The ‘social choice’ of privatising urban water services: A case study of Madrid in Spain

Available online at www.sciencedirect.com

ScienceDirect Journal of Policy Modeling 37 (2015) 616–629

The ‘social choice’ of privatising urban water services: A case study of Madrid in Spain Alberto Ruiz-Villaverde 1,∗ , Andrés J. Picazo-Tadeo 2 , Francisco González-Gómez 1 1 2

Universidad de Granada, Campus de Cartuja, 18071, Granada, Spain Universidad de Valencia, Campus de Tarongers, 46022, Valencia, Spain

Received 24 December 2014; received in revised form 22 March 2015; accepted 26 April 2015 Available online 5 May 2015

Abstract In countries where privatisation is permitted by law, policymakers usually provide different reasons of general interest to allow private companies to manage water services. However, these decisions often provoke intense political debate and are at times opposed by citizens. We illustrate how the Analytic Hierarchy Process can be used to introduce a political analysis regarding the management of water services. We analyse the recent decision taken by the Regional Government of Madrid (Spain) to part-privatise the management of water services. Our main result suggests that policymakers should reconsider the importance of citizen participation in the management of water services. © 2015 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. Keywords: Urban water services; Privatisation; Decision-making; Analytic Hierarchy Process (AHP)C6; H83; L33

1. Introduction In spite of countries being extremely diverse where choosing between the public and private management of urban water services is concerned, private sector participation in developed economies remains low in comparison to other industries (Pérard, 2009). The water industry possesses particular characteristics which explain the low level of participation of private companies. ∗

Corresponding author. Tel.: +34 958 244 046. E-mail address: [email protected] (A. Ruiz-Villaverde).

http://dx.doi.org/10.1016/j.jpolmod.2015.04.005 0161-8938/© 2015 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.

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On the one hand, water services are considered to be a merit good and universal access to water must be guaranteed, mainly due to the positive externalities this creates. On the other hand, it is difficult to incorporate competition into the water industry. Both circumstances result in the water industry being sensitive to public regulation and political control. In fact, while some countries do not contemplate the legal possibility of private companies becoming involved in water management, in countries where privatisation is permitted, local policymakers are concerned about the effect of privatisation on strategic aspects such as access to water, efficiency, service quality or water prices (Lobina, 2005; Pierce, 2012). Since the 1970’s, empirical research has attempted to explain why some local governments chose to privatise urban water services management, mostly using multivariate regression techniques, e.g., see Picazo-Tadeo, González-Gómez, Guardiola, and Ruiz-Villaverde (2012). In recent reviews of the literature, Bel and Fageda (2007, 2009) found that policymakers base their decisions mostly on pragmatic reasons, including fiscal constraints or the search for higher efficiency, rather than the political and ideological. However, they also highlight that researchers must use caution in generalising the factors which explain the privatisation of water services due to both the complexity of the decision and the methodological difficulties which exist in capturing the natural dynamics of local policymakers’ choices. Accordingly, several empirical papers have focused on providing more in-depth understanding for decision-making processes regarding water resource planning and management using Multi-Criteria Decision Analysis (MCDA) (see Hajkowicz & Collins, 2007 for a survey; also see Gómez-Limón & Atance, 2004 and Ruiz-Villaverde, González-Gómez, & Picazo-Tadeo, 2013). On this background, this paper shows how the Analytic Hierarchy Process (AHP) – a multicriteria decision tool pioneered by Saaty (1980) – can be used to support decision-making regarding the management of urban water services in scenarios where rather different criteria should be accounted for at the time of making a decision, as well as to perform ex-post evaluations of decisions already made by policymakers. As a case study, we carry out an ex-post analysis of the decision made by the Regional Government of Madrid (Spain) in 2008 to partially privatise the management of the urban water service in the region. The interest in this case study is supported by the intense political debate and social reaction provoked by the announcement of the above decision. Based on the information gathered from a series of questionnaires completed by several experts in water management, both scholars and experienced professionals, the AHP allows us to carry out a critical political analysis of the above-mentioned decision, with the overall aim of introducing clarity to the political debate and transparency in the decision-making process. Following this Section 1, Section 2 reviews the theoretical arguments for and against privatisation of water services. Sections 3 and 4 describe the case study and the methodology, respectively. Section 5 explains the empirical application and carries out a policy analysis of the results. Section 7 summarises and concludes.

2. Theoretical background 2.1. Considerations regarding competition, efficiency and funding The public interest theory, based on market failures, argues that when the market is unable to yield the most efficient (and equitable) results, public intervention in the economy is justified. This is the case of the water industry, a paradigmatic example of a natural monopoly, with high sunk costs, elevated asset specificity and significant health externalities associated to service provision.

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Despite this, there has been a significant privatisation trend in the management of water services in many industrialised countries since the last quarter of the 20th century. According to the public choice theory there are two possible explanations for this trend. First, privatisation through competitive bidding processes incorporates competition into public monopolies (Savas, 1987), which can lead to an increase in efficiency and reduction in costs if politicians and bureaucrats are no longer permitted to monopolise public services (Niskanen, 1971). Second, private participation could promote a better exploitation of economies of scale when public services are delivered at suboptimal level (Donahue, 1989). However, there is no consensus in the academia regarding the abovementioned effects of privatisation. On the one hand, it is not guaranteed that bidding processes incorporate real competition into the water sector; at best, quasi-markets are achieved with a limited number of bidders (Bel & Warner, 2008). On the other hand, economies of scale can also be exploited by aggregating demand through several forms of inter-municipal cooperation (Bel & Fageda, 2007). Additionally, empirical evidence regarding the relative performance of different management formulas in the water industry is not conclusive either (Abbott & Cohen, 2009; González-Gómez & García-Rubio, 2008; Tauchmann, Clausen, & Oelmann, 2009).1 The advocates of private participation in the management of water services have also backed their stance stating financial reasons. During the second half of the 20th century, policymakers in most industrialised countries justified tax increases to expand the welfare state. However, since the crisis and the first tax revolts in the United States at the beginning of the 1970’s, this financial resource has been disputed. Many policymakers were forced to govern with minimal margin to raise local taxes. As a result, the existence of fiscal restrictions has been considered one of the most important explanatory factors in the privatisation of urban water management (Bel & Fageda, 2009; Brunner, Lele, Starkl, & Grassini, 2010), as privatisation is a very attractive source of financial resources (Ruiz-Villaverde, García-Rubio, & González-Gómez, 2010). Nonetheless, the cost of funding is directly proportional to the economic risk that investors must bear and, as noted by Massarutto, Paccagnan, and Linares (2008), the water industry is capitalintensive with assets that have a long economic life; accordingly, it is particularly sensitive to capital expenditures. This circumstance raises doubts over the idea that private companies have more incentives to reduce costs and ease of access to financial markets. Consequently, private management can be more efficient in many cases, but not necessarily when capital-intensive service infrastructure is involved. 2.2. Other relevant aspects: monitoring and citizen involvement In the case of public services, the principal–agent problem or agency dilemma focuses on how to ensure citizens’ interests – the principal – prevail over managers’ interests – the agent – taking into account the difficulty of designing a contract to promote competitive dynamics and reduce the likelihood of monopolistic behaviour (Bolton & Dewatripont, 2005). It is necessary to implement processes of effective supervision and control that could help reconcile managers’ objectives with the objectives of the public administration and citizens. Academic discussion 1 Some studies have found that private companies are more efficient than public ones (Picazo-Tadeo, González-Gómez, & Sáez-Fernández, 2009a; Picazo-Tadeo, Sáez-Fernández, & González-Gómez, 2009b). However, this finding may just be reflecting the preference of private companies to take control of water services where expected returns are higher (González-Gómez, Picazo-Tadeo, & Guardiola, 2011), or the tendency of public companies to operate in scenarios with greater diseconomies of scale and scope (Carvalho, Marques, & Berg, 2012).

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focuses on studying when the monitoring and supervising processes are most effective in terms of agents’ performance considering two criteria, namely, ownership and company size. While in small companies the supervision and control exerted by the owners is stricter in the case of private ownership, in larger companies there is no evidence that one type of management outperforms the other in terms of supervision and control—in fact, monitoring processes in both cases, public and private ownership, can become highly inefficient. Partial privatisation is a managerial choice which warrants special attention in this context. Institutional public-private partnerships have played an increasingly important role in local public services management since the late-1990s, particularly in the water industry. Under this form of mixed management, the government maintains a degree of control over the private partner, which is responsible for the day-to-day management of the company. This formula incurs less monitoring costs by reducing transaction costs, as policymakers can exercise direct control over the company through their ownership rights, as well as the regulatory framework (Bel & Fageda, 2010). Furthermore, government involvement in the board of directors helps to reduce expected problems related to incomplete contracts. Also, mixed ownership may lead to lower costs while promoting improvements in the quality of service (Schmitz, 2000). Once again, there is no academic consensus on the advantages of mixed companies either. Eckel and Vining (1985) argue that mixed public-private companies can result in the worst aspects of both public and private management, in which case neither private nor social goals can be effectively achieved.2 For effective internal supervision in a mixed company it is necessary for public representatives to possess a high level of expertise and elevated ethical standards (Marra, 2007). Moreover, mixed companies often lack clarity and stability when setting goals (Boardman & Vining, 1989), while also facing internal conflicting pressures resulting from the coexistence of private and public interests within the same company. 2.3. Greater citizen involvement and the social choice theory New trends in the field of planning and public administration indicate that besides interacting with markets, policymakers must interact with communities by promoting deliberative democratic processes (Denhardt & Denhardt, 2000; Nalbandian, 2005). These trends lead to the understanding of policymaker decisions as dynamics which integrate market mechanisms and deliberative processes which take into account citizens’ opinions (Allmendinger, TewdwrJones, & Morphet, 2003). One could think of the social choice theory as the ground of this ideological shift. This theory goes one step further and proposes repetitive processes of dialogue which combine elements of markets and planning as a way of achieving optimal social solutions. Accordingly, policymakers recognise the potential market solutions, but they require debate and dialogue in order to respond to the diversity of interests and possible conflicts. The main challenge of this theory is to create the right context in order to take into account citizens’ opinion while developing political capacity to detect possible differences of interest and identify solutions which do not divide the community (Martin, Shields, Tolwinski, & Kent, 1996; Nalbandian, 2005).

2 Cruz and Marques (2012) conducted four case studies in Portugal and according to their findings, partial privatisation is not observed to have any advantage in local public services in practice, particularly in regards to the defence of general interests; in fact, the interests of the private entity (profit maximisation) usually prevail over citizens’ interests.

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3. Case study: Canal de Isabel II Canal de Isabel II (CYII) is a public company depending on the Regional Government of Madrid (Spain) that in 2012 was responsible for integrated urban water management in almost the entire population of the region, i.e., 175 out of 179 municipalities and 6.48 million inhabitants (Canal de Isabel II, 2012). Although CYII was founded in 1851 to provide urban water services to the city of Madrid, it rapidly spread water provision to other municipalities in the region, and since the early-1990’s the company has implemented a strategy of business diversification and expansion in order to leverage its expertise in public service management, the liquidity of its assets and its high level of technological development (Ortega de Miguel & Sanz Mulas, 2007). Nowadays, CYII is at the head of a multinational holding operating in different sectors, including water management, hydropower and telecommunications, diverse Spanish cities and several countries around the world, mostly in Latin America. In the plenary sessions of the Madrid Regional Government Assembly on the 16th and 17th of September 2008, the parliamentary group of the Partido Popular (PP) – the right-wing political party governing in majority – proposed the partial privatisation of water services managed by CYII. The leading argument held by the regional government to support this initiative was the necessity for attracting new financial resources to undertake major investment in infrastructure and technological processes (Gobierno de la Comunidad de Madrid, 2008), which were required due to growing water necessities and fulfilment of the requirements set out in the Water Framework Directive of the European Union. Aggregate required investment was estimated at around D 4bn.3 In addition, it was argued that the use of new forms of management and financing would help to maintain the quality of water services, while increasing citizens’ involvement in decisionmaking. Accordingly, a new law was proposed to allow the creation of a public limited company to manage urban water services for the region of Madrid. Initially, the Regional Government would hold 100% of the capital and a maximum of 49% of shares could later be sold on financial markets or the stock market. The proposal was approved with 66 votes for and 52 against. On the 1st of July 2012, the Council of the Government of the Region of Madrid approved the creation of a public limited company named Canal de Isabel II Gestión SA (CYIIG), which is subject to private law and is currently responsible for managing the water supply, sanitation and reutilisation services, including customer service, advertising and sales activities for slightly more than 60% of the 178 municipalities in the region of Madrid. While the regional government owns 82.4% of the shares of CYIIG, 17.6% are spread across the town councils of municipalities involved in this new management model. However, the process of partial privatisation has not yet been completed due to difficulties in finding investors, mainly due to the unfavourable economic climate in Spain. 3.1. Strong citizen opposition After the announcement of the partial privatisation of urban water services in the region of Madrid, the citizen movement – Plataforma contra la privatización del Canal de Isabel II – was

3 Investment requirements included the construction of two new reservoirs, one in the North of Madrid and the other in the South. Moreover, some works that were part of the old National Plan for Sanitation and Water Purification 1995–2005 were still pending execution and were thus included in the new National Plan for Water Quality 2007–2015, amounting to an extra investment of D 2.79bn.

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formed in opposition to this political decision. This movement consists of several social organisations, such as neighbourhood associations, sections of major Spanish national unions, political parties and individual citizens, and has held some notable events including several mobilisations and demonstrations against privatisation as well as a claim submitted to the Constitutional Court in March 2012 alleging that the decision was not constitutional. The movement’s greatest impact came when an informal consultation was proposed on the 4th of March 2012, asking citizens about their preferences regarding the management urban water services in the region of Madrid. The result was that 99% of participants voted against any changes in ownership, preferring to continue with public management.4 The citizen movement against privatisation is a warning that the case of Madrid might be very similar to that which took place in Berlin in 1999, when a consortium of two large multinational companies – Veolia and RWE – acquired 49.9% of the shares of Berliner Wasserbetriebe, the municipal company responsible for urban water service management. According to Lanz and Eitner (2005), there have been problems associated with this privatisation process, including a significant increase in water rates, a substantial reduction in the workforce, which was a breach of the agreements with the unions prior to the privatisation process, problems related to water quality and a lack of investment in maintenance. 4. The Analytic Hierarchy Process: a brief methodological note The Analytic Hierarchy Process (AHP) is a multi-criteria decision technique first introduced by Saaty (1980) and commonly employed to support decision-making processes in complex scenarios (Bhushan & Kanwal, 2004). In essence, AHP determines the weightings of a number of decision alternatives with respect to achieving a final goal. During the process, decision-makers or experts perform assessments considering the different criteria and sub-criteria contained in a hierarchy. The assessments are made by pairwise comparisons of the elements in each of the hierarchical levels compared to the higher level, commonly on a nine-point scale. Accordingly, A = (aij ) can be defined as the reciprocal matrix obtained from the pairwise assessments of the elements i and j. The values obtained for pairwise comparisons actually represent the ratios between the priorities, represented by w, given to the corresponding functions; in other words, aij is defined by the quotient between wi and wj for all i and j. The reciprocal matrix obtains the so-called priority vector, which shows the priorities derived from the assessments, i.e., numbers associated with the nodes of an AHP hierarchy indicating the order of preferences. The priority vector can be computed using the principal right eigenvector approach (Saaty, 1980) as: n AW = λmax w, and wi = 1 (normalisation criteria) (1) i=1

where, λmax is the principal eigenvalue of the matrix A, which is obtained by solving: Det(λI − A) = |λI − A| = 0

(2)

4 This result is worth highlighting, as a similar social movement – Forum Italiano dei movimenti per l’acqua – began in Italy in 2009. For similar reasons, this movement was opposed to a water privatisation project initiated by the government at the time. Their first achievement was a Constitutional Court ruling in favour of conducting a national referendum in relation to the privatisation of water services, in which 95% of participants voted against privatisation. On the 7th of June 2011, the Italian Constitutional Court upheld the claim and the privatisation project undertaken by the government was defeated.

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Finally, in order to verify whether the vector of priorities has been estimated consistently, a consistency ratio (CR) is computed as: Consistency ratio (CR) =

Consistency index (CI) Randomly generated consistency index (RCI)

(3)

where, the consistency index (CI) is estimated as: Consistency index(CI) =

λmax − n n−1

(4)

and randomly generated consistency index (RCI) values are given in Saaty (Saaty, 1977; p.249). Accordingly, consistency is rejected if the consistency ratio is greater than 0.1 (Saaty, 1980). Alternatively, Alonso and Lamata (2006) propose a simpler and less restrictive criterion to measure inconsistency in pairwise reciprocal comparison matrices, which is based on the computation of maximum right eigenvalues. One particular matrix of dimension n will be either consistent or inconsistent depending on the values taken by a consistency index, on the one hand, and on the level of consistency needed, named α (with 0 < α ≤ 1), on the other. The level of consistency required provides adaptability to different scopes and relates the consistency error of the matrix studied to the average error of matrices with the same dimension. Formally, the consistency error of a matrix A of dimension n is defined as: Error (A) = λmax (A) − n

(5)

while the average error for matrices of that dimension is computed as: Average error = λ¯ max (n) − n

(6)

Accordingly, the matrix A will be consistent if and only if: Error (A) ≤α Average error

or alternatively

  λmax (A) ≤ n + α λ¯ max (n) − n

(7)

Alonso and Lamata (2006) (p.456) provide several consistency benchmarks for different consistency levels and dimensions. 5. Applying AHP to the case study: results and policy analysis In the absence of a theoretical framework supporting the superiority of one management choice for water services over another, and bearing in mind the political debate and social reaction generated by the decision of partially privatising urban water services in Madrid, our objective here is to obtain a valuation of such decision from a group of experts in water management using the AHP technique. In other words, we aim to ascertain which choice of management these experts would have made, taking into account the criteria the Regional Government of Madrid used to support its stance in favour of partial privatisation at the plenary session of the Regional Government Assembly. For analytical purposes, the management alternatives recognised by the current legislation for urban water services in Spain are included among the possible management choices (see García-Vali˜nas, González-Gómez, & Picazo-Tadeo, 2013). Accordingly, the alternatives are:5 5 Pure public ownership on behalf of local government has been omitted due to not being a realistic option in our case study.

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Alternative 1 (A1): Public company. Continue as a public company which reports to the Regional Government of Madrid. Alternative 2 (A2): Private company. Establish a fully private company, or contractual publicprivate partnership (PPP). Alternative 3 (A3): Mixed company. Establish a public-private mixed company, or institutional PPP (51% owned by the Regional Government, and 49% by private partners). This was the alternative proposed and approved in the Parliament of the Regional Government of Madrid. The criteria used to evaluate these options stem from the arguments used in the plenary sessions of the Regional Government of Madrid and are as follows: Criterion 1 (C1): Financial capacity. In view of the imminent need for investment that CYII was facing, according to the information provided by the policymakers, this criterion refers to the company’s ability to obtain the necessary financial resources. Criterion 2 (C2): Effectiveness and efficiency in water service management. This criterion refers to the technical and economic organisation capacity of the company which manages the water service, e.g., exploitation of economies of scale and network density, incentives to innovate and reduce costs or capacity to apply new technologies, among others. Criterion 3 (C3): Transparency in the control and supervision of water service management. It refers to the company’s capacity to create a transparent information system which makes it possible to control and supervise company managers so as to ensure the prevalence of the interests of society which are typical of a merit good. Supervision and control should also encompass criteria of economic rationality. Criterion 4 (C4): Citizen involvement. This has been considered as the EU Water Framework Directive makes a special call to citizens to stay informed and participate in decision processes related to water management. In order to assess the different management alternatives for the new company CYIIG based on the above criteria, we relied on a panel of five experts in water management. These panellists are professionals with experience in managing urban water services–a senior technical manager and an auditor to perform audit reports of the integrated urban water management of the region of Madrid – and experts from the academia – three Spanish researchers with extensive experience in the field of governance and management of urban water services.6 Information has been gathered by means of a questionnaire concerning the abovementioned alternatives and criteria that the five experts completed. As experts in the panel are independent with different value systems, we have synthesised each of the individual’s hierarchies and aggregated the resulting priorities using the arithmetic mean (see Forman & Peniwati, 1998). 6. Results The results are shown in Table 1 – individual results – and Table 2–aggregate results. First, it is noteworthy that the levels of inconsistency for experts 1, 2 and 3 are high in the Saaty sense, although they can be considered consistent according to the criterion of Alonso and Lamata (2006). The main result highlights that the experts consulted considered the public company the most appropriate alternative, based on the different criteria taken into account for managing urban water services in the region of Madrid. Only expert 5 considered a mixed public–private

6 There is no optimum number for the composition of panels of experts in studies based on AHP, although a large number of experts are not usually included for pragmatic reasons (Lai, Wong, & Cheung, 2002).

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Expert 1Professional Criteria relative importance Financial capacity Effectiveness and efficiency in management Transparency in control and supervision Citizen involvement Ranking of alternatives Public company Private company Mixed company Consistency Saaty (1980) Consistency ratio (CR)a Alonso and Lamata (2006) Principal eigenvalue (λmax )b 1

Expert 2Professional

Expert 3Scholar

Expert 4Scholar

Expert 5Scholar

3.7% (4) 8.1% (3)

10.6% (4) 16.4% (3)

10.5% (3) 59.4% (1)

11. 8% (3) 5.5% (4)

27.4% (2) 55.1% (1)

23.7% (2)

40.6% (1)

26.1% (2)

26.2% (2)

13.1% (3)

64.5% (1)

32.3% (2)

4.0% (4)

56.5% (1)

4.4% (4)

77.8% (1) 11.1% (2) 11.1% (2)

77.7% (1) 10.7% (3) 11.6% (2)

68.5% (1) 8.1% (3) 23.4% (2)

39.4% (1) 28.7% (3) 31.9% (2)

32.2% (2) 32.1% (3) 34.7% (1)

(Reject CR > 0.1) 0.20 (Accept α = 0.5) 3.208

(Reject CR > 0.1) 0.27 (Accept α = 0.5) 3.280

(Reject CR > 0.1) 0.28 (Accept α = 0.5) 3.291

(Accept CR < 0.1) 0.04 (Accept α = 0.05) 3.041

(Accept CR < 0.1) 0.06 (Accept α = 0.1) 3.062

Note: Ranks are in brackets. a The consistency ratio is measured using expression (3). b The principal eigenvalue is measured using expression (2).

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Table 1 Summary of results for the AHP analysis1 .

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Table 2 Aggregation of experts’ priorities: criteria and alternatives1 . Arithmetic mean Criteria relative importance Financial capacity Effectiveness and efficiency in management Transparency in control and supervision Citizen involvement Ranking of alternatives Public company Private company Mixed company 1

12.8% (4) 28.9% (2) 25.9% (3) 32.4% (1) 59.3% (1) 18.2% (3) 22.5% (2)

Note: Ranks are in brackets.

company as the most appropriate, albeit by a narrow margin. It is worth recalling here that the different criteria used in the application of AHP have been established considering the arguments advanced by policymakers when they decided upon the partial privatisation of water services. Consequently, this result may call into question the decision by the Regional Government to seek a private partner to manage urban water services. 6.1. Policy analysis One possible explanation for the discrepancy between the decision made by the regional policymakers and the option resulting from the application of AHP with our panel of experts may be that they value the decision-making criteria differently. As for the decision-making criterion C1, while the experts under no circumstances consider financial capacity to be the most important criterion, it was the main argument wielded by the politicians in favour of the decision to privatise. This difference may be due to experts circumscribing their valuation to the particular case under study, while policymakers approach their valuations in a more general context, conditioned by the need to obtain resources to finance the deficit of the Spanish territorial administrations.7 In other words, privatisation of public services is a highly attractive alternative for local and regional policymakers to reduce budgetary imbalance. Therefore, it is reasonable to assume that financial resources obtained from the privatisation of urban water services in the region of Madrid may not be intended – at least in its entirety – to improve the infrastructure of the services, as was expressed by policymakers originally.8 As for the decision-making criterion C4, the experts assign the largest weightings to citizen involvement. The reason for this assessment may be due to different factors. Firstly, as noted in 7

The transfer of competencies of public service delivery to municipalities and regional governments, which have taken place in Spain since the 1980’s, has not been accompanied by the transfer of adequate financial capacity to manage them. For many years, Spanish municipalities generated extraordinarily high incomes through various taxes related to construction and real estate sales activities which allowed the financing of public services management. However, the bursting of the housing bubble in 2008 led to a drastic reduction in income as well as increased debt levels. Hence, new sources of funding are now necessary. 8 As González-Fernández and González-Velasco (2014) highlight, the level of public debt is directly related to the importance of the shadow economy and corruption. Consequently, the search for alternative sources of funding from public services privatisation may even have a negative effect. It may postpone the implementation of the necessary reforms to adapt Spain’s financial territorial model to the needs of municipalities and regional governments; and also, the combat of fraud and corruption.

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Section 2, the new theoretical framework proposed by the social choice theory pays particular attention to the importance of deliberation and citizen’s involvement in political decision-making, especially in situations where there are significant conflicts of interests, as is shown in our case study. Moreover, and in the second place, the EU Water Framework Directive also calls European citizens to be informed and involved in water management plans.9 Both circumstances may have influenced the great importance given to the criterion of citizen’s involvement by scholars and professionals. Nevertheless, an important difference exists between what is considered citizen’s involvement in both the social choice theory and also the EU Water Framework Directive, and what is interpreted by politicians at the head of the Regional Government of Madrid. While regional politicians have also labelled greater citizen involvement as one of the most important reasons for privatising water services, they have a completely different understanding of this criterion. Politicians maintain that the acquisition of minority shares will allow citizens to become involved in the decision-making and at a later stage, in the management of the new mixed company in charge of managing urban water services, CYIIG. However, not all citizens will have the ability to purchase shares in the new company; in fact, not even a minimally representative proportion of the population of the region of Madrid. Furthermore, a symbolic representation in the capital of CYIIG does not guarantee an effective citizen’s involvement in decision-making regarding the provision of water services. As for the decision-making criteria C2, effectiveness and efficiency in water service management and C3, transparency in control and supervision, both are positively assessed by regional politicians and experts. In recent years, the partial privatisation of urban water services management is gaining support within both the academic and political spheres. It is considered the best alternative in order to introduce transparency for monitoring public services which is essential to ensure that services are delivered effectively to the agreed standards. Additionally, as the public partner usually holds the majority of the share capital, the partial privatisation also minimises transaction costs.10 Nonetheless, the abovementioned arguments should be qualified in the particular case of the provision of the urban water service in the region of Madrid since, as noted in Section 3, CYII has nowadays become a multinational holding operating in different activity sectors and countries worldwide. The expansion and diversification plan of CYII has mainly been guided by the objective of maximising private profits. This could indicate serious principal–agent problems arising from the complexity of managing CYII as a consequence of unnecessarily risky operations performed outside and within the management of integrated water cycle services, which may also affect the new company GYIIG. Therefore, the creation of a mixed public-private company could be essentially seen as a way to satisfy private interests whilst continuing to take advantage of maintaining public institution status. This option could seriously harm citizens’ interests. 7. Summary and conclusions The legal framework in some countries allows policymakers to privatise the urban water service. While the management of water services is perhaps one of the most controversial decision-making processes in public administration, in the academia there is also an open debate regarding the convenience of private management in the water industry. Some authors argue that private management is more efficient, while others defend that public management is the greatest guarantee 9 10

Other countries have applied such reforms in the management of water, e.g., India (Brunner et al., 2010). Nonetheless, as commented in Section 2, partial privatisation has also generated controversy in the academia.

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for social interests, without impeding efficiency. In addition, several authors point to mixed companies as an option to combine the advantages of both public ownership and private management, although others have highlighted that mixed management could cause significant internal conflicts of interest between public and private managers. This paper illustrates how the Analytical Hierarchy Process (AHP) – a multi-criteria decision tool – can be used to achieve a better understanding of the complexity of decisions regarding the management of water services, and also to perform policy analyses of such choices. Furthermore, given that the political process may consider some optimal decisions as politically inopportune (Carlsson & Walden, 1995), this technique allows introducing transparency in decision-making and clarity to the political debate; also, choosing the decision-making criteria and weighting their importance allows focussed discussion on issues. In particular, we carry out an ex-post analysis of the decision of partially privatising the provision of the urban water service in the Spanish region of Madrid, a decision which has generated much political debate and social controversy. For this purpose, information has been gathered from a survey completed by five experts from professional and academic areas of knowledge in water management. The main result highlights the discrepancy between our group of experts, which assesses the public company as the most appropriate option for the management of water services in Madrid, and the Regional Government. The different relative importance that policymakers and the experts assigned to different decision criteria could explain this discrepancy. A second remarkable result is that experts assign the largest weightings to citizen involvement criterion, suggesting that policymakers should reconsider the importance of citizen participation in the management of water services. Considering the ongoing debate in Spain about the requirement for greater citizens’ involvement in political decisions and the renewed theoretical framework posed by the social choice theory, as well as requirements in the EU Water Framework Directive, the unaccepted challenge by politicians is to enable appropriate policy mechanisms for citizens’ voices to be considered. A final but no less important conclusion from this research is that policy decisions aimed at privatising urban water services in Spain – either fully or partially – ought to be conscientiously considered before being adopted, and pros and cons need to be carefully analysed in each particular case. This is particularly important as privatisation may appear to be an attractive choice to local governments in the short term, which generates financial resources that may contribute to alleviate their budget deficits. However, the potential advantages in the medium and long term of incorporating private participation in water services are currently subject to intense academic and political debate. In addition, disposing of fresh financial resources from privatisation of local services to reduce budget deficits could also have the undesired effect of delaying the necessary reform of the model of financing town councils in Spain. Acknowledgements We acknowledge the constructive comments of the anonymous referees and the editor. The financial support of the Spanish Ministry of Economy and Competitiveness (ECO2012-32189), the Regional Government of Andalusia (P11-SEJ-7039) and the CEi BioTIC programme from the University of Granada (mp CP 3) is also acknowledged. References Abbott, M., & Cohen, R. (2009). Productivity and efficiency in the water industry. Utilities Policy, 17(3–4), 233–244.

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