by Michael Hansen, Hawaii Shippers Council, June 29, 2015

Puerto Rico Governor Alejandro Garcia Padilla announced over the weekend in a New York Times interview the Commonwealth will not be able to pay its $72 billion outstanding debt and will need to restructure it.

To validate his position on the Commonwealth’s debt, Governor Garcia Padilla released a report, “Puerto Rico – A way forward” – which he commissioned, and was written by three economists led by Anne O. Krueger, a former chief economist at the World Bank and currently a professor at John Hopkins University.  It has become known as the “Krueger Report,” lays out the Commonwealth’s financial problems and proposes a series of reforms including an exemption from the Jones Act for Puerto Rico.

Key excerpts from New York Times, June 28, 2015:

The governor commissioned a study of the financial situation by former officials at the International Monetary Fund and the World Bank. Concluding that the debt load is unsustainable, the report suggests a bond exchange, with the new bonds carrying “a longer/lower debt service profile,” . . .

“There is no U.S. precedent for anything of this scale or scope,” according to the report, one of whose writers was Anne O. Krueger, a former chief economist at the World Bank and currently a research professor at the School of Advanced International Studies at Johns Hopkins University.

The “Krueger Report,” as it is being called, also seems aimed at the Obama administration and Congress, both of which have taken a largely hands-off approach to Puerto Rico’s fiscal problems.

Key excerpts from the “Krueger Report,” June 29, 2015:

Structural reforms. Restoring growth requires restoring competitiveness. Key here is local and federal action to lower labor costs gradually and encourage employment (minimum wage, labor laws,
And welfare reform), and to cut the very high cost of electricity and transportation (Jones Act). Local laws that raise input costs should be liberalized and obstacles to the ease of doing business removed. Public enterprise reform is also crucial.

Transport costs. All islands, remote from the centers of economic activity, suffer from high transportation costs. But Puerto Rico does so disproportionately, with import costs at least twice as high as in neighboring islands on account of the Jones Act, which forces all shipping to and from US ports to be conducted with US vessels and crews. Even those that consider the
Negative effects of the Jones Act to be exaggerated – e.g., outbound cargo rates are lower than inbound ones, as ships would rather not return empty – concede it is a clear net negative. Puerto Rico also has local laws that add to transportation costs – specifically, prices and licensing requirements set by the Public Service Commission for ground transportation.

The needed measures face domestic political resistance (e.g., on labor laws and cutting fiscal deficits), federal inertia (e.g., on exemptions to the minimum wage and the Jones Act), legal challenges (e.g., on debt restructuring), and organizational difficulties in keeping the program on track.

While some of these are within the Commonwealth’s power to fix (such as local labor regulations), others lie in the remit of the federal government and the US Congress (the minimum wage and welfare rules, the Jones Act, and Chapter 9 bankruptcy eligibility).

Exempting Puerto Rico from the US Jones Act could significantly reduce transport costs and open up new sectors for future growth. In no mainland state does the Jones Act have so profound an effect on the cost structure as in Puerto Rico. Furthermore, there are precedents for exempting islands, notably the US Virgin Islands. Puerto Rico should also eliminate its own self--‐imposed costs by freeing up the scope for competition in ground transportation and liberalizing the associated prices set by the Public Service Commission.

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