6

Catalonia: Overcoming Budgetary

Limits with Public-Private
Partnership and Performance-
Based Budgeting
Salvador Maluquer I Amorôs and Anna Tarrach I Colls

Introduction

Catalonia is a long-standing European nationality with a strong cultural

personality, whose people are proud of their identity, customs, and tradi-
tions. Politically and administratively, Catalonia is an autonomous com-
munity that forms part of Spain, according to the Spanish Constitution
and the Catalan Statute of Autonomy. The territory of Catalonia covers a
total area of 32,000 square kilometers and is home to a population of close
to 7.2 million inhabitants, representing 6 percent and slightly over 15 per-
cent of Spain’s total area and population, respectively.
The capital of Catalonia is Barcelona, a city recognized for its cultural
appeal, industrial past, and high standard of living. The Barcelona metro-
politan area, with more than 4 million inhabitants, constitutes 60 percent
of the Catalan population, and has grown significantly in the past 10 years
due to migration, mainly from Latin America, North Africa, and Eastern
Europe.
Catalonia maintains a high level of economic development. Its gross
domestic product (GDP) per capita—in terms of purchasing power parity
(PPP)—is higher than Spain’s (118 percent), and higher than the EU aver-
age, both for all EU countries (124 percent) and for those in the eurozone
(113 percent). Catalan production represents 19 percent of Spain’s overall
production. The Catalan economy is oriented toward the service sector
and the industrial manufacturing sector (automotive, food, petrochemical,
96 SALVADOR AMORÔS AND ANNA COLLS

electronics, and pharmaceuticals, among others), and is highly open to

foreign trade: imports and exports account for 70.4 percent of the GDP,
while in Spain overall it is 58.4 percent.1 Catalonia is also one of Europe’s
major tourist destinations.

Political Organization and Powers of the Catalan Government

The Generalitat de Catalunya is the institution that represents and

administers the Catalan autonomous government. It comprises an execu-
tive power, or government, and a legislative power, or Parliament. The
Generalitat, together with the general administration of the state (govern-
ment delegation and ministerial delegations) and the local governments
(941 municipalities, 41 counties, and 4 provinces), form Catalonia’s public
administration.
Public powers are distributed among these three levels of government
pursuant to the Catalan Statute of Autonomy and the Spanish Constitution.
So, the Generalitat de Catalunya is the competent administrator of the
so-called welfare-state services: health, general education and universi-
ties, and human services. It also controls public safety (police), prisons
and the administration of justice, transportation, public works, environ-
mental legislation, and economic growth and employment, among other
services.
Local governments exercise powers primarily in urban services (sewer
systems, waste management, water distribution, public sanitation, etc.),
although they also provide personal services on a voluntary basis: social
assistance, child care, cultural centers, sports, and so on.
Finally, the state’s general administration is in charge of defense, foreign
policy, social security, basic legislation in some matters, and large general-
interest infrastructures. By volume of public spending in Catalonia, the
Generalitat represents 44 percent of total nonfinancial public spending, the
state’s general administration 39 percent, and local governments 17 percent.

Public Spending in Catalonia’s Generalitat

The Generalitat de Catalunya’s total budget for fiscal year 2008 was 34.8
billion euros. That figure includes total consolidated expenditures, includ-
ing both the administration of the Generalitat (departments, equivalent to
ministries) and the different autonomous bodies, public companies, and
other entities dependent upon it and included in its budgets.
Spending on health, which accounted for 26 percent of the Generalitat’s
budget for 2008, is its major expense. Add to that spending on education,
with 17 percent of the total, and other social policies (social assistance,
 PUBLIC-PRIVATE PARTNERSHIP 97

employment, housing, and culture) totaling 10 percent, and it becomes

clear how so-called social spending constitutes more than 50 percent of
the budget.
The second largest group of expenditures on the Generalitat’s bud-
get deals with the promotion and support of economic competition: the
production of public economic property (roadway and transportation
infrastructure, environment, R & D, etc.) accounts for 17 percent of total
budgeted expenses, and support for the different production sectors
(agriculture, industry, trade, tourism, etc.) makes up 5 percent of total
spending. Overall, spending related to supporting economic competi-
tion represents 22 percent of the Generalitat’s 2008 budget.
Another major group of public expenses is financial support for local
governments (9 percent of the 2008 budget), which includes local gov-
ernments’ portion of state taxes—channeled through the Generalitat de
Catalunya’s budget—and the Generalitat’s own contributions charged to
its resources.
The three major groups of spending mentioned—social spending, eco-
nomic and infrastructure promotion, and local government support—
account for 84 percent of the Generalitat’s budgeted expenditures. The
remaining 16 percent corresponds to “operating institutions,” “general
administration,” and the “Contingency Fund,” with 7 percent of the total;
general services (safety, justice, international relations, etc.) make up 5.8
percent; and the final 3.6 percent is debt service interest and amortized
principal.
In light of the information in the preceding paragraphs, it is obvious
that two major spending characteristics of the Generalitat render its vol-
ume inflexible and leave almost no room for discretionary spending to
adapt to the demands of the economic cycle: first, the high amount of cur-
rent expenses, which make up 83 percent of total spending, and, second,
the high amount of social spending, which make up over 50 percent of the
total.

Budget Stability in a Restrictive Context

In the current context, strong demographic growth driven by immigra-

tion, together with the heightened pressure of a population that continually
expects to receive more and better public services, makes it difficult to con-
tain growth in public spending.
Also, there are financial restrictions resulting in part from the shifting
real estate markets—which are the basis for an important portion of taxes
collected by the Generalitat—and in part from limits on deficit spending
and debt imposed by a regulatory framework of budgetary stability.2
98 SALVADOR AMORÔS AND ANNA COLLS

The combination of both factors—increased pressure to spend and

restrictions on revenue and access to debt—generates high tension in the
Generalitat de Catalunya’s budget. This is exacerbated by the shortcomings
of an autonomous community finance model that actually suffers from a
lack of revenue autonomy and a clear inability to fund public investment
needs.3 This has only been offset by European funds and interterritorial
compensation in the less-developed autonomous communities, which can
therefore benefit from said funds, as well as significant amounts of debt in
the case of the more-developed autonomous communities like Catalonia.
In this context, the Generalitat’s lines of action have become twofold: (i)
seek public-private partnership formulas to fund public investment, and
(ii) seek greater effectiveness and efficiency in public spending through
the budget reform process, with a greater emphasis on performance.

Investment Funding Instruments with Private-Sector

Partnerships4

Since the early 1980s, the Generalitat has utilized a classic public-private
partnership formula called administrative concession for construction,
conservation, and operation of some roadways through the tolls imposed
on users. In the 1990s, two new formulas were added: deferment of full
payment until completion of work (also known as the German method)
and long-term leases.
The deferment of full payment until completion of work formula was
developed based on its inclusion in Law 13/1996 of fiscal, administrative,
and social order measures. Under this method, the private agent who
wins the bid funds the cost of the work during the construction phase in
exchange for a preestablished price. Certification takes place (including
both the strict cost of the project and finance costs) upon completion of
the work and transfer of the completed work to the administration, which
then proceeds to make payments during a preestablished period not to
exceed 10 years from the certification date.
Meanwhile, the long-term lease formula, adopted through Catalan
civil law, works as follows. The administration—acting as the lessor—
leases property it owns (usually a building or land) to a third party, usu-
ally a financing company acting as the lessee. They in turn supply the
necessary resources in exchange for annual lease payments for a prede-
termined term. The lease is directly linked to the property or real estate,
which serves as collateral for the payments. Although this method does
indeed require participation from a third party outside the administra-
tion, it cannot be considered a public-private partnership formula in the
strict sense. It is used more as a way to obtain or generate resources from
 PUBLIC-PRIVATE PARTNERSHIP 99

assets the administration already owns, which it can then use to fund
new investments.
These two formulas were employed on many occasions in the 1990s
and up to 2003, but the interpretation provided by the regulations of the
European System of Accounts (ESA 95) for the accounting of both formu-
las rendered them disadvantageous from the standpoint of the calculation
of deficit and of public debt, and consequently they fell into disuse.5
Faced with the rules and limits set by European and state regulatory
frameworks—particularly beginning with the implementation of the 2001
budget stability laws—and considering the funding margins available, the
Generalitat de Catalunya opted for a selective use of three public-private
partnership formulas to fund certain infrastructures: (i) shadow-toll con-
cession, (ii) surface rights, and (iii) operating lease.
Under a shadow-toll concession, companies bid on construction, main-
tenance, and operation of specific infrastructures, buildings, or other
properties (e.g., railways), at the concessionaire’s risk. In exchange, the
concessionaire has the right to receive a variable annual payment, based
on the winning unitary rate bid and the infrastructure’s number of users.
The surface rights formula consists of establishing ownership rights over
a third party’s land, with the property rights being separate from the rights
over buildings existing on the property for a maximum term of up to 99
years. In these operations the administration, which owns a plot, grants
rights to a third party to construct a building for a specific use and with the
desired characteristics of the administration, with the obligation to lease to
them for a predetermined term and price.
Finally, in the case of an operating lease, the lessor grants the lessee
usage rights over an asset for a determined period of time in exchange
for receiving payments from them, while retaining the risks and benefits
associated with the property.6
In combination, these public-private partnership formulas are used
by the Generalitat de Catalunya to fund roadways, infrastructure, and
railways, judicial buildings and police precincts, as well as irrigation
infrastructures.
Assessments of the use of these public-private partnership formulas are
generally positive, although it must be acknowledged that they have sig-
nificant limitations, suggesting that the possibility to continue using these
formulas could soon be exhausted.
In effect, the use of these public-private partnership formulas allows
the administration to postpone the need to fund certain investments and
soften their impact on annual budgets, while improving equity over gen-
erations. However, they also have an impact in terms of higher finance
costs with regard to traditional debt, and they substantially reduce future
governments’ margins for discretion and resource allotment.
100 SALVADOR AMORÔS AND ANNA COLLS

Toward Performance-Based Budgeting7

In the financial and economic context discussed earlier, and as the public
sector grew more and more complex,8 in early 2005, the Generalitat put
in motion budget reform and modernization that sought to inject reason
and order into a process that all too often resulted in decisions based on
incomplete or faulty information.9 The basic objectives of reform cen-
tered around increasing transparency at the various stages of the budget
process, and progressively transforming the budget itself into a tool for
maximizing effectiveness and efficiency in available resource allotment
and management.10 To reach these goals, a performance-based budgeting
approach was adopted, which allowed for a closer link between funding
for budgeted programs and the performance or impact they produced,
through the systematic use of performance data.
One performance-based budgeting model is program budgeting.
Although its use in the public sector goes back several decades, in the
Generalitat de Catalunya expenditure classification by programs had only
been used by the administration in a broad sense (that included depart-
ments or ministries, as well as governing and statutory bodies). In addi-
tion, it was only used in forecasting applications, but never for monitoring
spending performance. In the 2006 budgets, program classifications were
reviewed and resulted in the definition of 9 spending areas, 34 spending
policies, and 109 programs. Use of this classification was likewise extended
to all public-sector entities, so the program became a binding element of
budgetary credit. In addition, administrators were given the possibility of
structuring programs as subprograms, for the sake of having a separate
level of information to use exclusively for management purposes, though
without presenting this level of separation in parliamentary proceedings.
The Budget Commission established a set of general criteria for defin-
ing a program, its elements, and the level of performance data required.
Thus, a budget program is defined as an “integrated group of activities,
services, and products, under the responsibility of a single administrative
unit, which consumes resources in order to contribute to a specific set
of political objectives.” These objectives must be identifiable and measur-
able, and defined in terms of the problems that are to be addressed and
the coverage of detected needs. In this way, programs sum up the different
areas of budget action and allow budgeting credits to be grouped accord-
ing to set objectives.
Starting with the 2006 budget, each administrative unit (service or
entity) responsible for a program in the budget is required to produce
a report (Generalitat de Catalunya, 2006a, 2006b). These reports must
detail the value chain or production chain associated with the program,
 PUBLIC-PRIVATE PARTNERSHIP 101

as well as the objectives it will achieve, the ways it will achieve them, and
the indicators used to measure its progress toward achieving them. One of
the pillars sustaining this kind of budgeting is performance data, which is
basically understood to refer to performance indicators and evaluation.
In these reports, documents accompanying the budget contain per-
formance indicators for each budget program and administrative unit.
One of the main problems is the suitability and quality of the indicators.
Currently, performance indicators are proposed by department spending
administrators and by each body or entity,11 while the role of a posteriori
reviewer is played by the Department of Economics and Finance. In the
future, it would be better if the latter, together with the affected sectorial
departments, were more involved as a consultant to decide on which per-
formance indicators can best measure each budget program’s operation.
Regarding performance indicator systems, it should be mentioned that
at this point an effort has been made to coordinate budgeting activities
with the monitoring system of the Government Plan and the departmen-
tal strategy plans that define it.12 The Government Plan establishes a series
of boundaries and priority objectives for the legislature, and within a four-
year time frame the Generalitat’s departments create a plan that defines
the priorities within the government’s scope of responsibility. These plans
are monitored through performance indicators, some of which are also
used to measure the operation of budgeted programs. The performance
indicator system is therefore singular and all encompassing, serving vari-
ous users (administrators, directors, politicians, or citizens). This is not
the only way in which the budget is connected with the Government Plan,
as program reports must express to which objective in the Plan each pro-
gram intends to contribute.
The next steps must be aimed toward improving performance data, but
from a realistic and, in a sense, practical perspective. The number of indi-
cators should definitely be reduced and the most pertinent, in a broader
sense, selected in a combined effort by the Department of Economics and
Finance and the sectorial departments. In this process, it will be impor-
tant not to lose sight of the fact that the indicators are markers, not for
explaining the cause, but for directing attention to the problem.
Program evaluations must include an analysis of the indicators and an
in-depth study of the effects of public action. This phase of the budgeting
process is what will complete the circle (planning, executing, evaluating),
and will produce feedback for the entire process. In this area, there is still a
long road ahead. The evaluation results must provide a deep understand-
ing of the relationship between public actions and their performance,
which in turn will facilitate the adoption of actions with greater impact. It
may also provide insight into the public production process from start to
102 SALVADOR AMORÔS AND ANNA COLLS

finish, as well as determine the best way of producing goods while using
the smallest amount of supplies.
Performance-based budgeting is not confined to a single model, but
rather allows for different models depending on the highest-priority
objective, the way in which links are established between resources and
performance, and the performance data providing the basis. The most
common and well-known model is program budgeting, but other proto-
cols, such as performance-goals budgeting (performance contracts, pro-
gram contracts) or formula funding (Fainboim, 2007), are also used. In
the Generalitat de Catalunya, these latter models are basically used in the
fields of higher education and health. Program contracts or management
contracts are also used as a formula for establishing agent-principal rela-
tionships between the Generalitat and its instrumental entities.
Given that the center around which the entire performance-based
budgeting scheme revolves is the relationship between allotted resources
and measurable performance, the question of how to integrate it into the
Generalitat de Catalunya’s budgeting process remains.
It could be said that we are in the initial phase of implementation, at
different stages depending on the sector. Performance data are now being
produced and developed, and, at the moment, are submitted with the
annual budgets in a standardized way.
However, this information is still not used systematically to inform
budget allotments in the budget-creation process. It is partially used in
some cases, such as in university funding, where normal funding is allot-
ted to each academic institution through the funding formula, or in the
case of the health sector.
In fact, in the majority of countries that use performance budget-
ing, performance data are primarily used to inform, and not to decide
on resource allotments (OECD, 2007). Obviously, since measuring public
action and its diversity is so complex, automatic mechanisms linking per-
formance with resources cannot be applied in the same way to every case.
So every case, and the specifics of each sector, must be practically consid-
ered. The budget-performance link will be stronger when public services
and goods are standardized, and weaker when they are more diverse or
contingent (emergencies, police, etc.).
We must point out that one requirement for improving performance
data, as well as increasing spending effectiveness and efficiency, is cost
data. The more this is developed, the better the link that can be established
between performance and funding.
Finally, with regard to the mechanisms at the disposal of the Department
of Economics and Finance to boost performance and efficiency among
the Generalitat’s departments and bodies, one obvious mechanism is
 PUBLIC-PRIVATE PARTNERSHIP 103

self-allotment of greater or fewer resources in the case of program-contract

entities, for example, or in direct funding formulas. There are, however,
other stimuli, such as flexible management. Even though flexible man-
agement is commonly mentioned as a requirement for the introduction
of performance management, it is also true that both performance and
flexibility must be measured, for flexibility without the ability to measure
performance can endanger system controls. Thus, a good way to synchro-
nize tempos could be through the flexibility of certain requirements on
the basis of actual performance. This could be achieved by allowing the
transfer of resources between programs or between different classes of
expenditures, or by relieving the entity of certain administrative controls
that provide little value.

Conclusions

As we have confirmed, the basic principle behind budget reform in the

Generalitat de Catalunya is performance based, with the objective of
achieving greater effectiveness and efficiency in public-resource allot-
ment and management. But effectiveness and efficiency, though neces-
sary, are not alone sufficient to achieve modernization of the budgeting
process. This is dependent upon the process becoming part of the politi-
cal and social debate so that the people’s representatives that vote on the
budget and control its management, such as economic and social agents,
as well as citizens and society in general, have access to all the econom-
ic-financial and public-sector performance data, especially the most
relevant information for budget analysis. This does not merely mean pro-
viding large volumes of information for them to sort through, but also
guaranteeing its relevance and presenting it in such a way that it is under-
standable, so the public can analyze and assess what, how, why, at what
cost, and with what results the administration will spend the resources it
has at its disposal. In today’s world, advances in information technology
make this possible.

Notes

1. Foreign exports from Catalonia represent 29 percent of all Spanish exports.

2. Law 18/2001 of December 12 (General Budgetary Stability), reformed by Law
15/2005 of May 26 and Organic Law 5/2001 of December 13, complement the
General Budgetary Law, which was modified by Organic Law 3/2006.
3. Bosch and Vilalta (2008: 49): “In the Spanish state, there is an imbalance
between the weight of autonomous communities on total tax revenues and the
degree of public spending they manage. Although autonomous governments
104 SALVADOR AMORÔS AND ANNA COLLS

manage 32 percent of the public spending volume, they only make up 20 per-
cent of the tax revenue. In contrast, the central government, which manages
55 percent of spending (including pensions), makes up 72 percent of the tax
revenue.”
4. For a complete overview of the public–private cooperation formulas imple-
mented by the Generalitat de Catalunya, see Abelaira (2006).
5. In the first case, spending is assigned according to the values reported while
work is in progress and not at the time of completion, and in the second it is
considered a financial operation.
6. As opposed to financial contracts that transfer these risks and benefits to the
lessee.
7. This section is a summary of the article by Maluquer and Tarrach (2008).
8. The Generalitat participates in 240 entities.
9. A very suggestive reading related to this point is the article by Shick (2002).
10. For a broader view of the process of change, see Maluquer and Tarrach
(2006).
11. Each department plays the role of coordinator for its dependent bodies and
entities.
12. The Department of the Presidency coordinates the creation and oversight
of the Government Plan. The plan is defined in multiannual departmental
plans also coordinated by that department. These plans are created and over-
seen through the use of a computer application developed for this purpose.