Why is Puerto Rico, bankrupt and still recovering from Hurricane Maria, spending more than a billion dollars on expert advisors, including McKinsey?
Illustration: Historic Maps/Ullstein Bild via Getty Images This story was done in collaboration with Centro de Periodismo Investigativo. Lee aquí en español.
For the last two years, though, Chappuis and the firm have taken on an unusually visible role in Puerto Rico’s contentious and very public bankruptcy process. Under a law Congress passed in 2016, the island’s finances are overseen by a federally appointed board, which hired McKinsey as its “strategic consultant.” Chappuis, in turn, is the firm’s point man. In October, the board issued a 148-page fiscal plan that touches nearly every sector of the Puerto Rican government.
As if that weren’t enough, McKinsey’s involvement in Puerto Rico was complicated by … McKinsey. Over the past year, the firm’s once unimpeachable reputation has been tainted by disclosures stemming from a series of lawsuits and newspaper investigations that reveal its intimate links to bad businesses , bad policies , and bad people . McKinsey’s core company value, its loyalty to its clients, has been called into question by allegations of double-dealing.
Of course, that assumes that what advances the modern economy advances the common good — a proposition currently under siege from both the right and the left. “When things are working correctly, it’s a huge problem,” one young former McKinsey consultant said of the firm. Disgusted with the company’s work with federal law enforcement under Trump, he recently quit and penned a scathing anonymous essay in the leftist journal Current Affairs. “McKinsey is capitalism distilled,” he wrote.
Because of Puerto Rico’s quirky territorial status, its bonds offered tax advantages to mainland investors. “Puerto Rico debt was a hot commodity on the bond market,” Chappuis said. “This became an art form in Puerto Rican government: how to carve out revenue streams.” Around five years ago, though, the streams finally ran dry. The island’s credit rating plunged as analysts questioned whether it would have the revenue to service its enormous debt. When Puerto Rico made a desperate issue of $3.
Bertil Chappuis. When McKinsey landed in Puerto Rico in November 2016, its first task, in Chappuis’s words, was to “unravel the hair ball of data, of systems, of issues” facing the island. The job quickly proved more challenging than he anticipated. He says the government didn’t have reliable figures on the number of people it employed, it had no unified payroll system, and it wasn’t even clear how much money Puerto Rico possessed.
McKinsey stopped visiting in the immediate aftermath of the hurricane, but its consultants were back within weeks to survey the devastation, working on “power restoration” and “operational stabilization” at the power company. According to court documents, McKinsey sent consultants to San Juan’s airport to interview departing passengers to get “a sense for ‘what is happening on the ground.
Puerto Rico elected the 37-year-old Ricardo Rosselló governor soon after the passage of PROMESA. Although he campaigned on a pledge to put finances in order, his administration has been in constant, bitter conflict with the board and McKinsey. The first draft of the fiscal plan called for contracting the size of the government workforce by almost a third. That percentage has been reduced, but the initial target set the tone: The oversight board demands and Puerto Rico resists.
Soon after he started the job, Sobrino said, he met with Jaresko and, via speakerphone, McKinsey consultants. They presented him with a report, “The Path Forward”; on the first page, beneath the heading “The New Normal,” were three questions:• How does that decision lead to savings? “We’re just being squeezed, squeezed, squeezed,” said Luis Carlos Robles, who works for a nonprofit that serves an impoverished San Juan neighborhood. His community of 26,000 people surrounding the Caño Martín Peña — a polluted, debris-choked waterway — had absorbed a double blow.
McKinsey has managed to find a few allies in local government. “The McKinsey fiscal-plan people are all over my numbers,” said Julia Keleher, Rosselló’s education secretary, in January, but she was happy about it. The school system has reading scores on a par with Jordan’s and Moldova’s, and Keleher, a fast-talking 44-year-old native of Philadelphia, said many of the schools that the plan targeted for closure had small enrollments.
Outside a classroom building, Lara and I passed one of his students, Gabriel Negrón, a curly-haired 19-year-old student leader. He was in the middle of painting an American flag with a Spanish slogan decrying “thievery and piracy.” The next day, I saw him waving it at the rally outside the federal courthouse, where protesters chanted slogans attacking la junta and hedge funds. “The vultures,” Negrón said, “are just going to keep draining Puerto Rico.
One of the bankruptcies the MIO had an interest in was Puerto Rico’s. Last fall, the Times reported the MIO had a significant investment in Puerto Rican debt. The resulting outcry, in Congress and Puerto Rico, forced the oversight board to hire yet another consultant, a law firm, which released the February report concluding the MIO operated independently and that there was “no evidence” McKinsey’s consultants “knew about this direct investment, let alone altered their behavior because of it.
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