Claudio Rodríguez
Thompson & Knight
Expert Contributor

Peter Principle in Energy: Killing Competence with Incompetence

By Claudio Rodríguez | Mon, 08/02/2021 - 09:09

Lawrence J. Peter was a Canadian educator who created the principle that showed that, in complex organizations, good employees are constantly promoted until they reach their level of incompetence. Since 1969, the “Peter Principle” has been largely discussed as a fact in the development of careers and administration. With the same results, the level of incompetence can be reached by many other means, such as nepotism or political appointments, or even worse, because the organization is a state enterprise and, therefore, positions are not based or awarded on merit but in favor of ideological symmetry.

Historically in Mexico, with very few exceptions, both PEMEX and CFE have been directed by incompetent people or by competent leaders who have been guided by political rather than economic or logical rationales. Both cases are pernicious for the institution. Today, this has not changed.

I am not saying, of course, that people working for CFE and PEMEX are incompetent. In my experience, both companies employ the finest, most capable and best engineers and technical people in the whole of Mexico. Period.

But incompetent leaders, as harmful as they are in private entities, in state-owned companies can be catastrophic due to their importance in the use of state-owned (taxpayer) financial resources. Even more pernicious is when their incompetence is used to promote the destruction of market competition or private firms. In such cases, incompetence looks then to institutionalize non-competence in a monopolistic fashion and with market-destroying effects. The ultimate loser will always be the final consumer, who will be the victim of state-controlled incompetence, which always works under the political slogan of sovereignty. Not a relief, at all.

They are incompetent at their job and responsibility for creating value for the Mexican state (as expressly ruled by articles 4 of both the PEMEX and CFE laws) but they are very competent in destroying competence through artificial changes and against international treaties.

What the Mexican energy sector needs, indeed, is competence, both in the economic and professional sense of the word. We have seen the destruction of capabilities, alliances and synergies by people who follow orders and thus have not been able to distinguish between being faithful and loyal public servants and being completely incompetent

In private firms, incompetence is never allowed. For me, this is the main driver that makes private companies successful. That simple fact makes their services better. This rationale makes employees walk the last mile to reach the expectations of their bosses. Being competent in private companies is awarded. Delivering mediocre results has never been the mission of any private enterprise.

I can assure that private companies are not afraid of competition; they thrive with it, they work with it and they really are better when their capabilities are tested every day. The competition that is killing PEMEX and CFE is not private companies in their relevant markets, it is, as it has always been, the political competition to appoint or remove the union leader, the political competition to award juicy contracts and the political competition of using natural resources as personal spoils of war. The real competition that historically has affected PEMEX and CFE is the competition of being the most loyal incompetent.

As happened in the 1970s, killing private competence for dogmatic reasons will leave final users in Mexico in the hands of incompetent politicians. Strong as it is, this statement has been confirmed many times in Mexico. We are on the road to test it one more time and this will happen because being incompetent has never been controlled or resulted in lawful fines for people appointed for political reasons only. Even in state-owned foreign entities (examples are vast), the profiles of their CEOs are impressive, they have extensive domain over their companies and the market and they understand and work with their competition, they do not destroy it. This is possible mainly because their local laws provide high standards of who shall be appointed and the rules under which they can operate within a competitive market. Strong competition will never be the ultimate goal of mediocre leaders.

If PEMEX and CFE belong to Mexicans, as politicians love to say in covering their decisions, then it is time to implement changes to the law to ensure incompetent people do not reach the highest posts and that such decisions, if made, have sound technical, legal, financial and operational grounds. This will ultimately create value for the Mexican state because it is in the law. This is for starters.

Now, as state-owned productive companies (Empresas Productivas del Estado), both CFE and PEMEX should be driven by economics, best practices and competitive standards. Their days as national cash registers are far gone. The synergies they can create with private entities are stronger and better than being sequestered by illogical decisions that ultimately will be paid by taxpayers. In Mexico, synergies among energies are urgently needed.

In summary, avoiding competence in the energy market in Mexico through artificial changes is not only illegal, it is grossly mediocre. Having incompetent and obscure leaders in companies owned by the state is not only against the Constitution (because they cannot be efficiently managed as stated by the Mexican Constitution), it is sadly a constant fact.

What the Peter Principle says when incompetent people reach such level is that they never understand that they are incompetent and they lack insight of their situation.

If true, that is a sad conclusion for the Mexican energy market.

Photo by:   Claudio Rodríguez