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 Fomen-to 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 em-pirically evaluated in this paper