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Utilities Policy 31 (2014) 1e9

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Utilities Policy

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Beyond the publiceprivate controversy in urban water managementin Spain

Francisco Gonz�alez-G�omez a, *, Miguel A. García-Rubio a, Jesús Gonz�alez-Martínez b

a Department of Applied Economics and Institute of Water Research, Campus de Cartuja s/n, Faculty of Economics and Business, University of Granada,18071 Granada, Spainb Diputaci�on de Granada, C/ Periodista Barrios Talavera 1, 18014 Granada, Spain

a r t i c l e i n f o

Article history:Received 2 January 2014Received in revised form21 July 2014Accepted 21 July 2014Available online

Keywords:Urban waterPrivatizationRemunicipalizationInstitutional changesSpain

* Corresponding author. Tel.: þ34 958 244 046; faxE-mail addresses: fcojose@ugr.es (F. Gonz�ale

(M.A. García-Rubio), jesus.gonzalez@dipgra.es (J. Gon

http://dx.doi.org/10.1016/j.jup.2014.07.0040957-1787/© 2014 Elsevier Ltd. All rights reserved.

a b s t r a c t

This paper critically analyzes the Spanish privatization model of urban water management implementedover the last three decades. The high concentration of private participation in the industry, the absence ofcompetition, and regulatory deficiencies appear to have put the interests of water customers at risk.Improvement of governance is not guaranteed simply by changing water-system management frompublic to private. In Spain, an array of institutional reforms are needed to rationalize a change in man-agement structure for this service, reorganize technical operations, improve the administrative frame-work, increase transparency, and promote citizen participation. This paper moves beyond the simplepubliceprivate controversy and contributes to the literature by using fieldwork conducted by the authorsto assess private participation in the management of urbanwater services in Spain; by identifying gaps inthe privatization processes as well as failures in the industry; and, above all, by proposing reforms toSpain's institutional and regulatory frameworks for the industry.

© 2014 Elsevier Ltd. All rights reserved.

1. Introduction

In the 1980s, a “conservative revolution” started in the UK andUS that promoted the deregulation of markets and the privatizationof monopolies that were previously in public hands. This wave ofprivatization also extended to local public services, and somecountries facilitated private participation in the management ofurban water services. In 1989, England and Wales decided oncomplete privatization of the industry. Today, in France, Chile or theCzech Republic, private companies supply urbanwater services to asignificant proportion of the population. However, private partici-pation remains fairly discrete or even nonexistent in a majority ofcountries that consider public management to be the best option toguarantee universal access towater and to avoid situations of abusethrough market dominance (Thomas et al., 2012).

Spain has not been immune to this paradigmatic shift. Since1985 Spanish legislation has enabled privatization of urban waterservices. Since then, a favorable institutional framework for theprivatization process of local public services has been built. As a

: þ34 958 249 380.z-G�omez), magrubio@ugr.esz�alez-Martínez).

consequence, particularly since the last decade of the 20th century,there has been a marked expansion of privatization throughout anindustry that generated revenues of 5081 million Euros from urbanwater supply in 2010 (AEAS, 2012).

Nevertheless, in Spain the actual extent of private sectorparticipation in the urban water industry is unknown. All studiesdealing with this issue repeatedly use the data provided by thebiannual surveys produced by the Spanish Association of WaterSupply and Sanitation (AEAS). These surveys are not a census: theydo not reach 40% of the population and 88% of the Spanish mu-nicipalities. The first contribution of this paper is to ascertain thetrue level of private participation in the management of the urbanwater service in Spain.

Three decades since the start of the wave of privatization,intense debate rages over whether private participation in urbanwater management is generally positive or negative. Nations suchas the Netherlands and Uruguay have forbidden water serviceprivatization by law. In other cases, there has been a reversal of thedecision to privatize, and the municipality has retaken control of apreviously privatized service. Such a reversion has happened inmunicipalities in developed countries (such as Paris, Hannover,Atlanta, Berlin and Budapest), as well as in developing countries(Jakarta and Cochabamba), as a result of dissatisfaction with theprivate management company (Bakker, 2007; Pigeon et al., 2012;

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e92

Beveridge et al., 2014). Spainwas no exception to this phenomenon.In view of the high degree of penetration of private participation inthe industry and the intense ongoing debate about the desirabilityof this participation in the water services management, the secondcontribution of this paper is a critical analysis of the Spanish modelfor privatization of urban water services and the resulting marketstructure. A main conclusion is that a clear oligopolistically domi-nant position has been formed in the private component of themarket.

However, beyond the controversy between the public and pri-vate management of urban water services, we argue in this paperthat neither privatization nor a reversion to public management arethe solutions to the many challenges and problems that coexist inthe sector in Spain. There is a lack of resources in the smallermunicipalities, inadequate cooperation among municipalities, acomplex and inefficient administrative structure, a lack of rules andguidelines for technical management, laxity in the water qualitycontrols, an absence of transparency, and low levels of citizenparticipation. In summary, we believe that beyond the existingpubliceprivate controversy surrounding this industry in Spain,more fundamental problems associated with the organization andregulation of the industry should be addressed. The impact ofownership change may be marginal compared with these alter-native reforms (Beecher, 2013). In this vein, the third contributionof this paper is to identify the institutional reforms that must beimplemented in Spain in order to address the governance deficit inurban water management.

This paper is divided as follows. In Section 2, we describe themain characteristics of the Spanish urban water-managementmodel, with a particular emphasis on the degree of penetrationof the private component of the industry. Section 3 reviews severalpieces of research that have compared performance based onpublic and private management in Spain. In Section 4, we show themain deficiencies of the Spanish model. Section 5 details theinstitutional challenges faced in the provision of urban water ser-vice in Spain, independent of the management model. Finally, weconclude and present a number of recommendations.

Table 1Institutional arrangements in EU countries.

Public supply Ownership Management

Austria Municipal Public PublicBelgium Inter-municipal Public and private Public and privateCzech

RepublicMunicipal Private Public and private

Denmark Municipal Public PublicFinland Municipal Public PublicFrance Municipal Public Public and privateGermany Inter-municipal/

municipal/regionalPublic and private Public and private

Greece Municipal Public PublicHungary Municipal Public Public and privateIreland Municipal Public PublicItaly Municipal Public Public and privateLuxembourg Municipal Public PublicNetherlands Municipal Public PublicPoland Municipal Public Public

2. Characteristics of the Spanish urban water-managementmodel

In Spain urbanwater supply services, sanitation and wastewatertreatment are undermunicipal jurisdiction (Articles 25 and 26 fromLaw 7/1985, 2nd April, Regulating Local Regime Basis). Consideringthat there are 8117 municipalities in Spain, this means that thereare more than 8000 local governments responsible for, and withthe power to make, decisions on water services inside theirmunicipal area. Therefore, one of the main characteristics of theurban water services is the atomization of services in the scope oflocal administrative powers. That is not to say that there are 8117water utilities. To take advantage of economies of scale, manymunicipalities have opted for a model of joint management. Ac-cording to the Spanish Federation of Municipalities and Provinces,325 groupings of municipalities provide wholesale or retail waterservices (FEMP, 2012). Examples of groupings promoted by thepublic administration are the Consorcio de Aguas Bilbao (BilbaoWater Consortium) and the Mancomunidad de la Comarca de Pam-plona (Association of Municipalities in the Pamplona Region). Inaddition, some companies, both public and private,1 have adopted

1 Examples of public companies that have adopted growth strategies are Canal deIsabel II, which provides water services to almost the entire Community of Madrid,and EMASESA, which provides water services to the city of Seville and munici-palities in the metropolitan area.

growth strategies to manage the service together with severalmunicipalities (Ruiz-Villaverde et al., 2010).

These services can be managed directly or indirectly. On theone hand, direct management can adopt different forms: by themunicipality (for example, in-house provision or municipal as-sociations); by a local autonomous entity; or by a commercialcompany whose social capital belongs entirely to the municipality(public company). On the other hand, indirect management cantake the form of a concession (contractual publiceprivate part-nership); a commercial company whose social capital partiallybelongs to the municipality (institutional publiceprivate part-nership); and less frequently, interested management, agree-ments, or leasing. Municipalities can privatize only themanagement of the water service because the infrastructure as-sets still belong to the public administration. The Spanish modelof privatization is similar to that in France, Portugal and Italy(Table 1).

vSince the 1990s, there has been a marked trend in Spanishmunicipalities to privatize urban water supply management,mainly through contractual and institutional publiceprivatepartnerships (Ruiz-Villaverde et al., 2010). This was frequentlydone in opposition to the preferences of the population. As aconsequence, another of the characteristics of urban water man-agement is the heterogeneity of the systems and methods ofmanagement.

The contractual and institutional publiceprivate partnershipfor water service management remains for a specific period oftime after the competitive tendering process. There is a limit offifty years in BOT contracts (where the private partner builds andoperates the infrastructure and transfers it to the public partnerat the end of the contract), and twenty-five years in those con-tracts that only involve service management. Candidates in thebidding process place a first-price sealed-bid in response to apublic notice in the Province Official Gazette announcing thepublic tender of the contract for water-service management. Thisannouncement includes the purpose of the publiceprivate part-nership; technical and economic conditions; public tender pro-cedures; and performance assessment criteria. At the same time,it details the commitments that both parties will have to fulfillafter formalizing the publiceprivate partnership. Bidders must

Portugal Municipal/regional Public Public and privateSpain Municipal Public Public and privateSweden Municipal Public PublicEngland

and WalesRegional Private Private

Source: OECD (2004).

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e9 3

submit their technical and financial proposal in sealed envelopes,and the publiceprivate partnership is established with the pri-vate company that makes the best proposal, not only in economicterms, but also considering a number of other evaluation criteria.The municipality may also declare the public tender void. Themodel adopted in the majority of the Spanish municipalities hasbeen the public funding of the infrastructure and public or pri-vate management. Therefore the third characteristic of themanagement of urban water services is that the typical approachto privatization implies limited transfer of risks to the privatesector.

In terms of the percentage of the population supplied, partici-pation of the private sector in urban water management in Spain isamong the most significant among the OECD members countries,behind only England and Wales, France, and the Czech Republic(P�erard, 2009). From the census information obtained via the fieldwork undertaken for our research, 23% of Spanish municipalitiessupply their urban water service by some form of legally regulatedprivate management. However, this percentage increases to 55%when expressed in population terms.2 Therefore, another charac-teristic of the urban water-management service refers to the con-centration of the privatization processes in the municipalities withgreater service populations. Using data from the implemented fieldwork, it is concluded that the contractual and institutional pub-liceprivate partnerships operate in population centers with anaverage of 14,008 inhabitants, while the public sector managesurban water management in cities with an average population of3416 inhabitants.

Another feature of the Spanish urban water-managementmodel is the high concentration of private participation in a fewdominant companies. From the data obtained in the field work,Aguas de Barcelona (AGBAR) and Aqualia manage 67% of waterservices in the municipalities that have privatized their urbanwater service.3 In population terms, these two companies control75% of the private component of the industry. Therefore, themarket structure of this industry in Spain is an oligopoly with twodominant companies. Moreover, these companies are integrated intwo larger company groups. AGBAR is a subsidiary enterprise ofSuez Environment and Aqualia belongs to Fomento de Con-strucciones y Contratas (FCC), which may give them even greatermarket power.

Another remarkable feature in the Spanish urban water ser-vice is the regional specialization in the private component of theindustry (Fig. 1). Over time, the private companies have estab-lished their positions in geographical areas by expanding theirareas of influence to surrounding population centers.4 Conse-quently, although they have a presence in all Spanish regions,AGBAR occupies the predominant position in Catalonia, and has asignificant presence in Alicante, Murcia, Granada and CiudadReal, among others, while Aqualia has a significant presencein the municipalities on the Andalusian coast, Toledo and Bada-joz. In addition, other regionally specialized companies includeAguas de Valencia in the province of Valencia, FACSA in the

2 Our results permit us to conclude that the presence of private management inthe water industry is greater than was obtained in the last survey of the SpanishAssociation of Water Supply and Sanitation (AEAS), for which private managementprovides for only 49% of the Spanish population (AEAS, 2012).

3 Other companies in the sector are Acciona, Valoriza, Gestagua, Aguas deValencia, FACSA, Agua y Gesti�on, PRODAISA, Hidrogesti�on and Espina & Delfín.

4 The spatial concentration of privatization cases observed in Fig. 1 is, partly, theconsequence of a neighboring effect. The municipalities tend to emulate the de-cisions of geographical neighbors. Gonz�alez-G�omez and Guardiola (2009) andGonz�alez-G�omez et al. (2011a,b) evidences the neighborhood effect from themanagement of urban water supply in Spain.

province of Castell�on, PRODAISA in Girona and Espina & Delfín inGalicia.

Given the monopolistic character of urban water services, andthe high concentration of the private component in the industry,sector regulation is a key issue. Therefore, the last characteristic tobe highlighted in the Spanish urban water-management model isthe absence of a national economic regulator in the industry. In thisvein, the Spanish privatization model is more similar to the Frenchone, and far-removed from that of England and Wales, where astate regulator, the present Water Services Regulation Authority(Ofwat),5 has been in place since 1989.

3. Public vs. private: the Spanish situation

The management ownership of urban water services (public orprivate) generates intense debate. Supporters of privatizationdefend it as the best way to achieve more efficient management ofthe resources and to deliver better quality service. Conversely, de-tractors argue that public management is the best option to assureuniversal access to a primary and basic need, as well as to preventprivate companies in a natural monopoly from abusing theirdominant position.

Nevertheless, in the theoretical field there is a lack of consensuson the possible superiority of one management type over the other.Such disagreement has prompted research comparing the perfor-mance of public and private management of the urban water ser-vices in Spain. However, the lack of interest shown by the publicadministrations6 and the lack of transparency in the industry aresignificant barriers to obtaining the necessary data to makerepresentative comparative analysis.

One strand of the research conducted in Spain has aimed toanalyze the differences in the efficiency of the use of resources bythe public and private companies that manage the service.7 Thefirst conclusion that can be obtained from these papers is that thereis no evidence that one way of management is superior to the other(García-S�anchez, 2006; Gonz�alez-G�omez and García-Rubio, 2008).Evidence of greater efficiency by the private management disap-pears when environmental factors are taken into account (García-Rubio et al., 2010; Gonz�alez-G�omez et al., 2013). The results sug-gest that the public companies operate within complex scenarios,which explains their lower efficiency (Gonz�alez-G�omez et al.,2011a,b). In summary, the private company will avoid managingthe service in municipalities with lower projected profitability.Only the papers by Picazo-Tadeo et al. (2009a,b) find that privatemanagement is more efficient in the use of labor: a result that canbe attributed to the greater flexibility of labor management in theprivate sector.

A second strand of research has analyzed the differences inwater prices between private and public management. Martínez-Espi~neira et al. (2009, 2012), using a nationally representativedatabase, find that in those municipalities that opted for privat-ization (contractual or institutional publiceprivate partnerships)water service prices are higher at any level of consumption. Thisresult should be taken with a significant degree of caution as

5 Other features that further distance the model of England and Wales from theSpanish model include transferring the ownership of infrastructure to privatecompanies and the fact that there is one sole formula for private participation in theindustry.

6 The Spanish National Institute of Statistics, the Spanish Government and theRegional Governments supply aggregate information of the industry. The infor-mation is not given as micro-data.

7 The scope of the research is limited. The papers by Picazo-Tadeo et al. (2009a,b)and García-Rubio et al. (2010) are centered in the municipalities of the south ofSpain. The paper by García-S�anchez (2006) includes only 24 water utilities.

Fig. 1. Distribution by municipalities of private participation in the management of Spanish urban water services (in gray).Source: Authors' own elaboration.

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e94

higher prices in the private sector may be due to differences incost and quality of service not considered in the model. Also, alimitation of this research is that it only distinguishes betweenpublic and private management, without discriminating betweencontractual and institutional publiceprivate partnerships. Whilethe research of García-Vali~nas et al. (2013) is territorially limited,only using data from 386 Southern Spanish municipalities, it doesdistinguish four types of ownership: in-house provision andcontracting-out through public companies, contractual partner-ships, and institutional partnerships. They find, firstly, that pricesare higher when the municipalities contract out the urban waterservice. Secondly, taking into account only those cases in whichmanagement is contracted out, they find that prices set by publiccompanies are higher than the prices of contractual and institu-tional publiceprivate partnerships due to larger fixed quotas.This could be as a result of less efficient management of the re-sources by the public companies in the sample or, as the authorssuggest, it could be due to greater investment by the publicmanagement to provide a higher quality service in the interestsof society.

Finally, another area of interest is the quality of the waterservice. One justification for the privatization option is that theprivate company may be more likely to be able to obtain re-sources to invest in service improvement. It is true that the re-quirements imposed by the European Union in the field of waterquality have had an influence on the decision to privatize watermanagement. However, at least to our knowledge, there is noexisting research that permits us to conclude that the privatecompany devotes more resources to water purification systems.On the other hand, higher service quality should also be

associated with lower water losses through the distributionnetwork. However, research conducted by Gonz�alez-G�omez et al.(2012b), with data from 133 municipalities in Southern Spain,finds that unaccounted-for-water is greater under contractualand institutional publiceprivate partnerships. This might beexplained by the private entrepreneur having little incentive tocontrol water leakage (Gonz�alez-G�omez et al., 2011a,b; EuropeanCommission, 2012). This finding also is consistent with the ideathat the private company avoids supplying the service in mu-nicipalities in which projected profitability is lower due to higheranticipated expenses.

In summary, the research performed in Spain does not enable usto reach a conclusion about performance in the sector. The pub-liceprivate debate has strong ideological ties; and there is neithertheoretical nor empirical evidence to conclude that one form ofmanagement is superior to the other.

4. A poor and incomplete privatization framework

Despite the absence of empirical evidence that enables us todecide which form of management is better, there are inherentrisks in the way in which the Spanish privatization process hasbeen conducted. These risks are largely the result of the marketstructure that has formed over almost three decades of privati-zation activity.

In this vein, and in defense of the general public interest, it isnecessary to reform the normative and institutional frameworkunder which local governments decide to privatize. Below wecomment on the main issues that should be addressed in theSpanish urban water privatization model.

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e9 5

4.1. Privatization goals far from the general interest

A first critique of the Spanish urban water privatization isrelated with the main grounds for the privatization decision. Beland Fageda (2007, 2009) argue that, ahead of political and ideo-logical reasons,8 there are in most cases pragmatic reasons for theprivatization of municipal services. The principal pragmatic factorin favor of privatization is to relieve the financial burden on themunicipal budget (Bakker, 2002; Soler, 2003).

The decentralized administrative model formed in Spain afterthe transition period to democracy allocates limited fiscal capacityto municipalities and this depends on the budget transfers fromsuperior levels of the Spanish public administration. The financiallimitations on municipal expenditure policies cause municipalitiesto opt for the privatization of the urban water service in order toraise revenues for purposes unrelated to water service. Morerecently, austerity packages imposed in southern European coun-tries have become a further driver for privatization (Hall andLobina, 2012).

In these circumstances, when the management agreement isreached, the private company pays the municipality a concessioncharge that is recovered through the tariffs paid by the users of theservice. However, Spanish legislation does not prevent this incomefrom being devoted to alleviating the municipal budget deficit,instead of being devoted to improving the urban water serviceinfrastructure (as seems to be typical). Water service privatizationis thus an easy way to obtain resources to alleviate the financialstrains of the municipality.

It is worth mentioning the corruption cases associated with theawarding of concessions in the privatization of urbanwater servicesdotted throughout the Spanish territory. The judiciary is investi-gating possible payments to politicians for preferential treatmentin the awarding of public contracts (GWI, 2013). Investigators areanalyzing whether some politicians have made illicit gains, as wellas possible funding of the political parties through these means. Inany case, the Spanish model for awarding concessions for urbanwater services implicitly enables bad practices.

In summary, the Spanish institutional framework does notestablish sufficient guarantees to ensure that urban water serviceprivatization is the result of a decision taken in the general publicinterest. On the contrary, it could be the result of poor planning by apublic administration that has not devoted sufficient funding re-sources to the municipalities, inadequate local government man-agement, or even criminal practices.

4.2. Limited competition in the public-tender procedures

The natural monopoly nature of urban water industry causescompanies to compete not in the market, but rather for themarket. However, two of the above-mentioned characteristics ofthe Spanish urban water-management model (the high concen-tration of the private participation by a few dominant companiesand the regional specialization of the private component of theindustry) entail the risk of lack of competition in the public-

8 Only a few studies have found that the ideology of local governments is adetermining factor in the decision onwhether to privatize municipal services. It canbe seen, for example, in Dijkgraaf et al. (2003) relating to refuse collection orElinder and Jordahl (2013) for preschools and primary schools. In the case of waterservices in Spain, Picazo-Tadeo et al. (2012) found no significant differences in thedecision to privatize between the two main political parties occupying the center-left (Spanish Socialist Workers' Party) and center-right (People's Party). However, ithas been found that in municipalities governed by a mayor from the left-wing partywith most public support (Izquierda Unida e United Left), it is less likely that waterservices will be privatized.

tender procedures used to award the service-managementconcession.

In fact, in Spain it is not uncommon for public-tender pro-cedures to receive no bids. Some municipalities have had to callseveral public tenders before privatizing the management of theirurban water services. In practice, this can mean that municipalauthorities have to directly negotiate the conditions of the publictender with a private company. However, it is more common forthere to be only one to three bidders in the public tenders.9 Theexpected consequence of limited competition is an increase in thecost and price of water (Garcia et al., 2005; Chong et al., 2006; Belet al., 2014).

This lack of effective competition is especially prevalent insmall- and medium-sized municipalities. It is possible that theprivate companies have evaluated these cases and determined thatthe projected profitability of the business is not worthwhile.Accordingly, another of the features mentioned in the Spanish ur-ban water-management model is the concentration of the privati-zation process in municipalities with larger populations. However,paradoxically, it is in the lower-populated areas where privateparticipation could add value by contributing technical know-howand transferring organizational principles that produce more effi-cient management.

In other cases, the scarce competition could be explained by thepresence of private companies already established in neighboringmunicipalities who are able to exploit their positional advantage inthe geographic area. These positional advantages enable the com-panies to take advantage of economies of scale and offer a morecompetitive bid. The regional specialization of the private compo-nent of this industry in Spain can be interpreted as evidence of thisbehavior.

Therefore, the privatization model of the urban water service inSpain has created a scenario that tends to reinforce the above-mentioned aspects, both the high concentration of private partici-pation by a few dominant companies and the regional specializa-tion of the industry.

4.3. The absence of regulation and oversight deficit

From the moment a company obtains a concession for the waterservice in amunicipality, it acts as a local monopoly for the durationof the contract. During that time, the private company holds aposition of dominance that could be detrimental to the interests ofwater customers. Achieving objectives such as universal access towater, efficient management of production factors, sustainable useof water resources, and service quality could conflict with theprofit-making objectives of the private company. In order to pre-vent the private company from taking advantage of its dominantposition, a combination of different regulatory and control mea-sures is necessary (Oelmann and Czichy, 2013).

However, as we have identified above, the absence of a stateregulatory entity in the industry is a characteristic of the Spanishurban water-management model. The concession-holder’s obliga-tions are not established in nationwide regulations but mainly viathe awarded service contracts. Therefore, the only entity in controlof the conduct of the management company is the municipalgovernment. In general, the formal obligations of the concession-

9 There are no official statistics, nor any known study in Spain on the number ofcompetitors in tender processes for awarding management of water services. Of thetender processes in 2013 and 2014 for which information is available, the details areas follows: in 5 cases there were no bidders; in 13 cases there was one bidder; in 3cases there were 2 bidders; in 9 cases there were 3 bidders; 4 bidders in 5 cases; in1 case there were 5 bidders; and in 1 case there were 6 bidders.

10 The Survey of Local Infrastructure and Equipment published by the Ministry ofFinance and Public Administration only offers information on water losses formunicipalities with under 50,000 inhabitants.11 For the French case see: http://europa.eu/rapid/press-release_IP-08-150_en.htm, and for the Spanish case see: http://europa.eu/rapid/press-release_IP-11-729_en.htm.

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e96

holders specified in the contracts refer to the financial terms of theawarded contract, general conditions regarding provision of ser-vice, and the investment plan. However, this does not necessarilymean that the municipalities implement adequate oversightfunctions.

Oversight remains within the remit of the municipal govern-ment and is at the mercy of changes in the political majority. Issuesare then approached politically rather than technically. In someinstances, especially in relation to institutional publiceprivatepartnerships, local regulatory capture is evident. Cases can be foundwhere the private company sets out the rules for regulating serviceprovision that are then subsequently approved by the municipality(Alberic, Valencia) or where some control functions are actuallytransferred to the private company (Villafranca de los Barros).Finally, oversight has costs that maywell be inadequately evaluatedby municipalities when considering the possibility of privatization.This issue is compounded in smaller municipalities that usuallyhave limited technical capacity.

The absence of real institutional oversight and significant gapsin the regulatory framework present significant risks. For instance,there is no standard regulation of tariff systems. Spanish legislationonly makes reference to prices in guaranteeing the sustainable useof water resources and the recovery of service costs. As a result ofthis unspecific statement, the diversity of water tariff structuresand price levels among the Spanish municipalities is extraordinary(Martínez-Espi~neira et al., 2012; FACUA, 2013). There is evidence ofneighboring municipalities fixing similar water prices (Chica-Olmoet al., 2013), which suggests that the municipalities avoid possibleconflicts due to disparities in the price of this basic good. It alsosuggests that greater market power concentration in the privatecomponent of the industry might lead to the fixing of higher prices(Bel et al., 2014).

In summary, the absence of a regulatory entity and the lack ofgenuine oversight of the activity of private enterprise create ascenario where defense of the general public interest is not guar-anteed. This situation is exacerbated by the presence of significantgaps in the regulatory framework.

5. Pending institutional reforms in the urban water services

Similar to the situation in other countries, private participationin the urban water management in Spain is starting to be ques-tioned. Therefore, reversals of some processes have taken place inSpain, making it possible for the public sector to regain manage-ment of the service, as has been the case in Torredelcampo,Alhaurín de la Torre and Arenys de Munt. Additionally, in recentyears there has been greater social opposition to announcements ofnew privatizations of urban water services. Recent cases of citizenopposition to new privatization attempts have taken place inMadrid, Zaragoza, Laguna de Duero, El Puerto de Santa María,Cartaya, Candeleda and Alc�azar de San Juan.

Beyond the publiceprivatemanagement controversy, the realityis that the privatization and the remunicipalization of the urbanwater management do not appear to provide a sufficient responseto the important challenges that are faced by the sector in Spain(Gonz�alez-G�omez et al., 2012a). Deficits in the governance ofSpanish urban water-management services demand a series ofinstitutional reforms.

5.1. Capitalizing on economies of scale

The Spanish model of urban water management, with anatomized political-administrative basis at the municipal level,presents serious deficiencies as it cannot take advantage of econ-omies of scale and scope that are present in the industry. This

excessive fragmentation generates high transaction costs becauseof the need to resort to contractual or market agreements in placeof internal coordination.

In the field of urban water supply, a less fragmented manage-ment would permit greater professionalization of infrastructure-maintenance and resource-conservation tasks, as well as adminis-tration and service-management tasks. From the analysis of tariffrevision proceedings, we find poor service management in somesmall Spanish municipalities. This is not uncommon as nopersonnel are dedicated to the service, and in those cases wherethere are such personnel, they are clearly insufficient in number.The only maintenance and conservation work in the supply net-works is the repair of the most evident leaks that compromiseservice continuity. This explains why in many small municipalitiesthe volume of water losses frequently exceeds 60% (MHAP, 2011),10

which in turn is indicative of networks that are undervalued.Concerning waste-water treatment, municipal atomization

means that compliance with the commitment of the 91/271/CEEDirective on urban waste-water treatment is slow, costly, and inef-ficient. In England and Wales, industry concentration through bigregional companies has facilitated time and cost savings in theapplication of the Directive. On the contrary, countries such asFrance and Spain, with strongly atomized municipally based sys-tems, have registered significant delays and they face fines if they donot comply the EU standards.11 There have been a number of caseswhere municipalities have benefitted from public funding for theconstruction of waste-water treatment plants that then do notoperate as the operational costs cannot bemet by local government.

In Europe, various reforms have sought to overcome the frag-mentation of local governance to achieve economies of scale. InEngland andWales, the 1973Water Act restructured practically theentire water industry, creating 10 Regional Water Authorities(RWA) that took over the functions of 157 water undertakings, 29River Authorities, and 1393 Sanitary Authorities. In Portugal, until1993, there were 3324 units of management of which 90% providedservices to fewer than 5000 inhabitants; Decree-Law 379/93created the multi-municipal systems of collection, treatment, anddistribution of water, grouping several municipalities togetherprincipally in order to capture scale economies. In Italy, the Law 36/94 “Galli” grouped the approximately 6200 management units into94 Optimal Territorial Areas (ATO) for service provision, estimatingan optimal scale of about 200,000 inhabitants.

In all these cases, the debate on centralization versus decen-tralizationwas not separate from the publiceprivate debate; in fact,these reforms have given rise to increased private participation inthe industry, from full privatization in England and Wales toincreased publiceprivate partnerships in Portugal and Italy.

5.2. Rationalization of the administrative structure

The administrative structure of the urbanwater management inSpain is complex and inefficient. All levels of government in theSpanish Public Administration have some responsibility in this area(S�anchez-Martínez et al., 2012). The dispersion of responsibilityresults in poor effectiveness, a lack of coordination and a dilution ofresponsibilities that combine to produce deficient governance inurban water management.

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e9 7

Currently, supervision lies with financial, management and su-pervisory institutions such as: The Ministry of Agriculture, Foodand Environment, the Ministry of the Treasury and Public Admin-istration, the Ministry of Health and Consumption, the River BasinAuthorities, the Water State Societies, the Autonomous Commu-nities (through the Public Works, Urbanism and Transport, Envi-ronment and Public Administration Departments), the ProvincialCouncils, the municipal associations and consortiums, and themunicipalities as the ultimately responsible agents (MMA, 2007).

5.3. Technical ordering of the network management

No technical legislation in Spain clarifies the obligations of theurban water-service management. Independent of the kind ofmanagement, the great urban agglomerations provide professionalmanagement of the sector in Spain. This is not the case in smallerpopulation centers, which are the most common, where on toomany occasions management is deficient for a developedenvironment.

These deficiencies present a particular problem in terms of theabsence of minimum quality standards to which the services mustbe managed: the determination of the minimum performance re-quirements of the supply networks, preventive and correctivemaintenance for each element of the networks (as well as reno-vation deadlines), and the monitoring and adequate control of thewater supply.

On the other hand, for a country in which in more than three-quarters of the territory faces water stress, it is remarkable thatthere are neither legal limits nor supra-municipal entities thatoversee the efficiency of the distribution network. Taking into ac-count that on average 25% of water in the Spanish municipalities isunaccounted-for (INE, 2013),12 it can be concluded that local ad-ministrations do not act in a decisive manner in order to makesustainable use of water (and related energy) resources (Fig. 2).13 Inthis vein, the generalized implementation of audits in the waterdistribution networks is both necessary and urgent.

5.4. Stricter oversight of water quality

The sanitary criteria for Spanish drinking water are regulated byRoyal Decree 140/2003. This legal norm establishes minimumwater-quality standards and regulations including the compulsoryanalysis that must be performed at the end of purification treat-ment, at the end of the water storage tanks, in the distributionnetwork, and on arrival at the consumer's tap. The frequency of thewater analysis to be performed at each point is proportional to thenumber of inhabitants supplied by the system. The managers of theservice are in charge of the quality and control. Moreover, they havethe duty to supply all the data from the water quality control to theNational Water Consumption Information System (SINAC), whichreports to the Ministry of Health and Consumption.

Nevertheless, although the legislation threatens punishment inthe case of non-compliance, in 2011 SINAC received no waterquality information for 10.2% of the Spanish population. This waseither because the water quality was not monitored or because theresponsible agents were not notified. Non-compliance was prom-inent in the provinces of Guadalajara and Cuenca, where the ma-jority of municipalities have not reported any information onwaterquality since 2003 (MSCSS, 2012).

12 According to the Spanish Association of Water Supply and Sanitation 23.29% ofwater is unaccounted for (AEAS, 2012).13 The INE only provides information on unaccounted-for-water at regional andnational level.

However, an even higher degree of non-compliance is found inrelation to the mandatory quality controls at the consumer's tap. In2011 only 37% of Spanish municipalities, representing 42% of thepopulation, notified SINAC of the results of the analyses performedat the tap. This means that the Ministry of Health and Consumptionhas no information on the quality of tap water for 58% of theSpanish population. This non-compliance is especially significant inCastile-La Mancha, Catalonia, Extremadura, Murcia, and theValencian Community, which are the Autonomous Communitieswhere the perception of drinking water quality is lowest (MPTAP,2010). Taking this situation into consideration, it is evident thatthe Ministry of Health and Consumption must more forcefully de-mand compliance with the water-quality control legislation andimpose sanctions when these demands are not met.

Since failure to comply is more prevalent in smaller munici-palities, this problem is likely related to the fragmentation ofmanagement. Following the Portuguese reform initiated withDecree-Law 379/93, which creates multi-municipal systems, therewas a marked improvement in the control of water quality forhuman consumption in Portugal. Before the reform, cases wherethere was an absence of any analysis surpassed 45%; ten years laterit was less than 18% (ERSAR, 2002).

5.5. Increased transparency and citizen participation

There is insufficient transparency in Spanish water managemententities, with the most obvious deficiencies found in relation towater resources management, economic and financial matters, andbidding for public contracts (De Stefano et al., 2011). However, in theprivate component of the industry, the right to confidentiality thatprotects the companies operating in the sector generates opacity andmakes citizen control difficult. Moreover, there are no public or ho-mogeneous management indicators for the water supply sector, in-dependent of themanagement structure, to improve accountability.

The lack of transparency in the industry in Spain prevents anaccurate image or assessment of performance when comparingpublic and private management. There are no public statistics thatfacilitate this comparison, nor control entities that conductcomparative analysis. This significant limitation has hampered theapplied research performed in Spain and the results obtainedtherein should be considered with this in mind.

The European Water Framework Directive determines threelevels of citizen participation inwater planning: public information,public consultation, and active participation. The public in generalshould have access to information at every stage and shouldparticipate in the process of public consultations; as for the activeparticipation, at least the affected agents should be involved(European Commission, 2003). These same principles should guidethe urban water-service management. The promotion of trans-parency and the participation of citizens in the urbanwater-serviceindustry is an essential tool for preventing corruption in Spain. Insummary, changes are needed to combat the prevalent lack ofoversight by the Administration as well as by the water customers.

In the European context, under certain circumstances, citizensmay challenge decisions affecting urban water management in thecourts, as in the recent case of the privatization of the Athens watercompany EYATH. In Italy in 2011, pressure from civil societybrought about a referendum to repeal two laws that forced theprivatization of public water and sanitation and imposed a tax onwater services that consequently drove up water rates. The Italiancitizens have overwhelmingly opted to overturn the two laws. Thedebate centers on whether traditional forms of democratic partic-ipation are sufficient to promote citizen participation or whether itis necessary to bolster the mechanisms of direct democracy(Susskind, 2013). In Berlin, following the remunicipalization of the

Fig. 2. Unaccounted-for-water in Spain by regions (figures in percentages).Source: INE (2013).

14 The regulation at the highest government level is also a matter of concern inother parts of the world (Berg, 2013).

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e98

water company, the Berliner Wassertrich civil movement createdthe Berlin Water Council (Berliner Wasserrat) in 2013, open to allcitizens who want to be involved in the planning and operation ofthe city's water services.

6. Conclusions and recommendations

In Spain a legal system is needed to regulate the process forprivatizing the management of urban water services. A frameworkshould establish the ways in which such privatizations may beperformed. Specifically, it should deal with the standardization ofthe administrative and technical conditions for the public tendersthat are issued by the municipalities, as well as the duty of the cityto reinvest the concessional revenues into the water service.

The present Spanish privatizationmodel does not offer solutionsfor the deficiencies in the management of urban water services.Moreover, remunicipalization alone is not a guarantee of serviceimprovement. Therefore, beyond the publiceprivate debate aboutthe ownership of the management of urbanwater services in Spain,a series of institutional reforms are urgently needed to address anumber of deficiencies and improve governance: absence ofcompetition, limited resources of small municipalities, lack ofcooperation among municipalities, contractual opacity, insufficientinformation, deficient controls, organizational flaws, and weakpublic participation.

In a decentralized environment such as is the case in Spain, withmore than eight thousand municipalities, the financial aspects ofurban water services should be taken into consideration togetherwith the technical and quality aspects. Supra-municipal companiescan make the most of economies of scale and scope in order toefficiently provide urbanwater services. Failure to take advantage ofthese economies has pushed companies toward a relationship at thelocal level that has, in some municipalities, resulted in an inefficientservice supply and problems related to the use of public funding.Mergingmanagement through supra-municipal enterprises and thepromotion of inter-municipal cooperation would yield significantcost savings in management, invoicing, and purchases from sup-pliers, while allowing for improved quality of services. Cost reduc-tion is a sine qua non for equality among municipalities, as lowercosts make it possible to improve service quality, which is especiallyimportant for the smaller sized municipalities.

As regards the regulatory deficit of the urban water industry, aregulatory agency with jurisdiction throughout the national terri-tory is needed. However, establishing an organization of this natureis not without challenges in the current Spanish decentralizedframework. The ability of this organization to dictate policy regu-lations and judicial functions may conflict with the municipal au-tonomy enshrined in the Spanish Constitution and with the powersof the Autonomous Communities. These problems are not insur-mountable, since the national government has legal authority forprimary legislation. However, there are political problems stem-ming from territorial tensions in Spain. Therefore, it seems unlikelythat a regulatory body similar to OFWAT in England and Wales canbe established in Spain at this time.14

However, the establishment of a nationwide oversight organi-zation, without jurisdictional or regulatory powers, would repre-sent a significant advance in the current context. The mainfunctions of this national supervisory body would be to centralizeinformation from water utilities. It might, for example, developfinancial analyses of the operators; studies on unit costs and therelative level of efficiency of each business; proposals for stan-dardizing tariff structures; reports on supply security, networklosses and efficiency in water use; and an analysis of optimal ter-ritorial units for the provision of the service in order to benefit fromeconomies of scale. A supervisory body could also promotecompetitive bidding for concessions; advise municipalities (espe-cially the smaller ones); provide a forum for resolving complaintsbetween companies, contractors, and consumers; monitorcompliance with current legislation, and reduce the chance ofcorruption in the sector.

On the other hand, the strictly regulatory and judicial functionswould remain with the regulatory agencies in each AutonomousCommunity. This would circumvent many of the political problemsassociated with the creation of a nationwide regulator. The prin-cipal functions of such organizations would be to establish rules onthe quality of service, pricing systems, and standard contractingprocedures, with the relevant legal authority to impose sanctions.Privatization need not be a prerequisite for these reforms and

F. Gonz�alez-G�omez et al. / Utilities Policy 31 (2014) 1e9 9

strengthening governance should be extended to public and privateutilities. In fact, economic regulation of public utilities is areasonable alternative to privatization (Beecher, 2013).

Of all these reforms, the priority should be to strengthen thecontrols on the quality of water for human consumption, due to itsparticular importance in terms of public health. The subsequentproposed reforms are closely related to the establishment of theabovementioned regulatory bodies. This would rationalize theadministrative structure of urban water management and shouldlead to increased transparency and citizen participation. Over-coming fragmentation in water management by establishingoptimal supply areas and setting up a technical system for man-aging networks are the next steps. This reform package is essentialfor improving the governance of urban water management inSpain, meeting the challenges of service provision, and ensuringthe future sustainability of the water industry.

Acknowledgments

The authors gratefully acknowledge the constructive commentsand suggestions from editor in chief and two referees. It is alsoacknowledged the financial support from the Spanish Ministry ofEconomy and Competitiveness (projects ECO2012-32189) and fromthe Government of Andalusia (project P11-SEJ-7039).

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