Cate Long brought to our attention an article from Caribbean Business on April 17, 2014 In it, the Chairman of the PR House Treasury Committee, Rafael “Tatito” Hernández stated the following:
“There will be across-the-board adjustments that will be fair to all, but there are a lot of adjustments that need to be made within each agency or public corporation,” Hernández said.
Earlier this year, Gov. Alejandro García Padilla enacted Law 24, which ordered government agencies to pay off their debts with the Government Development Bank and barred them from seeking financing without a clearly identified repayment source and without having the financial capacity to assume the debt. Not only did the legislation bar such practice, but it also holds government officials personally responsible for violating the law.
Hernández, who along with Rep. José “Connie” Varela (PDP-Caguas) has been holding public hearings this year on the operations of public corporations, said a measure similar to Law 24, but targeted at public corporations, will be approved along with other budgetary measures.
‘We are waiting to bring down the new measure along with the budget, because it has some very heavy language. It will give a directive to the heads of these entities to sit down with all its suppliers and creditors and say, ‘You know what? I have too much debt. Let’s make a payment plan and let’s adjust the rate. If not, I will find someone else with whom to do business,’ he said.
Hernández said he is talking about ‘everything,” from negotiating with suppliers and creditors to renegotiating contracts with labor unions. “If we don’t do this, some of these public corporations will close because they don’t have access to financing and can no longer count on a bailout from the Legislature. They will automatically collapse if they do nothing,’ he said.
Sounds great but there are a couple of problems with this. To sit down with creditors and suppliers and say, you have to restructure my debt begs the question, what if they say no? There are contractual obligations guaranteed by the PR and US Constitutions and can only be modified by the enactment of a law, during a clear and defined crisis and the law has to resolve or greatly ameliorate said crisis. This was the holding of the PR Supreme Court in the recent Teachers Retirement Fund case, Asociación de Maestros de PR, et als, v. Sistema de Retiro de Maestros de PR and Trinidad v. ELA, 2013 TSPR 73. The First Circuit Court of Appeals had essentially the same holding in United Auto., Aerospace, Agr. Implement Workers of America Intern. Union v. Fortuño, 633 F.3d 37 (1st Cir. 2011). Second, no public corporation or municipality in PR is eligible to Chapter 9 of the Bankruptcy Code, see, 11 U.S.C. § 101(52) and the PS 993, for the local bankruptcy law, is moving at a snails pace. The next budget must be completed by June 30, 2014 and how these negotiations with suppliers and creditors are going to take place is an open question. Finally, please remember the US restructuring firms that had contracts with PR from February to March (see here my take on it ) More and more it seems that PR restructuring at least part of its debt is no longer an if but a when.
I personally lived this in General Motors in the mid 90′s, and was part of the Corporate Purchasing group that enacted some major changes to gain efficiencies on the $180 billion/yr in material and services that GM bought at the time. I managed to save GM around $725 million during my career, all related to the purchase of goods and services. But there is a big difference between GM and our public corporations: GM could renegotiate with suppliers because it had a HUGE leverage – their purchasing budget was larger than the budget of most countries. But local public corporations do not have that kind of leverage, and most (not all) attempts at renegotiating purchase contracts will more than likely fail, and might even endanger the supply of these services, which might bring their operations to a standstill. They will be able to more effectively negotiate with their creditors than with their suppliers. On the other hand, having had that experience and currently working with PREPA, I can tell you that there are a lot of low hanging fruit on their Purchasing operations that they should be going after, starting with the way they specify and encourage competition, all the way to the way they pay their suppliers. And I have a feeling this is the same at most public corporations. That’s where I would focus the efforts, “renegotiating” current contracts on the basis of comparing prices with other, also qualified, but more cost-effective suppliers. The use of a reverse-auction process instead of the traditional “subastas” might also help them reduce costs significantly.
Interesting, but I sense great resistance to change at PREPA and any mention of changing Union contracts will be greatly resisted