Peruvian economist Miguel Palomino, president of the Instituto Peruano de Economía, used the state water utility Sedapal as a case study this week to argue that Peru's public institutions have been so weakened over the past five years that they will take far longer than a single term to repair.
Palomino is a professor and director of the Master's in Finance program at the Universidad del Pacífico. He holds a doctorate in finance from the Wharton School at the University of Pennsylvania and previously worked as chief Latin America economist for Merrill Lynch and general manager of Merrill Lynch Peru, as well as a researcher at the Grupo de Análisis para el Desarrollo (GRADE).
He opened his column with an analogy: a mid-sized company of 22 workers is handed over for five years to someone with no experience or knowledge of the business, whose only goal is personal profit, and who knows the firm will be returned to its original owners once the five years are up. Regardless of the company's starting condition, he said, the outcome after five years would be expected to be far worse.
He then described the person taking charge afterward facing a wrecked operation: eight of the most competent workers gone, replaced by 16 unqualified staff hired on the old manager's recommendation, machinery left rusted from lack of maintenance, almost no cash or supplies, and a reputation with suppliers and clients in ruins. Even a committed manager with the goodwill of the remaining staff would need considerable time, likely more than a year, Palomino said, to bring such a company back to roughly where it started.
Applying the analogy to Peru's government
Palomino said a similar but more complex version of that scenario faces even the best-intentioned and most competent administrators in Peru's new government. He said he does not believe all of them fit that description, nor does he assume the state's starting condition was good to begin with. But he said the state apparatus has clearly deteriorated and that finding qualified people willing to take on posts discredited by years of poor governance will be difficult.
Sedapal's revolving door of managers
Palomino pointed to Sedapal, Lima's sanitation utility, as an example that affects millions of users and mirrors problems across many public organizations. He said Sedapal has had 12 general managers over the past five years, each lasting five months on average, not enough time to become familiar with the job. The company has also had eight board chairs and has had none since June 4, he said. Leadership at Sedapal was already unstable in the 15 years before that, Palomino said, but those officials lasted more than three times as long as those of the past five years.
The cost of going without a connection
Citing the Superintendencia Nacional de Servicios de Saneamiento (Sunass), Palomino said households without a connection to the public water network pay seven times more for the water they use than connected households, despite consuming less than half as much. He added that having a connection does not guarantee continuous service, as users already know from experience. He attributed the poor, inconsistent coverage to the high cost of reaching new users, the need to divert scarce resources to keep aging pipe networks from collapsing, the roughly one third of water service that goes unbilled, and restrictions on the tariff increases Sedapal would need to fund investment.
Cost of expanding service in outlying areas
Palomino also cited figures from Peru's Ministry of Economy and Finance on the cost of extending water supply to different parts of Lima. Expanding the network in Santa Rosa, in the Ancón district, costs 25 times more than the average cost of expansion across Lima, he said. The comparable figure is 14 times for Nueva Rinconada in southern Lima and nine times for Jerusalén in Puente Piedra. Palomino said Sedapal is constantly forced to respond to demand created by land invasions, which he said often follow wherever land traffickers can extract the most profit.
What Palomino says should be demanded of the government
Palomino said simply restoring Sedapal's operations to where they stood before what he called the disaster of the past five years will take considerable effort and time. He said it is as absurd to expect results from the government after only one month as it is to treat that patience as a blank check. No one should expect new pipe networks to suddenly appear, unbilled water to disappear, or Lima's disorderly growth to be resolved, he said. What can reasonably be demanded, he said, is that competent people be appointed, that they stay long enough to do their jobs, that investment decisions be based on technical criteria, and that the company stop being treated as political spoils.
Palomino said the same standard applies to much of the Peruvian state. Destroying institutions can take just a handful of appointments, he said, while rebuilding capacity necessarily takes time. For at least the first six months of the new government, he said, the question should shift from how many problems have already been solved to whether the institutions needed to solve them are being rebuilt. If Sedapal is still rotating managers, delaying necessary decisions and being run on political criteria a year from now, Palomino said, the blame can no longer fall solely on the disaster it inherited.
