Electoral opportunism and water pricing with incomplete transfer of control rights

ABSTRACT

One of the forms of intervention in public services that lie beyond market forces is price control. While such regulation is justified by the need to achieve social goals, empirical evidence has shown that it is often used by politicians for electoral gain. This paper looks for evidence of opportunistic political behaviour in urban water pricing. Using data for 119 large Spanish cities covering the period 1998–2015, we find strong empirical evidence of the influence of the electoral cycle on water pricing insofar as price increases are significantly lower in the years immediately preceding municipal elections than in non-pre-election years. Furthermore, outsourcing water service provision does not mitigate the relationship between the electoral cycle and water pricing. This result could be explained by incomplete transfer of control rights when the urban water service is outsourced, which allows politicians to use their right to supervise water tariffs to their advantage.

KEYWORDS:

• Control rights
• electoral cycle
• privatisation
• political opportunism
• quantitative analysis
• Spain
• urban water pricing

Acknowledgments

The authors are grateful for the comments and suggestions raised by the referees and the Editor, which have greatly contributed to improving the manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Cash-flow rights entail ownership of property rights over generated cash flows, while control rights refer to business running and management decisions.

2. This feature has important implications for the econometric analysis carried out in our research, as it implies that the date and year of the election are exogenously determined.

3. In this respect, about 10% of observations in the panel are missing due to the difficulties in finding data on some of the variables involved in our empirical analysis for these cases. However, we have no reason to believe that these missing values are not random.

4. In 2015, Spain had 8,119 municipalities, of which more than half _exactly 4,929_ had fewer than 1,000 inhabitants; 2,790 had between 1,001 and 20,000 inhabitants; and lastly, 400 had a population that surpassed 20,000 inhabitants (INE, 2015).

5. In some of the smallest Spanish municipalities water tariffs are not even published, thus breaching legal requirements, which further complicated their inclusion in our sample.

6. Following most studies in the field of political budget cycles, we employ nominal price changes since citizens tend to more readily perceive changes in nominal variables rather than in real ones. Brender and Drazen (2005) and Shi and Svensson (2006) take a similar approach at the national level, while Galli and Rossi (2002), Drazen and Eslava (2010) and Veiga and Veiga (2007) do so at the local and regional levels. Changes in nominal water prices are also employed in Klien (2014b, 2015).

7. According to Spanish legislation, as noted in the second section, in addition to in-house, fully private management and public-private partnerships, the urban water service can also be managed by an entirely public firm, which is the management variable omitted in our econometric analysis to avoid perfect multicollinearity. In our sample, 7.3% of observations correspond to in-house management, 28.5% to management by a public firm, and the remaining 64.2% to private management. This sample distribution is representative of the relative shares of different water management alternatives in large Spanish municipalities. In this regard, private management is more typical in more populated cities, probably due to the higher profitability of providing the urban water service (González‐Gómez, Picazo‐Tadeo, and Guardiola 2011; Picazo-Tadeo et al. 2012).

8. The omitted group is left_party which includes Izquierda Unida (IU) and Podemos. For their part, as noted in Table 1, the centre-left and right-wing parties are Partido Socialista Obrero Español (PSOE) and Partido Popular (PP), respectively; lastly, the group of other_parties includes several small parties, most of them local or regional in scope.

9. Let us recall here that in order to avoid perfect multicollinearity, the dummy representing public management, i.e., public, has been excluded; for the same reason, the interaction between before_election and public has also been removed from the estimations.

10. In our empirical dynamic panel data models, the number of years (T) is 16 (once the variable representing the change in water prices has been computed and lagged), and the number of municipalities (N) is 119.

11. Recently, De la Higuera-Molina, Plata-Díaz, and López-Hernández (2019) have shown, also using Spanish municipal data, that there is an opportunistic behaviour in the contracting out of local public services insofar as the probability of municipal services being contracted out is larger in pre-electoral years.

12. As explained in the third section, due to the difficulties in getting reliable data for small municipalities, our estimations are based on a sample of Spanish municipalities with more than 20,000 inhabitants. However, as suggested by a referee, it may be interesting to think about whether we should also expect to see this electoral cycle effect in smaller rural municipalities. The answer is not entirely clear. In this regard, in Spanish rural areas water prices are not always reviewed annually, and there still exists a widespread perception that water is a free good whose consumption must be heavily subsidised. In fact, several studies find that water tariffs in Spain are normally lower in smaller municipalities; these include García-Valiñas et al. (2013), Bel, González-Gómez, and Picazo-Tadeo (2015) and Chica-Olmo, González-Gómez, and Guardiola (2013). Besides, it is well known that in rural areas local politicians tend to establish closer relationships with citizens/voters. Taking both circumstances into account, increases in the price of water for household consumption could be expected to be lower in rural municipalities, in general, but particularly in pre-election years. However, this reasoning is essentially an educated guess, which would need to be confirmed with reliable data and proper empirical analyses.

13. It should be noted that after the economic crisis that began in 2007, unemployment rates were extremely high in Spain, even surpassing 25% in certain areas and periods of time.

Additional information

Funding

Financial support for this work was received from the Spanish Agencia Estatal de Investigación and the European Regional Development Fund (project ECO2016-75237-R), the Generalitat Valenciana (PROMETEO 2018-102), and the Government of Andalusia and the European Regional Development Fund (projects P18-RT-576 and B-SEJ-018-UGR18).

Notes on contributors

Andrés J. Picazo-Tadeo

Andrés J. Picazo-Tadeo is a professor of economics at the University of Valencia, Spain. His main areas of research are environmental economics, water economics and efficiency and productivity analysis.

Francisco González-Gómez

Francisco González-Gómez is a professor of economics at the University of Granada, Spain, and a senior researcher at the Water Institute of the same university. His research focuses on urban water management, including economic, political and environmental issues.

Marta Suárez-Varela

Marta Suárez-Varela is an assistant professor of economics at the Autonomous University of Madrid, Spain. Her work relates to environmental economics and its interplay with political and industrial economics, international trade, migrations and demand analysis.