The New Model Regional Financing System

A solution which is sometimes offered to Spain's economic woes is to do away with the system of regional government. The regions are a drain on national finances, they have spent money poorly, they have acquired vast debts. The arguments trotted out against the regions are familiar enough but they carry little force politically. There is no obvious will to reform the structure of regional government or to go so far as to eliminate it. Even were there such a will, there is one very major obstacle that would prevent it - the Spanish Constitution.

Instead, the focus has been on how to make the regions more financially efficient, and efficient financing is very much on the agenda at present, while the debate surrounding it may prompt a reconsideration of the nature rather than structure of regional government, making the regions more not less responsible for finance and creating what would be more a genuine financial and fiscal federal arrangement than the one which currently exists.

The Spanish Government has said that it will look at a reform of the present system of regional financing next summer. Certain regions, especially Madrid, want this brought forward; regional financing needs to be examined with greater urgency.

The financing of the regions is hardly a straightforward matter. The Aznar government tried to make it more straightforward in 2001 by introducing a reform which would have, it had hoped, stood for all time and taken away the regular, five-yearly rounds of negotiations which had only succeeded in generating political tensions. Almost from the moment the 2001 reform was introduced, it was apparent that it was unworkable. A weakness was to have assumed that one key factor in allocating national revenues to the regions - that of population increase - would be essentially evenly distributed. It was not, and the Balearics, by going through a boom in population, was a region which demonstrated just how uneven it could be.

The most recent reform was in 2009 by the Zapatero government. Under this reform the regions got more from the national tax revenue pot - 50% of income tax and IVA (VAT) for example. There were various funds set up, one of them called the Competitiveness Fund from which the Balearics has done quite well, and the system of equalisation between the regions was made more flexible and adjusted annually.

Though in theory all regions benefited to some extent from the 2009 reform, it was not without its critics. They focused on the political as much as the financial aspects of the reform, and politics have always played a part in how the regions' finances have been worked out. In 2009, the political criticism fell squarely on Catalonia. It had been pressing for a different financing arrangement and it got much of what it wanted, prompting attacks on the Zapatero administration for having in effect bought Catalonia's support.

The Catalonian dimension sours current opinion in several regions, especially those led by the Partido Popular and which make greater contributions to the overall revenue pot from which their finances are then redistributed. Madrid is one such region. The Balearics is another.

The starting-point for evaluating these finances is what the individual regions bring in from the tax-gathering function they perform for national government. In terms of tax capacity per head of population, Madrid stands in first position. Second is the Balearics; its tax raising per capita is three times greater than the region with the lowest capacity, the Canary Islands.

Based on 2010 figures, the Balearics had a tax capacity of 2,692 million euros. The final totting-up, which took into account different funds in addition to redistribution of income tax and IVA revenues, left the Balearics short by 300 million. Madrid was short by around 2,800 million. The issue of efficient financing centres, therefore, on what some regions believe to be unfair. They, in effect, subsidise other regions of Spain, and this has been an argument that Catalonia has long made as part of its claims for greater autonomy or even independence.

Regions like Madrid and the Balearics are politically very different to Catalonia and though they believed that they lost out to Catalonia under the 2009 reform (and still the system in operation), they have a similar gripe. It is because of this that the reform to be undertaken by the Spanish Government is seen as being potentially highly significant. Not only will it be political in addressing the vital issue of Catalonia's finances and so therefore the drive towards independence or not, it might just herald a move towards more of a fiscal federalist state, one in which, because it shouldn't be forgotten, there are two regions which operate in a totally different way to all the rest - Navarre and the Basque Country. They keep their tax revenues and hand over a percentage to national government. As such, they are not a part of the system of redistribution. Might they be the model for a new regional financing system?

Stupid And Crazy: Spain's airports

Following the previous feature about the profitability of Palma's Son Sant Joan, more on airports and this time their lack of profitability.

The national government's minister for development (which covers transport) has announced that there is to be a study of the viability and profitability of the whole of Spain's network of airports. The number of airports that this network comprises varies depending on which report you come across. It fluctuates between 46 and 49. Whatever the actual figure (and let's get round the confusion by saying that there are nearly 50), the fact is that there are way more airports in Spain than in, just as an example, Germany. Way more to the tune of there being twice as many for a population almost half the size.

At the end of the previous article, I concluded by sounding a warning for Menorca. Its airport is heavily in debt and its losses last year were among the highest of any airport in the Spanish network. It would, however, be most unlikely that Menorca would lose its airport, given that it is essential and that it would qualify for being maintained under a criterion of "public benefit", but there are plenty of airports within the network that could well face the axe.

The minister, Ana Pastor, has admitted that any adjustment to or rationalisation of the airport network would be "complicated". The complication is created by an infrastructure of airports which is, in her words, "stupid and crazy". There are far too many airports and far too many that came into being for no particularly good reason.

The growth in the airport network was symptomatic of the construction-led infrastructure boom in Spain which has been partly responsible for the mess the country is now in. While the continuance of older airports, such as Menorca's, despite its loss-making, is fully justifiable, the continuance of some newer ones is much harder to justify. Only ten of the airports in the network make a positive return, and of those which don't there are examples of airports having been built which were as a result of sheer folly. Which brings us to the case of Castellón airport. 

This airport, less than an hour away from Valencia's main airport, was built at a cost of 150 million euros. It was opened in March last year. To date, there has not been a single flight. The reasons why not are many, one of them having been the absence of the necessary licence. It is said that Castellón now has an agreement with Jet2 to start flights next year and that negotiations are ongoing with other airlines, but in the meantime, and in addition to the cost of its construction, the runway will have to be re-built as it is too narrow, 30 million euros have apparently been eaten up on advertising the airport and 300,000 euros have been spent on a truly hideous sculpture.

The sculpture tells its own tale. Featured within it is the face of Carlos Fabra, a leading Partido Popular politician and a prime mover behind the airport's construction. Fabra has been implicated, on more than one occasion, in corruption cases.

Castellón is perhaps an extreme example of the profligacy of the development of Spain's airport network. It is an example also, however, of how regional administrations have contributed to Spain's economic plight by embarking on wholly unnecessary projects.

Flavour of the month it is to give the regional governments a good kicking, but a recent and insightful article by a Spanish journalist writing in English for the "El Pais" newspaper's English website argued that the problem lies not with the system of regional government but with the politicians it gives rise to. It is a fair point, but the trouble is that if you give someone a toy then they will play with it, which is precisely what has happened. Hence the pointless, expensive and sometimes unused infrastructure projects that proliferate across Spain, of which regional airports are a case in point.

When the development minister speaks of "stupid and crazy" infrastructure, she could as easily be referring to projects other than just airports. Mallorca has its own examples, the current building of the Palacio de Congresos in Palma being one. The impression has been given that the only reason for it coming into existence is because other Spanish cities have got similar convention centres; an exercise in me-too in other words.

Me-too has been the real impulse behind all the airports, and of the new ones, none are profitable. Stupid and crazy? Discuss.


Any comments to andrew@thealcudiaguide.com please.