyse available stakeholder driven pathways, with an emphasis on modelling, that meet the Island’s targets and achieve short and long-term goals. In January 2023, it published its one-year summary report, in which the group of researchers developed four scenarios, all of which rely on a heavy increase in rooftop photovoltaic installations and battery energy storage systems. According to the report, a refined modelling and analysis of three feasible scenarios is expected in 2023.

To achieve the transformation of the energy system and improve other public functions, services and infrastructure, the government has promoted the development of additional public-private partnerships (P3) in different sectors. Since 2017, the government has executed P3 contracts for: the Operation and Maintenance of the Energy Transmission and Distribution System; the Operation and Maintenance of the Maritime Transportation System; the Concession of the San Juan Cruise Bay Terminals; and the Operation and Maintenance of Thermal Generation Energy Facilities. Furthermore, the P3 Authority is in the process of launching RFPs for: the concession of toll roads; the revitalisation of hydroelectric power plants; and the construction of a new base load energy generation plant in the northern part of the Island.

Of particular importance is the adoption of the federal policy towards the tax structures of controlled foreign corporations (CFCs) doing business in Puerto Rico, many of which are within the manufacturing sector – particularly pharmaceuticals, medical devices and biotechnology manufacturing operations. The changes in federal policy led to high-level negotiations between the Puerto Rico government and the US Treasury, which resulted in the enactment of Act 52-2022, known as the “Puerto Rico Public Finances Stability Act”. Act 52 modified the tax regime applicable to CFCs, allowing Puerto Rico to remain a competitive jurisdiction for the manufacturing sector, which has shown promising signs of recovery over the last two years.

The current market conditions will continue to support additional M&A, including within the distressed debt market. Continued interest for private capital investments may be promoted by the Puerto Rico Incentives Code (Act 60-2019), the US Qualified Opportunity Zone Program and other local incentives approved to attract strategic activities.

A continuation of the active adversarial practice of cases being litigated both in the local Puerto Rico courts and at the US District Court for Puerto Rico is expected, as a result of the complex economic and fiscal conditions, pending resolution of insurance recovery cases from the 2017 hurricanes, COVID-19 effects and contractual disputes in general. Given the significant construction that is taking place and will continue for the next few years, construction disputes are also likely to develop.

On the labour and employment side, unemployment is reaching historical lows but companies will need to deal with two minimum wage increases scheduled for 2023 and 2024, and with the impact of recent amendments to local labour laws.

Puerto Rico is on a path of profound transformation that is driven by programmes designed to attain fiscal, economic and physical infrastructure recovery. These efforts and initiatives create new opportunities and positive economic prospects for Puerto Rico.