Puerto Rico's debt crisis has its roots in a number of factors, not the least of which is government corruption.
As the latest corruption case went to trial Puerto Ricans have been transfixed this summer by the testimony. The case has produced pay-to-play allegations against at least one government official, a claim that the current governor's campaign manager illegally solicited cash donations, and led to the resignation of the president of the Puerto Rico House of Representatives from that post.
Along with producing scandal and causing leadership changes, analysts say corruption over the years also has taken a toll on the island's finances. Puerto Rico's government now faces the restructuring of $70 billion of public debt, under the oversight of a federal control board named last month by President Obama.
Government corruption has been a key factor in leading the Puerto Rico's gross national product to contract eight of the last nine years, said Zulma Rosario Vega, executive director of the Puerto Rico Office of Ethics.
Gustavo Bobonis, chief economist at the Center for a New Economy, said corruption affected the island's economic development, though it was probably not the chief factor.
Luis Cámara Fuertes, a professor of political science at the University of Puerto Rico, said corruption reduces competitiveness. If the government only entertains corrupt offers, then it accepts more expensive bids.
A common complaint about Puerto Rico government contracts is that "the system is very closed," he said. One needs to have connections to do business with the government.
By hurting the island's economy, corruption leads to reduced funds flowing into government coffers. Corruption also leads to inefficient use of public sector funds, which can undermine public corporation financial strength and divert government spending from potentially useful projects to wasteful ones.
Unfortunately for Puerto Rico these possibilities have been more than academic.
Starting with the administration of Puerto Rico Gov. Pedro Rossell-, who held office from the start of 1993 to the start of 2001, Puerto Rican governments have used bonds to finance "mega public works projects," wrote Emilio Pantojas García, professor of Sociology at University of Puerto Rico.
"Examples of major projects undertaken with bond issues guaranteed with future income to be realized from the fees of [the Puerto Rico Electric Power Authority and the Puerto Rico Aqueduct and Sewer Authority] include the 'Super Aqueduct' of the PRASA and two natural gas pipelines … of PREPA, which were intended to deliver natural gas from port to various power plants. Other projects included the 'Urban Train' subway, a multi-purpose coliseum, and various municipal projects.
"Of these the 'Super Aqueduct' was the only functional project. The urban train operates with a large deficit, and the two gas pipelines were never completed, although the materials were bought and contracts to develop them were issued, as a rule to party donors and affiliates," Pantojas García wrote in "Is Puerto Rico Greece in the Caribbean?," published in Winter 2016 in The Fletcher Forum of World Affairs.
"As a result, 33 members of the Rossell- administration were later indicted and convicted of corruption by the U.S. Federal Prosecutors in Puerto Rico," Pantojas García continued. "In general, these projects established a 'pay-for-play' scheme, requiring contractors to kick back 10% of the contracts to the ruling party, a practice that became known as 'tithing' (el diezmo)."
In 2006 the government introduced a sales and use tax to, among other things, refinance existing debt and thus lower government expenditure on the existing debt. However, money from the tax was used in part to purchase land for conservation at triple the assessed value of the properties. "The sellers were developers linked to the governing Acevedo Vilá administration (2005-2008)," Pantojas García wrote.
Corruption took a still different form in the Luis Fortuño administration. While the governor laid off many government workers, he also increased spending on service and consulting contracts. Some of these contracts and construction contracts were awarded to professionals who had just resigned from office. Though not necessarily illegal, the solicitation and awarding of the contracts may have been unethical, Pantojas García said in a phone interview.
Corruption in Puerto Rico has generally been on a big scale, Cámara Fuertes said. It has been more likely to entail big businesses offering contributions when they seek contracts than government officials seeking bribes for minor permits.
Though corruption has already harmed bondholder recoveries on all bonds through leading to economic contraction and government inefficiency, they may not do so in the future on particular bonds connected to corrupt projects. Executive director of Backyard Bondholders Jorge Irizarry said, "I don't see how the internal corruption [on a government project] could be a liability to the bondholders."
There has been no systematic study done in recent years comparing the level of corruption in Puerto Rico to that in the 50 U.S. states. However, most indicators are that there is more government corruption on the island than on the mainland.
For 2013, Transparency International ranked Puerto Rico 33rd in study of corruption perception of 177 countries and territories. This was worse than the 19th place that the United States achieved. Its score of 62 was higher than the global average of 43, but worse than the U.S. score of 73.
Transparency International constructs the corruption perception survey based on other groups' surveys of people who have experience with the countries and territories.
According to the World Economic Forum's Global Competitiveness Report for 2013-2014, Puerto Rico ranked 44th out of 144 polities in both diversion of public funds and irregular payments and bribes. By comparison the USA ranked 30th in the former and 36th in the latter categories. The higher one ranks the less corruption the forum believes there is.
Bobonis said corruption is perceived to be worse in Puerto Rico than in the states and offered explanations for the greater corruption. He cited the island's comparatively low income levels, greater needs, and more intense political polarization as factors. The polarization has given governments an incentive to use corruption to maintain political power, he said.
Bobonis also noted that Puerto Rico's local and commonwealth governments get a large portion of their revenue from the federal government. In this context residents may not be as perturbed by the misuse of government money, when much of the money doesn't come from them.
As for whether corruption has been increasing or decreasing, Rosario Vega said the 50 active complaints that her Office of Ethics was working on currently was fairly typical. Valdivieso said the 24 investigations that her office was pursuing compares with the 15-20 investigations that the office had been doing in the last three to four years. She indicated that the increase was partly due to changes in the leaders of the collaborating agencies. More of them are working with the office, she said.
Puerto Ricans do have some concerns about government corruption. How to handle it was the dominant topic in the first debate among Puerto Rican gubernatorial candidates in early September. When Puerto Ricans are polled, they name corruption as one of their top concerns, professor Cámara Fuertes said.
Puerto Rico has several bodies that investigate corruption in its government. The Office of Ethics and Office of the Comptroller look at possible cases in the central and local governments and the public corporations. Exceptions to this are for the Puerto Rico Senate and House of Representatives and the judicial branch. The ethics committees of the Puerto Rico Senate and House of Representatives look at the legislature. The Puerto Rico Supreme Court oversees ethics in the commonwealth's judicial branch.
Rosario Vega said her office had 1600 active investigations. The office has 10 attorneys doing these investigations. If they follow the normal path, many will be dismissed for lack of evidence.
If there is enough evidence the Office of Ethics will take an investigation and file a complaint. The office's 50 active complaints will ultimately be considered by the office's administrative judges, who will make recommendations. Rosario Vega will make the ultimate decision on penalties.
The number of investigations that the office has done since Rosario Vega took office in 2009 has grown substantially, she said. This was because the office has been more visible and people trust that it will investigate, she said. Puerto Ricans can complain to the office anonymously.
Valdivieso said the increase in the comptroller's office's investigations was partly because of the increased collaboration of Puerto Rico Secretary of Justice César Miranda in prosecuting the cases. Previous secretaries prosecuted fewer cases.
"Other secretaries often found that cases were either not important, not material, or not enough competent evidence was found," she said. "We have been very fortunate that the current secretary of justice has been such a believer in this office."
She added, "I think our office could be very helpful to the [Puerto Rico oversight] board, so I hope they do consult us."
The Office of Ethics penalties are usually monetary, Rosario Vega said. The office can ask government agencies to discipline their employees.
If the Office of Ethics finds that the infraction was made with criminal intention, it will refer the case to the Puerto Rico Department of Justice, United States Department of Justice through the FBI, or a special prosecutor's office. The last body is only used to prosecute very prominent individuals, Rosario Vega said.
The cases referred for criminal prosecution usually involve money, she said.
The comptroller's office specializes in financial improprieties. "We investigate corruption, fraud, ill/wrong/incorrect use of public funds anywhere we find it," Valdivieso said in an email.
In addition the comptroller's office is required by law "to do full audits of municipalities every two years and although there is not always corruption, we do have many findings of noncompliance with the law, fraud, etcetera."
The comptroller and the director of the Office of Ethics are appointed by the governor subject to the legislature's approval. The appointments are made for 10 year terms to prevent political influence, Rosario Vega said.
The governor and legislature still affect the ethics office because they approve its budget each year. Despite its heavy workload, the office recently had its budget cut to $9.2 million from $10.3 million, she said.
Rosario Vega said she hoped the prosecution of corrupt people would prevent other government employees from following their paths.
In addition the Office of Ethics does a range of other actions to prevent malfeasance and corruption. Employees in the executive branch are required to take 20 hours of training a year from the office on topics concerning professional wrongdoing. The government requires major officials before they start employment and all candidates early in their campaigns to take 7.5 hours of training with the office.
The office also demands from officials and candidates that before they take any possibly questionable actions, they get the office's opinions. In unusual cases the office can also provide dispensations to do what may need to be done, Rosario Vega said.
