Reverse Privatization as a Reaction to the Competitive Environment: Evidence from Solid Waste Collection in Germany

Abstract

After earlier waves of privatization, local governments have increasingly taken back control of local service provisions in some sectors and countries and instead started providing those services themselves (reverse privatization). Using a unique panel dataset on the mode of service provision for solid waste collection for German municipalities that cover the years 2003, 2009, and 2015, we investigate the motives for reverse privatization. Our results show that—in deciding whether to insource or not—municipalities react to the cost advantages of private suppliers as well as to the competitive environment and municipal activity: there is more switching to insourcing in concentrated markets and in markets with horizontally or vertically related public services. Local interest groups influence this decision as well.

What brings the state back in? An examination of contracting reversal

“…For example, previous studies have examined hard services such as water services (e.g. Bel et al, 2010;Hall et al, 2013;McDonald, 2018;Warner and Bel, 2008), waste collection (Demuth et al, 2018;Gradus and Budding, 2020;Warner and Bel, 2008), snow clearance (Cyr-Racine and Jalette, 2007), public transportation (Damanpour et al, 2020;Wang et al, 2018). In contrast, only limited research has looked at soft services including health care services (Macinati and Young, 2009), social services (Wollmann, 2018), support services (Young and Macinati, 2012), and ambulance services (Wadmann et al, 2019).…”

“…It is expected that when a service has limited market competition, the relative advantage of privatization would be diminished and thus governments may be more likely to bring the service in-house. The extant research investigating the role of market competition reveals inconsistent findings (Demuth et al, 2018;Hefetz and Warner, 2004;Shakirova, 2019;Wang et al, 2018;Warner and Bel, 2008;Warner and Hefetz, 2012). While some studies suggest that limited competition leads to contracting back-in (e.g.…”

“…Existing studies have examined the effects of fiscal stress on contracting back-in using different operationalizations of fiscal stress such as tax base revenue, average personal income, or the presence of tax and expenditure limits (TELs), but the findings have been inconsistent (e.g. Demuth et al, 2018;Gradus et al, 2014;Hefetz and Warner, 2007;Riles, 2014).…”

“…When making contracting decisions, public managers not only consider a government's financial capacity, but also respond to the external environment in which the government resides. For example, the extant studies have utilized the local unemployment rate as one proxy to represent local economic conditions (Gradus and Budding, 2020) and labor market (L opez-de-Silanes et al, 1997;Demuth et al, 2018). Scholars of contracting back-in argue that when the local economic and labor market situations are bad, local governments may face public pressure to insource in order to improve local employment, causing a higher level of contracting back-in (Demuth et al, 2018;L opez-de-Silanes et al, 1997;Gradus and Budding, 2020;Gradus et al, 2014).…”

“…For example, the extant studies have utilized the local unemployment rate as one proxy to represent local economic conditions (Gradus and Budding, 2020) and labor market (L opez-de-Silanes et al, 1997;Demuth et al, 2018). Scholars of contracting back-in argue that when the local economic and labor market situations are bad, local governments may face public pressure to insource in order to improve local employment, causing a higher level of contracting back-in (Demuth et al, 2018;L opez-de-Silanes et al, 1997;Gradus and Budding, 2020;Gradus et al, 2014). However, it should also be noted that contracting is sometimes used as a tool to promote local business.…”