Puerto Rico is embarking on a new school construction program that will incorporate a public-private partnership approach financed with $750 million of taxable qualified school construction bonds.

Officials anticipate issuing the commonwealth’s first-ever QSCB deal in the third quarter of this year, according to David Alvarez, executive director of the Puerto Rico Public-Private Partnerships Authority.

The P3 authority is working on the actual deal size and selecting an underwriter.

The Government Development Bank for Puerto Rico, the commonwealth’s fiscal agent, along with the P3 authority, will focus on the QSCB transaction details after completing its $1.4 billion sales-tax bond deal set to price this week.

Alvarez said that under the QSCB program, the bonds must be sold within two years of allocation and proceeds must be distributed in three years.

“So with those parameters, at this point, we want to make sure that we have very concrete and complete projects before we go to the market,” he said.

The commonwealth, which carries A3 and BBB-minus ratings from Moody’s Investors Service and Standard & Poor’s, respectively, typically finances school construction through general obligation bonds and appropriation debt issued by the Puerto Rico Public Buildings Authority.

Alvarez said the building agency may also serve as the conduit issuer for the QSCBs, though that decision is not final.

A June 3 desirability and convenience study of Puerto Rico’s schools compiled by Estudios Técnicos Inc. says the building authority would be a good option as a conduit issuer since rent that it receives on other property could help pay the bonds.

“If QSCB bonds are issued through the PBA, then rent of public buildings will provide for a source of repayment,” the study said.

Puerto Rico may opt to incorporate capital appreciation bonds in a QSCB sale. The desirability study mentions such a structure, noting that by using zero-coupon bonds, full payment of principal would not have to be made until 2027.

The taxable QSCB program was created in the American Reinvestment and Recovery Act. Issuers receive a 100% subsidy of interest costs from the federal government. Puerto Rico has $750 million of QSCB capacity from its 2009 and 2010 allocation.

Officials expect the $750 million of QSCBs to help finance upgrades to 95 schools and support construction of five new ones.

Each of Puerto Rico’s 78 municipalities will have a school that will receive QSCB proceeds, with areas that have a growing population set to have more than one school selected for improvements. P3 authority officials have met with the Department of Education and nearly all of Puerto Rico’s 78 mayors to select roughly 90% of the schools, Alvarez said.

Puerto Rico’s school system includes 1,520 schools serving more than 485,000 students.

About 70% of its schools were built 40 years ago and the DOE estimates a cost of $1.4 billion to bring all schools to a state of good repair.

Since Puerto Rico has been in a recession for several years, and with its revenues in decline, the government has reduced allocations for school construction over the past decade.

“In recent years, investment in school infrastructure has been down-trending and it hasn’t been enough,” Alvarez said. “What we have been doing in the last 10 years is more of repairs rather than constructing or rehabilitating schools that can add useful life to those assets.”

Puerto Rico’s fiscal 2010 budget included $74.4 million for school facilities, down from the $420.5 million it spent in fiscal 2002, according to the desirability study.

In particular, the government is looking to add more laboratories and technical infrastructure to its public schools.

About half of Puerto Rican schools do not have Internet access, according to the study.

“Today, a key component of the government’s economic strategy is to migrate to a knowledge-based economy,” the study said.

The new school modernization program includes the use of public-private-partnerships. Officials are looking to implement a design-build-maintain structure that puts maintenance costs on developers for a set period of time, potentially for five or 10 years, depending upon the school.

“We’ve structured this according to a design-build-maintain project where the public sector will be transferring the risks and some of the costs relating to the design, building, and maintenance of the facilities,” Alvarez said.

“In that sense, it makes it a P3 procurement process where you are not running a more traditional procurement where contractors do the construction but they are not in charge of the design or maintenance. Here we have decided to combine QSCB opportunities with a platform of a P3.”

In a more traditional procurement, each phase of development, design, construction, and maintenance is handled separately.

Officials believe that a design-build-maintain strategy integrates the different stages and will result in a faster development process and save money.

The desirability study indicates that in comparison with traditional development models, the design-build-maintain procurement will generate $225 million of construction and maintenance savings over five years.

Puerto Rico has more than $16 billion of GO and appropriation debt. The administration aims to end its structural deficit by fiscal 2013.

“The commonwealth overall is working to keep debt numbers under control and make improvements and do what they can without issuing a very large amount of debt,” said Moody’s analyst Emily Raimes.

The P3 authority’s internal deadline to release its request for qualifications to potential developers for school construction is June 30, Alvarez said.

Officials anticipate construction to begin later this year.

“Obviously, construction in Puerto Rico has been seriously affected by the recession,” he said. “So industry leaders have been very excited about the project and we expect great participation, a lot of competition. ”

Modernizing 100 schools is expected to create 7,000 jobs in the first year of the program and more than 14,000 indirect and induced jobs over the long term.

Incorporating P3s into school construction projects is not very common in the U.S.

While some jurisdictions have been able to enter into long-term concession agreements with the private sector for toll roads or airports, school construction has yet to receive a lot of P3 attention.

“The P3s seem to be more politically acceptable for assets that are not necessarily in the public good, but are individual-use assets,” said Guy LeBas, chief fixed-income strategist at Janney Capital Markets.

Puerto Rico is pursuing other P3 developments, including a potential concession agreement of its busiest toll road, Route 22, and a plan to bring in private companies to upgrade its water and sewer system rather than issuing municipal bonds.

The P3 authority released RFQs for those projects last week.

It anticipates issuing an RFQ in August for a possible long-term lease of the Luis Muñoz Marin International Airport in San Juan, the busiest airport in the Caribbean, Alvarez said.

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