The Spanish university system has witnessed many changes during the last thirty years. Initial conditions for competition were established in 1983, especially through the legal recognition of private universities. However, a shortage of students since 1998 and a drop in demand for higher education, which has been aggravated by an extraordinary increase in supply, has prompted further reform in the past few years. A new regulation was adopted in 2001 in order to impose market-like behaviour and privatise some of the operating conditions of State universities, such as the freedom of students to choose their university, hiring policies, quality assessment and public accountability, the allocation of research funds and rankings. Although it is probably too early to assess the impact of these changes, it is clear that public funding remains largely unchanged. This is a key issue that needs to be addressed in order to create the appropriate conditions for competition in the higher education industry. Although the market has been introduced into the provision of higher education in Spain, the continued public funding of State universities creates a powerful distortion that prevents the development of a truly fair and competitive market.