Contract Renewal in Urban Water Services, Incumbent Advantage, and Market Concentration

• Published date: 01 March 2022
• Author: Daniel Albalate,Germà Bel,Francisco González‐Gómez,Andrés J. Picazo‐Tadeo
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/puar.13282

Research Article

314Public Administration Review • March | Apri l 202 2

Andrés J Picazo-Tadeo is professor of

Economics at University of Valencia. His

main areas of research are environmental

economics, water economics and efficiency,

and productivity analysis. He is Editor-in-

Chief of

Applied Economic Analysis

.

E-mail: andres.j.picazo@uv.es

Abstract: Contract renewal with the incumbent is common practice in the contracting-out of public services. It could,

however, affect competition by reinforcing trends towards market concentration. This article contributes empirical

evidence on the determinants of the result of public tenders for the renewal of private provision of urban water

services. A dataset with information on 215 public tenders held in Spain between 2008 and 2019 is employed. The

methodology is based on logistic regression techniques. The findings indicate that incumbent size does not play a role in

the probability of alternation between service providers. Furthermore, competition (proxied by the number of bidders)

and transparency in managing public tenders both increase the likelihood of alternation between providers. Lastly, the

estimates suggest that larger municipality size and discretionary power of entrenched political parties might also play a

role in favoring incumbent contract renewal.

Evidence for Practice

• More bidders and higher transparency make alternation more likely in public tenders for the renewal

of contracts for the private provision of urban water services. Conversely, discretionary power of well-

established political parties and large municipality size make incumbent renewal more likely.

• Incumbent size and their share of the private market for urban water provision do not play a role in

explaining the result of renewal public tenders.

• Promoting competition in tenders and boosting transparency in the management of contracts are critical for

ensuring the achievement of public interest goals in the contracting-out of urban water services.

It is common practice in developed economies

to contract out the provision of municipal

services, including some social services,

environmental conservation, street cleaning, and

water supply or waste collection and treatment. A

large body of literature has addressed the different

forms of contracting-out (Bel and Gradus2018),

and the factors that explain such decisions made

by local governments (reviews are provided by

Bel and Fageda2009 and Wassenaar, Groot, and

Gradus2013). While city councils always retain

responsibility for ensuring the provision of local

services, delivery concessions are normally awarded

through public tenders and are limited to a given

period of time. Once the concession is over, the local

government must decide whether to renew it or return

to in-house provision.

In the case of renewal, a new competitive tender

could lead to the contract being awarded to

either the incumbent or some other bidder, i.e.,

alternation. Literature on the determinants of contract

renewal is, however, scarcer and mainly focuses on

remunicipalization (Gradus and Budding2018).

Existing research suggests that the renewal of public

service contracts largely depends on the type of service

concerned, with the incumbent’s contract more likely

to be renewed for more complex services (Brown and

Potoski2003; Rodrigues, Tavares, and Araújo2012)

such as urban water services and waste disposal

(Campos-Alba et al.2017; Guérin-Schneider, Breuil,

and Lupton2014).

Competitive tenders in public services are seen as

a means of introducing competition into sectors

with natural monopoly conditions (Demsetz1968);

however, incumbents very often retain contracts.

Although the debate is ongoing, some authors have

construed the lack of alternation as a symptom of

insufficiently effective competition and collusive

behavior (Yvrande-Billon2009). Lalive, Schmutzler,

and Zulehner(2015) performed a comparative

analysis of negotiations with the incumbent and open

auctions in the procurement of railway services in

Germany, finding that negotiations correlate with

lower consumer surplus and higher prices. Conversely,

renewal with the incumbent has also been perceived

as the result of cooperation among the players (Beuve,

Contract Renewal in Urban Water Services, Incumbent

Advantage, and Market Concentration

Daniel Albalate

Germà Bel

Francisco González-Gómez

Andrés J. Picazo-Tadeo

Universidad de Granada

Universitat de Barcelona

Universitat de València

Francisco González-Gómez is professor

of Applied Economics at Universidad de

Granada and a senior researcher at the

Water Institute of the same university.

His research focuses on urban water

management, including economic, political,

and environmental issues. He is a member

of the Editorial Board of the

International

Journal of Water Resources Development

.

E-mail: fcojose@ugr.es

Germà Bel is professor of Economics and

Public Policy at Universitat de Barcelona,

Director of the Pasqual Maragall Chair on

Economics and Territory, and Director of the

Observatory of Analysis and Evaluation of

Public Policies at UB (OAP-UB). His research

focuses on government reform, local public

services, transportation, and infrastructure.

On these topics he has published several

books and more than 100 peer-refereed

articles. He is Editor of

Local Government

Studies

. For more details, visit www.ub.edu/

oap/germa-bel/

E-mail: gbel@ub.edu

Daniel Albalate is associate professor of

Economics and Public Policy at Universitat

de Barcelona and Deputy Director of the

Observatory of Analysis and Evaluation of

Public Policies at UB (OAP-UB). His research

focuses on the analysis and evaluation of

public policies, local public services reforms,

and the economics of transportation

and infrastructure. On these topics he

has published more than 50 refereed

articles. For more details see http://www.

danielalbalate.cat

E-mail: albalate@ub.edu

Public Administration Review,

Vol. 82, Iss. 2, pp. 314–324. © 2020 by

The American Society for Public Administration.

DOI: 10.1111/puar.13282.