Por Agustín Navarro de Vicente-Gella
User charges could contribute to a structural change in some public services’ financing model, especially those linked to infrastructures. This is particularly relevant in the current budgetary structural adjustment context. However, in Spain, addressing this issue has, in some sectors, been erratic and has lacked coherence. Charges to users have not always been introduced when feasible or even compulsory under EU law and when they have been introduced, actual demand and willingness to pay have not always been correctly estimated (for example, 8 bankrupt toll motorway concessions in 2018, after too optimistic forecasts made during the early 2000’s). On the other hand, where there is reluctance to charge users, scarcity of resources may delay necessary investments and deteriorate existing infrastructures, such as in the case of water services. All this leads to a blurred public service provision model that may neither be sustainable nor fair.
Since other sources of financing (such as public debt) are constrained and will continue to be so in the foreseeable future, a stable long term model for the provision of public services with charges to users is needed to make an optimal use of scarce public resources and guarantee services quality and maintenance.
So far, in Spain, different solutions have been adopted for each sector with an ad hoc and erratic approach. A global analysis with an economic policy approach has been missing, which has led to lack of consistency in the approach to this issue. In particular, the experience of the following sectors can be illustrative:
- a) Transport: most of the roads have been financed through public expenditure, although the first motorways built in the 1970’s were through toll motorway concessions and, in the early 2000’s this modality was used again. As a consequence, less than 17% of total high capacity roads in Spain (3,039 km) currently have infrastructure charges to users (21% in the case of the central government’s high capacity roads network or 2,539 km). These 3,039 km are less than 2% of Spain’s total road network (165,483 km). This is in contrast with other modes such as railways, where infrastructure expenses are charged to users. As a consequence, the Spanish transport system is biased towards road transport, which causes significantly more negative externalities (pollution, congestion, casualties and healthcare expenditure) than railways, which do pay for using infrastructures and, therefore, railway transport operators cannot compete with those of roads on a level playing field, which results in an inefficient modal distribution. Moreover, the Central Government invests €1,000-1,300 million annually in roads construction and spends €850-1,000 million in road maintenance, also annually, while the road network generates very little revenue. Additionally, expenditure is significantly below pre-crisis levels despite the network having increased. Therefore, road quality is progressively deteriorating, possibly worsening the problem of negative externalities linked to accidents.
- b) Environment, especially water: current pricing does not ensure the recovery of the cost of all water services, which is in breach of the Water Framework Directive. In fact, Spain is currently in infringement of Directive 91/271/EEC concerning urban waste water treatment in 9 urban areas (down from initially 38 urban areas), due to which Spain has been imposed pecuniary penalties upon (Judgment of the Court of Justice of the European Union of 25 July 2018, on Case C-205/17, related to previous case C-343/10). It moreover has other open infringement procedures. However, regional and local governments are reluctant to increase cost recovery through users’ contributions due to political sensitivity. The design of pricing policies on waste water treatment is very diverse. According to the pieces of information analysed, prices for waste water treatment can range from 0 to 60 cents per cubic meter, and the resources raised are not always earmarked for waste water treatment financing. Therefore, resources are often insufficient to cover investment and operation needs. Hence, urgent investments in the sector are being delayed and this may jeopardize Spain’s compliance with EU regulation. In fact, the percentage of water supply and sanitation networks older than 30 years currently stands at 40% in water supply networks and at 60% in sanitation networks, the network renovation rate at 0.6% in water supply networks and 0.38% in sanitation networks.
Low population density is also an important problem for waste water projects’ sustainability in a number of regions. This could be addressed through higher scale projects that would allow to meet the minimum efficient unit and that would include big or middle size cities and small municipalities, recovering average costs in the project overall. However, in some cases the main regional cities’ local Authorities’ are reluctant to cross-subsidize users from rural municipalities.
In urban waste management, municipalities have also been reluctant to charge users. This may have, also in this sector, reduced the availability of funds to appropriately treat and reuse waste, increasing the percentage of urban waste that ends up in landfills. It may also have reduced the viability of private sector participation in these projects.
As discussed above, user charges are politically sensible and raise concerns related to affordability. However, these should be addressed through accurately targeted social assistance policies rather than by not charging any user for the use of infrastructures.
The deployment of a user charges policy is usually linked to public private partnerships, but these are in fact two separate decisions. Indeed, the public sector could directly charge users for the services they are given. However, it may be true that delivering a public service through a concession contract may make the introduction of user charges more feasible from a political point of view. On the other hand, public private partnerships may also be made without charging users for the public services they are delivered. In many of these cases, the public sector pays the private partner annually for the availability of the infrastructure. These payments are usually called unitary payments. When charges to users are avoided, investments may be unblocked through concessions under unitary payments, but in these cases, PPPs can easily turn out to be a very heavy burden for the public sector during a very long period, especially when project design or long term fiscal space have not been adequately estimated.
In theory, PPPs are, inter alia, meant to improve intergenerational fairness by spreading expenditure among the generations that use the facilities built (either through user charges, through tax revenues or through a combination of both). However, this intergenerational fairness is only obtained provided that the project design is adequately adapted to the actual social needs. If not (for example if capacity needs are significantly overestimated and, for example, a waste water treatment plant built is too big for the actual waste water flows reaching the plant, or if actual demand for a toll motorway is significantly below expectations), several generations may end up paying for the mistakes of the first generation involved in the project, raising an intergenerational fairness issue. Although this problem arises regardless of the project delivery model chosen, since the PPPs financing costs are typically above those of traditional public procurement (a concessionaire’s weighted average cost of capital is typically significantly above the cost of long term public debt) and since, due to their complexity, PPP contracts structuring costs are also significantly above those of other more traditional procurement models, the issue is clearly more acute in the case of PPPs. Therefore, even though it is always crucial to accurately design investment projects, it is even more important to do so when the delivery model chosen is a PPP.
Such a kind of experiences, in which project design was not mature enough when tendered, can be found in the waste water treatment sector (for example that the volumes of waste water actually reaching the treatment plant are much below the capacity for which it was built).
Also in the transport sector, as mentioned above, 8 toll motorway concessions went bankrupt in 2018, after too optimistic demand forecasts made during the early 2000’s so as to get all the necessary approvals, hiding contingent liabilities for the public sector that materialized a few years later.
In parallel, there are over 600 desalination plants in Spain. There have been a number of success stories with desalination plants PPP’s for human consumption but there have also been a number of failures. In the Balearic Islands, for example, two PPP plants have turned out to be successful whereas another two failed due to changing regional governments having different technical criteria, which led to the new governments changing the requirements imposed upon the private partner and this ultimately sending the projects out of track. It is important to draw lessons from all these failures.
The existence of both success stories and failures prove that PPP’s should not always be seen as the solution. This will depend of the innovations and efficiencies, if any, that the private sector may bring to the project and of risks transferred to the private partner of the PPP, which have an important economic value. However, once the contract is signed, both parties will have incentives to try to transfer risks back to the other party.
Moreover, in sectors such as waste water treatment and urban waste treatment, in the case of Spain the optimal solutions may considerably differ from one region to another. Spain has 17 Autonomous Communities plus 2 autonomous cities. The 17 regions have very different characteristics that may affect concession contracts’ sustainability or that could make them sustainable only if they are designed in a certain way: for example, population (which ranges from Andalucía’s 8.4 million inhabitants to La Rioja’s 0.3 million), size (which ranges from Castile and León’s 94,224 sq. km. to the Balearic Islands’ 4,992 sq. km), administrative division (ranging from Castile and Leon, which is divided into 9 provinces, to Asturias, Cantabria, La Rioja, Navarre, the Balearic Islands, Madrid and Murcia, which are single province regions), population density (from Madrid’s 820.59 to Castile-La Mancha’s 25.56 inhabitants/sq. km), share of the largest city in total population (which ranges from 48.9% in Aragon to 8.2% in Andalucía), size of the largest city in the region (ranging from Madrid’s 3.2 million inhabitants to Extremadura’s 150,543 inhabitants) or income per capita (which ranges from Madrid’s €33,809 to Extremadura’s €17,262). There will not be a one-size-fits-all kind of solution.
More specifically in the case of municipal waste, different types of waste require different kinds of treatment, going from treatment of waste in proximity, where the goal is to minimize CO2 emissions from transport, to centralized treatment for waste coming from larger populations. This may affect the viability of private participation depending on the size of municipalities, the degree of decentralization in treatment and possibly the phase in the treatment cycle. This may also require different tasks to be allocated to public and private entities in different municipalities, creating a complex task division and the need for coordination among them.
Contracting authorities should therefore have a better insight, for each sector, on when a project is suitable to be tendered as a PPP and when it is more appropriate to choose traditional public procurement instead. This decision (PPP vs. a different procurement tool) should be based in the existence of Value for Money (VfM).
It should be noted that under the Spanish procurement law, contracting authorities have no obligation to make any kind of Value for Money comparison, which raises the risk of launching concession contracts for projects in which traditional public procurement brings more VfM to the public sector.
In order to improve PPPs’ sustainability, article 333 of the Spanish public procurement law creates the National Evaluation Office, with a mandate to give a written opinion on the financial sustainability and the degree of risk transfer of PPP contracts proposed for tender.
This opinion is compulsory for contracts in which the public sector makes any kind of payment to the concessionaire or grants it any kind of financing support. The Office’s opinion shall additionally assess whether the profitability that the concessionaire will obtain from the project is commensurate with the demand risk to be borne by it.
Therefore, if the National Evaluation Office is appropriately staffed (both from a quantitative and qualitative point of view) and it really becomes Spain’s reference PPP unit, it may bring huge value added to Spanish contracting Authorities so as to know when PPPs may bring value for money to projects and so as to avoid repeating mistakes of the past. Yet, the National Evaluation Office’s resources are still far from those needed for it to accomplish its crucial mission.
We can also note that its role is to assess the actual degree of risk transfer to the private sector but its legal mandate does not explicitly include an assessment of what is the optimal distribution of risks between the public and the private partners of a concession, based on which one of them is better prepared to bear each source of risk. However, we could consider this to be included in its mandate to provide a written opinion on a concession’s financial sustainability. We may also consider this mandate to include the capacity of assessing the risk of incompleteness of a proposed contract, which is another of the main concerns surrounding concession contracts.
On the other hand, its risk screening has not been well thought through by the Spanish legislators since it would not prevent past mistakes, such as those of the 8 bankrupt motorways, from happening again (since those motorways were supposed not to need any public financial support and, therefore, had it already existed, the National Evaluation Office’s report would not have been compulsory in those cases and would not be so in case similar projects were proposed in the future).
In summary, satisfying the population’s needs through high quality public services requires important investments and maintenance expenditure to make them sustainable. Since other sources of financing (such as public debt) are constrained and will continue to be so in the foreseeable future, a stable and sound long term model for the provision of public services with charges to users is needed to make an optimal use of scarce public resources and guarantee services quality and maintenance. Such a model should be accompanied by enhanced and accurately targeted social assistance policies. The private sector could have an important role to play in this user charges-based model but its potential needs to be assessed carefully, so as to avoid it being overestimated. For this, the new National Evaluation Office will need to become a true PPP unit for Spain, focusing of those projects that have a higher risk of creating a long term heavy burden on fiscal space or of hiding important contingent liabilities, regardless of whether they are supposed to be financed though unitary payments or user charges.