Airport Privatization Takes Off in Puerto Rico

Seventeen years ago, lawmakers slipped an obscure section of text into the annual federal aviation bill. In February, the intent of that law was enacted for only the second time when the Federal Aviation Administration approved the privatization of Puerto Rico’s Luis Munoz Marin International Airport.

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The deal has come under withering criticism from many on the island. Numerous elected officials, lawyers and economists have denounced it as a bad bargain for Puerto Rico. Major protests roiled San Juan prior to the transfer two months ago. Puerto Ricans now worry that their publicly owned ports, highways and other public goods will be sold off, liquidating a century of public investments. Indeed, two highways have already been handed over to private investors prior to the airport’s transfer. Similar privatization agreements may soon arrive in Illinois and other states, where local leaders are considering selling airports under long-term lease agreements to private operators, most of them European, Australian and Latin America companies.

A Decade of Tax Cuts and Ballooning Debt

Taking control of the Luis Munoz Marin Airport is Aerostar Airport Holdings, a combination of the Mexican corporation Aeropuertos del Sureste (ASUR) and High Star Capital. Aerostar will be allowed to monopolize operation of the airport for 40 years and to collect the airport’s revenues as profit. In exchange, Aerostar will pay the Puerto Rico Port Authority up to $1.75 billion and has promised $1.4 billion of investments in the airport’s basic infrastructure.

When the deal was first announced in July of last year, Puerto Rico’s then-Governor Luis Fortuño called it a “milestone day” for the island and for the whole United States, noting that “this will be the first major airport investment of its kind ever.” Fortuño, however, also said the sale of the airport was compelled by the need to provide cash to pay down the government’s crushing debt.

Puerto Rico has one of the worst bond ratings of any US state or municipal issuer. Moody’s most recent grade of the Puerto Rico Port Authority, which oversees the airport, was Baa3, the lowest rating above junk bond status. Moody’s added that they viewed the Authority’s prospects as “negative.”

“In one sense, the fiscal story of Puerto Rico is similar to the story with municipalities like Oakland, and states like California, or even countries like Greece,” said Deborah Santana, a professor at Mills College in California in an interview with Truthout. “You get into the 1980s and 1990s and there’s deregulation of Puerto Rico’s economy, privatization of some sectors and a pressure on the state to take on higher debt in order to cover government expenditures.” However, said Santana, “Puerto Rico is still very much a colony, so unlike other distressed states, it has no sovereignty, and is at the mercy of the US and the banks.”

The government has been rolling over short-term debt since before the Financial Crisis in a desperate effort to stay afloat. Since about 2007, bond investors have been punishing the island by demanding higher interest rates and even withdrawing from the market for its securities. In classic debt market fashion, this twisted logic has locked-in bigger profits for the remaining investors; as the island’s debt skyrockets and its ratings are cut, yields on short and long-term bonds rise, and the public pays more. Puerto Rican debt has therefore been used by hedge funds and private equity to harvest growing arbitrage profits in recent years.

“We are in hole because there have been succeeding admins that have mismanaged our budgets. They are not touching the multinational corporations here, however,” said Salvador Tio, an organizer of PUEDA (People United in Defense of the Airport) told Truthout. Tio and the PUEDA coalition opposed the privatization plan and demanded an end to tax cuts for the wealthy instead. “They are not touching people with high incomes,” said Tio.

In fact, the island’s wealthy have actually managed over the past half-decade to convince lawmakers to cut taxes on top income earners, both for individuals and corporations.

For decades, Puerto Rico served as an offshore tax haven for large US corporations thanks to a special tax break for factories and offices located in Puerto Rico. “US Corporations didn’t have to pay income taxes on earnings of their Puerto Rican subsidiaries, and they could repatriate these profits to the US tax free,” said Santana, whose 2000 book Kicking Off the Bootstraps, tells the history of US economic policy in Puerto Rico. “This was thanks to Section 936, a section of the 1976 US Tax Reform Act, which led to the explosion of the pharmaceutical and petrochemical industries on the island.” Congress phased Section 936 out in 2006 to capture the billions of dollars in lost taxes each year, but instead, the multinationals found new loopholes to offshore their profits to the Cayman Islands, leaving Puerto Rico out in the cold.

Governor Fortuño cut taxes on the wealthy by $1 billion in 2010 and resisted proposals to raise corporate taxes above a token amount. Last year, Puerto Rico entirely eliminated capital gains taxes, a measure aimed at benefitting billionaires and millionaires, but of virtually no value to the vast majority of the island’s people. Ex-governor Fortuño has since joined the Washington, D.C.-headquartered Steptoe & Johnson law firm where he “[represents] Fortune 500 companies in regulatory, financial, real estate, mergers and acquisitions, and other corporate matters throughout Latin America.”

In this context of austerity for the public sector and lucrative giveaways to the wealthy, Puerto Rico’s conservatives have pushed privatization of state assets as a means of closing budget gaps. The airport is the most recent, and by far the most controversial privatization deal. It’s also just one of several airport privatizations currently being proposed by local governments in the United States.

A Clinton-Era Initiative Led By Republican Governors

The push to privatize America’s airports began almost two decades ago in the adopted home state of the Puerto Rican Diaspora, New York. In the early days of Governor George Pataki’s administration, the conservative, pro-privatization governor appointed a state commission to study the sale of public assets. In the way of the state’s plan, however, was the federal government’s interest in infrastructure, especially in airports, where billions in federal funds have been invested since 1946. Following the panel’s recommendations, Pataki leaned on the Clinton administration and Congress to authorize the sale of airports to private investors. Lawyers and lobbyists representing the privatization industry, mostly foreign firms but also a few big American investment funds and construction companies, drafted a portion of the Federal Aviation Reauthorization Act of 1996 to allow for the sale of up to five airports, including one major hub airport. Importantly, the legislation allowed the FAA to waive the federal government’s financial stake in local infrastructure – essentially creating a subsidy for local governments and the private investors seeking concessions.

In 2000, Pataki succeeded in handing over the Stewart International Airport under a 99-year lease to a British corporation. The concessionaire experienced financial and managerial trouble and sold the airport back to the New York/New Jersey Port Authority in 2007.

In the meantime, the Chicago Midway Airport was being targeted for privatization by then-mayor Richard M. Daley. In 2008, six bidders lined up to purchase Midway, the 25th busiest airport in the United States. Hungry buyers included a private equity subsidiary of Morgan Stanley, the Carlyle Group private equity firm, the Australian investment bank Macquarie Capital, and the German Hochtief corporation. In 2009, the winning investors, a team led by Citibank, John Hancock Life Insurance Company and the Canadian Vancouver Airport Services company, suddenly backed out of the deal as credit markets seized up, and financing became impossible.

In spite of these two fizzled deals, the infrastructure privatization industry stuck with their agenda for airports and pressed for the sale of the Luis Munoz Marin Airport, even while the financial crisis wreaked havoc on governments and money markets. Ultimately, the weak economy has strengthened advocates for privatization as states plunge deeper into debt and seek emergency means of closing deficits.

Six consortiums made the short list to privatize Puerto Rico’s airport, including a team backed by Goldman Sachs. In fact, Goldman Sachs has a foothold on the island already. In 2011, Goldman, and its partner the Abertis corporation of Spain, bought one of the largest toll highways on the island under a 40-year concession.

Prevailing over Goldman Sachs and other privatizers for the Luis Munoz Marin Airport was Aerostar Airport Holdings, a front company that combines two major forces in the infrastructure privatization industry – a little-known American private equity firm with strong ties to the Republican Party and a Mexican corporation owned by one of the country’s wealthiest tycoons.

ASUR and Highstar

The new owners of Puerto Rico’s airport already control billions of dollars worth of infrastructure in the Americas, including airports, maritime ports and pipelines.

The main financial power behind Aeropuertos del Sureste (ASUR) is the cigar-smoking Mexican oligarch Fernando Chico Pardo, one of the nation’s beneficiaries of the wave of privatization that enveloped Mexico after the debt crisis of 1982. Chico Pardo’s fortune is hard to estimate, but his shares of ASUR, which he acquired between 2005 and last year, are worth over $5 billion based on the company’s most recent stock price. ASUR currently owns 9 airports in Mexico, including the busy Cancun hub.

“Chico Pardo used to be lieutenant of Carlos Slim. They have good relations,” said PUEDA’s Tio. Slim, the world’s wealthiest man, controls a vast slice of the Mexican economy, and has a controlling stake in The New York Times, among other far-flung holdings. Tio’s group attempted to shed light on Chico Pardo’s Mexican business empire, and the effects of privatization and NAFTA, as a means of nixing the Puerto Rico airport deal. Tio points to dozens of obscure investments and a complicated web of ownership in which various companies owned by Chico Pardo exert controlling influence over some of Mexico’s most lucrative franchises.

“People in Puerto Rico are very familiar with Carlos Slim,” said Deborah Santana. “That’s partly why ASUR and Chico Pardo were so thoroughly investigated by opponents of the privatization deal here. It’s also because Carlos Slim owns the telephone company in Puerto Rico, having bought it from Verizon after it was privatized in 1998.”

Chico Pardo owns stakes in Carlos Slim’s Grupo Carso holding company, Sears Roebuck’s Mexican affiliate, and the French Aerospace company Bombardier, among other business ventures. Fernando’s brother Luis Chico Pardo is also a director of ASUR. Fernando Chico Pardo’s ownership of ASUR is so concentrated, the company found it necessary to include the following warning in its 2012 annual foreign corporation report filed with the US Securities and Exchange Commission (because some of the company’s stock trades on the New York Stock Exchange):

“The interests of Mr. Chico Pardo, Grupo ADO and ITA may differ from those of our other stockholders, and there can be no assurance that any of Mr. Chico Pardo, Grupo ADO or ITA will exercise its rights in ways that favor the interests of our other stockholders. . . . the concentration of ownership by Mr. Chico Pardo, Grupo ADO and the special rights granted to ITA may have the effect of impeding a merger, consolidation, takeover or other business combination involving ASUR.”

In other words, Fernando Chico Pardo calls the shots at ASUR.

The other half of Aerostar Airport Holdings is Highstar Capital, a New York-headquarted private equity firm that was a subsidiary of AIG until 2010. Highstar already holds privatization concessions for US infrastructure. In 2009, Highstar took a portion of the Port of Oakland private, and a year later signed another 50-year lease to obtain Maryland’s Seagirt Marine Terminal. Highstar’s port concessions are similar to the Luis Munoz Marin Airport deal in that they involve long-term monopoly leases, and are largely justified as delivering up-front cash to fiscally weakened local governments, while securing private investment for the infrastructure.

Highstar happens to be the biggest owner of ports and port leases in the United States. Through its subsidiary Ports America, Highstar runs facilities in 42 US ports. Highstar acquired its continent-spanning port properties in 2006 in a lightning fast purchase of P&O Ports North America from Dubai Ports World. The acquisition of P&O by Dubai Ports World earlier that year resulted in an Islamophobic panic within the US Congress. Various senators and congressional representatives warned that the nation was losing control of a “strategic” asset to a corporation headquartered in the United Arab Emirates. Highstar benefitted from this display of nationalism, taking over P&O Ports for a bargain price. But Highstar may also have been helped in acquiring US port infrastructure by the firm’s many friends in Congress.

Friends in Highstar Places

Highstar’s partners are influential funders of the Republican Party. Thirteen of Highstar’s partners and executives have made $940,000 in federal campaign contributions since 2000, according to Federal Elections Commission filings. Republicans received 90 percent of these dollars. Christopher Lee, the president of Highstar, gave $15,000 to the Republican National Committee, and another maximum contribution to Mitt Romney’s presidential campaign last year.

Juan Giusti, a professor at the University of Puerto Rico, investigated Highstar last year while organizing with the campaign against privatization of the Lus Munoz Marin Airport. “There wasn’t much information on these people,” Giusti told Truthout. “I followed the local radio and TV news about the deal, and there was talk about the Mexican company ASUR, but nothing about Highstar.”

According to Giusti, Highstar provided most of the financing for the deal and will take the biggest cut of the profit, facts that didn’t seem to justify the firm’s anonymity in Puerto Rico, even as it was taking over arguably the island’s most important infrastructure asset.

An article Giusti wrote for the Puerto Rican magazine 80 Grados traced Highstar’s Christopher Lee, whom Giusti identified as a “gringo insider,” back to Mexico in the early late 1980s while he worked for the Shearson Lehman Hutton buyout firm. A New York Times report from 1993 described Lee as “reassured” by the Salinas government’s pro-privatization policies.

“In those years, the Mexican government contracts flowed like oil from a well, and corrupt insiders made a killing,” wrote Giusti. “In Mexico, Christopher Lee helped to finance several transactions for toll roads for the Tribasa Group, one of the largest construction companies in the country that was taking public assets private. In 1993, Tribasa hired Lee as chief financial officer, the same year the company debuted on the Stock Exchange of New York.” Giusti’s article has made the rounds among Puerto Ricans, lifting more than a few eyebrows.

After founding Highstar, Lee became increasingly wealthy. He applied his expertise and political connections to deals involving privatization of infrastructure, but gave himself increasingly large cuts of the equity in deals. In addition to controlling more ports in the United States than any other company, today Highstar operates the privatized London City Airport. Highstar also owns a large East and Gulf Coast waste management corporation, with lucrative government contracts, and holds stakes in major oil and gas companies like Kinder Morgan and Caiman Energy. Both are deeply involved in the natural gas fracking boom.

The real political rainmaker for Highstar, however, is Wayne Berman, a long-time Republican fundraiser, businessman and close friend of Highstar’s Christopher Lee. Highstar’s web site lists Berman as a “senior advisor” to the firm. A Johns Hopkins University Alumni Magazine article from 2010 describes Berman as a cofounder of Highstar. Berman is currently also the Blackstone private equity firm’s in-house lobbyist.

In the 2012 election, Berman was a top bundler of campaign cash for Romney, delivering half a million dollars in contributions sourced from hundreds of wealthy friends and corporations. Berman has personally written checks totaling $657,000 since 2000, directing virtually all these funds to Republican candidates and the Party’s National Senatorial and Congressional Committees. Unlike Romney, many of the politicians Berman has bankrolled have won, giving him access to numerous Senate and House offices. Berman has also been present in one role or another in every Republican presidential campaign since Reagan.

In 1994, Berman was a member of New York Governor Pataki’s budget and policy priorities committee. The committee was tasked with identifying portions of the state budget to cut and other areas of savings, including infrastructure privatization. The committee’s members played a role in priming the Steward Airport for sale.

Berman worked as Highstar Capital’s chief lobbyist for eight years while a partner at the Ogilvy Government Relations lobbying firm. From 2004 until last year, when he moved to Blackstone, Berman and his Ogilvy team held regular meetings with senior Senate and House staff to discuss legislation related to “port security” and “transportation finance,” according to Senate records.

Last year when Berman left Ogilvy, Highstar replaced the Ogilvy firm with two other Washington lobby groups stacked with former government officials who have revolving door connections to legislators and agencies. Records from the Senate’s disclosure database show Highstar lobbyists employed by the McKenna, Long & Aldrige firm met with various Senate and House members during negotiations to privatize Puerto Rico’s Airport in 2012. Details about what they discussed are unvailable.

Austerity Sales

Like the public toll roads Puerto Rico has sold, the Luis Munoz Marin Airport’s privatization was justified as a means to raise cash to pay down debt. Critics say, however, that the deal shortchanged the public, and that it will only worsen the island’s debt situation.

A widely circulated analysis by Puerto Rican economist Jose Antonio Herrero calculated the total loss to the public as approximately $1.78 billion in revenues that are being given to the private operators at no cost. Other problems with the deal, according to Herrero, include a noncompete clause that prevents Puerto Rico from investing in its regional airports as well as the loss of one of the Puerto Rico Port Authority’s most valuable generators of cash. The LMM Airport, said Herrero, was actually running surpluses most years that were used to subsidize the smaller regional airports. Without owning LMM, but still retaining the regional airports, and other costly assets, Herrero believes the Port Authority’s debt situation will actually worsen.

Hererro called the sale of Luis Munoz Marin a “further nail in the regional airports’ coffin” and simply “a bad deal for Puerto Rico.” He concluded that the post-privatization Puerto Rico Port Authority will still have most of its weaknesses, “but would not have the monopolistic control over the airports that was considered a strength,” and that “the Puerto Rico Port Authority may lose its viability, putting at risk the extensive investment in grants, passenger facility charges, and other funds that the US government has made up until now.”

In his comments to the FAA, Mario Pabon Rosario, a lawyer who worked with Herrero to analyze the airport deal, pointed out various conflicts of interest among different parties that worked with the government to take the facility private. “From its beginning, this privatization process has been plagued by questionable practices on the part of the [government], such as contracting as advisers entities that would later become bidders in the privatization process, and contracting as a legal adviser a firm that previously had bidders as its clients,” Pabon Rosario wrote.

“On its merits, it is clear that this privatization transaction has been undertaken on the basis of a ‘Study of Desirability and Convenience’ containing many erroneous premises and drafted with the sole purpose of justifying the conclusion to which the [government] wanted to reach.” Rosario submitted a lengthy critique of the privatization agreement to the FAA, bolstering several hundred comments filed with the administration in opposition to the airport’s sale.

In another set of comments drafted for the FAA’s consideration last year, Pabon Rosario pointed out that advisers to the Puerto Rican government on the privatization deal were later participants in the bidding process. Macquarie Capital was retained by the Puerto Rican authorities to advise the government on structuring the privatization deal. Later ,a business venture in which Macquarie owned a half stake, Grupo Aeropuertos Avance, sought the privatization contract. The Credit Suisse bank was also hired by Puerto Rico’s government to advise them on how to structure the airport deal. Credit Suisse is also a majority owner of the Aberdeen Asset Management company, one of the minority shareholders of Fernando Chico Pardo’s ASUR corporation which bid and won the privatization contract.

“The involvement of Credit Suisse and its subsidiary is expressly prohibited.” Puerto Rico Assembly member Charlie Hernandez stated on the floor of the Puerto Rican House of representatives, adding that it was a “blatant conflict.” Hernandez slammed the deal while it was still in the works and called for an investigation last year. “The privatization of the airport has been plagued by irregularities from the beginning. Companies that Fortuño’s government brought in for advice on this transaction have ended up using confidential business information to present their proposals and take the contract on which they are advising. No further action has been taken on Hernandez’s accusations, however. Credit Suisse quietly sold its remaining shares in Aberdeen in July of 2012, one month after Rep. Hernandez called attention to the financial link.

“In the 1930s and 1940s, Puerto Rico had a very activist state to promote development,” said Juan Giusti. “People are very used to publicly-owned industry here, so privatization generates a lot of debate.” Giusti wonders now what’s next. “It’s amazing that it hasn’t gotten off the ground in the US, but with the FAA doing this in Puerto Rico, it could be gathering steam.”

Chicago issued a request for qualifications for privatization of the Midway Airport in January of this year, and received a go-ahead from the FAA to take bids. Earlier this month, authorities in Gary, Indiana proposed privatizing the Gary/Chicago Airport. Other privatization plans for airports across the United States are under informal consideration.

Highstar’s Christopher Lee pressed his case for the further privatization of infrastructure in a POLITICO op-ed published last month. Touting his recent acquisition of Puerto Rico’s airport and Highstar’s port concessions, Lee wrote, “It’s time for government at all levels in the United States to partner with the private sector to bring our transportation infrastructure back to world-class levels.”

Juan Giusti said he felt compelled to leave a comment. “POLITICO should require higher standards of disclosure by its opinion contributors,” wrote Giusti. “The endnote on Mr. Christopher H. Lee states only that he is the founder and managing partner of Highstar Capital. What the note does not say is that Highstar Capital was the financial platform for the two transactions that the column praises.”