Hey Puerto Rico: You Need Money for a Sovereign Wealth Fund

Puerto Rican Minister Alberto Bacó appears to be a wee bit confused about how one gets a sovereign wealth fund. (@RamCuFlo)
Puerto Rican Minister Alberto Bacó is a wee bit confused about how one gets a sovereign wealth fund. (@RamCuFlo)

EspañolLate last week, Reuters reported that Puerto Rico’s economic development minister, Alberto Bacó, is seeking to create a new “sovereign fund” to pay for incentives for companies to invest in the island. He claims that the fund would be created out of “concessions from creditors,” and would be used to spur development and job growth on the island.

Sovereign wealth funds are a well-explored and understood tool in public finance. Put simply, they act like an endowment fund for the nation, to prevent politicians from spending revenues from natural resources on current citizens, preserving the value of the nation’s assets for future generations.

The world’s greatest sovereign wealth fund is Norway’s Government Pension Fund, which economists point to as the model for all sovereign wealth funds. Norwegian officials created the fund to preserve the value of the country’s vast North Sea oil reserves in perpetuity, and it now holds nearly US$900 billion in assets, for a country of 5 million people. Closer to home, North Dakota and Texas are both states that have sovereign wealth funds within the United States.

The entire point is to lock the money away, and only spend the interest on the endowment. You create them when you have too much money.

This is the opposite of the problem present in Puerto Rico. The island’s government faces a debt crisis, which is why Bacó’s comments are so confusing. One cannot create a new fund full of money to hand to businesses without, you know, having money to hand to businesses.

It is unclear where he thinks this money is going to come from. He claims that “concessions from creditors” would be used, but concessions from creditors would come in the form of not collecting bills that are coming due, not giving him new money to give away.

The only way Bacó’s plan might come to fruition would be if Congress were to decide to create such a fund out of federal taxpayer dollars. And the chances of that are even lower than the feds bailing out the island outright. Does anyone realistically think that congressional Republicans want to give a slush fund to an indebted, mismanaged Puerto Rican government?

Bacó’s comments seem par for the course for Puerto Rican officials as the territory’s debt crisis unfolds. The territory’s current administration has not been serious about reform, pushing for a Washington bailout without the need for the unpleasant-but-necessary reforms to return the island to economic growth and fiscal solvency. Sound familiar?

Editor’s note: see more from Nick Zaiac regarding Puerto Rico here and here.

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