“Political connections, corruption, and privatization of public services: Evidence from contracting out water services in Spain”

Political corruption is a type of market failure. One area of public policy where corruption is relatively common is the contracting out of public services. Private firms can improve their chances of obtaining contracts by bribing politicians or public servants and funding political parties. In the same vein, firms can gain access to policy makers by hiring influential former politicians –a practice commonly referred to as revolving-doors. In Spain, a number of corruption cases, involving all the major political parties, are presently under judicial investigation. Some of these cases involve water contracts. Also, there is evidence showing that private firms have been funding political parties as well as hiring former politicians for top positions. In this paper, we use information from 892 privatizations of water services in Spanish municipalities between 1984 and 2014 and logistic multinomial regression techniques to study the association between specific firms securing contracts and the political parties ruling the municipalities. We find evidence of a systematic association between the Popular Party (Partido Popular or PP) and the firm, Aqualia, part of the large Spanish holding company, Fomento de Construcciones y Contratas (FCC), which is known to have funded the PP. Furthermore, former PP politicians have been appointed to top positions in the FCC board of directors. JEL classification: D73; L33; L95