The Oversight Board has the responsibility to clearly communicate the strategy supporting the lawsuits filed against individuals and entities who provided services to the Puerto Rico government prior to the debt restructuring process under PROMESA.
The uncertainty surrounding the claims impacting nearly 320 private contractors and vendors, leads to the perception that it is an arbitrary action that threatens the island´s economic activity and undermines its credibility.
The lawsuit was filed by the Unsecured Creditors Committee (UCC) and the Board´s Special Claims Committee (SCC).
Suppliers are asked to return the charges for services rendered within four years and 90 days before filing for bankruptcy. The severity of such claims is exacerbated by the Board´s lack of communication, one of the main criticisms to the fiscal entity.
The four-year period set as the timeframe subject to recover payments does raise concern over a broad sector. According to experts, this timeframe -distant from the moment bankruptcy was declared- as well as other considerations included in the claims have not been properly explained.
This aggressive action against the business sector and the third sector, which includes small, medium and large contractors, poses a serious distraction to the process of stabilizing public finances and restructuring the obligations of the Puerto Rican government. It could also lead to costly litigation that would require the hiring of attorneys financed with public funds or professionals representing the private entities.
Those potentially affected include, for example, therapists who have served thousands of students with special needs, and bus drivers transporting low-income students to school. There are also medical offices that serve thousands of indigent people covered by the government health plan; small and medium-size contractors who provided education and health services; and professionals who have been bonafide contractors for decades. There are also service companies that subcontract professionals, which translates into savings for the government and, in many cases, reduced profits for the contractor.
For individuals and small entities, returning what the received for the work done would seriously affect their finances. Many may not even be able to return that money.
It has been reported that the lawsuit would seek to challenge payments arising from contracts not registered with the Office of the Comptroller. The legitimacy of disbursements can be verified through safeguards in the agreements signed with the government. These contracts must identify accounts to make payments, among other accountability mechanisms. In the case of payments made for work properly done, reimbursement would be inappropriate.
The Board announced a mediation alternative to explain these claims that may represent a space to review and clarify whether there are discrepancies in payments to suppliers. Although the mediation option maintains a fiscal impact for the defendants, it seems less expensive than a judicial process.
However, the lawsuit does not fail to send a discouraging message to the investment sector, as it moves away from the main objective of debt restructuring process under PROMESA, in Federal Court. Looking ahead, the right path must be to fine-tune controls that guarantee uniform payments for types of service, with duly registered agreements with the Comptroller´s Office.
The fiscal balance process, as well as debt restructuring, should contribute to attract investment. The fact that an essential part of the island´s development is based on boosting the business climate should not be forgotten.