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Municipal energy and water suppliers expand investment

Press Release of October 22, 2015

Unlike the investment of core municipal budgets, public companies’ investment in energy and water supply is not decreasing – DIW experts find no connection among regional financial power, shifting demographics, and investment

Countless municipalities in Germany are investing too little, which is primarily having a negative impact on infrastructure. However, for the municipal energy and water utilities—that is, public companies outsourced from municipal budgets—this is not the case. As a recent investigation conducted by the German Institute for Economic Research (DIW Berlin) shows, the investment of public energy and water supply companies is increasing and comparable in trend to that of private energy and water suppliers. For example, the purely public companies’ net investment in network infrastructure increased from 1.4 to nearly 2.3 billion euros between 2005 and 2012. Although the regional financial power and demographic trends in the service areas vary greatly, these factors have so far had little impact on the investment expenditures of the public energy and water supply companies: Municipal providers in financially weak federal states do not invest less than do those in financially strong ones, and municipal providers in shrinking regions invest no less than those in growing ones. “However, this result does not necessarily hold true for other municipal services that have not yet been outsourced,” explain DIW economists Astrid Cullmann, Maria Nieswand, and Caroline Stiel in their study, “because the energy and water supply differs fundamentally from other municipal activities to the extent that it is usually profitable, and thus mostly independent of a municipality’s financial situation.”

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

Public and private energy and water suppliers invest on a similar scale

The study’s authors analyzed the investment expenditures of municipal energy and water supply companies based on newly available microdata from official statistics. These data contain information about both public as well as private companies from 2005 to 2012. The analysis is based on all of the energy and water supply companies in Germany with more than ten employees, which include roughly 1,000 private companies, 1,400 purely public companies, and roughly 300 majority public companies. All companies—regardless of ownership—invest primarily in network lines and other distribution facilities like transformers or pump units.

According to DIW Berlin’s analysis, the investment behaviors of private and public energy and water suppliers were very similar up until 2009. After 2009, investment developed differently—primarily because the energy transition toward a sustainable energy supply required substantial network expansion investment to integrate decentralized power plants, most of which were located in the network areas of private companies. If this effect is taken into account, public and private utility companies continued to invest similar amounts in networks.

Changes in demographics will likely have a stronger influence on investment decisions in the future

To determine whether the level of investment is affected by regional financial power, Cullmann, Nieswand, and Stiel divided up the federal states according to the inter-state fiscal adjustments (Länderfinanzausgleich) into donor states, recipient states in West Germany, and recipient states in East Germany, and analyzed the behavior of the municipal energy and water suppliers in each state. The central finding: Regional financial strength plays effectively no role—for example, until 2008 municipal companies in the donor states actually invested less than did those in the recipient states. In turn, the financially weak East German recipient states showed no differences compared to the financially stronger West German recipient states. “The analysis therefore provides no evidence that municipalities as owners reduce the companies’ financial resources through profit transfer agreements to such an extent that it restricts their investment possibilities,” the DIW researchers. Nevertheless, according to the authors, the finding can only be understood as a preliminary approximation, since the investment behavior of municipal energy and water suppliers, due to limited data availability up until now, could not be compared with the financial power of the respective municipalities—it could only be compared with that of the federal states.

Similarly, there is little evidence that investment in rural areas with shrinking populations is decreasing. According to DIW’s evaluation, investment in rural and urban areas, respectively, followed similar paths of development between 2005 and 2012. Although it is impossible, based on the available data, to rule out the possibility that the rural regions are starting to make investment in adjusting the energy and water networks to fit the smaller population sizes, a KfW Baking Group survey conducted among the municipalities indicates that dismantling investment has hardly been a point of focus. However, the DIW economists expect this to change in the future: “Given the major challenges municipalities are facing due to the shifts in demographics, the impact of financial power and demographic issues on the municipal energy and water suppliers’ investment decisions is likely to increase in the future.”