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Paying for Failure High Fees for Finance Consultants Shortchange Puerto Rico Electrical Grid

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Paying for Failure High Fees for Finance Consultants Shortchange Puerto Rico Electrical Grid Cathy Kunkel, Energy Finance Analyst 1 Tom Sanzillo, Director of Financial Analysis April 2021 Paying for Failure High Fees for Finance Consultants Shortchange Puerto Rico Electrical Grid Executive Summary Puerto Rico continues to suffer from an electrical system that is bankrupt, in poor physical condition and charges among the highest rates in the United States. For the last seven years, the island’s government and the congressionally created Financial Oversight and Management Board (FOMB) have sought to transform the Puerto Rico Electric Power Authority (PREPA) and restructure its debt. So far, the PREPA transformation has produced two failed debt restructuring agreements; a failure to prioritize renewable energy; a controversial and potentially unviable privatization contract; and continuing contracting scandals. Yet hundreds of millions of dollars have been spent on professional consultants in an attempt to solve the electrical system’s problems. The proliferation of off-island, unaccountable consultants making key operational and financial decisions for the electrical system is symptomatic of a failure of governance reforms. By the time this electrical system transformation process is completed, professional consulting contracts may exceed $1 billion. IEEFA reviewed professional services contracts related to debt restructuring and the transformation of PREPA from fiscal year 2015 to the present. IEEFA found: ñ Puerto Rico agencies have signed more than $440 million in professional services contracts for PREPA’s restructuring and transformation. ñ Puerto Rico firms have received only 3% ($14 million) of the total contract amounts. ñ Some legal and technical consulting firms charged rates that topped $1,200 per hour. ñ The FOMB estimates PREPA will require an additional $500 million to restructure its debt and exit the bankruptcy process. ñ The issue of excess fees and lack of controls over professional services has been independently raised by the Puerto Rico Energy Bureau (PREB) and by a court-appointed fee examiner in PREPA’s bankruptcy case. This boon to legal, financial and technical consultants represents not only a major and often unnecessary expense to the people of Puerto Rico, but has also contributed greatly to a structure in which there is no meaningful incentive to produce solutions. Paying for Failure: High Fees for Finance Consultants Shortchange Puerto Rico Electrical GriD 2 IEEFA’s analysis points to a particular failure of the FOMB, which was established with the mission of achieving fiscal responsibility and restoring capital market faith in Puerto Rico. As a start towards correcting these fundamental problems, IEEFA recommends: ñ A fee structure that reflects Puerto Rico’s economy; ñ A substantial reduction in fees for contractors with long-standing agreements in Puerto Rico; ñ Enhanced transparency around how PREPA and the FOMB are budgeting for $500 million in future consulting fees; ñ Amending federal law so that the people of Puerto Rico are no longer responsible for paying the costs of the FOMB; and ñ Implementing an Independent Private Sector Inspector General (IPSIG) to monitor electrical system contracting, and deter waste, fraud and abuse. Paying for Failure: High Fees for Finance Consultants Shortchange Puerto Rico Electrical GriD 3 Contents Executive Summary ............................................................................................................... 1 Introduction .............................................................................................................................. 4 PREPA’s Debt Restructuring and Transformation Have Generated Over $440 million in Consulting Fees ....................................................................................... 5 Expensive Contracts Have Generated Little of Value for the People of Puerto Rico .............................................................................................................................. 10 The FOMB Has Perpetuated the Problem of Excessive Fees ............................... 19 Conclusions and Recommendations ............................................................................. 23 Appendix A: Methodology ................................................................................................. 25 Appendix B: Contracts ........................................................................................................ 27 About the Authors ................................................................................................................ 36 Paying for Failure: High Fees for Finance Consultants Shortchange Puerto Rico Electrical GriD 4 IntroDuction For years, Puerto Rico has suffered from an electrical system that is bankrupt, in poor physical condition and charges among the highest rates in the United States. The Puerto Rico Electric Power Authority (PREPA) defaulted on its debt in August 2014.1 In 2016, then- President Barack Obama signed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) to establish the Financial Oversight and Management Board (FOMB) to oversee the debt restructuring of the commonwealth and its public corporations, including PREPA. This process has yet to produce a viable debt restructuring agreement for PREPA’s $8.26 billion in legacy bond debt. As part of its efforts to transform PREPA, the FOMB has championed privatization, a goal also articulated by then-Gov. Ricardo Rossello after Hurricane Maria. The process for privatizing PREPA was established under Puerto Rican law in 2018 and 2019 (Act 120-2018 and Act 17-2019). The implementation of these laws has generated substantial controversy on the island. Most recently, the Puerto Rico House of Representatives launched an investigation into the 15-year transmission and distribution system concession contract. Even though PREPA is bankrupt and the FOMB, together with the government of Puerto Rico, has pursued policies of privatization and cuts to labor in the name of efficiency, cost-effectiveness and prudent financial management, these values have not been pursued in one core area: Contracting for professional services. 1 Kobre & Kim LLP. Final Investigative Report. August 20, 2018, p. 124. Paying for Failure: High Fees for Finance Consultants Shortchange Puerto Rico Electrical GriD 5 In this report, we explore the extent to which the restructuring and transformation of PREPA have proven to be a boon to legal, financial and technical consultants while The restructuring and producing little of value to the people of Puerto Rico. We argue that this does not transformation of simply represent a waste of money paid for PREPA have proven by the people of Puerto Rico (and, to a lesser to be a boon to legal, extent, mainland U.S. taxpayers), but that it goes to the heart of fundamental governance financial and technical problems that continue to impede the consultants. transformation to an affordable, stable and democratically accountable electrical system in Puerto Rico. PREPA’s Debt Restructuring and Transformation Have Generated Over $440 million in Consulting Fees Despite the bankrupt state of Puerto Rico’s electrical system, it has been capable of generating an extraordinary level of professional services fees to (almost entirely) off-island law firms and consultants. With some exceptions discussed below, these fees are largely paid by the people of Puerto Rico. IEEFA examined professional services fees related to restoring PREPA’s access to capital markets. This includes the debt restructuring process, as well as the physical and financial transformation of PREPA, including its privatization. It includes contracts entered into by PREPA, as well as PREPA-related contracts entered into by the Puerto Rico Public-Private Partnerships Authority (P3 Authority), FOMB and LUMA Energy (the private operator that was awarded the transmission and distribution concession).2 A description of IEEFA’s methodology is provided in Appendix A. It is worth noting that all FOMB expenses are paid by Puerto Ricans.3 Appendix B provides a complete list of contracts analyzed for this report. Professional services contracts related to the restructuring and transformation of 2 As will be described in more detail later, in addition to entering into its own professional services contracts, FOMB also has oversight authority over contracts entered into by commonwealth entities. FOMB’s policy is to review contracts worth $10 million or more. Some professional services contracts related to PREPA’s bankruptcy are subject to review and oversight by the fee examiner in PREPA’s bankruptcy case. Additional oversight over contracts is supposed to be provided by the Office of Contract Procurement and Compliance created in 2017 by then-Gov. Ricardo Rossello in response to the high-profile Whitefish contracting scandal. The office, located within PREPA and managed by the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish acronym), was charged with reviewing and certifying all PREPA transactions related to the procurement of goods and services and with reporting regularly to AAFAF. (See Executive Order, November 8, 2017.) These regular reports are not posted on AAFAF’s website, nor is OCPC proactive in its release of its contract reviews. 3 48 U.S. Code § 2127 (b). Paying for Failure: High Fees for Finance Consultants Shortchange Puerto Rico Electrical GriD 6 PREPA total over $440 million from FY 2015 through FY 2021.4 Five firms received more than 40% of the total.
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