State or entrepreneurship: the immovable public sector – politics

Oliver Rottmann is the Managing Director of the Competence Center for Public Economy, Infrastructure and Services of General Interest eV (KOWID) at the University of Leipzig.

There has been debate for years about whether infrastructure services can be better and more efficiently provided by the state or, in competition, by private companies. Influence on control processes, income generation or climate protection are central.

The corona pandemic has intensified the discussion about the optimal organization of public services in the context of services of general interest for the citizen.

Most advocates are for stronger public involvement. Competition between public and private implementation for the best service, as required by European law, is rarely favored. There is little reason for this in many ways.

Greater involvement of the government makes sense in areas such as the health sector, for example when it comes to the production of medicines. However, in most areas services of general interest can be regulated in a more competitive way. This also applies to the energy supply.

After Hamburg, which bought back its district heating network from Vattenfall, Berlin now also plans to return its electricity network to the public sector – inspired by owner Vattenfall’s desire to sell the network after years of legal disputes with the city of Berlin.

However, network purchases are a technically complex and financially demanding challenge, as there are large information asymmetries and uncertainties about network status, which must be assessed prior to the transaction. An incorrect estimate of the maintenance intensity can lead to unplanned follow-up investments. Given the tight budgetary situation in the Land of Berlin, the question arises why an investment of this magnitude should now make sense.

Berlin has a debt of more than EUR 50 billion and the debt per capita is one of the highest in Germany. Investments of between one and three billion euros related to the buyback of the city’s electricity grid will further increase Berlin’s mountain of debt. In subsequent years, however, these expenses will only be offset by income from regulated taxes.

So why are federal states and municipalities still pushing for power grid acquisitions? There are essentially three goals associated with remodification: The first goal involves the control of the municipality or state, which, it is argued, does not exist in a private infrastructure. Without control it is difficult to offer citizens a better or even cheaper service. But are private service providers necessarily more expensive and worse than public ones?

There is competition when it comes to purchasing electricity and every end user is free to choose his supplier. Electricity does not differ in quality. Electricity is a homogeneous commodity regardless of whether it is generated in yellow, green or black. In addition, the delivery of the service itself is hardly at risk: power outages are extremely rare in Germany compared to other European countries, which speaks for a generally smooth delivery across the board.

A second goal is to develop additional sources of income for local authorities. Electricity grids are natural monopolies, separate from areas of competition under company law and regulated by law. To generate a reasonable profit, the network must be managed efficiently. This applies to both public and private law owners. No benefit can be derived from this public provision.

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The third goal is ecological. Proponents of repurposing often argue with better management of climate protection. However, this discussion must be conducted during production. It has little effect in relation to the distribution of electricity in a city with limited space. Not least because of the obligation of non-discriminatory network access (transmission) by third parties, Berlin’s design space remains limited.

Ultimately, the question arises for further indebtedness in the fiscally tense country, for hardly any control option, for little climate policy potential and a regulated return. Berlin should refrain from this and instead turn to other areas of public interest much more necessary for Berlin, such as digitization or social housing, rather than hindering private investment with a rent ceiling. This would be a good service of general interest.

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