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Puerto Rico’s Construction Capacity and the Disbursements of Disaster Recovery Funds

Introduction

Much has been said and speculated about the Disaster Recovery Funds in Puerto Rico since the aftermath of hurricanes Irma and Maria. As of today, May 2024, over $28 billion has been disbursed in Disaster Recovery funds that have been used for the reconstruction of Puerto Rico. Puerto Ricans continue working in all affected areas, and since the catastrophes of 2017, have proven to be resilient, committing to work for a better future in all areas of their lives.


As part of the efforts to recover the much coveted "normality" in Puerto Rican’s daily life, efforts of reconstruction have taken place with disaster recovery funds. Even though federal disaster recovery funds are available, other problems such as new federal bureaucracy, lack of available labor, and materials have risen and hindered the speed of the recovery and reconstruction process of the island. For Puerto Rico, it has been a challenging process to rebuild the island, but even with the challenges, disbursements have kept a healthy pace provided all the moving parts of the federal process and the available resources in Puerto Rico.


At the time the hurricanes hit Puerto Rico, and disaster recovery funds were available, the construction industry in Puerto Rico was at its lowest point. Puerto Rico had to jumpstart the construction industry to begin reconstruction of the island. Since the recession of 2007-2008, the construction industry contracted and affected Puerto Rico’s economy because this industry is an essential contributor to the process of economic development of a country. Roads, dams, irrigation works, parks, schools, houses, hospitals, factories, and other construction works are the foundations for development efforts and improving living standards. The availability of federal Disaster Recovery funds has improved the construction industry and the economy as it is linked with the total economic output generation and employment.


This brief research article explains and illustrates how the construction industry behaved before and after the disaster recovery funds were available. To understand the behavior of the receipt of disaster recovery funds, we delve into historical comparative analysis and the trend of the construction industry in recent years. We will examine the productive and counterproductive factors of the management and ability to use these funds in Puerto Rico and we will leave you with a slightly clearer view of what is happening. This article will explain the capacity of the construction industry and whether the past and current disbursements of Disaster Recovery funds are slow or fast, provided the variables that exist in Puerto Rico. This research article reviews the historic construction output, the factors that drive this output, and how it can increase.


Section 1. Background Overview

In recent years Puerto Rico’s construction industry has had a boom due to the overflow of federal funds received after Hurricane Irma and Maria. In 2017, right before the hurricanes, the construction industry reached its lowest point where the total construction investment reached $2.4 billion and construction jobs represented only 3.3% of the total jobs in Puerto Rico. At its peak (2000 to 2007) the construction industry had an investment of 6.8 billion and 98 thousand jobs, which represented over 7% of the total jobs in Puerto Rico. In 2007 the construction industry was affected by the Housing Bubble recession and in 2017 construction jobs were reduced to 1/3 the amount it was in 2007, which, on average, was a reduction of 12% each year. For further details please refer to the graph below and the detailed appendix table.

As established by the previous graph, there is a strong correlation between the construction value/investment and the total construction jobs. The construction output follows the same trend as the growth and contractions of construction jobs. Both lines are parallel almost every year, except for 2017-2018 which are outlier years due to the import of high-cost labor due to the emergency of Hurricane Irma and Maria. This similarity is due to the nature of the construction industry as it is a very labor-intensive profession, and, unlike other professions, construction workers must be dedicated to one construction project until finished. Provided this fact, it can be stated that the amount of available skilled labor is equal to the construction capacity/output in Puerto Rico.


Section 2. Construction Capacity

In this article “construction capacity” refers to the maximum amount of construction output that can be produced at an equilibrium level before the effects of inflation apply to construction costs due to the lack of labor and materials. To calculate the optimal capacity level, we look at the historic construction trends from the year 1999 to 2022 and the average number of jobs in construction per million invested. The 24-year average is 12.43 construction jobs per million dollars invested/output in construction in Puerto Rico. For further details and data, please refer to the appendix table.


The optimal construction capacity, and economic job multiplier of 12.43 is consistent with data from U.S. input-output models, such as RIMS II and IMPLAN. These models use financial inputs and outputs to generate a final demand multiplier that is then used to determine job creation from spending. Generally speaking, these models produce estimates ranging from 10 and 15 jobs for every $1 million in construction spent. Of course, job creation figures are influenced by many variables, including the project’s region, the nature of the construction activities, and the types of structures being built, so job creation estimates can vary significantly from project to project. For the effects of our calculations, we use historical figures to define the P.R. multiplier to 12.43, which falls within the U.S. construction range.


Provided the “construction capacity” calculation, we compare it with the construction investment/output per year in Puerto Rico and we can determine in which years there was a shortage or surplus in “construction capacity”. As per our calculations, from 2006 to 2010 there was a surplus construction capacity, meaning that you could have more construction output than what was produced. From 2011 to 2022 the construction industry produced at shortage levels, where costs were higher due to the shortage of construction workers.

As established, after 2007 construction investment and jobs declined, and the construction distribution completely changed. In 2007 40% of the construction investment went towards building housing. In 2022 only 15% of the total construction investment went towards building housing. This change in construction distribution adds to the current shortage of housing in Puerto Rico. It is forecasted that this construction investment structure will remain in the future as most disaster recovery funds do not cover housing construction.


As of May 2024, there were approximately 57.4 billion dollars left to disburse in disaster recovery federal funds that will go toward the construction industry. Most of these funds are FEMA funds that were obligated in Hurricane Irma and Maria, and from more recent disasters such as Hurricane Fiona and an Earthquake. As established, the disbursements of the construction federal funds are limited by the availability of construction workers as the construction industry is a very labor-intensive profession. Meaning, that there can be $57.5 billion of obligated federal funds, but Puerto Rico’s capacity for construction is only about $5 billion per year, of which around 60% is allocated to disaster recovery.

Several variables limit the speed of disbursement of Disaster Recovery (DR) funds:

  • Capacity – availability of specialized personnel, construction workers, and materials to execute the projects

  • Applicants – DR funds require applicants to comply with federal regulations that often are slowly met

  • Federal process – each obligated project must go through project formulation and costs must be agreed by the state (COR3), FEMA, and the applicant. This is a lengthy process that is cumbersome and varies by project.

  • Pre-construction process – every project requires Design (A&E) work, permits, and studies (environmental, historic), among other specialized work to begin the construction. This can be a lengthy process.

  • Documentation – construction projects are disbursed via reimbursements of work performed; thus, the required construction certifications and documentation must follow federal regulations. A state revolving fund of $250 million was opened to fast-track this requirement, which provides funding to applicants before reimbursements.


Even with these limitations, the construction industry is performing at over-capacity levels, where inflation costs (high costs in labor and materials) are affecting construction projects. Currently, Disaster Recovery funds are being disbursed at a fast pace, considering the low-capacity levels that exist and the process they must go through. That said, it is very difficult to disburse more federal funds without more construction workers or without affecting the private construction investment, which is crucial to developing more needed housing and/or office/commercial spaces.


Section 3. Disaster Recovery Funds & Construction Forecast

In the efforts of forecasting the disbursements of DR funds, we consider past construction output trends with the growth of construction jobs in Puerto Rico. Since the main driver of the construction output is construction jobs, the forecast is based on the average annual growth of construction jobs of 7.3%, a multiplier factor of 12.43 jobs per million invested in construction, and an allocation factor of 60% for DR funds. The forecast results present a possible output from 2023 to 2027 of total construction of $5 to $6.6 billion, of which 60% will be dedicated to DR funds.

As a “control” of our forecast, total jobs in Puerto Rico are forecasted to grow at an annual average rate of 4.3%. Total growth in employment is forecasted using a moving growth average of employment in Puerto Rico over the last four years (2019-2022). Out of the total employment growth, it is assumed that construction jobs in the “probable” forecast scenario will capture 6% of total employment in Puerto Rico by 2027. We also forecasted an “optimal” scenario where, by 2027, employment in the construction industry would capture 7% of the total employment in Puerto Rico. A 7% capture rate of the total employment industry is high and probable inefficiencies may occur, but it refers to the peak point in 2007 where this was the representation in the construction industry in Puerto Rico. In the United States, the construction industry represents 5.2% of the total employment, and at its peak (2007) it represented 5.6%. In comparison, we estimate that a 6% employment representation in the construction industry is a reasonable growth forecast for construction jobs, and thus the construction output in Puerto Rico.


Based on this forecast, the output of DR funds would be $3 billion in 2023, to $4 billion in 2027. This “probable” output would require an increase of 4,895 employees every year for the next five years in the construction industry. According to our estimates, in the next five years, the construction industry is in demand of 24,473 to 37,941 new employees. Even with this increase in probable employment in the construction industry, the capacity and processes would limit yearly DR disbursements and it would require another 12 years (up to 2036) to disburse the entirety of DR funds currently obligated. Mainly, the capacity is what guides the flow of DR funds, and the capacity must be within reason of available people in Puerto Rico.


Section 4. Findings

Disaster Recovery funds continue to fuel economic growth in Puerto Rico and in the construction industry. This growth is expected to continue at a fast pace for the next five years and stabilize after that. Currently, all efforts are being made to fast-track DR disbursements, and the proof is shown as construction projects are being performed at over-capacity levels. After this analysis, some of our findings and key takeaways from this research article include:

  • Historically the construction industry had its peak in 2007 when jobs in this industry represented 7.8% of total employment in Puerto Rico, while in 2017, before the hurricanes, it reached its lowest point representing only 3.3% of total employment.

  • From 2019 to 2022 construction jobs have increased at a pace of 9.6% each year.

  • The lack of skilled construction labor is a key limiting factor in increasing construction output in P.R.

  • It can be stated that the amount of available skilled labor is equal to the construction capacity/output in P.R.

  • The 24-year average of jobs per million dollars invested/output in construction in P.R. is 12.43, which defines the construction capacity line in future years.

  • Based on the defined capacity line, from 2006 to 2010 there was a surplus construction capacity, while from 2011 to 2022 the construction industry produced at overcapacity levels, where costs were higher due to the shortage of labor.

  • In 2007 40% of all construction was dedicated to building housing, while by 2022 this was reduced to 15%.

  • From 2018 to 2019 76% of all construction was allocated to construction-related Disaster Recovery (DR) funds. Currently, over 40% of all construction is allocated to DR funds and this is expected to increase to 60% due to an increase in CDBG funds.

  • Based on an increase in construction employment an increase in construction output is forecasted. In a “probable” scenario (where 6% of the total employment is in construction) the output of DR funds would be $3 billion in 2023 to $4 billion in 2027.

  • In the next five years, the construction industry is in demand of 24,473 to 37,941 new employees.

  • Currently, DR funds are being disbursed over the capacity line. Even with the proposed increase in construction labor, it would require another 12 years (up to 2036) to disburse the entirety of DR funds currently obligated.


In conclusion, the construction industry in Puerto Rico has been transformed by the massive amounts of obligated federal Disaster Recovery (DR) funds. This transformation has had both pros and cons. On the pro side, DR funds have injected millions of new funds into the economy, while on the con side, the transformation has over-saturated the construction industry inflating construction costs (materials and labor) and deflected from the construction of new housing and private projects.


Construction with DR funds has been moving very rapidly, or as fast as it can, given the shortage of labor and skills that currently exists in Puerto Rico. Currently, DR funds are being disbursed at maximum capacity levels and cannot increase without increasing labor, increasing inflation, or capturing a higher percentage of private construction, which can be harmful to economic development as the construction of more private housing is needed. The disbursement of DR funds is a question of capacity and not willingness, as a great amount of labor is needed to disburse the current obligated funds. Knowing the construction capacity helps Puerto Rico get organized as it doesn’t become a question of how fast you can disburse, but rather what projects you should disburse. Increasing construction capacity (with foreign labor for example) is not the best approach, as over-inflating the construction industry could be harmful in future years and could replicate the construction bubble that occurred in 2007. A better approach would be to improve construction efficiencies, prioritize projects, regulate construction pricing, and let the market self-regulate with construction demand.




Disclosure

The views in this article are solely the responsibility and the opinions of the author and HI Project Consultants, LLC. Opinions should not be interpreted as reflecting the views of any other company affiliates. All information used in this article is public, published information referenced in each table and/or graph.



About the Author

Hector Rivera, MBA, PMP, ChE, is an economic advisor with over 20 years of experience in the fields of economy, finance, and federal funds. He has been a part of “Fortune 500” financial firms in New York City, top consulting firms in Puerto Rico, and Leadership roles in Government Agencies in Puerto Rico such as COR3 and FOMB. Currently, he is HIPC’s Economist and Director.




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