The impact of functional decentralization and externalization on local government transparency

GOVINF-00999; No. of pages: 13; 4C: Government Information Quarterly xxx (2014) xxx–xxx

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The impact of functional decentralization and externalization on local government transparency Beatriz Cuadrado-Ballesteros University of Salamanca, Facultad de Economía y Empresa, Campus Miguel de Unamuno, Edificio FES, 37007 Salamanca, Spain

a r t i c l e

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Available online xxxx Keywords: Transparency Local governments Decentralization Externalization

a b s t r a c t Local governments are increasingly establishing functional decentralized agencies, such as autonomous organizations, public companies, foundations and public business entities to provide public services. Furthermore, they are also introducing the private sector, contracting out public services to a private company and creating mixed companies. Our aim is to analyze the effect of functional decentralization and externalization (outsourcing or contracting out) processes on public transparency levels, since theoretically, they are aimed toward good governance and accountability. To do so, we use a sample composed of the 110 largest Spanish cities for the period 2008–2010. The results show that decentralized agencies, especially public companies and foundations, impact positively on levels of public transparency. However, there is no evidence that suggests that the introduction of the private sector, using outsourcing and mixed companies, affects the transparency of local governments. © 2014 Elsevier Inc. All rights reserved.

1. Introduction As providers of resources, citizens increasingly require information and accountability (Scott, 2006) in relation to the activities that are defrayed by their resources. Information regarding this should help citizens know where and how much financial resources are being allocated, and how are they being used (Jorge, Moura e Sá, Pattaro, & Lourenço, 2011). In this regard, transparency favors an understanding of the policies implemented by governments, and citizens should be encouraged to take part in decision-making (Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011). Transparency enables the observation and analysis of the ways in which governance, business and public affairs should be conducted (Heald, 2006). The OECD (2001) defines transparency as “openness about policy intentions, formulation and implementation”. In general, “transparency” and “openness” are used as synonyms, although some authors find distinctions between them. For example, Larsson (1998) posits that transparency extends beyond the concept of openness to make it more simple and comprehensible, and also states that transparency requires external recipients that are capable of processing the information provided. Other authors define transparency as the access by the public to timely and reliable information on decisions and performance in the public sector (Armstrong, 2005), as well as the overall degree to which citizens, the media and financial markets can observe the government's strategies, its activities and the resulting outcomes (Alt, Lassen, & Shanna, 2005). More recently, Piotrowski and Bertelli (2010) have E-mail address: [email protected].

posited that transparency is the degree to which access to government information is available. Furthermore, the economic difficulties that many countries and local governments are suffering have led to higher authorities, such as the World Bank, the International Monetary Fund and the European Commission, among others, to focus on the behavior of the public sector. More specifically, several financial scandals that have become public knowledge have intensified interest in particular topics like transparency. Sharman and Chaikin (2009) posit that good governance is initially assessed in terms of the degree of transparency in decision-making and policy implementation. This assessment affects the image that citizens have of their government, which has led to a trend toward “open government” in the United States and most OECD countries. In addition, globalization and competition in the global economy has provided an incentive for governments to show openness, since business leaders contend that access to information is critical for efficient markets (Relly & Sabharwal, 2009). Several authors have focused their attention on the relationship between transparency and socio-economic and political factors. For example, Laswad, Fisher, and Oyelere (2005) found that leverage, municipal wealth, press visibility and types of council are related to financial disclosures of local governments in New Zealand. Alt et al. (2005) showed that more equal political competition and powersharing are related to greater levels of fiscal transparency in American states. They found that political polarization is related to lower transparency, and past fiscal conditions also affect levels of transparency. Piotrowski and Van Ryzin (2007) found that there are several dimensions to the public's demand for transparency, including fiscal, safety and government concerns, and principled openness. Factors

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Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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such as age, political ideology, confidence in government leaders, etc., affect the public's demand for transparency. Gandía and Archidona (2008) found that disclosure levels in Spanish local governments depend on political competition, public media visibility, access to technology and educational levels. More recently, the results of a study by Cárcaba-García and García-García (2010) show that size, capital investment and political competition are positively related to information disclosure by Spanish local governments, but that press visibility and voluntary financial disclosure are negatively related to it. Guillamón, Bastida, and Benito (2011) found that local governments with higher levels of taxes and transfers per capita, a left-wing party in power and a higher population tend to be more financially transparent. Furthermore, the same authors (2011b) showed that government fragmentation is related to higher levels of transparency, but that the unemployment rate impacts negatively on levels of financial transparency. As we can see, most previous literature is focused on socio-economic and political determinants of public disclosures, but we have not found any studies that analyze the impact of the different modes of public service delivery on levels of public sector transparency. Partially, this could be due to that fact that measuring the concept of transparency is a complex task and, in addition, it has been difficult to find reliable data, especially at the local level, until now (Guillamón, Bastida, & Benito, 2011). In this regard, the organization Transparency International Spain has undertaken this task with a great amount of effort. Thanks to this group, there are now useful data about public transparency from 2008, which makes it easier to analyze this concept. As Guillamón, RíosMartínez, and Vicente-Oliva, (2011) suggested, the publication of this information has meant an incentive for local governments to improve their level of public transparency. In this respect, the main aim of this study is to observe the effect of functional decentralization and externalization processes on the level of Spanish local governments' public transparency. Our goal is to further contribute to this line of research by: (1) specifying the impact of functional decentralization and externalization processes; (2) conducting a complete analysis of functional decentralization, considering we have taken into account the creation of different entities (public companies, foundations, autonomous organizations and public business entities); and (3) choosing a time period that permits the use of panel data methods, which provide more robust results than cross-sectional studies by the control for unobserved heterogeneity. This method also allows for the correction of endogeneity problems between dependent and independent variables. Very briefly, we advance that decentralized entities involved in the creation of different types of agencies have greater autonomy in the achievement of their objectives. Politicians and agents become more directly responsible for their actions and, as a result of these higher levels of direct responsibility, their ethical behavior may be improved (Persson & Tabellini, 2000). Decentralization increases transparency because the decision-makers (politicians) are more accountable to citizens for their actions, improving their responsiveness too (Regmi, Naidoo, Greer, & Pilkington, 2010; Vrangbaek, 2007). In the case of outsourcing, despite the advantages of this process in terms of the efficiency and quality of services, some scholars argue that outsourcing may lead to fraud (Frederickson, 1999; Kettl, 1993; Pessoa, 2009), since politicians may intervene too often in the selection of the providers of these services, with cases of favoritism in the assignation of contracts (Fernández, 2007; González, Gascó, & Llopis, 2011). Thus, local governments tend to be less transparent so as to avoid citizens knowing about these situations. Externalization of public services considers private markets, which operate generally for profit motives rather than public accountability (Regmi et al., 2010). Subsequently, there is much debate about the ethics of outsourcing in relation to accountability in public service delivery (Johnson, 1995; Moss, 1997). Although the private sector tends to be more accountable for results, it falls shorter in terms of process transparency (Mulgan, 2002).

With the aim of testing these previous ideas, we have selected a sample of the 110 largest Spanish cities, for which information regarding their transparency has been published by the non-government organization Transparency International Spain. This information is available for the years 2008, 2009 and 2010, so this is the period of time that concerns our study. Our results show that the most transparent municipalities are those that present higher levels of functional decentralization for public service delivery, specifically through public companies and foundations. However, the introduction of the private sector (through outsourcing and mixed companies) does not affect the municipalities' levels of public transparency. 2. Modes of public service delivery in Spain In 2008, there were 8112 municipalities in Spain, 60% of which had a population of less than 1000 people, a figure that rises to 91% if we take into account towns with a population of less than 10,000. Article 11.1, Act 7/1985 of April 2, of the Regulatory Law for Local Governments (Ley Reguladora de Bases de Régimen Local — LRBRL), states that municipalities are the basic local entities of the territorial organization of the state, with legal personality and full capacity for fulfilling their purposes. With regard to their organizational structure, municipal administrations are composed of two types of bodies: the political body, formed by the mayor and the town councilors, with either possessing decisionmaking functions or duties related to the management of service provisions; and the executive body, comprised of the set of services and units that carry out the decisions taken by the former. The responsibilities attributed to local governments are set out in chapter 25.2 of the LRBRL, and are strongly linked to the population of each municipality. This law sets out a series of minimum services to be provided by local authorities, including public lighting, refuse collection, street cleaning, water provision, sewerage, access to population centers, road maintenance, food and beverage control, and cemetery management. In addition, municipalities with more than 5000 inhabitants must provide at least one public park, a library, a market and waste-processing facilities; those with more than 20,000 inhabitants must provide civil protection services, social services, fire prevention and fire fighting services, and sports facilities; finally, those with more than 50,000 inhabitants must also provide collective transport and environmental protection services. In addition, article 28 poses the possibility for municipalities to offer complementary services related to aspects such as education, culture, promotion of women's rights, housing, health care and environmental protection. The aforementioned Regulatory Act allows the provision of municipal services through direct management, autonomous local entities (decentralization), or private agents (contracting-out) and mixed companies, as follows: • Direct management: Public services are managed and controlled by the local authority itself. • Functional decentralization (decentralized direct management): Public services are provided by smaller and more flexible entities in which a business culture predominates (Aberbach & Rockman, 1999). Local governments are able to create different decentralized entities such as autonomous organizations, public companies, public foundations and public business entities. The main characteristics of these entities are shown in Table 1. • Externalization (outsourcing or contracting-out): Local governments enter into agreements with private sector entities for the management and provision of municipal services. Nevertheless, the local administration continues to enjoy ownership, and maintains decision and control capacity to a large degree. The main formats of indirect management or externalization are administrative concession, self-

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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Table 1 Modes of decentralized direct management. Autonomous organizations (AAOO) Public bodies with their own legal personality that have an autonomous management system, but which continue to form part of the general administration. They are subject to public law, and their regulations are governed by Act 6/1997 of April 20, on the “Operation and Organization of the General State Administration”. This type of structure is often used for tax collection purposes, in view of the budgetary control obtained, and the fact that procurement rules are flexible in this case. Public companies Entities with their own legal personality, separate from that of their members, and which operate in accordance with private law using their own capital. The provision of public services through these corporations is usually financed by public property taxes and prices charged to the users of the services (Molinari & Tyer, 2003; Rubin, 1988). Public companies are usually preferred for urban management, water supply and sanitation, and urban waste management. Public foundations According to the Spanish Association of Foundations, these are non-profit organizations whose patrimony is perpetually devoted to the general interest, and whose beneficiaries are groups of people. Among their general interest goals are the defense of human rights (including assistance to victims of terrorism and other acts of violence); social care and social inclusion; educational, cultural and social issues; scientific, sportsrelated, health-related and work-related activities; environmental protection; and technological development. Public business entities (PBE) These are public bodies that are engaged in providing services or goods with financial compensation, and are subject to private law, except in relation to the exercise of public powers and certain aspects of performance, where public law is applied (Barrera, 2008). These entities are used for some cultural services, urban development and housing services, mainly in municipalities in Catalonia and the Basque Country. Source: The authors, based on Cuadrado-Ballesteros et al. (2013).

interested management, agreements, leasing, corporations and cooperatives, and consortia (Pina, Torres, & Royo, 2007). Following Cuadrado-Ballesteros, García-Sánchez, and Prado-Lorenzo (2013), Spanish local governments often externalize water supply and sanitation, the collection and treatment of urban waste, and the provision of urban public transport. In general, for water services, local governments rely on the company Aqualia, which is part of the FCC Group. In the case of urban waste, FCC shares their provisions with the ACS Group, although, in general, municipalities that use FCC for water services use the same company for their urban waste disposal services too. Finally, for urban public transport, local governments usually contract-out to small local companies. • Mixed companies: Both public administrations and the private sector provide capital to create these companies, so that their ownership is neither entirely public, nor entirely private. In this case, the management of public services is shared by both sectors. Mixed companies are normally used for water services, and some cultural and housing services. In the case of water services, the most used company is the Agbar Group. For cultural and housing services, local governments use specific companies, an option that is predominant in Catalonia and the Basque Country (Cuadrado-Ballesteros et al., 2013). Since there are different modes of public service delivery in Spain, it is important to consider all of them at the same time, because otherwise the analysis would be partial and the results could be biased. 3. Research hypotheses 3.1. Functional decentralization and financial transparency Functional decentralization is the process through which public administration creates smaller, more flexible and user-oriented entities, in which a business culture predominates (Aberbach & Rockman, 1999) in an attempt to avoid the usual rigidities of a system subject to common administrative law. These agencies are closer to citizens, so they have better knowledge of their preferences and needs. Thus, public administration may improve public service delivery. Rationales usually invoked when defending this type of move include the belief that it improves efficiency in attaining objectives (Boyne, 1996), improves coordination and control (Tullock, 1965), reduces bureaucratic processes (Niskanen, 1971) and recognizes needs more easily, thus providing services faster (Downs, 1967) due to the fact that decentralized units are closer to citizens, and therefore more aware of their preferences (Hayek, 1945). The fact that management units are smaller and more flexible makes them more dynamic, and leads users to express greater satisfaction. Nevertheless, it has also been noted that decentralization of the public sector into autonomous institutions and units is not always feasible (Boyne, 1996; Meyer-Sahling, 2009), since it tends to involve focusing

on short-term results as opposed to strategic public priorities (Schick, 1996), and may also result in poor coordination, and an overlapping of functions and uses of resources (Rhodes, 1994). Therefore, as far as management is concerned, large bureaucracies are cheaper (Andrews & Boyne, 2009). Further criticisms are the fact that decentralization focuses on individual interests rather than on collective ones, and its dependence on market mechanisms (Du Gay, 2000; Lane, 1997; Van de Walle & Hammerschmid, 2011). Under these methods of service provision, citizens become clients and communities become mere groups of clients, so that those who are richer and better informed are rendered the highest quality services (Olsen, 1988). However, in spite of these criticisms, there has been a clear trend toward decentralization all over the world, both in industrialized countries such as the U.S., France, Italy and Spain, and in developing countries (Ahmad, Hewitt, & Ruggiero, 1997; Bahl & Sjoquist, 1990; Cuadrado-Ballesteros et al., 2013). Specifically, in the case of Spain – a country that lags considerably behind in the incorporation of the reforms proposed by new public management (NPM) (Hood, 1996) – we can appreciate a significant development as far as the process of functional decentralization is concerned (Cuadrado, 2008). The relationship between decentralization and public transparency is unclear. Some authors posit that results may depend on the type of decentralization that is being dealt with (Fisman & Gatti, 2002), and the form of measuring it (Sharma, 2006). In addition previous literature has shown that some decentralized agencies have been created for an inappropriate use of indebtedness (Escudero, 2001; Monasterio, Sánchez, & Blanco, 1999; Prado-Lorenzo, Martín-Jiménez, & García-Sánchez, 2009, 2010). However, in general, there is a widespread belief that high levels of decentralization and high levels of transparency are closely related, although, to date, there are few studies that have empirically analyzed this proposition. Decentralization is one of several reforms based on NPM theory that have been proposed to create a more efficient and effective public sector — one which is oriented to the needs of the citizens and that improves accountability (Ferlie, Ashburner, Fitzgerald, & Pettigrew, 1996; Kettl, 2000; Pollitt & Bouckaert, 2000). Regarding Rodríguez-Bolívar, Caba-Pérez, and López-Hernández (2005) a more citizen-oriented public sector tends to disclose a higher volume of information. This improves the level of public transparency, which reinforces the stakeholders' power and fosters citizens' participation (Justice, Melitski, & Smith, 2006). Decentralization is a way of improving accountability and transparency in governance (Regmi et al., 2010; Willis, Garman, & Haggard, 1999), and participatory budgeting and planning in public services (Santos, 1998). One of the reasons for the aforementioned is that decentralization can correct imbalances in the vertical relationships of governments, being frequently proposed as an action plan to encourage greater responsibility and good governance (Bjedov, Madiès, & Schnyder, 2010; McKinnon & Nechyba, 1997; Rubinfeld, 1987; Tiebout, 1956).

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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Persson and Tabellini (2000) emphasize the importance of direct responsibility in the sense that, in the context of decentralization, politicians and agents become more directly responsible for their actions, and thus their actions and ethical commitment might improve as a result of these higher levels of direct responsibility. Furthermore, decentralization can help to limit the “predatory” behavior of governments; although it may have the opposite effect if certain institutional and politic restrictions, such as private incentives for local governments, are not respected (Bjedov et al., 2010). In other words, decentralization processes make politicians more accountable to citizens for their actions (Regmi et al., 2010), and increases accessibility to political decision-makers by making this process more transparent (Vrangbaek, 2007). Although most studies on the relationship between decentralization and transparency only take into account fiscal or administrative decentralization, many do not deal with the functional type. However, the theoretical arguments in favor of decentralization as a strategy to improve efficiency and efficacy are the same for all its types, and therefore these ideas also apply to functional decentralization. In accordance with the above, and due to the absence of studies analyzing the relationship between functional decentralization and transparency in the case of local governments in Spain, we pose the following hypothesis that we will subsequently proceed to test: H1. Functional decentralization has a positive effect on levels of public transparency.

3.2. Externalization and financial transparency Another mode of public service delivery is externalization, also called “outsourcing” or “contracting-out”, through which public administrations may allow service managements to contract with the private sector. This is another important reform of NPM theory. For the proponents of NPM, this process is a way of increasing accountability by turning to individuals from the market; the idea is that this may maximize economic efficiency, reducing government costs and increasing the quality of public services, as a result of the transfer of certain government functions to the private sector, where they are left in the hands of specialist suppliers (Cannadi & Dollery, 2005; González et al., 2011). In this way, public organizations may focus on those strategic operations that are more important, and externalize the less relevant ones (Brown & Potoski, 2003; González et al., 2011; Pessoa, 2009). Furthermore, strategic management literature defends the notion that externalization has competitive advantages through economies of scale (Bovaird, 2004; Pessoa, 2009), economies of scope and opportunities for mutual learning (private sector of public sector and vice versa), since this process involves a transfer of knowledge between providers and customers of outsourced services (Norton & Blanco, 2009). However, the rationalities of introducing the private sector into public service provision are contested. Some scholars argue that outsourcing has the potential to produce considerable fraud and corruption if managerial control by the public sector is weak (Frederickson, 1999; Kettl, 1993; Pessoa, 2009). Politicians have intervened too often in the selection of providers, with cases of favoritism in the allocation of contracts (Fernández, 2007; González et al., 2011). The level of transparency diminishes as overworked contract managers in governments pay less attention to service delivery and performance indicators than they do to financial audits (Raffel, Leisink, & Middlebrooks, 2009). To tackle kickbacks, skimming and fraud, it is essential to have very tightly drawn contracts and close oversight (Marvel & Marvel, 2007), preferably by experienced government contract managers; otherwise governments are open to corruption (Frederickson, 1999; Kettl, 1993). Externalization of public services involves private markets, which generally operate for profit motives rather than public accountability (Regmi et al., 2010). There is much debate about the ethics of particular

forms of commercialization (especially outsourcing) in relation to the methods of accountability in public service delivery (Johnson, 1995; Moss, 1997). Wanna, O'Fairchealliagh, and Weller (1992) argue that commercialization of the public sector may create problems around accountability, since resourcing arrangements divide attention between satisfying governments and paying customers. Following Cameron (2004), problems of accountability may be generated by opacity to information, which may affect good governance. Although the private sector tends to be more accountable for results, it falls short in terms of process transparency (Mulgan, 2002). In accordance with the above, and due to the fact that we are dealing with a highly controversial topic, we propose the following hypothesis with the aim of clarifying the relationship between externalization processes and local government transparency: H2. Externalization has a negative effect on levels of public transparency.

4. Methodology 4.1. Analyzed population The data used corresponds to the 110 largest Spanish cities, for which information regarding their economic and financial transparency has been published by Transparency International Spain. Our study includes all the provincial capitals and almost all the municipalities with a population of over 50,000 inhabitants. The time period analyzed comprises the years 2008, 2009 and 2010, since these are the periods that correspond to the available information provided by Transparency International Spain. The Spanish context was chosen because of the important record it has as far as the processes of functional decentralization and externalization are concerned. In this respect, the number of public enterprises and entities owned by municipalities and communities has tripled in the last decade (Cuadrado, 2008), and the number of externalized services has also increased. These entities have proliferated because they have fiscal-administrative, labor-related and financial advantages.1 Furthermore, in relation to transparency, Spanish local governments are to be held responsible for their economic, financial and budgetary undertakings, although there are disparities regarding the processes that they follow (Transparency International Spain, 2010). We have chosen the local level to conduct our analysis because problems with transparency are more frequent at the local level (Guillamón, Bastida, & Benito, 2011; Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011; Prud'homme, 1995; Tanzi, 1994) since local politicians are usually more discrete when it comes to taking decisions. In addition, the local sphere allows us to collect more extensive data, data that are more homogeneous than when comparisons are made between different countries (García-Sánchez, Prado-Lorenzo, & Cuadrado-Ballesteros, 2011; García-Sánchez, Prado-Lorenzo, & Mordán, 2011). However, the high number of Spanish municipalities, and the analysis of the disparities among them, has led us to select a sample. The most adequate criterion is related to population size (Navarro, Alcaraz, & Zafra, 2010). Following these authors, our sample was composed of municipalities with large populations, which are legally obliged to provide all basic public services under Act 7/1985 regulating local government. This act was later amended by Act 57/2003, dealing with measures to modernize local government, which urged local governments to 1 For example, the use of decentralized agencies has been associated with attempts to avoid legal limitations on indebtedness, since public administrations can transfer costs and debts from their own financial statements to those of the decentralized agency (Bennett & Dilorenzo, 1982, 1984; Bunch, 1991; Escudero, 2001; Grossi & Mussari, 2008; Grossi & Thomasson, 2011), formally complying with the restrictions while maintaining the fiscal illusion. In the case of Spain, public foundations are more important to this aim. In addition, public companies have more freedom to manage their budget, since they have their own legal personality, use their own capital and charge a price to users of the services, on top of public property taxes that they receive.

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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promote local sustainability and technological development in order to encourage citizens to participate in local government, thus enhancing information transparency. Subsequently, we considered municipalities with populations over 50,000 inhabitants because they are the only ones obligated by law to provide all public services established in the Regulatory Law of Local Governments. In addition, municipalities that are smaller tend to use other modes of public service delivery, performed by a body formed of several local governments instead of using decentralized entities or externalized public services. This kind of management is widely used by municipalities with a small population and surface area because they need to group together through different mechanisms of municipal cooperation, e.g. associations combining several small towns, consortia, and so on (Font & Parrado, 2000). In this regard, we used a panel composed of 110 individuals (local governments) for which we have information about different aspects (variables) for the years 2008, 2009 and 2010. Thus, the use of panel data methods provides more robust results than cross-sectional studies because a panel allows us: (1) to obtain a more accurate inference because a larger number of observations is used, and thus there are more degrees of freedom, meaning the efficiency of the model is enhanced; (2) to control omitted variables (missing or unobservable), and also to determine the unobservable heterogeneity, consisting of differences among individual units that are constant through time; and (3) to derive more accurate predictions for individual outcomes (Hsiao, 2007). In view of these considerations, we decided to use panel data models, thus providing the analysis with a certain degree of dynamism, and achieving both greater consistency and better explanatory power.

4.2. Dependent variables The main aim of this study is to analyze the effect of different modes of public service delivery on the level of local governments' public transparency. It follows that the selected dependent variable represents transparency in municipalities. For our purposes, we selected an index published by Transparency International Spain (http://www. transparencia.org.es/), which gathered information about economic and financial transparency in the largest Spanish cities.2 This index takes values between 0 and 100, and it is one of the dependent variables in the present study, referred to as the “IT index”. In addition, this index summarizes the information contained in five sub-indexes concerning the following topics: (A) (B) (C) (D)

municipal corporations; relationships with citizens and society; economic and financial transparency; transparency related to the bidding of municipal services contracts; (E) transparency in urban planning and public works.

In our analysis, we deal with all of these sub-indexes, each of them appearing as a dependent variable. On this basis, we show the areas of transparency that are more influenced by decentralization and externalization processes. This transparency index is useful for the assessment of pieces of information provided by local governments, and its publication encourages governments to improve their level of transparency (Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011) since it leads to increasing competitiveness among local governments, each of them attempting to get a better score than the rest (Lizcano, 2010).

2 In 2008, Transparency International Spain sent the questionnaire to the 100 largest municipalities in Spain; this sample was extended to include 110 cities in 2009 and 2010.

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4.3. Independent variables The following independent variables have been chosen to test the hypotheses of this study. For hypothesis H1, we have defined different variables in order to identify the different typologies of entities involved in the decentralization process as a mode of public service delivery. These are: “TOTAL DECENTRALIZATION”: Numerical variable that represents the total number of decentralized agencies (companies, autonomous organizations, public business entities and foundations) of each municipality. It symbolizes decentralization processes carried out in the local administrations of large municipalities, and can consist of the creation of: • “COMPANIES”: number of government-owned corporations used by each local government; • “FOUNDATIONS”: number of public foundations used by each local government; • “AUTONOMOUS ORGANIZATIONS” (AAOO): number of autonomous bodies used by each local government; • “PUBLIC BUSINESS ENTITIES” (PBE): number of municipal business entities used by each local government. For hypothesis H2, we have defined two variables that identify the level of the private sector's autonomy on local service management: “EXTERNALIZATION”: numerical variable that represents the number of private agencies that have acquired the right to provide public services in each municipality. In addition, we include a variable to represent other modes of public service delivery in Spain – mixed companies – although they are less used than the others (Cuadrado-Ballesteros et al., 2013): “MIXED COMPANIES”: numerical variable that represents the number of mixed companies that are created in each municipality. Both the public and private sectors are the owners of these companies. 4.4. Control variables In order to avoid biased results, we have introduced a set of variables whose influence on the level of public transparency has been widely confirmed. We consider different factors that have explained e-government in previous literature (political and socio-economic factors), and some geographical and proximity factors in relation to competitiveness. In this regard, one of the control variables represents the political ideology through a dummy variable called “RIGHT”; this takes the value of 1 if the governing party is conservative and of 0 otherwise. In general, governments that favor a larger public sector tend to be more transparent in order to gain the trust of the providers of public resources, i.e. voters (Ferejohn, 1999). Therefore, progressive ideology parties who prefer a larger public sector (Borge, 2005) tend to be more transparent (Cárcaba-García & García-García, 2008; Guillamón, Bastida, & Benito, 2011; Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011; Tolbert, Mossberger, & McNeal, 2008). In this respect, Jaeger and Bertot (2010) highlighted how the Obama administration has promoted transparency and access to governmental information after the limitations of the Bush years. Nevertheless, Piotrowski and Van Ryzin (2007) posit that the effect of political ideology on the level of public transparency depends on the type of information. In relation to the political competition, we have included a numerical variable – “COMPETITION” – calculated as the difference between the percentages of votes obtained by the parties coming in first and second place (Solé, 2006). Inter-party competition plays a key role in the decision of politicians devolving institutional power to citizens (Smith

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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& Dridkin, 2008). Competition may increase the level of transparency because it generates more freedom of information: when political competition is high, there are incentives for showing the good actions and management carried out by the political party in power (CabaPérez, Rodríguez-Bolívar, & López-Hernández, 2009), reducing the chances of looting (Nyblade & Reed, 2008). Following Jorge et al. (2011), politicians with high expectations of remaining in power (low political competition) tend to be less transparent, since the informational advantages are higher than the risk of being replaced by political opponents (Alt et al., 2005; Gandía & Archidona, 2008; Piotrowski & Bertelli, 2010). In addition, we take into account the level of indebtedness of each local government using a numerical variable – “DEBT” – that represents the level of public debt per capita. In general, evidence shows that the lowest levels of debt are related to the most transparent budget procedures and institutions (Alesina, Hausmann, Hommes, & Stein, 1999; Alt & Lassen, 2006; Gavazza & Lizzeri, 2009; Marcel & Tokman, 2002; Stein, Talvi, & Grisanti, 1998) and to fiscal transparency (Alt et al., 2005). Politicians tend to use public debt to generate fiscal illusion, since citizens tend to underestimate the cost of public goods and services in relation to the amount of taxes they pay; this leads to greater demand, which in turn causes an increase in public spending (Higuera, Marcos, & Pérez, 2004). Fiscal illusion was achieved by financing higher public spending with external funding (public debt), based on the idea that taxpayers do not realize that current indebtedness must be covered by future taxes (Levy & Feigenbaum, 1987; Pommerehne & Schneider, 1978; Raymond & González-Páramo, 1987; Wagner, 1987). There are information asymmetries between politicians (agent) and citizens (principal) that could be used by opportunistic politicians aiming to be reelected (Alesina & Perotti, 1995). Thus, transparency may reduce these asymmetries (Alt, Lassen, & Skilling, 2001) because citizens now realize the consequences of public debt. This means that the lowest levels of debt are related to the most transparent local governments. Following this agency problem, it has been shown that the electoral cycle usually sees an increase in public debt and a reduction in taxes in the periods before elections (Ashworth, Geys, & Heyndels, 2005; Baber & Sen, 1986; Bastida & Benito, 2009; Binet & Pentecote, 2004; Clingermayer & Wood, 1995; García-Sánchez, Prado-Lorenzo, & Cuadrado-Ballesteros, 2011). To control this effect, we use a variable called “YEARS ELECTIONS” that represents the number of years left to the next election. In this case, as the time period analyzed is 2008–2010, this variable takes the values of 1 in 2010, 2 in 2009 and 3 in 2008, since local elections were held in 2011 in Spain. Voters and different interest groups channel votes and resources to politicians that are best at promising to meet their aims, so as to influence policy implementation decisions (Bavetta & Padovano, 2000). These actors have been traditionally represented by different socioeconomic variables, since higher economic and educational levels lead to greater participation in governance. Cuadrado-Ballesteros, GarcíaSánchez, and Prado-Lorenzo (2012), we use the level of unemployment as a proxy of the economic level of citizens, because other variables such as population and density are correlated to other control variables, especially to debt per capita; also, GDP is not available for the years analyzed. Finally, geographical and proximity factors in relation to competitiveness have been addressed. Following the “Global Competitiveness Report” published by the World Bank Forum (Schwab & Sala-i-Martín, 2012), there is a narrow relationship between competitiveness and productivity and transparency. They highlight the role of institutions because governments take part in regulation processes, public contracts, disclosure of information, etc., especially during crises. The quality of institutions in terms of efficiency, corruption, transparency, honesty and good governance is related to competitiveness and growth.

For this reason, we consider the variable “COMPETITIVENESS” to be measured by the global indicator of competitiveness at the regional level, as provided by the organization CEPREDE.3 Due to differences among the Spanish regions, we think that a relevant aspect is controlling the sample through the geographical situation of municipalities. We have created five dummy variables – “NORTH”, “SOUTH”, “EAST”, “MIDDLE” and “ISLANDS” – that take the value of 1 when a municipality is situated in these different areas and 0 otherwise. Therefore: • municipalities from Galicia, Asturias, Cantabria, Basque Country, La Rioja and Navarre take the value of 1 for “NORTH”; • municipalities from Andalucía and Murcia take the value of 1 for “SOUTH”; • municipalities from Cataluña, Aragón and Comunidad Valenciana take the value of 1 for “EAST”; • municipalities from Castile and León, Comunidad de Madrid, Castile-La Mancha and Extremadura take the value of 1 for “MIDDLE”; • municipalities from Canary Islands and Balearic Islands take the value of 1 for “ISLANDS”. 4.5. Research models The main aim of this study is to show the effects of functional decentralization and externalization processes on levels of public transparency. This is empirically tested using the following models: IT index ¼ β0 þ β1 FUNCTIONAL DECENTRALIZATION þ β2 EXTERNALIZATIONit þ þβ3 MIXED COMPANIESit þ β4 DEBTit þ β5 RIGHTit þ β6 COMPETITIONit þ þβ7 YEARS ELECTIONSit þ β8 UNEMPLOYMENTit þ β9 COMPETITIVENESSit þ þβ10 NORTHit þ β11 SOUTHit þ β12 EASTit þ β13 MIDDLEit þ β14 ISLANDSit þ ε1i þ μ 1it

ð1Þ

IT sub‐index ¼ α0 þ α1 FUNCTIONAL DECENTRALIZATION þ α2 EXTERNALIZATIONit þα3 MIXED COMPANIESit þ α4 DEBTit þ α5 RIGHTit þ α6 COMPETITIONit þ þα7 YEARS ELECTIONSit þ α8 UNEMPLOYMENTit þ α9 COMPETITIVENESSit þ þα10 NORTHit þ α11 SOUTHit þ α12 EASTit þ α13 MIDDLEit þ α14 ISLANDSit þ ε2i þ μ 2it

ð2Þ where, IT index is the index provided by Transparency International Spain; IT sub-index represents each of the topics comprised in the global index. We recall that these topics are: (A) municipal corporations; (B) relationships with citizens and society; (C) economic and financial transparency; (D) transparency related to the bidding of municipal services contracts; and (E) transparency in urban planning and public works. FUNCTIONAL DECENTRALIZATION, EXTERNALIZATION and MIXED COMPANIES are the independent variables that represent the different modes of public service delivery. FUNCTIONAL DECENTRALIZATION refers to the different forms in which this process can be carried out: companies (COMPANIES); foundations (FOUNDATIONS); autonomous organizations (AAOO); public business entities (PBE); and all of them simultaneously (TOTAL DECENTRALIZATION); DEBT, RIGHT, COMPETITION, YEARS ELECTIONS, UNEMPLOYMENT and COMPETITIVENESS are the control variables, NORTH, SOUTH, EAST, MIDDLE, ISLANDS are dummy variables to control the geographical situation of municipalities; i represents the municipality, and t refers to the time period; β and α represent the parameters to be estimated; 3 CEPREDE (Centro de Predicción Económica) is an organization created by a group of professors at the University Autónoma de Madrid (UAM) with the help of different private and public institutions. They're work provides reports, data and analysis about economic issues. For more information see www.ceprede.es.

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

B. Cuadrado-Ballesteros / Government Information Quarterly xxx (2014) xxx–xxx

εi stands for persistent unobserved heterogeneity, and μit stands for the classical disturbance term. To estimate these models, we need an adequate methodology that takes into account the fact that the dependent variables lie between 0 and 1. The technique chosen is the Tobit regression models for panel data, which allow us to use the IT index, as well as the sub-indexes, due to the fact they are censored by the left-side and the right-side (0–1). The Tobit models estimate efficiency and consistency coefficients through the method of maximum likelihood. In addition, the randomeffects estimator controls individual heterogeneity, since individuals are observed in different periods. Therefore, the random error term (εi) is broken down into two parts: μit, which changes depending on municipalities and time periods; and the individual effect ηi, which characterizes municipalities and remains constant over time. These would be the factors that are not included in the regression, and they are specific to each municipality. 5. Empirical results The empirical part of the investigation includes two analyses: one of them is descriptive, to provide a global idea about the main characteristics of the municipalities included in the selected sample; the other is explicative, to provide evidence of the relationship among the aforementioned variables. 5.1. Descriptive analysis Table 2 shows the descriptive statistics for the variables used. The mean of the transparency index is 62.45, which is similar to the mean of sub-index (E), which summarizes the information regarding urban and public works. On average, the highest scores achieved by Spanish municipalities appear in sub-index (B), which summarizes transparency in relationships with citizens and society. On the other hand, the lowest scores are displayed in sub-index (C), which reports the economic and financial transparency of local governments in Spain. Thus, it is interesting to know whether decentralization/externalization processes determine the transparency of local governments. As far as the rest of the variables are concerned, we can observe that on average, local governments create about eight or nine decentralized entities in the analyzed period, of which three or four are public Table 2 Descriptive statistics. Variable

Mean

Std. dev.

IT_index A_subindex B_subindex C_subindex D_subindex E_subindex TOTAL DECENTRALIZATION COMPANIES FOUNDATIONS AAOO PBE EXTERNALIZATION MIXED COMPANIES DEBT RIGHT COMPETITION YEARS ELECTIONS UNEMPLOYMENT COMPETITIVENESS NORTH SOUTH EAST MIDDLE ISLANDS

62.45375 69.69844 72.66219 47.91906 55.81563 62.99781 8.327273 3.733333 0.5363636 3.966667 0.0909091 1.9 0.2727273 72.01932 0.5818182 0.3092727 1.99696 9.271429 97.95788 0.1636364 0.2181818 0.2636364 0.3 0.0545455

21.05091 20.65767 18.35811 35.23493 29.48701 24.70239 7.32665 4.1126 1.242685 3.361969 0.4783226 0.7390539 0.4660333 56.32022 0.4940094 0.0819078 0.817113 4.054899 19.43774 0.3705071 0.4136387 0.4412735 0.4589535 0.2274357

7

companies, one a foundation and four autonomous organizations, or almost any type of public business entity. Likewise, two contracts with private companies for public service delivery are established, but almost any mixed companies for this delivery. Finally, we can draw attention to the fact may highlight that the Spanish municipalities analyzed are mainly governed by right-wing governments, although they do not have absolute control (58% are right-wing). In addition, the difference in votes between the electionwinning party and the party with the second largest vote is only 0.3; therefore, Spain is a two-party country. The mean of the local unemployment rate is 9.27, although the standard deviation is 4.05, meaning there are important differences among local governments. The mean value of the competitiveness index is 97.95 if taking into account the base value of the calculation is 100 (Spain = 100). This means that, in general, local governments tend to the values of the nation; however, the standard deviation is 19.44, showing important differences among Spanish local governments. Finally, the mean values of dummy variables that represent the geographical situation show that about 16% of municipalities in the sample are in the north of Spain, 22% in the south, 26% in the east and 30% in the middle of the country. Just 6% represent the island municipalities. 5.2. Explanatory analysis 5.2.1. The effect of decentralization/externalization processes on the global transparency index Table 3 shows the effect of the different modes of public service delivery in Spain on the global transparency index published by Transparency International Spain. The first five coefficients in Table 3 represent the effect of the different decentralized agencies (“COMPANIES”, “FOUNDATIONS”, “AAOO” and “PBE”), as well as the total decentralized agencies (TOTAL DECENTRALIZATION), on the level of public transparency as represented by the global index provided by Transparency International Spain. We have put independent variables that represent decentralized agencies (“TOTAL DECENTRALIZATION”, “COMPANIES”, “FOUNDATIONS”, “AAOO” and “PBE”) into the regression one by one. This is because we want to see the effect of each agency independently of the effects of other agencies. Variables that represent functional decentralization, externalization and mixed companies have a positive effect on municipal transparency, although the “TOTAL DECENTRALIZATION” variable is the only statistically significant one, with a 99% confidence level. This justifies hypothesis H1, which was established at the beginning of the study; however, there is not sufficient empirical evidence about hypothesis H2, due to fact that the “EXTERNALIZATION” variable is not significant in the analysis. Mixed companies affect transparency positively, although this effect is not relevant in the analysis. In this regard, the most transparent municipalities are the most functionally decentralized ones, in particular through public companies and foundations, which are relevant at a 99% confidence level, and public business entities (PBE), which are relevant at 95%. In relation to the control variables, political ideology is relevant at a 90% confidence level in the case of models for “COMPANIES”, “FOUNDATIONS” and “AAOO”. The effect of these variables on transparency is negative; therefore, the level of transparency is higher in municipalities governed by left-wing parties. The variable “YEARS ELECTIONS” is relevant in all models at 99% of confidence level, and impacts negatively on the level of public transparency. This means that local governments tend to be more transparent when elections are coming up. Unemployment rates impact negatively on the level of transparency too, and it is statistically relevant at 90% in models for “TOTAL DECENTRALIZATION” and “COMPANIES”, and at 95% in models for “FOUNDATIONS” and “PBE”. This effect means that local governments tend to be less transparent when the unemployment rate is higher. Finally, competitiveness is relevant in all models for a confidence level of 99%. Its effect on the transparency index is positive, indicating that more competitive

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

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B. Cuadrado-Ballesteros / Government Information Quarterly xxx (2014) xxx–xxx

Table 3 Effects of modes of public services delivery on global transparency index. IT_index TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.3951846* 0.7377144* 2.734098* 0.252386 1.462183 1.557259 −0.0053166 −2.911695 12.50836 −11.06739* −0.7311693*** 0.1936476* 6.766567 −2.439909 1.531532 −6.808041 65.4879* 11.3616* 10.7765* 0.5264108

1.164532 1.38014 −0.0055968 −3.091524*** 17.35633 −11.15542* −0.7553014*** 0.1839031* 6.74457 −2.977409 1.464158 −7.225591 66.98918* 11.11676* 10.81998* 0.5135265

0.8927832 1.953955 −0.0079292 −3.543789** 16.80799 −11.20711* −0.7919959** 0.2170207* 6.255203 −0.2826528 3.192793 −7.383924 65.48413* 11.21917* 10.76499* 0.5206507

1.227804 0.8206481 −0.0039118 −3.148772*** 16.24488 −11.18586* −0.803641 0.2353249* −7.324545** −4.554553* −14.79196 −4.689474 70.79703* 11.61406* 10.74992* 0.5385819

3.277919** 1.265842 1.214172 −0.00425 −2.559878 18.30812 −11.08969* −0.7808798** 0.2360234* 3.73541 −2.641156 −0.578471 −10.71781 65.76251* 11.56892* 10.74882* 0.5366969

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

municipalities tend to disclose more information in an attempt to show it to their citizens. 5.2.2. The effect of decentralization/externalization on the different transparency sub-indexes Tables 4, 5, 6, 7 and 8 show the effects of public service delivery in Spain on the different transparency sub-indexes related to: (A) municipal corporations; (B) relationships with citizens and society; (C) economic and financial transparency; (D) transparency related to the bidding of municipal services contracts; and (E) transparency in urban planning and public works. The first five coefficients in each table represent the effect of the different decentralized agencies (“COMPANIES”, “FOUNDATIONS”, “AAOO” and “PBE”), as well as the total decentralized agencies (TOTAL DECENTRALIZATION) on the different kinds of transparency represented by sub-indexes A–E. Table 4 shows a positive effect of functional decentralization, externalization and mixed companies on municipal corporations' transparency (A). However, the only relevant variables are those related to decentralization processes, “COMPANIES” and “FOUNDATIONS” at 99% confidence

levels. These results comply with hypothesis H1, although we do not have sufficient evidence to accept hypothesis H2 about externalization. Table 5 shows the effect of these processes (decentralization and externalization) on transparency concerning their relationships with citizens and society (B). All kinds of functional decentralized agencies positively affect this type of transparency (at 99% confidence) except PBE, which is relevant at 95%. These effects are consistent with hypothesis H1. However, externalization processes and mixed companies are not relevant in the analysis, so we have no evidence to accept hypothesis H2. This means that the most transparent municipalities regarding general information and the relationship with citizens are the most decentralized ones (through public companies, foundations, autonomous organizations or public business entities). Table 6 shows a positive effect of functional decentralization and externalization on economic and financial transparency (D). However, functional decentralization, especially creating public companies and foundations, are the only statistically relevant ones. “TOTAL DECENTRALIZATION” and “COMPANIES” are statistically relevant at 95% confidence level, and “FOUNDATIONS” at 99%. The variables that represent

Table 4 Effects of modes of public services delivery on transparency subindex “A” (information about municipal corporations). A_subindex TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.5421969* 1.006814* 2.758931* 0.4594724 1.644108 4.193633 0.0203547 −2.862 6.41144 −0.520381 −0.5475886 0.1551377** 7.714763 −1.483569 2.060863 −5.327049 51.28687* 13.35487* 11.47274* 0.5753748

1.892498 4.436164 0.0204822 −2.728281 9.406082 −0.7737552 −0.6196894 0.1490185** 5.948361 −2.423352 1.10431 −6.54609 53.40624* 13.39577* 11.47593* 0.5767328

0.8844781 4.312382 0.0183642 −3.65943*** 13.28012 −0.7691348 −0.6526963 0.1916731* 5.930606 0.6164575 3.241185 −7.402834 52.37155* 13.62272* 11.423* 0.5871558

1.08237 3.136231 0.0223249 −3.433345*** 11.91529 −0.6734452 −0.6272888 0.195028* −6.725475*** −4.253169 −13.96377* −5.089012 58.01123* 13.84875* 11.40908* 0.595698

1.952757 1.012331 3.665318 0.0210869 −2.949969 16.72293 −0.9377193 −0.7121828 0.2023388* 3.189929 −1.605561 −0.6582808 −10.6646 54.55302* 14.07451* 11.37561* 0.6048674

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

B. Cuadrado-Ballesteros / Government Information Quarterly xxx (2014) xxx–xxx

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Table 5 Effects of modes of public services delivery on transparency subindex “B” (information about the relationship with citizens and society in general). B_subindex TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.4831269* 0.779288* 2.921627* 0.5853115* 0.8067925 −0.7184272 0.0044502 0.7825891 14.48081 −4.185756* −0.0599509 0.1842542* 1.815659 −6.628385*** −3.061431 −6.836932*** 57.27537* 12.19334* 8.498807* 0.6730315

0.641434 −1.323057 0.0058804 0.8655469 17.20272 −4.920519* −0.2638763 0.1874932* 0.067286 −7.419362** −4.85013 −8.485975** 62.37281* 12.15688* 8.487437* 0.6723023

0.1510024 −0.6154388 0.0018328 −0.2966283 21.71466*** −4.662881* −0.2032404 0.213532* 0.3840018 −4.632245 −1.393835 −8.497188** 58.88865* 12.25088* 8.476519* 0.6762512

−0.1440856 −1.943895 0.0045796 −0.0421128 20.55957*** −4.173655* −0.0625853 0.2031862* −8.381377* −4.950964** −10.39596* −1.941966 60.27833* 12.59105* 8.461588* 0.6888822

3.162219** −0.2608729 −1.771772 0.0051576 0.2961363 26.78659** −4.350737* −0.1276178 0.2192521* −0.7639611 −6.668589*** −4.274584 −10.80767* 59.44931* 12.38285* 8.461982* 0.6816701

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

other kind of entities (“AAOO”, “PBE”, “EXTERNALIZATION” and “MIXED COMPANIES”) are not significant in this analysis. Table 7 shows the effect of functional decentralization and externalization of public service delivery on transparency regarding this delivery. However, none of the variables are statistically significant in the analysis, so we cannot draw a specific conclusion for transparency in the procurement of services. Finally, Table 8 presents the effect of these processes on municipal transparency regarding urban planning and public works (E). Again, decentralization, externalization and mixed companies affect transparency positively. Nevertheless, functional decentralization is the only relevant process, specifically when it is carried out by public companies and foundations (“TOTAL DECENTRALIZATION” and “COMPANIES” variables are significant at a 90% confidence level and “FOUNDATIONS” at 95%). These results allow us to accept hypothesis H1, but they do not show sufficient evidence about hypothesis H2. These results show that the most transparent municipalities are the most decentralized ones as far as public service delivery is concerned, especially taking place through public companies and foundations in

general. Finally, we have proved that the introduction of the private sector (externalization and mixed companies) does not affect the level of municipal transparency. Regarding the control variables, competitiveness is relevant in all models at different confidence levels, but the effect is always positive. This means that the most competitive local governments tend to be the most transparent, maybe with the aim of making citizens realize their local government is one of the most competitive. This effect shows the narrow relationship between competitiveness and transparency, as supported by the “Global Competitiveness Report” published by the World Bank Forum (Schwab & Sala-i-Martín, 2012). In addition, “YEARS ELECTIONS” variable is statistically relevant in all models at 99% of confidence level, except in Table 4 (transparency about municipal corporations). This variable negatively affects the level of public transparency (total transparency in sub-indexes B, C, D and E). This means that politicians tend to be more transparent in the years prior to an election, as they perform more socially-accepted actions: previous literature has shown an increase in public debt and a reduction in taxes in the periods before elections (Ashworth et al., 2005; Baber &

Table 6 Effects of modes of public services delivery on transparency subindex “C” (economic and financial transparency). C_subindex TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.4732813** 1.026251** 4.581705* −0.1643146 1.510727 −0.6395511 0.00951 −7.651209** −0.876853 −21.88756* −0.9065885 0.2596474** 13.84802 −11.98897 2.489235 −7.138239 74.22732* 14.53586* 23.42513* 0.2780045

1.871194 −0.2437582 0.0089832 −7.397719 0.7486668 −22.12032* −0.9573951 0.2445809*** 12.75694 −12.95216 1.862857 −7.516668 75.9862* 14.38941* 23.45122* 0.2735152

0.7880807 0.4813112 0.0014338 −8.49414** 2.53849 −21.97965* −0.9581307 0.2800141** 14.87836 −7.835564 6.324591 −5.904419 73.07782* 13.97824* 23.48509* 0.2615886

0.755992 −1.61319 0.01212 −8.199057** 8.678741 −22.2404* −1.101623 0.3148041** −20.70856* −8.20312 −21.58045* −8.783714 86.96597* 14.96547* 23.29294* 0.2921819

2.272471 0.9086982 −1.287108 0.0117625 −7.717496** 6.821594 −22.02286* −1.023247 0.3039779** 9.729271 −11.898 0.5896324 −11.68882 76.61129* 14.8979* 23.31766* 0.289877

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

10

B. Cuadrado-Ballesteros / Government Information Quarterly xxx (2014) xxx–xxx

Table 7 Effects of modes of public services delivery on transparency subindex “D” (transparency in the procurement of services). D_subindex TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years Elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.1462648 0.5324394 0.464217 −0.2892729 2.144664 −2.210491 −0.0474845 −3.846251 63.12947** −16.76266* 0.0945104 0.4100561* 12.33911 4.849605 1.454396 −11.91528 33.27254 8.552016* 25.88952* 0.0983812

2.487149 −1.79338 −0.0490984 −3.566288 62.34769** −16.84117* 0.1013331 0.3896582* 12.71081 4.327994 1.558706 −11.04019 33.66528 8.507411* 25.88921* 0.0974595

1.926271 −2.284741 −0.0478833 −4.043716 64.72805** −16.81831* 0.0530851 0.4224283* 11.55927 5.35766 1.521106 −12.77563 33.97493 8.572591* 25.87858* 0.0988836

1.804039 −2.51978 −0.0461053 −4.088308 67.70205** −16.96454* −0.0193278 0.4360928* −4.633353 −9.064812 −24.32154* −9.622585 45.28522*** 8.575303* 25.87678* 0.0989524

2.900658 2.043732 −2.068247 −0.0471521 −3.394386 65.18415** −16.61358* 0.1204299 0.4193253* 11.27582 4.942424 0.6889915 −12.90215 32.7611 8.527316* 25.89064* 0.0978616

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

Sen, 1986; Bastida & Benito, 2009; Binet & Pentecote, 2004; Clingermayer & Wood, 1995; García-Sánchez, Prado-Lorenzo, & Cuadrado-Ballesteros, 2011) — as such, citizens do not suffer a tax increase or a reduction in public spending, meaning they will positively value the party in power thanks to the fiscal illusion effect. Finally, the rest of the control variables are statistically relevant in scarce models. We can highlight that “RIGHT” is significant in Table 6, with a negative effect on the level of economic and financial transparency. This means that local governments governed by a right-wing party tend to disclose less information about economic and financial issues, as mentioned in previous literature (Cárcaba-García & García-García, 2008; Guillamón, Bastida, & Benito, 2011; Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011; Tolbert et al., 2008). In the case of “COMPETITION”, its effect is relevant in Tables 5 and 7, but only for “FOUNDATIONS”, “AAOO” and “PBE”. In all of these models, variable that represents political competition positively affects the level of public transparency about public services (Table 7) and information about relationships with citizens (Table 5). This means that when the difference between percentage of votes between the first and second

party is higher (lower political competition) these kinds of transparency are higher too. This is in contrast to previous literature by Caba-Pérez et al. (2009) and Jorge et al. (2011) who show that when political competition is high there are incentives for showing the good actions carried out by the party in power. 6. Concluding remarks Recent international financial scandals have put the spotlight on the organizations that operate in both the private and the public sector; the aim is to restore citizens' confidence regarding their activities, since citizens require information and more transparency concerning the activities that are defrayed by their resources (Guillamón, Ríos-Martínez, & Vicente-Oliva, 2011). Theoretically, decentralization processes are aimed toward good governance and accountability, being an effective mechanism of increasing levels of public transparency. However, there is a heated debate around the relation between the decentralization of public activities and the level of transparency. Empirically, most studies deal with

Table 8 Effects of modes of public services delivery on transparency subindex “E” (transparency in urban planning and public works). E_subindex TOTAL DECENTRALIZATION Companies Foundations AAOO PBE EXTERNALIZATION MIXED COMPANIES Debt Right Competition Years Elections Unemployment Competitiveness North South East Middle _cons /sigma_u /sigma_e rho

Coef.

Coef.

Coef.

Coef.

Coef.

0.3499812*** 0.6022583*** 2.643252** 0.2301512 1.541739 4.547932 −0.0273387 −4.36268 24.06789 −14.53248* −0.8600349 0.2229908** 11.06979 7.479407 3.871112 −4.825523 66.17602* 7.799866* 18.50951* 0.1507979

1.651864 4.636978 −0.0275235 −4.264523 25.99497 −14.70051* −0.9130253 0.2208924** 9.793168 6.917386 3.291166 −5.758394 67.7888* 7.854084* 18.48758* 0.1528875

0.9546782 5.0308 −0.0323921 −4.848161 26.64319 −14.58095* −0.91066 0.2406365** 11.08192 9.984111 5.999648 −4.708837 66.30986* 7.676951* 18.49301* 0.1469983

1.152127 3.886356 −0.0251129 −4.718425 27.70399 −14.66982* −0.9473265 0.2536023* −1.436554 −6.035923 −16.48637* −8.953021 76.65758* 8.066637* 18.43364* 0.16072

1.629855 1.124577 4.084978 −0.0256979 −4.404044 29.59986 −14.62963* −0.9452966 0.2569548* 8.046568 7.514902 2.477737 −8.240369 67.8239* 8.114242* 18.40724* 0.1627038

*, ** and *** indicate significance at the 1%, 5% and 10% level, respectively.

Please cite this article as: Cuadrado-Ballesteros, B., The impact of functional decentralization and externalization on local government transparency, Government Information Quarterly (2014), http://dx.doi.org/10.1016/j.giq.2013.10.012

B. Cuadrado-Ballesteros / Government Information Quarterly xxx (2014) xxx–xxx

fiscal or administrative decentralization, but set aside functional decentralization. Hence, this paper adds empirical evidence at the local level to this analysis. Furthermore, we consider another mode of public service delivery – externalization or outsourcing – because if we were to deal only with decentralization, the results obtained might be biased. Despite the advantages of the contracting-out process in terms of the efficiency and quality of services, some scholars argue that outsourcing may lead to cases of fraud (Frederickson, 1999; Kettl, 1993; Pessoa, 2009), because politicians sometimes intervene too often in the selection of the private providers of public services, with cases of favoritism in the assignation of contracts (Fernández, 2007; González et al., 2011). Thus local governments tend to be less transparent in order to avoid citizens knowing about these situations. The aim of this paper was to analyze the effect of functional decentralization and externalization processes on levels of public transparency. To do this, we have selected a sample of the 110 largest Spanish cities, for which Transparency International Spain has published information regarding their level of transparency for the years 2008, 2009 and 2010. The results show that the most transparent municipalities are those that have carried out more functional decentralization processes for the delivery of public services, especially through the creation of public companies and foundations. Foundations are non-profit entities that depend on public administration, and receive monetary funds from it. These entities have to be periodically audited to guarantee the adequate use of public funds. Public companies are attached to councils or departments that control and assess them. These organizations are strictly controlled, which favors informative transparency. Decentralization processes improve transparency in Spanish municipalities, because politicians and other involved agents are directly related to service delivery, and are thus more responsible for their actions (Persson & Tabellini, 2000). This induces more ethical behavior from the involved agents, limiting predatory behavior in governments (Bjedov et al., 2010). In addition, it is probably when local governments use decentralized agencies to provide public services that the outcome of such a process makes the interface between functions within the organization explicit. Decentralization is typically oriented to citizens' needs, and it is usually used to improve accountability (Ferlie et al., 1996; Kettl, 2000; Pollitt & Bouckaert, 2000), which is essential for good governance. A more citizen-oriented public sector tends to disclose a higher volume of information, which reinforces the power of stakeholders and thus leads to a fostering of citizens' participation (Justice et al., 2006). Decentralization is a way to improve accountability and transparency in governance (Regmi et al., 2010; Willis et al., 1999). Our results also show that the introduction of the private sector, in the form of outsourcing and mixed companies, does not affect levels of public transparency in Spanish municipalities. This means that although the private sector tends to be more accountable for results, it falls short in terms of process transparency (Mulgan, 2002). Externalization should not be understood as a mechanism to conceal information, since there is a broad literature about the private sector's tradition of disclosing information to their stakeholders. The lack of relevant coefficients in this study could be explained as follows: in general, companies that provide public services are large; for example, Aqualia for water services, and ACS and FCC for urban wastes, all of which tend to disclose information on their own websites. So, in this case, information is provided by the private companies themselves instead of local governments. This could be the reason that externalization has no effect on their level of public transparency. In conclusion, this study has useful policy and practical implications. It shows that modes of public service delivery (other than direct delivery from the public sector) are not the cause of possible cases of Spanish local governments' lack of transparency, despite the doubts they raise: rather it is the inappropriate use of indebtedness (Escudero, 2001;

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