Exploring Differences in Reverse Privatisation in East and Western Germany: Ideology and Politics or Economic Incentives?

In recent years, local governments have often reverted earlier privatization decisions in solid waste collection and have started to provide these services in-house. In this paper, we document a higher probability of reverse privatization in Eastern German municipalities and investigate whether these differences are driven by ideology and politics or economic incentives. Previous studies have shown that ideological differences between East and West have persisted in Germany, resulting inter alia in higher share of votes for leftist parties in federal elections. Interest group pressure for municipal provision is potentially stronger in the East: public employees are a larger share of employment, while there are only few local entrepreneurs active in municipal waste collection. At the same time, concentration of private suppliers and the share of municipalities in waste collection is higher in the East, potentially also resulting in higher rates of reverse privatization. However, there are much fewer municipally owned waste incinerator plants which would lower rates of reverse privatization in the East. Using a unique panel data set on the mode of service provision for German municipalities covering the years 2003, 2009, and 2015 we investigate reverse privatization decisions in municipalities, which initially have contracted out solid waste collection. We employ logit regression models for reverse privatization decisions controlling for state and time fixed effects. Ideological and political motives may only show up if the fiscal situation allows for it, and we additionally control for economic factors and fiscal constraints. Contrary to expectations, we find that the probability of reverse privatization decreases with a higher vote share of leftist parties. This relationship is particularly negative in Eastern Germany, whereas in Western Germany and in densely populated areas there is almost no discernible relationship between the vote share and the probability of reverse privatization. We find a robust positive relationship between the municipal and county employment share and the probability of reverse privatization. This relationship is particularly strong in Eastern Germany where the municipal employment share has been larger than in the West but declining. Reverse privatization may be a reaction to the downsizing of the public employment in Eastern Germany. Reverse privatization happens less often if the local market has a larger importance for the incumbent firm. While the presence of a local player reduces the probability of reverse privatization in Western Germany, we do not find such effects in Western Germany. We also find higher rates of reverse privatization when the concentration of private suppliers is high in Eastern Germany, but not in Western Germany. Furthermore, population density is a stronger predictor of reverse privatization decisions in Eastern Germany. The results show that the higher rates of reverse privatization in Eastern Germany are partly driven by pragmatic, efficiency-related motives and partly by differences in the strength of interest groups. Ideological motives – while also being found a relevant factor in Eastern Germany in principal – do not seem to explain the observable higher rates of reverse privatization in Eastern Germany compared to Germany’s Western Länder.