Financial and Political Factors Motivating the Privatisation of Municipal Water Services

Abstract

Financial and political factors are widely considered to be an explanatory factor of the privatisation of public services. However, the empirical evidence in this respect is not convincing. This paper considers elements of long-term financial condition and ideological and political strength, together with other socio-economic factors and the effects of the current global financial crisis, to address the financial stress–privatisation relationship, with respect to urban water services, observed during the period 2002–2012 in Spanish municipalities. A discrete time survival model is applied, and the results obtained show that certain elements of financial condition, together with political and ideological factors, are decisive influences in decisions to privatise urban water services. We also highlight the major impact of the Great Recession and its effect on the financial stress–privatisation relationship.

Key Words:

• Privatisation
• municipalities
• financial stress
• water services
• recession

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Following Bastida, Benito, and Guillamón (2009), we considered Spanish municipalities with more than 1,000 inhabitants. As these authors point out, the reliability of financial data is doubtful for small municipalities and furthermore, data for some variables were only available for municipalities with more than 1,000 inhabitants. The Spanish Survey of Infrastructure and Equipment (EIEL), which was consulted to identify the type of municipal management and the level of service quality provides information about municipalities with fewer than 50,000 inhabitants but does not include the municipalities in the Spanish regions (in Spain, termed Autonomous Communities) of the Basque Country, Navarre and Madrid.

2. To measure the concept of financial stress, we use four indicators, obtained from budgetary and balance sheet information. However, despite local authorities’ obligation to provide budgetary information to the Directorate General for Financial Coordination with Regional and Local Authorities (DGCFCAEL, part of the Ministry of Finance and Public Administration), a number of local authorities do not comply with this requirement (especially those with fewer than 1,000 inhabitants), and this further limits our sample size. The Index of Tourism was obtained from the Spanish Economic and Social Yearbook (Anuario Económico y Social de España) published by La Caixa, which provides information only for municipalities with over 1,000 inhabitants. The study period starts in 2002 because the budgetary and balance sheet information provided by the Ministry of Finance and Public Administration is only available from that date (http://serviciosweb.meh.es/apps/EntidadesLocales/BDatosPL.aspx).

3. The methodology requires that the dataset be re-organised so that, there are as many data rows as there are time intervals at risk of the event (privatisation) occurring for each municipality. As Jenkins points out (2005) ‘We need to go from the simple data with one row of data per municipality, to another data set in which each municipality contributes T_i rows, where T_i is the number of time periods (years) i was at risk of the event. In effect an unbalanced panel data set-up is required’. Consequently, each municipality is repeatedly measured over time until it moves from public to private delivery.

4. This survey is only available for years 2000, 2005, 2008–2012. Accordingly, to complement the data with forms of public water service provision during the period considered, we consulted the inventory of local public sector bodies maintained by the Ministry of Finance and Public Administration, which lists the entities operating in the municipality, when they were created and to what purpose. Thus, this inventory identifies the exact way in which the service was provided for each year studied.

5. The baseline hazard was assumed to have a parametric specification (which could be monotonically increasing, decreasing or constant). If the shape of the baseline hazard function were addressed using non-parametric techniques, we would have to create a dummy variable for each privatisation time during the period, which would cause problems of multicollinearity with respect to the dummy variables (Jenkins 2005; González-Gómez and Guardiola 2009).

6. This variable was created as the ln (survival time) and is included in the estimations to reflect whether the hazard rate is monotonically increasing, decreasing or constant. Survival time is the variable that uniquely identifies each time period during which the privatisation of the water service might take place in each municipality.

Additional information

Funding

This work was supported by the Spanish Ministry of Science and Education [grant number ECO2013-48413-R]; the Fundación Centro de Estudios Andaluces, Junta de Andalucía (Spain) [grant number PRY139/14]. Ana María Plata-Diaz is grateful to the financial support of ‘Consejería de Economía, Innovación, Ciencia y Empleo de la Junta de Andalucía’ and ‘Fondo Europeo de Desarrollo Regional’. Juan Carlos Garrido-Rodríguez is grateful to the financial support of ‘Beca de Investigación de ASEPUC’.

Notes on contributors

José Luis Zafra-Gómez

José Luis Zafra-Gómez is an associate professor in accounting at Granada University, Spain. His research interests focus on local government finance. He has published papers recently in journals including Journal of Public Administration Research Theory, Public Administration, Urban Studies and Regional Studies.

Antonio Manuel López-Hernández

Antonio Manuel López-Hernández is a professor of accounting at Granada University, Spain. His research interests focus on management systems and financial information in federal and local government. He is the author of numerous articles in Spanish and international journals, including the International Public Management Journal, Government Information Quarterly, the Online Information Review and Public Management Review.

Ana María Plata-Díaz

Ana María Plata-Díaz is a PhD student and lecturer in accounting at the University of Granada, Spain. Her research interests focus on local government finance. She has published in journals including Public Administration, Spanish Journal of Finance and Accounting, Spanish Accounting Review, Urban Studies and Gestión y Política Pública.

Juan Carlos Garrido-Rodríguez

Juan Carlos Garrido-Rodríguez is a PhD student in accounting at the University of Granada, Spain. His research interests focus on social services and water delivery forms in local government.