Weakening political connections by means of regulatory reform: Evidence from contracting out water services in Spain

Abstract

One area of public policy where rent-seeking and favoritism is relatively common is the contracting out of public services. Private firms can improve their chances of obtaining contracts by bribing politicians or public servants and funding political parties. In the same vein, firms can gain access to policymakers by hiring influential former politicians—a practice commonly referred to as revolving-doors. In this paper, we use information from 922 privatizations of water services in Spanish municipalities between 1984 and 2016 and multinomial logistic regression techniques to study the association between specific firms securing contracts and the political parties ruling the municipalities. We find robust statistical evidence of an association between the Popular Party (Partido Popular or PP) and the firm Aqualia, part of the large Spanish holding company Fomento de Construcciones y Contratas (FCC), which is known to have funded the Popular Party. Furthermore, former PP politicians have been appointed to top positions in the FCC Board of Directors. However, this relationship weakened after the institutional reform of 2007 on public procurement and financing of political parties, which is empirically evaluated in this paper.

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Notes

  1. 1.

    This case has been named the Bárcenas Case after Luis Bárcenas, who was Manager (1982–1987, 1993–2008) and later Treasurer (2008–2009) of the Popular Party, and also member of the Senate for this party (2004–2010). The Popular Party holds the central government in Spain, as well as most regional and local governments.

  2. 2.

    See details in Huffington Post, 11 May 2014 (http://www.huffingtonpost.es/2014/11/05/hacienda-caso-barcenas_n_6108430.html); and Europa Press, 11 May 2014 (http://www.europapress.es/nacional/noticia-barcenas-hacienda-cree-no-hay-correlacion-temporal-donaciones-pp-contratos-publicos-20141105165940.html).

  3. 3.

    See El País, 28 May 2013 (http://politica.elpais.com/politica/2013/05/28/actualidad/1369751484_277881.html).

  4. 4.

    Aqualia belongs to Fomento de Construcciones y Contratas (FCC), a group that used to be controlled by the Spanish Koplowitz family, until Inmobiliaria Carso (owned by the Mexican magnate Carlos Slim) bought a 25.6% ownership stake in FCC in late 2014 (FCC 2015), thus becoming the major shareowner. In addition to providing water services to more than 850 Spanish municipalities, this holding company is also present in more than 50 countries, including China, Mexico, Portugal, the Czech Republic, Poland and Algeria.

  5. 5.

    Agbar (an abbreviation of Aguas de Barcelona) is a subsidiary of the French holding company, Suez Environment. It comprises over 150 companies and has around 13,000 employees, and provides water services not only in Spain but also in countries such as the United Kingdom, Mexico, China, Chile, Cuba, Colombia and Algeria. Moreover, this company operates under different names in different Spanish regions: Aigües de Barcelona in the metropolitan area of Barcelona and Sorea in the rest of Catalonia; Aquanex in Extremadura; Aquara in Aragon; Aquarbe in Cantabria, Basque Country and La Rioja; Aquaona in Castile-La Mancha and Castile and Leon; Asturagua in Asturias; Canaragua in the Canary Islands; Hidralia in Andalusia; Hidraqua in the Valencian Community; Hidrobal in the Balearic Islands; Hidrogea in Murcia; and, finally, Viaqua in Galicia.

  6. 6.

    Actually, five out of the seven members of Agbar’s Board of Directors are French. Its Executive President has never had any involvement in institutional activities.

  7. 7.

    The regulation of the management of municipal services in Spain is set out in Law 7/1985 on Local Government Regulations, and Law 57/2003 on the Modernization of Local Government.

  8. 8.

    Partial privatization, by means of mixed firms, is also becoming increasingly common. Ownership is shared between the government, who usually retains ownership of a large fraction of the firm’s capital and is expected to ensure the public interest, and the private partner, who has industry know-how and is often in charge of the day-to-day management (Warner and Bel 2008; González-Gómez et al. 2009).

  9. 9.

    Even so, some municipalities—particularly small ones—still do not have the Contractor Profile institutional webpage, which has caused additional difficulties in our data collection process.

  10. 10.

    Despite the lack of a public register until recently, we estimate that in the period 1984–2006 around 1350 privatizations of local water services took place in Spain, while between 2007 and 2016 the number of privatizations was approximately 450. Accordingly, the estimated representativeness of our sample was 40 and 85% before and after the legislative reforms passed in 2007, respectively.

  11. 11.

    Note that privatization policies in the water delivery service were almost non-existent in the case of Madrid, another highly-populated Spanish region.

  12. 12.

    In this regard, note that these dummies represent all Spanish regions but Navarra and the autonomous cities of Ceuta and Melilla, for which the sample has no observations.

  13. 13.

    As a result of the comments of one referee, we have also included in the multinomial logit regression the square of population as an additional explanatory variable, in order to test for the possible existence of non-linearities in the effect of population on the probability of choosing a given firm for the privatization of the urban water service. However, the estimated parameter for this variable is not significant at standard confidence levels in any cases, while the estimated parameters for the rest of variables in our models and their statistical significance remain unchanged. Moreover, given the highly skewed distributions of the market variables we also tried logs rather than levels for population and economic activity. Results for the marginal effects of interest in our models do not change, except for the variable PP in the second column, i.e., the marginal effect for Agbar, which now becomes significant at 10%, rather than at 5% as it does in the model with levels.

  14. 14.

    Following the suggestion of one referee, in addition to our set of political variables, we included in the multinomial regression four variables computed as the interactions between majority and continuity, on the one hand, and PP and PSOE, on the other. However, none of these variables was found to be statistically significant; moreover, including these interactions even reduced the statistical significance of the variables majority and continuity in some of our estimations. These results might indicate that what really matters is whether or not the political party ruling the municipality holds a majority of councillors, rather than whether they belong to the PP or PSOE. In fact, political coalitions have historically been unusual in Spanish municipalities, where the party that wins the most votes normally rules the local government. According to these arguments, we have preferred to follow the parsimony principle by keeping our model specification as simple as possible.

  15. 15.

    In order to further investigate the relationship between the Popular Party and Aqualia, and the effect of the 2007 reforms on that relationship, we have also estimated a logistic regression for the probability of Aqualia being awarded the water services management contract after a privatization tender. The estimated marginal effects, which are available on request, are fairly similar to those from the multinomial logistic regression, and unequivocally show how the probability of Aqualia being awarded the contract increases—in this case by 14.3%—when the Popular Party is ruling the local government. Besides, the marginal effect of the variable PP*Reform 2007 is also negative and statistically significant at a confidence level of 5%, corroborating the notion that the political connection between the Popular Party and Aqualia weakened after the reforms.

  16. 16.

    Results from the falsification tests in the logistic regression for Aqualia also show how the only reform that weakens the relationship between the Popular Party and Aqualia in awarding contracts is the real, 2007 reform. These results are also available on request.

  17. 17.

    We thank a referee for pointing out that a donation of €5.03 million over seven years is a small amount of money relative to the potential size of the contracts involved. Along these lines, Tullock (1972: 355) argued that, given that there is little money in politics considering the value of public policies at stake ‘...the amount of influence that can be purchased by this method is small’. This view has received empirical support in studies such as Ansolabehere et al. (2003) (see Stratmann (2005) for a deeper discussion). We should also recall, however, that the amounts of money in Spanish politics are relatively small compared, for instance, to US politics; by way of example, the Popular Party spent a total of €22.7 million in the 2008 national election campaign.

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Acknowledgements

We acknowledge financial support from the Spanish Ministry of Economy and Competitiveness (ECO2016-76866-R and ECO2016-75237-R), the Catalan government (SGR2014-325), the Valencian government (PROMETEOII/2014/053), and the Andalusian government (P11-SEJ-7039). None of the funding sources had, however, any involvement in any stage of this research. Moreover, we are thankful for useful comments and suggestions received from the referees and the Editor, and also when this paper was presented at EPPP-Université Paris I- Sorbonne, and Universidade do Minho.

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Correspondence to Andrés J. Picazo-Tadeo.

Appendix

Appendix

Variables: Description and sources

Variable Description Source
Dependent variable
Firm awarded the contract in the privatization contest Name of the firm to which the contract to manage the urban water service is awarded: either Aqualia (1), Agbar (2) or Others (3) Own elaboration
Policy variable
Reform 2007 Dummy variable that takes the value 1 for privatizations occurring before the passing of Organic Law 8/2007 and Law 30/2007, regarding the financing of political parties and procurement of public contracts, respectively; and 0 otherwise Own elaboration
Market variables
Population Number of inhabitants in the municipality Spanish Statistical Office (INE)
Economic activity Indicator of economic activity computed at the municipal level using information from the Spanish Business Activities Tax (IAE in its Spanish acronym) La Caixa (2014)
Regional variables 16 geographical dummy variables that take the value 1 if the municipality belongs to the regions of Andalusia, Aragon, Asturias, Balearic Islands, Basque Country, Canary Islands, Cantabria, Castile-La Mancha, Castile and Leon, Catalonia, Extremadura, Galicia, Madrid, Murcia, La Rioja and the Valencian Community, respectively; and 0 otherwise Own elaboration
Political variables
PSOE Dummy variable that takes the value 1 if the left-wing Spanish Socialist Workers’ Party (PSOE in its Spanish acronym) was in power at the time of privatization; and 0 otherwise Spanish Ministry of Finance and Public Administration
PP Dummy variable that takes the value 1 if the right-wing Popular Party (PP in its Spanish acronym) was in power at the time of privatization; and 0 otherwise Spanish Ministry of Finance and Public Administration
Majority Dummy variable that takes the value 1 if the party in power held a majority when the decision to privatize was taken; and 0 otherwise. This variable is defined by the number of city councilors Spanish Ministry of Home Affairs
Continuity Dummy variable that takes the value 1 if the decision to privatize was taken in the second or a subsequent term of office of the party ruling the town council; and 0 otherwise Spanish Ministry of Home Affairs

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Albalate, D., Bel, G., González-Gómez, F. et al. Weakening political connections by means of regulatory reform: Evidence from contracting out water services in Spain. J Regul Econ 52, 211–235 (2017). https://doi.org/10.1007/s11149-017-9338-6

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Keywords

  • Rent-seeking
  • Political connections
  • Privatization
  • Urban water services
  • Spain

JEL Classification

  • D73
  • L33
  • L95