When the Public Sector Fails...

Sat in downtown Medellin are two identical buildings, both resemble something out of Eastern Europe during the era of Russian control - no doubt they used to be white however the captial of Antioquia has also now inherited the pollution issues associated with Leipzig, Warsaw etc back in the day and now they are some sort of dirty grey, but that is a story for another day. Where we will focus today is the ugly dispute that continues to make waves over the Hidroituago project which a year ago started to make headlines for all the wrong reasons as the dam threatened to collapse putting the lives of 100,000 souls at risk - the various stakeholders in the end were forced to make decisions that will eventually cost at least USD1bn but which had to be made in order to save the project and avoid an even bigger loss, the 100,000 downstream residents were little more than an after thought according to the public statements initially released. The side effect of all this is that EPM is being forced to sell down much of their strategic portfolio and vital education and social projects around the city have found their funding cut. In a convoluted structure, the Govenor's office and that of the local Mayor ended up as partners and couldn't grab enough headlines as the mammoth project approached that date when it would generate $100s millions per year for the two entities, it would be the biggest hydro-electric project in a country that already generates over 70% its energy via this source. Many experts as well as the local community itself who know the geology very well argued decades go that the project was unsafe - oddly enough they weren’t listened to and indeed one of the root causes was multiple landslides. Fast forward to 2019 and suddenly no-one wants to own the project and even less so the costs involved with the near-disaster of 2018. Following on from a study by Skava Consulting the owner of 46% of the project, EPM (representing the Mayor's office) who have been providing the expertise, announced they would be passing all of the overrun costs to Hidroituango (Governor's office with 50%+) due to the fact that the design fault was nothing to do with them. The Governor's office are having none of it with Governor Perez stating that EPM contracted the orginal studies and additionally EPM's use of Skava was in order to get a favourable outcome. Governor Perez also announced that the Mayor via EPM’s energy bills was already have the populace of the city pay - there is no direct evidence of this however bill payers are watching the Other Costs part of their bill carefully.

This is just the latest in series of ugly spats between the two offices with neither the Governor or Mayor prepared to cede ground, they both hold unlikely ambitions for higher office and the final blame for this mess could prove to be a future millstone. Ultimately what has failed is the public sector - EPM have been drinking their own bathwater for too long - it is part of the 'Patria Boba' whereby the incoming mayor simply names a new CEO who may or may not have experience in the sector, additionally as per much of the public sector it is overrun with staff who no-one wants to dispatch due to enormous costs of redundancy payments, not to mention the political fallout. EPM had been a success up until this point and had been a huge supporter of Medellin's transformation however that has now been placed at risk and it is long overdue for privatization - not a full 100% or even 51%, just a nominal amount as per Ecopetrol which would allow expert management to set out long term goals and carry out the housekeeping that is so badly required. Locals in Medellin are aghast at even the suggestion that they aren’t capable of running the company but the facts now speak for themselves - last week in the latest update the cost overruns of Hidroituango officially stood at USD1.2bn which both is unlikely to be the final number a those involved stumble around in the dark looking for a solution and also wipes out a few years of profits. In most any other company such a mess would have even executives out on the street but again EPM is apparently bullet proof, after all, what's the point ? Come the end of the year the Mayor who has overseen this will be gone and so will his choice as CEO - before the cycle starts again. This failed structure is oddly supported by much of the private sector of the city as well as most other entities, it as if the Hidroituango failure is just part and part of business, it is as if it would effect the very pride and reputation of Medellin - well the message in case people can’t see it is that the damage has been done and as per any disaster it is how you react to it that marks you, and thus far the fallout in terms of reputation has been far worse than the disaster itself. Multiple investigations are underway and none of them are likely to shine a favourable light on EPM or any of the entities related to the project. Would anybody argue that Ecopetrol having become a private entity after the Government sold 11.5% is a worse company, or that ISA isn’t in far better shape ? - of course not, privatisation, even a small sale would bring a new level of professionalism, the efficiencies required and ultimately far better result coupled with the corporate governance which is badly lacking. Will it happen ? Not likely under the current political situation but that doesn’t mean it shouldn’t.