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The European Commission has just released a report on structural reforms in Spain developed by the Ivie and NIESR

The Spanish internal market, barriers to internal trade, obstacles that affect firm growth, as well as the financial health of the corporate sector and the inefficiencies in public procurement procedures are some of the issues considered in the report

The European Commission, within the European Semester framework, has just released a report that offers an in-depth discussion on four areas in which structural reforms are needed in Spain: internal trade, firm growth, financial health of the corporate sector and public procurement procedures.

The report was developed jointly by the Ivie and NIESR (National Institute of Economic and Social Research) for the European Commission. Ivie Researchers, Juan Fernández de Guevara, Joaquín Maudos, Silvia Mollá and Francisco Pérez are the authors of two chapters of the report on the financial health of Spanish firms and public procurement policies.

Regarding the financial health of the corporate sector, the report explains that although companies have reduced since 2012 their debt levels and burden, there is still an important number of firms at risk.

The favorable economic tailwinds have reduced the financial fragility of companies. However, Spanish companies are sensitive to two factors: increase in interest rates and GDP growth. According to the report, the expected evolution of both variables would have a minor impact on the development of firms and jobs at risk. However, the vulnerability of firms would increase rapidly as a result of a sharp slowdown in economic activity.

The vulnerability of Spanish firms is no longer due to excessive indebtedness, given the severe deleveraging of recent years, but rather to the existence of a large group of firms with excessive debt levels and not enough profitability to pay off the debt and its depreciation. Financial fragility is mainly concentrated in small firms and microenterprises and higher in the construction and real estate sectors.

The report provides evidence that the Spanish economy still faces the legacy of the debt overhang from the last credit boom and the consequences of its debt burden. Enterprises with structural difficulties concentrate a significant portion of bank credit, which in some cases may have been refinanced to avoid banks from classifying them as non-performing loans, keeping them alive artificially. These types of firms are known as zombies and are financially fragile, with low profitability and productivity. This phenomenon can be harmful to competitive companies whose access to finance is reduced as part of the credit that would otherwise be available to them goes to the zombie companies.

Public procurement

The chapter on public procurement analyzes the inefficiencies produced by the public sector when purchasing goods or services to private firms. Spending on public procurement represents 23% of total public expenditure in Spain (10% of GDP). Given the weight of the procedures of public procurement in the economy, it is important to guarantee their efficiency and performance.

The concentration of public procurement is greater in local and regional governments than in other levels of government, accounting for nearly half of all procurement.  In the case of the regional governments, health, education and social services account for the bulk of their expenditure.

Important differences exist across regions in per capita public procurement spending. In education, the difference is even greater, with the Basque Country spending the most per inhabitant (449 euros) and Castile-La Mancha the least (118 euros). Catalonia stands out as the region with the greatest expenditure per capita in health (819 euros) and Andalusia the least (572 euros).

The differences in regional government spending are a result not only of the prices paid for services but also of the differences in the services supplied, how the public service is provided (publicly, privately or by subsidization), the characteristics of each region (demographic, geographic, etc.), the intensity of competition and efficiency of public contracts awarded by the different governments (unit cost of goods or services).

The report developed for the European Commission indicates some deficiencies in public procurement procedures. Namely, it highlights the need for a correct and transparent application of the procedures, the fostering of competition in the contracting markets through open procedures, the excessive duration of the procedures and contract splitting. For this purpose, the recent Spanish Law on Public Procurement 9/2017, of 8 November 2017 intends to repair some of these aspects, but it is still early to assess its effectiveness.

The analysis indicates that the higher the level of competition (the number of competitors is large), the greater the savings in the procurement process. On the other hand, savings are lower when the procurement procedures limit the number of bidders. This indicates that non-competitive procedures tend to increase the costs of the process. The duration of the procurement procedures was analyzed for both governments and companies indicating that there are significant differences in efficacy and efficiency between governments and within their departments.

The report suggests five steps that should be taken to improve public procurement in Spain:

• Definition and selection of appropriate procedures
• Transparent and correct application of the procedures
• Consistent generation of information on the processes and their outcomes
• Systematic evaluation of the information and the level of competition in the contracting markets
• Review and improvement of the procedures