Urban Capitalisms

Blackwell Publishing Ltd.
Oxford, UK and Malden, USAIJURInternational Journal of Urban and Regional Research0309-1317Joint Editors Blackwell Publishing Ltd 2005June
200529223167Original ArticleUrban capitalisms: European models in competitionDominique Lorrain
Volume 29.2
June 2005
23167
International Journal of Urban and Regional Research
Urban Capitalisms: European

Models in Competition
DOMINIQUE LORRAIN
The fall of communism in the early 1990s blurred the global opposition between
capitalism and socialism, which had broadly structured debates, and this in turn helped
to bring to light real, though concealed, differences between countries in the capitalist
bloc (Albert, 1991). Thus came a rediscovery of literature that put this type of
differentiation at the heart of its analysis the historians of business in the United
States, grouped around Chandler (1990; Chandler et al., 1997), and the French
Regulation School (Aglietta, 1976; Boyer and Saillard, 1995).
These schools have strongly established the major differences between an AngloAmerican version of capitalism financial, and oriented towards a service economy
and a German and Japanese industrial capitalism based on different wage relations and
on different coordination mechanisms. But all of them did so essentially through studying
the nature of industry and finance. The state did not occupy a very central place in these
analyses, while local public policy (a generic term covering forms of urban government
as well as the organization of urban network industries)1 remained beyond their horizon.
In fact, the extension of market principles to these sectors at the end of the twentieth
century led to major change. For a long time, local public policy issues were
encompassed in a unifying whole, either relating to direct administration or falling into
the ambit of capitalism: changes now in progress serve to reveal forgotten differences.
As it applies itself to the reform of network industries (electricity, telecommunications,
gas, water and sewage), the European integration project is serving to highlight these
profound differences between various ways of organizing a market economy. The reason
is simple: more than in any other sector, institutional choices concerning these networks
are continuously expressing the complex influence of the political sphere, markets, firms
and weighty anthropological factors. These differences not very visible in the past,
before the creation of a major market related to industry, banking or market services
have now come fully into view.
The arguments that underlie this article are that (1) beyond any first-level complexity
actually noted in the organization of each urban service in a given country, European
countries basically follow three major models; (2) these simplified forms, or models,
represent three ways of combining public policy principles with a market economy: they
may be read as versions of urban capitalism; (3) given that all three are represented in
Europe, these models today find themselves doubly competing. Within the European
Translated from French by Karen George. An earlier version of this article was published in LAnne de
la Rgulation (2002) No. 6. Substantial changes to this English version mostly relate to the discussion
of various firms: the landscape has shifted between mid-2002 and early 2005, so factual information
has been updated.
1 We use this term to refer to activities with an industrial dimension that can be but are not
necessarily the responsibility of local government, and may be carried out by either public or
private corporations. These activities correspond to the notion of local public services in France,
or network industries and utilities in the Anglo-American countries. To put it simply, they
encompass the design, construction and operation of basic elements that relate to the urban fabric:
electricity and gas, telecommunications, urban transport, heating, water and wastewater, solid waste.
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232
Dominique Lorrain
integration project, each one is attempting to promote its own solutions. However, if we
acknowledge that the real difference between them relates to long-standing concepts of
collective action, we may understand the present difficulty in creating a single Europe
in these spheres. These internal difficulties are augmented because each country
through the intermediary of its firms exports its products, its services and, similarly,
its concepts to other countries in the world. Veiled competition in Brussels is increased
by what is happening internationally.
First-level complexity, second-level regularity

How complicated the world is! or, the problem of international comparison . . . Let
us start from a simple fact: town and city governments provide services and industrial
goods technical networks for water, sewage, waste, heating, transport and distributing
electricity. But as soon as we start to develop a concrete analysis of their policy, we
encounter the reality that any analysis of political and organizational forms of urban
government is immediately complicated by the need to consider the institutional
architectures through which these productive tasks are delivered. The problem of
complexity arises from the outset. We encounter it when comparing towns within a
single country; when we move on to international comparisons, it is increased tenfold.
In the distribution of drinking water, for example, when we take into account the
level of the institution responsible (the organizing authority), the nature of the operator
(public, private), the type of contract and the methods of financing the service as between
its three essential interlinked elements (investment, maintenance, operation), it becomes
difficult to perceive any consistency between towns (Lorrain, 1989).
We studied 150 conurbations,2 which differed in many ways. In principle, the first
choice made was a simple one: either the municipalities were responsible or else they
had transferred their competence to a supra-municipal institution (a second tier).
However, when we examined things in more detail, we observed that additional
differences might be introduced if production was separated from distribution. Although
a new drinking-water plant might be run by a supra-municipal institution, the
municipalities could retain responsibility for providing the end service. This situation
was also found in the sewage sector and in waste management.
When we examined operation, we found that this differentiation continued. Where
there was public management, the municipal enterprises might call on a private provider
to take on an aspect of their work: purchasing drinking water in bulk, invoicing, meter
management, subcontracting the operation of a water treatment plant. The difference
between these cases of broad subcontracting and those of municipal enterprises set up
specifically to provide services functioning as integrated public enterprises and active
at every stage was one of size, even if the words used to describe these situations
were the same: municipal enterprise or direct operation. Where operation was
delegated to a private business, things no longer fitted a single mould, even though the
parameters of the firms involvement might have been defined by the main types of
contract, from the most complex to the simplest: concession, lease or management
contracts.3 However, here too, the actors constantly reintroduced singularity,
adapting contracts to tackle their own practical problems so that actual instances were
often hybrids of these legal types. Heterogeneity overrode consistency.
2 The French statistical category is agglomeration: this notion corresponds to a central city and the
first ring of towns around it. More recently, INSEE has established a new concept of urban area,
which includes the villages that come under the citys influence.
3 With a franchise, the firm invests in, maintains and operates the concession at its own risk. In the
case of leasing, maintenance and operation are at its own risk, but the investments are made by
the public authorities. With a management contract, the public authorities finance both investments
and maintenance: the firms involvement in this type of contract is time-limited, and precise in its
objectives.
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Urban capitalisms: European models in competition
233
Given these facts, how could we distinguish some significant types, and how could
we account for a given way of organizing local public services? Description seemed
naturally to favour the explanation that complexity was the key, and this seemed to be
the strongest argument because it was congruent with a good part of the literature on
local government written during the relevant period4 a problem we also found with
the comparative European literature.
In considering the electricity sector, Jean Michel Glachant differentiates between the
organization of production, transport and distribution, according to the degree of market
openness and whether or not a natural monopoly exists (2001). For him, despite the
European Commissions desire to create an internal market, there is no single market,
but several markets. He does not see convergence, but observes a range of situations
where each finds its own solutions for each criterion. As far as the railways are
concerned, the various elements to be compared are express trains, freight services,
regional trains and ordinary long-distance trains and here too, countries differ
strongly.5 The same emerges from studying forms of regulation of public services across
Europe (Matheu, 2002). Studies of local governments again clearly reveal diversity
between different European countries, with comparisons based on a battery of criteria:
the electoral system, local government functions, finance, the influence of the political
variable (Page, 1991; Goldsmith, 1992; Dufay and Lefevre, 2001).
Comparison between countries, whatever the field and whatever the indicators taken
as a starting point, invariably leads to the same conclusion: generalizations cannot be
made. The idea that emerges most strongly from this literature really seems to be that
of complexity.6
The all-embracing explanation
Alongside this first line of explanation, there is other literature offering a solution to the
problem of comparison. Its authors clearly note important differences between what they
observe, but the beginning and end of it is that everything can be categorized through
an all-embracing explanation relating to culture, to values and to history.
Philippe dIribarne, in his comparative works on the organization of labour within
firms, strongly emphasizes the existence of national cultures that must be taken into
account, making it impossible to pin down one model of management (1989);
For Aoki, the network of conventions that forms the firm J is inserted into values,
contexts and culture (Coriat and Weinstein, 1995: chapter 5; Sellier, 2002);
Dumez and Jeunematre (1991) stress the contextualization of regulation, pointing
out that everything is to be read in the various national contexts;
For the evolutionists (Sidney Winter, Richard Nelson), the competences accumulated
within a business create routines. But where do the routines come from? How are
learning processes created?
Sellier, Sylvestre and Maurices (1982; 1986) societal analysis uses the notion of
qualification space. In this analysis, the origin of conventions that is, the
historical dimension is essential. It puts the specific construction of spaces for
the production of qualifications and organizations at the heart of its analysis
(Maurice, 1989; Sellier, 2002).
In other words, whatever the solutions adopted internally in a firm, they can function
only under certain general conditions: culture (dIribarne), the nature of the vertical
4 Following the 1970s, when explanations tending to emphasize structural factors were put forward,
the literature dealing with local issues from the mid-1980s rehabilitated the singularity approach.
We should point out that this meant that what was gained in precision was lost in generalization: a
good part of this literature is subject to the criticism of contingency (Lorrain, 2000).
5 See Luc Baumstarks work for Plan 2002.
6 In this regard, we should mention that there are currently 43 codifications (accounting and legal)
that organize businesses in Europe (Financial Times, 25 February 2002).
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Dominique Lorrain
hierarchy (Aoki). One key to explaining what is happening in a business relates to the
context, to the environment, to national cultures. The same can be asserted for the local
government. In a chapter comparing various types of local government, Michael
Goldsmith suggests that different models may be identified by combining political
regimes, the extent of responsibilities, and the experience and values that he
characterizes as the sum of history (1992: 17).
But this use of an all-embracing explanation raises as many questions as it answers.
Firstly, is it possible to understand this last addition, culture whose role is as vital
as a cathedral cornerstone, supporting the whole edifice in a slightly more formalized
way? How can shape be given to this soft concept? How do cultures form? Secondly,
even if we succeeded in this, the whole issue of complexity would remain, since we
would effectively be saying: things are actually complex and different, but it is possible
to highlight consistent features by relying on a cultural factor. The problem is that if we
applied this variable across the inside of a whole country, any comparison on any subject
(labour within firms, technical networks, urban government) would lead to the same
typology. By being too encompassing and having no empirical linkages to the first-level
factors that describe the objects observed, all-embracing explanation through cultural
factors is by its very nature tautological.
Second-level regularity, explanation by models
Another way of reasoning is to say, effectively, that when we start to go into the detail
of analytical criteria, things are complicated we are talking about first-rank complexity.
But, if we go on to make an overall comparison of several sectors in the same country
with those in other countries, regular features emerge: these sectors have something in
common, and this distinguishes them from solutions adopted in other countries.
These factors, which enable us to highlight regular features, should be sought more
in the first, visible layer of institutions than among the less visible factors relating to
policy principles and to what we will call, for the time being, culture and values. This
means two things. In each country, alongside specific sectoral features, there are
common elements running through these sectors. By comparing them overall,
deliberately minimizing the details that make comparison impossible by their excess of
singularity, we can identify regular features;7 we can trace the contours of entities that
have an internal coherence, that are capable of change but are based on some unvarying
features. International comparison allows us to discern that these internally coherent
features function over the long term.
In describing this, we use the term model, which may be defined as a simplified
formalization that allows us to account for an entity made up of a large number of objects
(in the descriptive sense) or of situations. This formalization relies on some rules
(general laws, principles) common to several sectors, established over the long term and
capable of evolving while still preserving certain intrinsic properties, even when the
model is subjected to disruption. In using this term, we distance ourselves from other
concepts that could come to mind when describing these regular features: structures,
systems, regimes (Mossberger and Stoker, 2001), configurations (Elias, 1991),
institutional architectures (North, 1990).
The idea of models

At the outset, the problem was to describe the situation of local public services in France,
while avoiding the overarching image of French-style public service, characterized by
large nationalized enterprises (an image that completely ignores the specific features of
7 This is analogous with genetics, which is marked by differentiation between species that are each
truly diverse, using the elementary building bricks of DNA assembled in unique combinations.
Another analogy is with astronomy: Order out of Chaos (Allgre, 1992: Chapter 3).
235
urban technical networks), to move away from reducing public services merely to the
legal categories of franchisor and franchisee (concdant and concessionaire: Terny and
Prudhomme, 1986), and to link this whole to local government.
Our first, spontaneous approach was to compare the visible elements: the actors and
the institutional frameworks. Looking deeper, we quickly realized that this way of
characterizing the management of urban networks accounted for only some of the
phenomena. It was also necessary to take some interest in contracts, in designs for
implementing partnerships, in techniques for financing, in decision-making processes,
and in forms of monitoring and regulation.8 It seemed to us essential to accord
importance to socio-economic and institutional factors, whose impact equates to an
invisible technology. Institutional architectures and policy principles gave us the two
first stages in characterizing a model.
But something else remained how to explain the solutions that are most natural
to the indigenous observer but draw an incredulous why? from the foreign
observer.9 Why retain any municipal level of organization? An obvious idea in one
country, challenged elsewhere on grounds of non-optimality (municipalities too
small). Why is it natural in some places to make use of private enterprise and
large-scale profit-making businesses to boot while other countries envisage only
public-sector solutions? Why do some prefer to grant monopolies to large integrated
firms, while others incline towards more competitive solutions? Why regulatory
agencies for one and co-production procedures for others? The answer to these
questions was very often: because thats the way things are done, because it
corresponds to a political tradition. But this kind of answer tackled only half the
issue: saying its different because its always been different runs the risk of
tautology.
On digging deeper, we quickly realized that this related to more profound
conceptions, with a certain thickness. For example, with regard to the forms of contracts
(complete or incomplete), behind the technical choices lies the issue of the trust that
partners place in each other. Then there is the importance of written as opposed to oral
commitments. When it comes to regulatory institutions, some countries will opt for
specialized structures exercising strict control, while others prefer co-regulatory
formulas: behind these, we find very different concepts of the right way to handle
conflicts of interest.
To sum up, it very quickly became apparent that reducing international
comparison to single, visible institutions that were the targets of reforms could not
offer a real explanation: in fact, the unity observed in the French case related partly
to less visible factors, spontaneously referred to as values and political culture. The
question that still remained open was how to account for this a question that is
less simple than it seemed and can also be encountered in the work of other social
scientists.10
A major inspiration came from historians and from reading (Agulhon (1986), who
introduced a distinction between ideas, ideology and collective mentalities.
8 Length of contracts, ways of creating competition, levels of competition, the importance of

monitoring, level of penalties.
9 International differences have greatly assisted the process of thinking about these particular
invisible features, by forcing us to question what seems natural from an indigenous point of view.
This can be highly revealing. Hence, England started its radical deregulation experiment; later, West
Germany was challenged by the integration of the Eastern Lnder.
10 Numerous international comparisons, whether relating to social protection regimes (Esping
Andersen), vocational training (Sylvestre, Sellier), the organization of firms (Chandler) or general
regulatory regimes (Crouch and Streeck, 1996) have brought out profound differences between
national solutions and led to the acknowledgement of the way practices are embedded in elements
of context and are products of history. Recently, see Lallement and Spurk (2003).
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Dominique Lorrain
In his inaugural lesson at the Collge de France, starting from an analysis of French
identity,11 Agulhon posed the fundamental distinction between the history of ideas and
collective mentalities. We must position ourselves on the theoretical terrain of the
history of collective mentalities, as distinct from the history of ideas. This distinction is
my main profession of methodological faith (1986: 23). When he mentions the results
of his Rpublique au Village, he concludes that the classic history of ideas, opinions,
theorized politics and organized politics does not explain the totality of behaviours
(ibid.: 25). Having recalled that politicians know how to sense this kind of thing
these specific differences between one place and another he puts forward the notion
of temperament, and immediately clarifies it: it allows us to distinguish between
countries, regions, nations or cultural areas (ibid.: 26).
This concept of temperament had been introduced by Andr Siegfried (1913) in his
Tableau politique de la France. Having weighed all the factors that play a part in
electoral behaviour patterns of population, ownership regime, religion, state policy
he put forward the idea of an irreducible residue of determination [that he called]
temperament . . . Beyond the word [remains] a reality to be explained that of the
common mental characteristics of members of a group (1986: 27). And in order to find
traces of this, we have to go back into history. For Agulhon, this thing that remains to
be explained, referred to as temperament or collective unconscious, emerges from the
history of mentalities: characteristics of which the actors are not clearly aware will have
to be highlighted, since the history of collective mentalities differs from that of
opinions, ideas and political programmes rather as the unconscious differs from the
conscious (1986: 27).
This question was re-examined by Paul Bois in his doctoral thesis on electoral
behaviours in the dpartement of Sarthe. After recapping all Siegfrieds arguments as
they relate to certain districts enabling him to refine his focus he comes to the
conclusion that, in order to explain radically different electoral behaviours (red versus
blue, Left versus conservative) in neighbouring rural micro-societies, it is necessary to
go back to ideas originating at the time of the revolution. For at least six years the
country was shaken to its core . . . blood was spilled, and the crimes committed incited
lasting hatred and interminable vengeance. Even when peace was restored, there were
still traces of this to put it mildly . . . An ideology was born (Bois, 1971: 359).
These Agulhon-Blois explanations offer a key. (1) They enable us to distinguish the
conscious from the unconscious in collective action a major distinction that we came
across constantly in our attempts at comparison. Ideas and ideologies are in the realm
of the conscious. They are constructed in the normal and often rational processes of
collective action: in our case, they are broadly in line with the study of institutions and
policy principles. (2) Collective mentalities, however, may be understood by going back
to their time of origin. Here, the fact that these two authors started from the French
Revolution suggested to us a methodological avenue: collective mentalities were less
likely to be formed in the processes of ordinary policy the interplay of gradual
adjustments and contingent adaptations (Friedberg, 1993) than at times when violent
events, crises, social movements and wars challenged the social bond.
This distinction meant we did not hesitate to return to sources or to introduce the
long view, in order to grasp the origin of the higher, unwritten principles that have helped
to establish so many of the differences between countries. It also suggested that we take
into account the role of crises and tension in creating these collective mentalities
(Lorrain, 2000: 171).
11 This talk was given in 1986, at a time when the extreme Right vote was starting to mass. In some
very elegant pages, Agulhon calls this the second of the national crises (p. 17), and recalls the great
foundations of the Nation by evoking Renan: a nation hardly exists if it is reduced to the contingent
collectivity of those who live inside the same circumference of borders and who are administered
by the same state. There must be a minimum of unity there, both objective and subjective, and by
its nature more profound. What is ours? (p. 18).
237
In the mid-nineteenth century, doctrines were developed to face the challenge of

industrialization. In arriving at an understanding of the different responses of the
European labour movement to the process of industrialization and urban development,
one primary factor certainly relates to the robustness of municipal socialism.12 Some
countries opted for a political form of local government with powers, and others for
local government under supervision, leaving the responsibilities to the authority of the
state. A second major factor relates to the roots of state legitimacy, which differ between
continental Europe and Britain and the United States (Crouch and Streeck, 1996). In
both France and Prussia, the state has been a modernizing one (Rioux, 1980; Kuisel,
1984),13 while the concept of a pluralist state has been a thread running through AngloAmerican political philosophy (Cox, 1987). In the case of the English model, this has
served to moderate the interventionist tendencies that resulted from active municipalism.
These responses must be read against a background of habits and references. This
meeting between past references and problems to be solved leads to different solutions;
then things develop over long periods, before new challenges again lead to new changes.
If we want to go down this road to look at the origins we will have to introduce
the history of the construction of choices in order to understand the debates of the age,
how the chosen solutions were justified, and why others were left aside. Ideally, one
would start at these founding moments and track the automatic progressions that create
an authentic path dependency (Thelen, 2003). But since not everything is regulated, it
can be argued that something that has succeeded through and been sustained around
a few policy principles must have been through some crises, come to some possible
forks in the road. What were these critical points? How did the model then in place
react? Did it come out at the other end changed stronger?
Analytically, a model of urban services may thus be described as an entity existing
on three levels, each of which is important.14
Institutional architectures relate to the division of labour between the actors. This is
the most visible level, answering the question Who does what?. This question itself
can be split into two: Who is responsible? The nation, the region, the metropolitan
county, the municipality? and Who is the operator? A large state enterprise, a
municipal enterprise or a private firm?
Policy principles correspond to types of contract, modes of financing, methods of
fixing a scale of prices, and principles of budgetary record keeping (independent
accounting and a properly balanced financial position, as against attachment to a
much larger whole within which cross-subsidy operates). These factors represent
invisible techniques that enable the model to function effectively.
All these rational constructions the outcome of public policy rely to some extent
on beliefs that are so strongly shared that no one dreams of making them explicit:
political cultures and collective mentalities.
The way these factors come together very broadly explains the different forms of
urban capitalism that can be observed empirically today. Articulations between the
12 See the works of Castel and Rosanvallon, and those of Topalov on urban development.
13 We cannot think about models of urban services separately from public policy. Reform projects,
concepts of the way collective action should be carried out, and ideas about the division of
respective responsibilities between state and market all throw light on the solutions that have been
adopted in each country. Thus, although a model of urban services can be described on the basis
of specific internal criteria, it is an intrinsic part of a broader context (societal effect). This gives an
empirical linkage between three areas: overall concepts of capitalism, forms of public policy and
models of urban services.
14 In truth, a model is also defined by its technical dimension. The formation of a model presupposes
a certain technical stabilization, with the result that the reverse is true: moments of technical change
may also be opportunities to challenge institutions. In this article, we concentrate solely on the
institutional dimension.
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Dominique Lorrain
Concept of the State
Legacy of Municipal Socialism

Strong local authorities
Pluralist
organizing state
Pluralist
interventionist state
Weak local authorities
United Kingdom
United States
Germany
Unitary
interventionist state
Japan
France
Figure 1 Original principles
influences of these factors over the long term give the various forms the coherence of
models. Institutional architectures very largely dictate supply structures, since varying
degrees of expansion in the public sector explain the differing spaces left for private
firms: we will return to this point. In addition, the implementation over the long term
of different policy principles and collective concepts enables us to understand the actual
organization of markets. In one country, an essential role will be played by large firms
regulated through simple state supervision, and through observing the higher principles
of competition and the rules of joint responsibility. In other countries, strong belief in
the virtues of competition will explain smaller-sized firms and the constant presence of
consultants and lawyers responsible for creating the conditions for open competition,
while overall responsibility for the whole will systematically be taken by regulatory
agencies. Therefore, any differences in respect to firms and to the functioning of
markets have direct linkages to long-term choices of institutional architecture. Our
analysis of these questions led to a formalization around three models (see Figure 1).
All three originated in Europe at the end of the nineteenth century, and although we will
firm up our argument by attaching each to one main country, in reality they have wider
influence.
Strong local public sector

The German concept was that of a contractual, interventionist state, as defended by
Bismarck at the time the country was first unified. This vision was strengthened by a
fundamental distinction between major policy and ordinary policy. The first concerns
the traditional central functions currency, justice, defence, diplomacy and
economic policies, and comes under the government and the Bund; the second is
managed at the local level. Several writers have shown how this division lies at the origin
of political arbitration on the major organizing principles (Hussermann, 1988).
Christophe Charle (1990) has explained this special way (or Sonderweg), as has
Kockas (1996) thesis on the distance maintained between the nobility and the urban
bourgeoisie.
This contractual, modernizing model has been applied to two aspects of
development. Firstly, through its involvement in the rules of workforce management, it
affected industrial relations. In a business, this meant doing things in such a way that
employer/worker relations did not lead to confrontation: the resultant introduction of
industrial legislation prefigured the employee participation system of the 1970s. From
the point of view of our interests here, the important thing to note is that these
ultimately very long-standing principles of employee participation (sometimes
called co-determination) were to flow well beyond regulation of the labour market
239
alone, becoming a sort of higher principle that pervades the whole society and also
applies to relations between utilities and local authorities. By comparison with
England, Germany leans very clearly to the side of consensus-seeking rather than
towards direct competition, towards negotiations between actors rather than mobilizing
the rule of law.
This concept is also illustrated in what we can call the local production democracy.
The state very quickly promulgated laws and regulations in the areas of housing and
infrastructures, and recognized the important role of local authorities in providing these
basic services (water, electricity, transport, gas, housing). This concept was expressed
in a pragmatic municipalism (Korte, 1991a; 1991b; Querrien, 1991; Hussermann,
1992). For social democrats, these policies would contribute to the emancipation and
the organization of the working class. For the Right, the management of a city and its
infrastructures by local burghers or labour movement representatives would establish
the conditions for industrial peace. We must observe that this was a secondary
compromise, since it was accepted that urban services were in the sphere of
redistribution less central than that of production, which was where the real
development took place and the profits were made.15
The model rests on some higher principles:
The concept of an interventionist, organizing state, going back to the early nineteenth
century (Cox, 1987; Steinmetz, 1990);
A central place for cities in the administration of local affairs in the late nineteenth
century and then during the Weimar Republic. This diminished to the benefit of the
regions or of national enterprises during the Nazi period and was then re-established
after the second world war;
However, this autonomy of cities is limited by the principle of subsidiarity: they have
a subordinate position in relation to the Land and to the Bund, which promulgate
laws and redistribute funding.
This concept of water and gas socialism establishes the models difference from the
more political, more encompassing, but less operational French concept. The idea of a
strong local public sector is shared by Germans as spontaneously as the idea of Frenchstyle public service is in France. We should also note that this model developed in
Japan, too, where the state played a central role in industrial modernization; and that it
is found in Northern Europe the Netherlands, Denmark, Sweden, Finland
countries where the vigour of local government has never flagged.
These higher political principles explain the institutional architectures. In terms of
simple description, the organization of these sectors is the responsibility of the
municipalities (see Table 1) Those responsible are local elected officials, each occupying
only one such post and supported by a senior corps of municipal professionals (civil
servants), who are in turn grouped into national organizations such as the DIFU or
Sttetag.
Operation is almost exclusively the remit of public bodies, principally in the form of
the Stadtwerk. Like everywhere else, in the nineteenth century the Germans began by
operating their public services through public enterprises incorporated directly into
municipal services and just as unwieldy and inconvenient as in other countries. These
were later modernized by being given autonomy and multi-sector powers. These public,
multi-sector Stadtwerke manage the spheres of water, gas, electricity, heating and
transport (Reidenbach, 1997). They may have the status of a semi-autonomous
municipal agency (Eigenbetrieb) or of an enterprise whose capital is held by the local
15 It may also be thought that the current major movement known as privatization is evidence of a
transformation in production systems, of a shift in the boundaries between markets, and of the
incorporation into the market sphere of sectors that were largely excluded from it, such as the
environment or logistics.
Culture
Principles
Other actors
Heating
Stadtwerke
Siemens, Deutsche Babcok, Linde, KSB, Hochtief
Querverbund, cross-subsidy between sectors (electricity contribution, concession rights)
4 integrated groups
and Stadtwerke
Stadtwerke
Transport
More importance placed on industrial production factors than on institutional design
Consensus culture, co-production
Concept of change based on pragmatism (gradualism)
Industrial integration in electricity, oligopolistic structure regulated from above by mechanisms of competition and from below
coordinated by local elected representatives and municipal civil servants
Territorial monopoly, concept of network unity
Energy
850 local authorities responsible for the four sectors

Municipal Dept. or
private enterprises
Waste
Strong local public sector: centring on the city level, multi-sector municipal enterprises
Municipal Dept
Stadtwerke
Operator
Sewage
Districts
Local authorities
Organizing authority
Water
Table 1 Strong local public sector: Germany
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Dominique Lorrain
241
authority (Eigengesellschaft). Until recently, sewage treatment was carried out directly
by municipal service operators.16
This integration of several spheres has dual significance. It may help to generate
economies of scope through better coordination of field crews and road works. Around
1994, the director of a Stadtwerk, quoted by Reidenbach (1997: 83), stated in their
professional journal that this integration was enabling economies of up to 25% in one
investment programme: that seems very large, and the figure cannot be verified.
However, let us accept horizontal integration as an essential feature of the German
model, constituting a radically different approach from the efficiency through vertical
integration that characterizes the other two models. This multi-sectoral nature has
financial consequences, too, since it allows cross-subsidy: profits from the profitable
sectors (distribution of electricity and gas and, to a lesser extent, water) compensate for
losses on urban transport. This represents a powerful factor in the strength of the German
municipal public sector.
What is the place of the private sector in this model? This question must be examined
on several levels. Part of the answer follows from the above factors and from the models
architecture. Given the major role of the Stadtwerke in the operation of several services
(and, often, in some of the consulting), private firms find themselves blocked from that
angle. They can be active only in some remaining operational and consulting areas and
in other functions as builders, as manufacturers (and, it may be said, as industrialists).
This was largely what we observed:
In the water sector, the Stadtwerke are omnipresent, and this explains the paradoxical
situation noted by John Briscoe, a director for water at the World Bank, who asks
why no cross-Rhine distributor is active on the international water market, despite
their high technical standards, the good quality of the water produced, and the
smoothly run system (HydroPlus, May 1997: 18). The approach of private firms has
mostly centred on the supply of equipment. But recently things have begun to shift.
Under the pressure of budget constraints and from liberalization of the electricity
market, the Stadtwerke have reacted with different strategies: some are opening their
capital to the large German utilities, while others in order to remain independent
are merging or cooperating with other Stadtwerke. This is a complex, incremental
process that is not highly visible; nevertheless, it is reshaping the landscape of
municipal government and of the Stadtwerke. In the area of international competition,
some of these municipal enterprises Berliner Wasser (minority owned by RWE
and Veolia), MVV (Mannheim) have won some contracts abroad, mostly to
provide studies and services (Lorrain, 2003: 75).
Specific attention has to be paid to the organization of the electricity sector, since
this lies at the source of the development of this German form of urban capitalism,
representing the organic interface between municipalities and firms. This interface,
which operates through the Stadtwerke, is at the heart of the strong local public
sector model, firstly for highly material reasons. Long-term development
presupposes the availability of financial resources: electricity distribution brought
these. Next, permanent working relations between civil servants in the public sector
and executives in the private electricity firms helped the former to evolve away from
an administrative view of public policy. In a word, electricity distribution represented
the door through which market principles measurement, efficiency, profitability
entered the public sector. In France, the equivalent function was performed by the
drinking-water distribution sector and by urban planning.
16 This relates to legal differences enshrined in municipal law. Water has a clearly commercial status,
and may be financed through a scale of prices and managed by either public or private enterprise;
while sewage disposal is a sovereign good and can be financed only through taxation: this provides
an incentive to maintain it within the perimeters of direct municipal services (interview on
delegation in Rostock, 1994).
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Dominique Lorrain
Relations between these two worlds were established naturally over a long period
(Stoffas, 1994). Private companies created the first electric power stations in the late
nineteenth century; the municipalities granted them franchises and territorial monopolies
on generation and guaranteed distribution, with the latter handled either by the firm or
by the city. The municipalities fairly rapidly came to be shareholders. These companies
had territorial monopolies and were vertically integrated. Western Germany was divided
between nine firms working with the Stadwerke on distribution as well as generation
(under an equilibrium subject to change from one place to another). This picture altered
little in its principles until liberalization of the sector in 1998, which represented a
profound reorganization. The municipalities sold their shares in order to give the
management of firms more freedom to develop internationally; the reform was
introduced first by Preussen Elektra and Bayernwerk, with RWE following in 1998. The
firms reacted to the competition on tariffs with two mega mergers: RWE and VEW
merged to create a new RWE (2004 turnover: 43.9 billion euros), while Veba and Viag
formed the new E.ON (around 46 billion euros in 2002). As the BundesKartellamt (the
Cartels Office) requested the firms to sell several assets in order to gain approval,
the merger itself was followed by several operations, the most important being the
restructuring of the eastern Lnder around Vattenfall. In addition, Electricit de France
invested in the capital of EnBw (Baden Wrttemberg). Thus, the industry is organized
around two large and two medium-sized corporations. It has preserved its oligopolistic
structure and the principle of vertically integrated firms (see sub-section Integration and
self-regulation, below).
Other large German groups have developed an industrial capacity related to urban
markets: Siemens, Brown Bovery, KSB for pumps, Linde, Lurgi Bamag, Wabag. As
manufacturers of the basic components of the urban machine pumps, turbines,
pipes, escalators, people movers, depollution systems, incinerators, cranes they
rank first in the world in their specialities.17 This industrial approach is another
characteristic of urban capitalism, totally congruent with the institutional architecture
of the model. As the operation and the engineering of these sectors were largely the
responsibility of the public sphere (the Stadtwerke), the space remaining for private
firms was in manufacturing and construction.
German pre-eminence is less marked in the construction field. Hochtief, an RWE
subsidiary (until 2004, when the utility company sold its 56% control), is the fourth
largest company in Europe, behind the French groups Bouygues and Vinci and the
Swedish one, Skanska. The countrys former number one, Philipp Holzmann, did not
manage to get out of its difficulties, despite a recovery plan, and had to announce its
bankruptcy at the beginning of 2002. Then we find several German groups ranking
lower than eleventh in Europe, despite the countrys size: they are outstripped by
Swedish and Dutch businesses (DAEI, 2002). There are two explanations for this.
The first relates to the history of the economy. In a federal country, these groups have
developed from a family and regional base. The natural structure of the market is
less national than in France, and only a few groups, such as Bilfinger und Berger,
Walter Bau or Strabag, have created organizations that have moved away from their
initial regional framework. The other reason relates to the principles on which these
markets are organized, relying mainly on competitive tendering for lots separated
according to the specialized functions being subcontracted. This means that, unlike
the French lead-contractor pattern (Campagnac, 1992), construction enterprises are
not in control of the whole value chain, both upstream (engineering) and downstream
(subcontracting finishing work). In Germany, the public consultants and municipal
17 Here the parallel must be drawn with Japan, also a country characterized by the strength of its
industry in these sectors. Most of the information relating to the firms and the history of utilities
discussed in this article are based on previous works we have published in FLUX, under a permanent
rubrique: Portrait dentreprise. Since 1999 we have presented 10 firms and sectors. See also a
special issue of Entreprises et Histoire, No. 30, September 2002.
243
Stadtwerke who broadly organize urban networks are backed up by house-building

consultancies run by design architects: this division of labour does not make it easy
for private firms from the construction sector to expand.
Private operators are involved in the waste sector. At the outset, family businesses
won precise, short-term waste collection contracts. They worked alongside municipal
services, creating a situation fairly similar to the one that can be observed in England
and in the United States. As the sector became more technical under pressure from
environmental movements and tougher standards, firms became more concentrated.
The initial family groups were regionalized, and in the mid-1990s some fell into the
clutches of large infrastructure groups. The Otto Group was bought up by the worlds
leading waste disposal company, the American Browning Ferris Industries, before
being sold on. RWE, the large German electricity company, was very active
throughout the decade through consolidation with local businesses and contracts with
cities, it managed to create an enterprise RWE Umwelt with a turnover of 1.94
billion euros in 2004. This company was offered for sale at the end of 2004: among
the potential buyers was the family-operated waste group, Rethman.
If we go back to the global view, public management has thus relied for more than
a century on an active principle, one derived from a strong primary equation: public
goods must be managed publicly. Other countries also asserted the same in the late
nineteenth century, but they have changed. The Germans, however, have been able to
adapt their model so as to preserve what they conceive to be a higher principle.
Examining this approach also helps to reveal other formal and more informal principles
relating to collective mentalities.
This model is characterized by a pragmatic, gradual concept of change. Unlike the
English model, it does not seek to impose major framework shifts, but to adapt what
already exists. Germany has held to some major policy principles and gradually
modernized them (Reidenbach, 1997).
In the 1970s, the Germans saw their policy on municipal groupings through to a
successful conclusion, so that, as organizing authorities, the municipalities now cover
vast territories (Grunow, 1991; Jouve and Lefevre, 1999).
They have strengthened the Stadtwerke by transforming them from municipal
departments into companies (Reidenbach, 1997).
Functional optimum
The English model of which certain features are to be found in the United States
rests primarily on a philosophy of the free administration of local affairs. From the early
nineteenth century, the parishes ensured the provision of numerous services: water
distribution, public lighting, road building, help to the poor, funeral activities (Byrne,
1985; Garrard, 1994). Pre-first world war England was the country where local
government powers were the most extensive, and it served as a reference point for the
whole of municipal socialism. At this time, its genealogy was close to the North
European strong local public sector model. Moreover, a split would come, since the
first principle was to be limited by two other principles that became increasingly
important: a rationalization of public policy and a pluralist conception of the state.
A rationalization movement emerged in the 1880s. For reasons of efficiency, some
of the parishs tasks were transferred to boards (a sort of specialized public enterprise,
operating in a larger context than that of the municipality). This movement was
permanent and created a strong belief in the idea of optimal institutional choices. The
influence of economic ideas may also be seen in the sphere of public policy (WalrasPareto). In terms of price and quality of services, an optimal situation for the parties
involved is obtained when certain conditions for organizing sectors and creating
competition are brought together.
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Dominique Lorrain
A second limit on the free administration of municipalities came from the pluralist
concept of the state: the state does not have to do everything or decide everything. This
distinguishes the English tradition from the more interventionist philosophy of the
continental countries. And if the state does not do a thing itself, it has to have it done
whence the long-standing development of thinking on control (Cox, 1987; Wright,
1993).
The intersection of these three philosophies free administration, rationality and
pluralism explains the chaotic history of local government in the UK, a picture of
continual reforms with major changes in the rules of the game. This history which
contrasts with German gradualism and French pragmatism in local affairs followed
three major historical sequences (Stoker, 1997).
First of all, a period of the strong local public sector type: until the late nineteenth
century, the municipalities administered utilities directly. Then, between about 1920 and
1940, the system adapted its local geometry, still within the public sector, through a
transfer of powers to committees. As Gurr and King (1987: 171) explain, the initial
incentives to create a modern system of local government arose from the economic and
social consequences of the industrial revolution. At this period, local public management
and the tasks of the organizing authority and the operator were merged within the same
public body.
A second period (196070) may be described as strong central public sector, since
powers were gradually transferred to local public agencies. This relinquishment took
place in the name of an efficiency principle and of the search for the institutional
optimum. Among the important reforms of this period, we should mention the
reorganization of local authorities into groups of municipalities, recommended by the
Redcliffe-Maud Report18 (Goldsmith, 1986), as well as the transfer of water and sewage
activities to public companies at the regional level. This rationalizing phase was an
intrinsic part of the building of a modern welfare state. However, although local public
spending increased, the 1970s were also marked by growing state control. Rhodes has
described these years as a period of incorporation, signifying that local government
through the intermediary of its national associations was gradually being drawn
into the circles of the central decision-making process (Rhodes, 1988). This
rationalization process included three potentially dangerous factors:
1 This incorporation placed local government in a position of increasing dependency
on Whitehall;
2 The rationalization of government agencies strengthened a long-standing
professionalization movement. This, though originally a strength, was to lead to the
slightest sensitivity to pressures from electors (Pickvance, 1985; Dunleavy, 1991);
3 It also acted to reinforce a trait of the political culture, described by Bulpitt as dual
polity, signifying a separation between high politics (defence, foreign policy,
national economic policy) and the technical spheres of low politics. Gradually,
therefore, English local government lost part of its political dimension (a source of
legitimacy in the two other models), becoming just a service provider and going on
to encounter the pressure of the market principles, precisely in that sphere.
A third stage began in the 1980s, with privatizations and the extension of market
principles to local public services. The English model distinguishes between two ideas:
privatization designates the sale of assets, while marketization means the introduction
of market principles measurement, fixing a scale of prices at real cost, ending crosssubsidies. During the first half of the 1980s, Margaret Thatchers Britain was to play a
pioneering role in the world, signalling a challenge to the paradigm dominant since the
1930s: the state as corrector of market failures and the benefactor state, brought together
under notions of Keynesianism and of the welfare state.
18 See also the report of the Royal Commission of 1969.
245
These ideas were in phase with those of Ronald Reagan, elected President of the
United States in 1980, a year after Thatcher came to power. These two leaders actively
promoted what may be called the conservative revolution (King, 1987). These ideas
fundamentally questioned current theories, challenging the states vision, public
monopolies and local authorities modes of action. This is a now well-known story, with
widely documented justifications (King, 1987; Vickers and Yarrow, 1989) and results
(Bishop et al., 1994; Ernst, 1994).
However, before arguing the model-type unity of these reforms, we would like to
stress the continuity of ideas. What happened in England was not only part of a direct
political struggle against Labour and the trade unions expressed in the slogan rolling
back the state but also part of a reshaping of public policy, which flowed directly
from past experiences of rationalization and from a body of work critical of the theory
of natural monopolies. The justification of this theory was based on the idea of market
failures. The model found its inspiration in an impressive series of theoretical works,19
which questioned state failures and examined multiple routes to the reform of
monopolies.
Privatizations have changed the face of local government a great deal, but in some
ways they have merely continued a trend inscribed in its long history. The transfer of
powers from municipalities to higher-level bodies in the 1930s illustrates the loss of
local government influence. The nationalization of gas and electricity in 1947 and 1948
strengthened this trend, depriving local authorities of some of their resources. The
reform of water and drainage in 1973 to the benefit of regional public companies played
an intrinsic part in this same genealogy (Kinnersley, 1994).
The consequences of doctrinal hesitation are somewhat evident, since two traditions
are being combined: should the model be promoting the development of grass-roots
democracy or seeking efficiency through the use of specialized agencies in other
words, local government versus local agencies? For half a century, reforms tended to
diminish local government in favour of local agencies (Steward, 1989).
This explains the current landscape. English answers to the primary question, who
are the authorities responsible? vary depending on the sector. The industrial structure
of markets is explained by the search for competition. Where there were vertical,
integrated public monopolies, the English reformers fairly rapidly shifted to more open
architectures (see Table 2).
The water and sewage sector is the responsibility of two administrative bodies and a
regulator (Ofwat). It is structured around approximately 20 long-standing private
enterprises, which only distribute water, representing 25% of the market (statutory water
companies), plus 10 regional companies privatized at the end of 1989. The development
of these companies is an example of the way in which the definition of the rules of the
game can affect an industrial sector. It is clear that privatization gave freedom to the
water companies: they diversified into waste management (Severn), construction
(Anglian) and electricity (North West, Welsh), and became much more international.
Later on, changes in rules and their drastic hardening under the Final Determinations
of 1999 endangered the whole industry. The landscape has become more unstable, and
the water industry has been subject to a reshaping process since 2000 (Bakker, 2002).
All the ten water companies except Severn Trent have experienced some changes
in their shareholders (from acquisition to restructuring of the debt); all those that went
international have restructured their portfolio of contracts (Lorrain, 2003).
In the sphere of electricity, the reformers did not wish to repeat the experience of
British Gas, which had been privatized without any changes to the structure of the
industry. They wanted to set up a more competitive framework: the electricity industry
was totally dismembered (Glachant, 2001).20 Where the Central Energy Generating
19 For the record, we should also mention Friedrich Hayek, Armen Alchian, Harold Demsetz, Georges
Stigler and Joseph Stiglitz.
20 See also Dominique Finons works and Jean Michel Glachants references to the UK literature.
Integration of the
cycle
Principles
Culture
10 private enterprises
20 statutory water
companies
Operator
Waste
Separation
collection/treatment
Competitive tendering
WDA+ private
Waste District
District
Ofgen
Energy
Competitive structure, unbundling

Coordination by the pool
12 distribution enterprises
3/10 producers
Heating
Transport
Open competition by lines

Pooled coordination
Private buses
1 transporting
enterprise
Ministry
Local authorities
Belief in the importance of institutions. Permanent process of institutional reform
Trust in markets to allocate resources more than in integrated enterprises (role of traders, openings for foreign enterprises):
competition
Challenge, conflicts, disputes (recourse to the law), culture of control (agencies, monitoring)
Elimination of cross-subsidies between sectors and between subsidiaries of the same operator
Open competition: by line (waste, buses), by sectoral organization (electricity, unbundling) or by third-party access to the network
(common carriage)
Functional optimum for institutions and sectoral specialization
National River
Authority
Dept of Environment
Ofwat
Organizing authorities
Water & Sewage
Table 2 Functional optimum: England
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Dominique Lorrain
247
Board had had the monopoly of generation and of transport, there were now a transport
enterprise (National Grid) and three producers (National Power, Powergen, British
Nuclear Fuels), whose influence declined steadily with the arrival of independent
producers. Distribution was covered by twelve private regional enterprises. This
landscape has changed enormously. Immediately after the golden share arrangement
came to an end in December 1995, six American utilities bought regional electricity
companies. A couple of years later, they changed their strategy and resold the shares.
Continental utilities then entered the market, buying not only regional electricity
companies but also generating companies; they created new forms of vertical integration.
The liberalization of the market gave consumers the right to choose their supplier. This
sector, which had been within a public service (or utility) logic has become as
commonplace as other markets, and electricity has become a commodity. In this sector,
Europe clearly presents three configurations: fragmented architecture in this case,
oligopoly in Germany and in Spain, historical operator dominant in France and in Italy.
The reforms also applied to urban transport (under the local authority) and to the
railways, where each line was opened up to competition. Auctioning off lines and tracks
led to the award of contracts in these two sectors to private groups. National urban
transport firms have emerged: First Group, Stagecoach, Cowie/Arriva, Go-Ahead. For
the railways, the situation is more balanced between foreign firms (SNCF, ConnexVeolia) and British firms like Virgin (a new entrant) or Stagecoach. By comparison with
continental solutions, which privilege the development of a meshed network and the
coordination of the whole by a single network operator, these reforms bring a market
vision to a technical realm.21 Each line may be awarded to a different operator, whose
performance is then tracked through indicators. But the question of how the whole
system can be optimized still remains.
In waste management, a different competition principle was introduced. The
municipalities, who are the responsible authorities, have to put their service out to
competitive tender (the CCT procedure). A private supply therefore rapidly formed;
initially very broken up, it equally rapidly consolidated. There too, an essential impetus
came from foreign groups: Onyx (Vivendi), Sita (Suez), Brambles (Australia). In a
panorama that has been profoundly transformed in 15 years, one British group (Shanks)
emerged, while another (Biffa) was integrated into Severn Trent, the second largest water
company.
Thus, in world competition between firms and between models, the English reforms
have not been totally successful in producing national champions capable of competing
with the heavyweights of the two other models the German and French electricity
companies, and the water and construction groups in France. There are two reasons for
this. The reforms are recent; and, more importantly, the main objective the search
for greater efficiency through competition has had effects on supply. The quest for
open architectures, the unbundling process imposed on the electricity companies and on
British Gas, and the refusals to admit merger requests from the water firms do not
predispose this model to the creation of large groups.
On the other hand, there is one sphere where this models supply excels: consulting.
If we take technical consultants, general consultants, financiers (securities firms) and
lawyers together, then this model of urban services is the world leader. Firms like
Hallcrow, Binnies and Mott MacDonald, or Clifford Chance, Freshfields and SG
Warburg,22 play an essential role upstream of these sectors. They advise the decisionmakers, define problems, organize selection procedures and take part ex post facto in
monitoring. Influence is not inevitably measured in turnover or in capitalization, but
equally in the ability to affect strategic links in the chain.
21 On these questions of coordination between the technical and the market, see Curien (2000) and
the works of J.M. Offner.
22 The Americans lead the market in this banking consultancy (or securities firms) niche, with
Goldman Sachs, Morgan Stanley, Merrill Lynch, J.P. Morgan and Credit Suisse First of Boston.
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Dominique Lorrain
Everywhere, the architecture of an industry reflects higher principles. In a model that

seeks to increase competition in sectors where the history is one of monopolies, the
essential power lies with those who organize the market. Industrialists or builders are
there only as executors: to apply assembly procedure schedules, to respond to schedules
of conditions drawn up by consultants.
The principal actors vary according to whether beliefs centre on the virtues of
integration or of competition. In the first case, large industrial or service groups become
established in the country, offering an integrated supply from operation to engineering;
structures are oligopolistic this applies to Germany and France. In the second case,
the structure becomes more atomized, with more specialization by sector, and the
function of consultants and engineering firms is to steer the system: this is the case with
England.
To clarify all this, a series of principles, of collective mentalities, may be mobilized,
which partly explain what is being described.
1 The first essential idea that we have highlighted is the notion of the search for optimal
solutions. This explains a certain institutional architecture, highly characteristic of
the Anglo-American model and, if we compare it with those of continental Europe,
exceptional. The consequence of the quest for optimum is to change the level of
organizing authority according to the service: it can be the region, the metropolitan
county or the town. Shifting responsibilities in this way contrasts with the basic
equation of the two other models: the organizing authority is the municipal
government. More basically, however, it provides evidence of an attachment to the
idea of rationality: the management of local affairs ought to be able to escape political
passions and follow the harmonious principles of good government. There are
certainly intellectual relationships that can be established between the English way
of responding to problems of corruption (rife in the late nineteenth century), the
American movement for good government (Banfield and Wilson, 1966; Lowi, 1969)
and the current rhetoric around good governance.
2 The quest for efficiency evidenced through the construction of competitive
architectures at the level of firms and through regulatory institutions fundamentally
expresses an adherence to standard economics and to the virtues of competition.
There is another very important cultural feature, turning on the pairing of trust with
control. We could say, by way of caricature, that the English reformers are always
boasting of the virtues of markets and of firms, while trusting them so little that they
constantly seek to restrict them within a framework. The way competition is
organized in Europe, as set out by Dumez and Jeunematre (1991), demonstrates two
collective mentalities: in Germany, a Cartels Office and oligopolistic competition
organized by agreements are considered sufficient, whereas the UK has several
overlapping institutions. The French model of urban services is even more heterodox,
in that it regulates without formal regulatory institutions but by using different
mechanisms that function through the interplay of checks and balances (Lorrain,
2001b).
Perhaps the imprint of a long history can be seen here. Anglo-American capitalism
was open (the British Empire), supple, innovative and sometimes savage. The state
knows that it may be outflanked, as the experiments with railways and with gas showed
(Chandler, 1977; Tarr, 1999). Examples of opportunism are numerous: the more
exchanges are made between distant territories, the less interpersonal trust is able to
play a moderating role. German capitalism, developed at first on a regional base, could
rely on trust between peers (bona fides); the same principle structures exchanges
between urban services in France. The Britain of large-scale overseas trade or the United
States, where markets are immense, may have been faced with the problem of
anonymous exchange before others were, and they responded to it with new theories
(the principal agent) and institutions of control.
249
Attitudes to trust and control reflect two different concepts of partnership relations:
France and Germany are characterized rather by consensus-seeking; the English model
more by confrontation. Everything there works towards the recognition of individual
rights and the presence of those (lawyers) who undertake to govern conflicts of interest
through the law.
3 There is another trait that characterizes this model that of belief in the role of
institutions as impelling change. This establishes a major distinction from the
two other models, which are typified by gradualism and pragmatism. The
English launched three major reforms in urban services in ten years:
privatizations, the award of bus licences or compulsory competitive tendering,
and then the PFI Act (Private Finance Initiative, November 1992), which merged
construction and operation activities for public facilities or public buildings. This
all followed the reorganizations of institutions in the 1970s, the abolition of the
Greater London Council (GLC) around 1985, and changes in local taxation (the
Poll Tax).
In every case, these reforms were presented with a lot of publicity as essential
and universally relevant. In the water sector, the reform dates from December 1989.
Since then, battalions of consultants and engineers have (despite some setbacks) spread
over the whole world, expounding the merits of their approach. Of course, any human
activity presupposes at least a minimum of support from the actors involved, and
everyone believes in what they themselves are undertaking. But, in this claim to
universality, there is an astonishing behaviour that actually runs counter to the real
English tendency towards understatement. If this point is accepted, perhaps these
behaviours must be seen less as evidence of a propensity towards bombast than of a
profound belief in the virtues of good institutional architecture, which has to be sold
to the emerging countries for their own good.
University academics have invented a branch of economics institutional economics
that focuses attention on institutional design. As Vickers and Yarrow have shown
(1989), the English frequently raise economics to the level of a noble art. The community
of economists has had a major influence on the reforms: yet each one limits his
recommendations to what he knows and does really know what he is doing in
practice. It should come as no surprise that they are setting out to reform the world with
their institutions.
Their equivalents in France and in Germany are primarily engineers. Part of the
difference is explained by the systems for producing elites: the London School of
Economics and Oxbridge, versus Universitt or X-Mines-Ponts. In the long term, these
channels generate differences in the spontaneous view of problems (here again, we find
the thesis of path dependency). Continental engineers work on technical objects, on
processes. They optimize and adapt before changing everything. When two firms merge,
they study needs and translate them into programmes of work; the financier only comes
in afterwards. In the parallel English situation, the financial aspect seems always to be
tackled first: lawyers and financiers are in the driving seat.
Politics and delegation

France oscillates between two concepts of the state, liberal or grand organizing (Auby
and Ducos-Ader, 1975; Rioux, 1980). They vary according to economic circumstances:
liberalism in the late nineteenth century, central planning in the 1930s and recourse to
the mixed economy in the 1950s. But these variations function around a very old unitary
state with an interventionist philosophy. A primary trait marks this model in an obvious
way: the ultra-powerful nature of the state. This is reinforced by a second trait: economic
backwardness.
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Dominique Lorrain
These two permanent features explain a great deal, or at least enable an understanding
of why certain higher principles were established a century and a half ago. By
comparison with its two neighbours, France has been backward in industrial
development. The country was more rural, and this explains the organic weakness of
local government, which can be illustrated by the number, availability and competence
of local elected officials, or by the history of civil service activity at the local level.23 Its
representative elites in small towns broadly rejected municipalism and its ideas of
contract-based modernization. These were fairly largely foreign to their mental realm
and to their ordinary experiences. Furthermore, these ideas came partly from Prussia,
the old enemy of 1870, while the word municipalism was an echo of the Paris
Commune two sensitive experiences in the collective mentality.
Economic backwardness also explains the strategies implemented to compensate for
it. Its roots can be found in seventeenth-century maritime history, in the story of the
Trading Companies24 (Lemarchand, 1993; Lorrain, 1993): if the state cannot do
everything itself but needs something done in a hurry, it calls on private enterprise. The
idea of having things done by someone else is therefore a very old one and, from this
period onwards, royal civil engineers and economists justified recourse to private
enterprise, compared remuneration procedures for the firm and debated the question of
profit. It was in the seventeenth century that the basic grammar of public policy by
delegation was compiled.
In the organization of urban services (as in wage relations), French solutions are
radically different in nature from German ones backward in collective negotiation
within enterprises and supportive of private sector operation of urban services, thus
removing any possibility of constructing a strong local authority.
Since the mid-nineteenth century, the model has been characterized by the delegation
of public service tasks to the private sector. This situation is coherent with a strong state,
maintaining weak local authorities, with a centre mistrustful of specific local features.
It has become stronger because there is no political philosophy on either Left or Right
that makes cities a site of societal change. Unlike Germany, France has had no real
political plan on cities: reform priorities have lain elsewhere. This explains why
modernization of municipal public enterprises was delayed. The example of Germany
helps us to discuss the question: why weak public enterprises?
Because the concept that prevailed in France until the 1920s was one of a minimum
state, the public law rulings of the Conseil dEtat sought to set permanent limits on
local interventionism, in order to forestall the development of municipal socialism. At
the same time, French political elites, particularly on the Left, did not see material
policies on water and gas as resources in their project for social change. The secondary
status of an elected official like Henri Sellier within the SFIO is an illustration of this:
his ideas were belatedly and then badly received.25 Although the distinction between
high and low politics functions explicitly in Germany and England, in France it
operates implicitly. Elites there have a taste for grandeur, are passionately in favour of
big ideas, and are not interested in mere stewardship. Take care of the pounds and the
pence will take care of themselves might be their motto. Philippe dIribarne has been
able to show the logic of honour, present in the concrete behaviour of actors in a
working situation, as characteristic of a culture handed down from the Ancien Rgime
(1989); this is also the period we need to look to if we are to grasp the relationship of
the political elite to stewardship. The word applies to the relationship between the
master, who decides, and the steward, who applies. Passionate about debates on ideas
23 See IFSA (Institut Franais de Science Administrative) (1977) Ladministration des grandes villes.
Cujas, Paris, and special issues of Annales de la Recherche Urbaine (1989) Volumes 44/45 and Politix
(2001) Volume 53.
24 For a genealogy more focused on construction and major works, see Bezanon (1999).
25 See again the two special issues of the journals cited above (footnote 23), and the references to
the works of Christian Topalov, Jean Pierre Gaudin, Viviane Claude and numerous historians.
251
and geopolitics, French political elites have been consistently uninterested in the local
it is just too mundane. This leads them to delegate management of local affairs to
others.
These historical features explain what happened next. The actors followed what
seemed to be the natural course: the weakness of cities demanded solid partners and
found them in the urban services groups. These had come into being in order to provide
water supplies the great modernization of the late nineteenth century. The Compagnie
Gnrale des Eaux dates from 1853, the Socit Lyonnaise des Eaux et de lEclairage
from 1880. The latter increasingly developed internationally and diversified into the
electricity sphere, where it came to play a leading role. Post-war nationalizations,
followed by decolonization, were to cut it back severely. It was only in the late 1960s,
when urban planning developed rapidly, that these two urban services groups developed
interests in the other urban technical networks sewerage, heating, waste, then
transport and later cable and communications.
From a descriptive, institutional point of view, the communes are the organizing
authorities26 for all the networks, as they are for electricity distribution (even though the
existence of a large nationalized enterprise has tended to lead people to forget this
principle) (see Table 3). At their head we find mayors, politically legitimized, close to
citizens. There is, therefore, some proximity to the German model with two slight
differences, however.
Some of the mayors of large cities hold other, nationally elected offices as well, so
the political dimension in France is more marked than it would be with a purely
professional approach. Because of this, such prominent elected representatives tend
more to act as chairpersons; in work on problems of a heterogeneous nature, they tend
to delegate more, so that they can continue to manage their power base.
The second difference is that of the issue of groupings of communes. In the 1970s,
France rejected changes implemented throughout the rest of Europe. How can it remain
efficient while it is still institutionally broken up into 36,500 communes? Here the other
institutional dimension, industry, comes into its own. The existence of a few large groups
reintroduced coherence. The model depends on political authority delegating: it is
institutionally fragmented, but industrially concentrated.
The next feature of this model relates to long-standing, large enterprises
diversified, internationalized, long since integrated into engineering activities and
sometimes into construction. For its size, France is certainly the country in the world
that can line up the most majors in a given economic sector: Suez, Veolia,27 Bouygues,
Vinci, EDF. To these should be added the urban Caisse de Dpts et Consignations
(CDC), a public financing body that may be said, in another sense, to produce from the
town, through its majority ownership of semi-public construction and planning
companies (SMEs), through consulting and through financing.
Here the difference from England is stark. The disparity between sizes of firms is
partly an expression of differences over time: these French groups have been built up
over several generations. Above all, however, it is an expression of differences in views
on the nature of firms. The English fear the abuse of monopoly; they seek spontaneously
to recreate Adam Smiths markets; they make their firms weaker. Not in France: on the
contrary, the existence of national economic champions there is rather seen as a
competitive advantage. The values of the elites differ, too, as is further illustrated by the
notions of shareholder and stakeholder. In France, operating results have not
represented immediate gains for shareholders: chief executives have had a great deal of
freedom to allocate profits and cash flows to employees, to managers and, above all, to
expanding the firm. On this point, the closest comparison is that of Rhine capitalism.
26 See four previous articles that present differing elements of this French model of urban services
(Lorrain, 1992; 1993; 2001b).
27 The former Compagnie Gnrale des Eaux became Vivendi in 1998, and was then renamed Veolia
Environnement in 2003.
Waste
Heating
Energy
Culture
Principles
Renault, Matra
4 groups
Transport
Gradual change. More importance accorded to specific, incremental modernizations than to changes in institutional framework
Self-regulated consensual system (merger of industrial and state elites), regulation by checks and balances
Favouring large groups, with a monopoly or oligopoly structure. Acceptance of reasonable profit. Firms freedom of action;
importance of engineers
Legacy of strong state and weak local government: supervision and delegated management
Industrial integration in major groups
Consumption measurement (metering)
Sectoral specialization, breaking even financially (banning subsidies between sectors)
City level plus support by delegated management. Central role of contract
Alstom
Integrated engineering firms
Other actors
Major construction companies: Vinci, Bouygues, Spie
RATP; SNCF 85 networks (Keolis/Via-Transexel+Cariane); Connex (Veolia, CGEA, CGFTE); Transdev (CDC)
Urban transport
EDF/GDF
Suez Bouygues,
Tractebel
Endesa
12,000 municipalities or associations of municipalities in all these sectors
Municipal public enterprises or groups (Veolia, Suez Bouygues)
Water & Sewage
Operator
Organizing authorities
Table 3 Politics and delegation: France
252
Dominique Lorrain
253
Another difference from the English model relates to the way in which all this is
implemented and regulated. The contract is at the heart of the relationship between the
organizing authority and the firm. But it is not a complete contract. Since its inception,
concession has relied (although it does not say so) on a principle of incomplete contracts,
balanced by a duty to achieve a given result: the groups have great freedom to conduct
their policies, but are required to take decisions that make the system work.
To make it possible for markets to function, it has been necessary to perfect other
techniques, such as operator autonomy or measurement of consumption using a scale
of prices to achieve a properly balanced financial position. Firms have always worked
on a sectoral basis: the model does not rely on cross-subsidy between sectors, as in
Germany. Establishing legal, accounting and financial autonomy very soon enabled the
calculation and measurement of real costs to be introduced.
Finally, the main actors of this model are elected officials and engineers, which means
that it is motivated by real issues, not by quarterly financial results or performance
measured by a regulator and by rating agencies. This establishes another difference from
the English model and a similarity to the German.
Revealing crises and crashes

The above account has not covered every detail of what these models are, how they
differ, or how they depend on collective beliefs that are not spontaneous. The collective
mentalities that justify policy principles are the most difficult aspects to grasp, since
they are part of an unconscious process, so internalized that it becomes invisible
unless external challenges force the actors to produce justifying discourses and
behaviours. One method of bringing these factors to light may therefore be to explore
some threatening situations. Tracking infrastructure issues throughout the 1990s has
allowed us to pinpoint some of these moments.
The virtues of the market
In England, when the privatizations of the water and electricity sectors took place in
December 1989 and 1990, everything seemed to be regulated. The economists had
imagined a coherent system, well-controlled, with many justifications: only progress
could flow from it, to the benefit of all users, taxpayers, the country, firms. This is
not the place to draw up a balance sheet of these reforms: we would simply like to
highlight two rough patches and look at what is revealed by the way they were handled.
Having always been managed by public bodies, water services passed into the market
sphere. What happened? And how was this new idea accepted by politicians and the
general public? This reform came at the end of the Thatcher governments cycle of
deregulations, and aroused no major opposition. Initially, all went well, matching the
forecasts. Firms got involved in investment programmes and conducted diversification
policies, evidence of their expected dynamism.
The first alarm signals came with disconnections for outstanding payments. These
rocketed in 1991/2, reaching 21,300, as against an average of 8,000 in earlier years
(Ofwat, cited in Ernst, 1994). Then came announcements of very high profits and
managers pay rises, while firms were reducing their workforce numbers to maintain
their productivity. A shift in public opinion came in the summer of 1995, when a drought
situation led to water being cut off. Some regions, such as West Yorkshire, were
particularly affected (Bakker, 1998). This crisis was especially important because it
brought to light a dysfunction of the reform: the enormous power of the firms.
However, if we look at the responses that were implemented and at the possible
responses that were not, the crisis goes a long way to revealing established concepts.
By awarding huge regional monopolies to enterprises that owned assets and held
operating licences, the reformers placed the whole sector under a dual tension: (1) the
enormous power of firms that have a 25-year licence ahead of them, with a monopoly
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Dominique Lorrain
over vast territories;28 (2) the need to generate returns on investments commensurate
with the assets purchased. Yet there was no challenge or criticism on any of these points.
One could imagine solutions that reintroduced elected local officials into the cycle as a
counterweight; the option was also open to the cities to set up their own systems.29 Yet
none of this was done, which demonstrates that, on the contrary, all the actors shared
the implicit idea of the functional optimum. These two services, organized at a local
level throughout the rest of the world, here remained at the regional level because
this was considered the best one for managing the water cycle.
The first response was to stiffen regulation and, in late 1999, this led to the Final
Determinations (Ofwat, 1999) but within an unchanged framework. This provided
evidence of the belief that managing water primarily means managing a technical cycle,
while others see it as part of urban government. There is a real difference in the way
the line is drawn between a technical concept (managing) and a political concept
(governing).
The second response was to strengthen competition mechanisms. In the late 1990s,
economists and Ofwat teams worked on the idea of third-party access to the network
(or common carriage). According to them, the difficulties encountered in the water
sector (rising prices, high profits) arose from a lack of competition. Competition had
been introduced into telecommunications, electricity, waste disposal and urban
transport: the water and sewage sectors were resisting this, forming the ultimate utility.
This debate is very interesting, since it reveals one of the intellectual horizons of the
intelligentsia and the political class. Basically, the aim of these reforms was to deal with
all these sectors as if they were supplying ordinary goods, simply regulated in order to
maintain their universal service obligations. Historically, they had been categorized as
utilities (public services): in future, they would be viewed as commodities.
When challenged, the model did not change: it adapted to follow its natural line,
strengthening its essential principles. In other countries, the response would have tended
towards the idea of a diminishing role for firms, towards the reintroduction of the
political, and towards a debate on public services, highlighting the fact that they occupy
a particular space between state and market. In the very sensitive areas relating to the
management of water, the spontaneous response at the time clearly favoured technology
(managing the water cycle) and market (strengthening competition).
There is another point that may astonish the outside observer: the way the matter of
national interests was treated. This was taken into consideration at the time of
privatization, through the golden share technique, which fixed shareholdings for a
period of five years. England thus protected itself from the predictable entry of large,
powerful foreign groups into the sectors it was opening up. But at the end of five years,
the system became fully open. The American electricity companies very quickly arrived
on the scene, followed by Scottish Power, then EDF, then the German groups (Finon
and Serrato, 2000; Electricity Association, 2001). In the water sector, movement was
slower, but just as great. Welsh Water and North West Water diversified into electricity.
Lyonnaise des Eaux (Ondeo) acquired Northumbrian in the North-East. The two other
French groups already had a presence in the statutory water companies. Scottish Power
returned to the sector (through Southern) before leaving again (2002). Waste
Management, the American waste giant, approached Wessex Water before withdrawing
to give way to Enron (the American gas company), which in turn withdrew in 2002
in favour of a Malaysian group (YTL). In September 2000, the leading water
group, Thames Water, accepted a friendly takeover bid from RWE. We have painted a
28 Thames Water and Lyonnaise des Eaux France each serve the same number of people in their home
country: 12 million. In the first case, this is the result of a single monopoly position in one region. In
the second , the same figure represents the sum of hundreds of different contracts located all over
France (without ownership of the fixed assets). Thus, the real market power of the two firms is not
the same, which explains differences in modes of regulation.
29 If we take the view that these local networks are very rarely integrated into a large regional-level
technical system providing production or transport, then the idea becomes technically possible.
255
similar picture for urban transport and for waste removal, and we could add
telecommunications.
The English infrastructures industry is characterized by two traits: the strong presence
of foreign groups and an instability of supply. Yet overall reactions to these two points
have been weak no reaction to the American electricity companies, and a tactful
silence at the time of the highly symbolic purchase of Thames Water. In order to grasp
how this type of behaviour provides evidence of deep-seated collective mentalities, we
must compare like with like: that is, we must examine how the same issue was handled
in another country.
Industrial independence
The French model of urban services offers two examples of this. In 1992, it found itself
under threat from the entrance of Waste Management into the waste sector. The
American giant, with its 8.7 billion dollar turnover, largely dominates its rivals, since
its activities represent more than ten times theirs: its arrival was worrying. The model
reacted at all levels: vigilant watch was placed on SMEs that could have been tempted
to sell up at a good price, and elected representatives and public authorities were lobbied,
presenting the new entrant in the least favourable light. The work of a California District
Attorney who had reported that Waste Management had links with the Mafia was widely
publicized in France; the groups convictions for infractions of environmental legislation
were loudly relayed by the press. The system responded in every possible way.
A similar problem was posed ten years later. This time, the stakes were on a different
scale. In Spring 2002, Vivendi Universal announced that, in order to reduce its debt, it
intended to reduce substantially its 63% participation in Vivendi Environnement. First
of all, this represented a considerable strategic change, given that the whole entity had
been constructed from the legacy of the Compagnie Gnrale des Eaux a legacy that
was still clearly evident, since it was valued at 24 billion Euros compared to 20 billion
for the whole telecoms and media branch. Then, who might acquire the 2330% of the
capital concerned? Candidates could be counted on the fingers of one hand. The only
groups with a strategic interest and the financial capacity were the two large German
electricity companies and Suez.30 The French establishment was immediately up in
arms.31 The chair of the Association des Maires de France [French Mayors Association]
intervened, recalling that the groups value related very largely to the contracts that it
had made with the French municipalities and that, at the time, these contracts had been
negotiated with the Compagnie Gnrale des Eaux, a part of the national landscape. Any
rescue bid for the company would oblige the mayors under law to review their leasing
contract (Delevoye, in Le Monde 4 April 2002: 2021). This was hardly a veiled threat:
todays value will not necessarily be tomorrows. Buying a company on the stock market
confers neither ownership of the assets (in the case of leasing, these belong to the local
authorities) nor a guarantee of operator status.
In France, therefore, these questions concerning foreign ownership are judged to be
sufficiently strategic that they lead to a reaction. They trace the outlines of a collective
mentality opposed, point by point, to that of the English model. The Mayors
Associations reaction shows that these issues are viewed as an integral part of the
government of cities. Of course, cities delegate, but they maintain ultimate control. So,
we have clearly found two ways of perceiving a sector: one that inclines to the side of
local government (a political component) and another that leans towards the technical
side of the water cycle and to markets (a commodity approach).
Perhaps this term commodity and this issue of degree of integration into the market
bring us closest to pinpointing the biggest difference between the two models. All the
30 Suez the other large group in the sector could not really be envisaged, since this merger would
have led to a super-concentration that would undermine the legitimacy of the whole system by
concentrating too much power. At a time when this model was being challenged for its lack of
competition and of transparency, a similar alteration to the supply would present many risks.
31 See inter alia two pages in Le Monde (4 April 2002: 2021).
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Dominique Lorrain
literature on these subjects in France has constantly affirmed that public services are not
totally within the remit of the market, but are a material expression of the social bond
(Stoffas, 1995; Bergougnoux, 2000; Martinand, 2001). On the French side of the
Channel, being a member of the same nation to take up Agulhons argument again
seems to mean having the same access to a network and paying an equitable price
for it. These higher principles are guaranteed by the political force in charge of the
markets.
However, French reactions to foreign capital bear the hallmark of a more
interventionist culture. The way in which political, state and industrial spheres interlock
is such that leaving the market alone to decide is not viewed as an option.32 The French
are open to the market in this sector, but the break with the political is less distinct than
in England, where there has been no reaction to the purchase of a large part of the public
services by non-English firms. Perhaps pragmatism based on judgement by results should
be perceived as a feature of the English outlook, as the outcome of a long-standing
financial approach to the issues. The nature of the operator does not really matter: in
the English model, the authorities concentrate on regulation and on the power of
command, while in France like Germany more importance is accorded to control
of the whole process, and so the idea of entrusting it to a foreigner raises questions.
Integration and self-regulation
Since the early 1990s, the German strong local public sector model has been subject
to two major challenges first, reunification with the East, then deregulation. These
were disruptive crises that placed the model in danger, forcing it to react. Given the cost
of bringing infrastructures to the same level, reunification could have led to Englishstyle privatization procedures: in its systematic privatizations of East German
enterprises, the Treuhand could have sold urban assets, as it did industrial assets
(Bafoil, 1996). With deregulation, the threat was more pernicious. Opening up the
market led to the arrival of new entrants and to price competition, with an impact on
the Stadtwerkes receipts. In the end, both their financial equilibrium and the realm of
politico-industrial relations, in which they were used to functioning, were challenged:
let us look at this more closely.
Reunification and the challenge of modernizing infrastructures clearly acted as a
signal to the large German electricity companies. For instance, RWE, up to then a
sleeping giant living comfortably on its monopoly of electricity generation and
transport in the Rhineland,33 accelerated its growth into electricity and construction in
East Germany. It announced a 5 billion DM investment programme there for the period
19905 (Financial Times, 7 November 1990); it developed a network of 200 petrol
stations; its construction subsidiary (Hochtief) made its presence felt. In 1994, RWE
and the two other large electricity companies, Preussen Elektra and Bayernwerk, acted
to ensure that the electricity sector in East Germany could not escape them, by acquiring
75% of Veag, which held the monopoly of electricity generation and transport. These
strong beginnings were consolidated by upstream and downstream operations.
Upstream, a subsidiary of RWE bought Laubag, Veags supplier. Downstream, it
acquired through the Treuhand process three electricity distribution companies,
in Cottbus, Leipzig and Chemnitz.
The German electricity companies thus managed to reproduce their model of
integrated enterprise, transmitted locally through distribution companies, even though
the price to pay was very high.34 The Germans have held to their industrially
32 In contrast, in his book J6M.com, J.M. Messier develops his credo in favour of markets and of
enterprise, explaining that, at the time of the operations with Vodaphone/Mannesmann and then
Seagram, he conducted his strategies without informing the political authorities.
33 See Financial Times (12 December 1990).
34 According to the financial press (Financial Times, 6 July 1994), DM 8 billion was paid for Veag, with
a commitment of DM 40 billion investment; for Laubag, the respective sums were DM 2.1 billion and,
over the next 20 years, DM 6 billion.
257
integrated model: this points up a profound difference from the Anglo-American

model. The latter believes in the virtues of competition, and in order to achieve these,
integrated firms must be unbundled, internal exchanges made transparent, crosssubsidies eliminated. Basically, this vision aims for the idea of an atomized market.
The English are the heirs of Adam Smith, but they are also merchants. Trading
activities take precedence over organizing production, just as the market prevails over
the firm. This goes back to a very long tradition that is not merely political and which
clearly influences theoretical debates on the status of the firm: is it just a firm, or is it
an autonomous body offering one means of exchange? Here we must, of course, cite
Coriat and Weinsteins overview, Chandlers work, the contributions of Williamson
and the French Regulationists.
German executives in this area have an entirely different conception of things. They
(like French utilities, in fact) take the view that productivity gains may be made by better
organization within firms, which presupposes control of a good part of the value chain.
It also presupposes that this control will be sustained over time in these sectors, where
fixed costs are high and returns on investments are slow. The German executives
horizons are not the short-term ones of quarterly reports: their concept of capitalism
involves optimization, stability of exchange, compromise between stakeholders. This is
right at the opposite pole from good governance: unbundling, short termism,
shareholder value, return on equity. When the large German electricity companies were
merging, the Chairman of Veba (the future E.ON) expressed this whole discrepancy in
the following terms: We are better than fund managers at controlling and developing
different businesses . . . We understand more about business. Were in closer. We follow
international developments. We know the people (Atkins, 1999).
This argument expresses a radically different view of who it is that ensures
exchanges: the market (via traders), fund managers or engineers? The Anglo-Americans
spontaneously entrust this task to the financiers who manage the money the most
universal means of comparison while the German model relies on its engineers.
The deregulation of the electricity sector represented the other major crisis for this
model. For a long time, the electricity companies had been subject to criticism from
industrialists because prices were on average 30% higher than in other countries.35
Deregulation of the sector, which took place officially in April 1998, was therefore
supported by many actors. Firms adapted very rapidly to the new context, and did so
with a vigour that surprised all observers. RWE-Energie announced a price reduction of
20% for private individuals. Preussen Elektras prices fell by 60% in 18 months for some
industrial customers (Financial Times, 21 October 1999).
These falls were enormous, and one may wonder how they could have been possible:
how did the electricity companies find productivity gains like these in so short a time?
The conclusion may be drawn that this partly reflects the monopoly income that the
firms had captured. However, another part of the explanation relates to restructuring
(Glachant, 2001).
As has already been outlined, the industry responded to the challenge of opening
markets with two giant mergers, both announced in October 1999, which created E.ON
operating in the North and Bavaria and RWE, an integrated enterprise covering
an area from Switzerland to the Netherlands. The other, less immediately obvious
response was that of better integration with Scandinavia, where, thanks to North Sea
gas and oil, very cheap electricity is generated. The Scandinavian electricity industry,
historically fragmented between numerous small local producers and municipalities,
was restructured around a regional leader, Vattenfall, a company with public capital that
has a presence in the countries of the region. The large German groups started
cooperating with this group, first in Hamburg and then, especially, in Berlin. Getting
35 In the report that he produced for the Commissariat du Plan, Jean Michel Glachant gives a great
deal of data, including the following half-yearly averages for industrial customers, expressed in Ecu/
100 kwh: Germany 8.3, France 5.8, Belgium and Italy 6.7, Sweden 3.2, Norway 3.
258
Dominique Lorrain
into Berlin through the control of Bewag enabled them to command the restructuring
of the East German network (around Veag).
One of the conditions for BundesKartellamt approval of mergers was that the two
new entities should sell off assets in order to preserve the oligopolistic structure of the
system and to avoid the risk of creating strong, monopolistic positions in many places.
The way in which this was done illustrates what competition means in the different
models. The operation could have centred on an American group, Southern, which had
taken a share in the Berlin electricity company and made no secret of its ambitions to
rise further. Veba and RWE, however, preferred the Swedish company Vattenfall, to
which they disposed of their shares in four companies (HEW in Hamburg, Bewag, Veag,
Laubag in East Germany) by private sale during 2000. The Swedish group thus became
the countrys third largest operator (Financial Times, 8 August 2000; 4 May 2001).
The German electricity companies moves towards Scandinavia functioned on two
levels. Firstly, they strengthened trade with the Scandinavian pool on their northern
border and made themselves ubiquitous in the integration of this continental area, since
the Hamburg regions networks lie very close to those of Denmark and Sweden.
Secondly, this industrial alliance, which has all the formal attributes for creating
competition, strengthened them in their own model. There is a great deal of similarity
between the countries of Northern Europe and Germany: a system that combines a
strong public sector philosophy with market principles (hence the way the system was
reformed, leading to the rise of Vattenfall), a role for local authorities, integrated firms
and, finally, a concept of exchange relations based on cooperation rather than on
confrontation.
On this point, the German firms felt themselves totally removed from the principles
that inspired the American firms. Southern quickly took its differences before the courts.
At the same period, another firm, Enron, was putting pressure on the European
Commission for a more radical approach to opening up markets. Its criticism related to
the fact that the German model is organized by a small number of integrated enterprises,
which own the transport network as well as generating the electricity. The ideal for the
American group, which was then developing a trader strategy (Defeuilley, 2001; 2002),
would have been totally free access to these transport infrastructures. These pressing
demands justified a response from the Cartels Office, which also helps us to understand
differences in policy principles:36 Each country has its own historical conditions.
Unlike England, which, before the 1990 reform, had one large nationalized enterprise,
the German electricity market (before the mergers) was split between eight regional
companies. Unlike other countries, Germany has no regulatory authority that supervises
the deregulation of the market. Instead of such an authority, the companies regulate
access to their network through a code. The Cartels Office believed that, although it has
a specific form of organization, Germany has more competition than many other
countries where generation and transport are actually separate.
A year later, in May 2001, the controversy was still running, and Enrons European
management continued to express its criticisms of the naughty pupils in the class.37
What ideal model was the German system being judged against? The measures seemed
to be that:
1 Its architecture was not open. A comparison might be England, where firms were
dismembered and the market shares of the three historically-established electricity
producers fell from 80% to 37% (Glachant, 2001). Another reference point is Spain,
36 See Financial Times (8 May 2000).
37 The statements made say more about this issue than any lengthy theorizing could. Enrons staff
were so convinced of the superiority of their model that one of them went so far as to say, If I were
their teacher, Id make them all [European countries] stay behind after school for extra lessons
(Financial Times, 23 May 2001). Six months later, the landscape was to change abruptly: October
2001 saw the onset of the groups difficulties, which eventually led to its bankruptcy (Defeuilley,
2001).
259
which rejected a merger between Endesa and Iberdrola at the time the Germans were
accepting a mega merger;
2 Another criterion was freedom of choice for consumers, and the number who changed
their supplier;
3 Lastly, the criterion of falling prices.
In these high-stakes confrontations, it can again be clearly seen that, for the AngloAmericans, the intellectual implications of a high-performance system would include
the creation of an atomized market and generalized competition. German industrialists,
on the other hand, would reply by asserting that a fall in prices and service
improvements could be obtained by maintaining the architecture of their system:
industrial integration, tight relationships with the Stadtwerke and coordination
throughout the continental area.
The German industrial system resisted, defending its original features against the
demands of the new corporate governance. There was conflict around architectures
(integrated or dismembered), around the siting of power (engineers or traders) and
around internal principles of coordination (coordination or authorization procedures for
free access to transport). The German energy groups adapted while still preserving their
identity, oligopolistic structure, integrated firms and management power.
Local integration and public management
The other dimension of this Northern European industrial model relates to the way it
is enmeshed with the local political system. The strong local public sector model, like
the French model, must be thought of as having dual industrial and public
components.
The restructuring of the electricity sector also affected the Stadtwerke at the end of
the chain, which numbered 900, in comparison with the countrys 7,000 or so water
companies.38 In Autumn 1999, when the Chairman of Veba set out his plan for merger
with Viag-Bayernwerk, 20,000 employees of the publicly-owned electricity enterprises
marched through the streets of Berlin (Le Monde, 29 September 1999). Everyone
clearly understood that there was a risk of problems resulting from falling franchise
incomes and of private sector partners entering the Stadtwerke when they became
companies. Some observers took the view that, in a new, open system, the Stadtwerke
might lose 5 billion DM a year, as well as the associated advantages for local elected
officials. This situation was aggravated by the consequences of a slowdown in the
economy. Since the mid-1990s, German cities had stretched their budgets; so, as
elsewhere, local elected officials had an incentive to sell off part of the capital of their
public companies.39 Numerous examples show that a change was in progress. In 1995,
the City of Bremen, heavily in debt, was the first to move, disposing of 49.9% to a
consortium managed by Veba. In 1993, the Rostock contract had been won by
Eurawasser, where Lyonnaise des Eaux was the operator. 1997 saw the Cartels Office
approving the sale of 48.8% of the Berlin electricity company. From then on, the
movement seemed to accelerate.
But, from our point of view, the ways in which the model offered resistance are just
as significant. In 2000, the Mayor of Hanover had to terminate an operating contract,
in the face of mounting opposition from various quarters. More significant still was the
privatization of 49.9% of the Berlin water company, and the precautions surrounding
this. This operation is a strategic one for the industry, since it is one of the major water
enterprises, serving a population of 3.5 million, and has business operations worth 1.3
billion DM. It also has a symbolic value for Germany. The authorities finally accepted
the bid from a consortium formed by RWE (45%), Vivendi (45%) and Allianz (10%).
38 The Stadtwerke relate to big cities and the specialized public enterprises to towns and villages.
39 All the more so because trade-in values are high between 1.2 and 2 times the businesss turnover.
For example, the enhanced value for Dsseldorf in 2001 was announced as being 2 billion marks, on
a turnover of 1.2 billion.
260
Dominique Lorrain
However, this design meant that private sector interests remained in the minority; and
the risks that might arise from the entry of a foreign group into the sector were
contained, since Vivendi held only 22.45% (45% of 49.9%). Despite all this, the move
was only made possible by a series of exceptional commitments on the part of the
firms,40 in the face of fierce resistance from the Stadtwerke system and its political
supporters.
These supporters mounted a resistance in defence of established interests. They also
laid out a certain concept of public policy, which has its own logic:
1 Politically, this system for delivering local public services is an element of the welfare
state, so that any privatization policy may be viewed as a challenge to a broader social
protection model;
2 Financial cross-subsidies between sectors function invisibly but ensure the quality of
the whole. Privatizations would tend to separate what had been brought together,
introducing measurement and calculation;
3 The system is economically justified because it has a better capacity to coordinate
interventions in networks, each of which has its own logic but all of which share the
same urban ground. What is the reality of this? What are the organizational conditions
in which these gains can be made?
Consequences
Different institutional architectures have different consequences for the organization of
markets, for industrial supply, for modalities of competition. If we accept that all services
can be broken down into four different functions operating, engineering, construction
and manufacturing each may be treated separately.
The current structuring of the industrial supply for infrastructures in developed
countries results broadly from the way the public authorities have left certain spaces for
the private sector (see Table 4). Where a strong local public sector acts as operator
frequently with integrated engineering41 we find enterprises that are powerful in
works activities and, especially, in the supply of industrial plant. There are both German
and Japanese examples of this. The German groups did not originate in the water or
waste sectors: they came from industry, construction and the electricity sector. The UK
relies on a long tradition of independent consultancies, working largely in the export
sector and on major construction firms Amec, Balfour Beatty, Carillion (ex Tarmac),
Bovis Land Lease, Taylor Woodrow although the privatizations as well as other
reforms, like the PFI, have modified this structure. In France, where the institutions have
allowed firms to come in as operators and then to diversify into engineering and
construction, we do not find any very large groups entering in this way; on the contrary,
large concerns are less numerous in industry and independent consulting.42
In the long term, therefore, the space occupied by local public authorities has
delimited the possible development of the private sector. Current strengths and
weaknesses reflect certain major choices made in the past. Therefore, although it is true
to say that French urban services groups are powerful and that they have a unique
position in the world, this results primarily from their service operator function. Their
power with regard to the other functions is less evident and, for the purely industrial
aspect, far from total. The same goes for independent consulting. However, it can be
argued that the origins of patents and of the plant purchased are as strategically important
40 See Les Echos (5 July 1999).
41 The Munich Stadtwerk has a turnover of 2.5 billion DM and employs about 10,000 people (cited in
Reidenbach, 1997).
42 There are exceptions, however: Saint-Gobain and Bonna for cement pipes, Alstom for railway equipment and turbines.
261
as the operators nationality, since they relate to industrial independence and can affect
the balance of trade. These analyses show that it is as important to track the policies of
industrial groups ABB, Hitachi, Kawasaki Heavy Industry, Mitsubishi, Siemens,
General Electric as the policies of the operators.
Table 4 Positioning of sub-markets in different countries
(1) Service operator

(2) Engineering, consulting
(3) Works enterprise
(4) Industrial, plant or
equipment
Germany
UK
France
Municipal enterprises
Depends on the sector
75% private sector
Integrated with (1) or (4)
++++
Integrated with (1)
++
++
+++
++++
++
Such reasoning leads us towards another view of the strengths and weaknesses of
urban services in each developed country and of the ways they tackle export questions.
Let us examine the consequences of a commercial transaction, according to which of
the four areas it falls into.
1 The sale of an industrial plant is a credit for the exporting countrys balance of trade
and, if related production is carried out in the country, an operation that generates
jobs domestically;
2 A contract for works abroad is a credit for the balance of trade but has less effect on
employment, since markets often expect that the purchasing country will take a share
of that;
3 The same is more or less true for consulting.
In these three cases, the vendors relationship with the host country is discontinuous
over time the period of a contract, the timing of a delivery, or the time taken to
complete the works and the economic transaction has only a very slight impact on
the political culture of the host country. The sale of pumps, pipes, buses or incinerators
is independent of any national political debate on the reform of institutions that would
allow the smooth running of an outsourcing contract in the long term.43
Operating a service in a foreign country functions within another logic. This kind of
activity produces weak effects on employment at home and on the balance of trade;
profits are expressed in financial transactions that impact on the balance of payments.
Vertical integration of the operation of an urban service may lead to repercussions for
consultancies or for construction companies within a group; but it can also be restricted
to the sole function of operator, as a result of the political culture of the host country.
Above all, approaching markets from an operating base implies roots and long-term
commitment; therefore, the quality of the institutions cannot fail to be a matter of interest.
This way of reading the situation certainly explains some of the confrontations
between firms on the markets. The Anglo-Americans often tackle the development of
urban infrastructure from their consulting base: they recommend international
invitations to tender, division into separate lots, complete contracts, then monitoring and
regulation. The French think they can make negotiated offers, that a good solution is to
reform the whole technical system and, finally, that contracts cannot provide for
everything. Complete and incomplete contracts represent two salient areas where there
43 Buying certain very visible equipment can frequently reactivate political passions. In 1978, the
purchase of Mercedes buses by the Socialist-run Town Hall of Brest sparked vigorous demonstrations by the CGT (Confdration Gnrale du Travail), claiming to defend French workers jobs at
Renault.
262
Dominique Lorrain
is real competition between different views of the issues. Some people think that a good
analysis and a good contract will launch an operation.44 For the French, the contract is
only a stage: it cannot provide for everything and, in particular, for anything not covered
by contracts (devaluation, political crisis, slump). The main problem is to bring it to life
while perfecting adjustment mechanisms. To express this simply, we could say that
some view their activities as ballistic (if we calculate the details right, well
automatically get results), while others see them as interactive having set our
objectives and obligations, well have to recalculate the trajectory depending on the
conditions we encounter.
Nor are these models identical in regard to their effects on urban government, on
democracy and on the construction of a local public space. The choice of a mode of
urban service delivery relates not only to technical operation: it is one of the choices
that organize the local political space. We could maintain that there is a link between
the existence of dynamic, active local government, adaptable over a long period, and
the material base that serves to support it. A politicians knowledge of his city and his
capacity to respond to situations depend on the boundaries of his direct powers.
Reducing local government deprives it of some of its basis for legitimacy as in the
example of the English model. Therefore, the growing autonomy of the private sector
has a limit in principle.
For example, what was the nub of the responsibilities of elected representatives in a
municipality of 41,000 inhabitants in the suburbs of Los Angeles that employed 60
agents and made 60 contracts with specialist businesses?45 Where contracting-out has
led to such butchery, what remains of the idea of local public policy? We can look to
the good health of the German political system, resting on a broad, permanent base, in
contrast to the current crisis in English local government, where local politicians have
seen their room for intervention shrink away.
If the distinguishing feature of local politicians is to act as integrators, then uprooting
them from specific responsibility for production will automatically push them towards
the joys of politics for its own sake. Of course, it is all a matter of degree, but it is well
understood that somewhere there is a point of balance between what one does and what
one has done by others. Having too little to do may lead to loss of competence in regard
to the issues, while having too much to do directly may cause a loss of direction
management is substituted for the political. This may be one of the risks of the strong
local public sector model. An interesting compromise might be well-implemented
delegated management.
The challenges of defining perimeters for the intervention of local authorities also
apply to certain ways of carrying out policy. Must politicians be networkers or brokers,
who delegate, or political entrepreneurs, who create and then are faithful to a situation
through production? The networker and public entrepreneur are the two figures around
whom public policy is organized. The first corresponds to the French historical tradition
of the notable, or influential local figure, of the courtier, of the broker as the
Americans would say.46 The second figure gets involved in acting on things, not just on
principles: this is the outlook in Germany, as it was in Britain before the second world
war.
44 An account of these issues can be found in Lorrain (1999). For the complete vision, see a recent
tool kit, Managing and Hiring Consultants, put together by the World Bank teams for emerging
countries; it is very well done, but presupposes a world where the institutions are those of the United
States (www.ppiaf.org).
45 According to a survey of French cities we did in 1985, the number of local civil servants as a
proportion of the population of the city was around 2%. For suburban municipalities with fewer
facilities, it is a little lower (in the order of 1.4%), which means that a municipality with a population
of 41,000 would employ, on average, 574 officials. The difference is obvious.
46 See Thodore Lowis work on the American political machine (1969) and also the classic work by
Banfield and Wilson (1966).
263
But this second approach relies on a distinction between high politics and ordinary
politics. The first operates in Parliament, and relates to diplomacy, defence and financial
policy. The second relates to everyday management. This separation although it may
be possible for other countries is not possible for the French. Politics is everywhere
perhaps this is a feature of the French identity: love of the word and of rhetoric,
boredom with the daily round. Politicians cannot escape the attraction of politics. They
go on being networkers, perhaps because their compatriots collectively need tragedy,
drama, words and seduction in order to manage relations with the other. Surprise me!
says the public to its politicians. This obviously tends to discredit ordinary politics: one
cannot but acknowledge that it is difficult to produce the expected thrill by presenting
the latest plan for rubbish collection.
Conclusion
Basically, two ideas have structured our analysis: political ideas and theoretical
positioning.
On the political side, the present is marked by past European debates and by
institutional choices made since the nineteenth century. The numerous examples that we
have given show that, after their roads divided, each has followed an authentic path
dependency. This idea of the long-term impact of the original institutional framework
makes sense today in the emerging countries, where very often a local political space
has yet to be constructed, and where a clear distinction between public and private
interests is not always guaranteed (Le Gals and Lorrain, 2003). This construction is
certainly taking place through tackling questions that have been the subject of debates
for a long time in Europe and have therefore become less burning in nature. Are urban
services pure public goods, financed by taxes, free at the point of use and accessible to
everyone, like roads and schools? Or are they commodities whose consumption and
production costs are measured, and which are sold to customers? Is there a right
compromise between these two extremes? What should a good territorial level of
organization for these services be: states, regions, areas, municipalities, etc.? What type
of operator should be used: public, mixed or private? What pricing policy should be
adopted, and how should the principle of equality of citizens before public services be
implemented? Resolving these questions is no slight matter. Maurice Agulhons works
on late nineteenth century France have clarified perfectly the role of local affairs in
extending the idea of democracy: cities were a site of learning (Agulhon, 1988). Urban
democracy naturally depends on political means of exercising universal suffrage, but it
is also implemented through institutions for managing cities. This long-term linkage
between urban institutions and political democracy should be ever-present in the minds
of those responsible for international institutions involved in emerging countries. This
is a major issue: the choices made often determine long-term commitments. Nor can
the management of urban services be reduced to a single equation that can be optimized
at sectoral level. From this point of view, the three models under study offer some
contrasts.
On the theoretical front, the message is that analyses of local government must be
released from drifting towards particular disciplines and sectors the delights of
localism. Models of government include the political, the state, markets, firms. Thinking
about them means mobilizing history, industrial economics, political sciences and
institutional economics, and this complexity is the price to be paid for being able to
introduce meaning and real comparison. For 20 years that is, over the period of the
decentralizing reforms in France too much of the literature has merely told us that
directed public policy results only in specific, contingent contracts and that it is very
difficult to generalize. This analysis can be challenged on two counts (Lorrain 2001a).
Firstly, contracts did not begin when decentralization came in. Rather, they prepared for
it: the French model of urban services provides an illustration of this, as do the
264
Dominique Lorrain
modernization programmes of the 1970s. In fact, we have been living against a backdrop
of ideas that has changed little in 30 years: the heirs of the notables and those observing
them have simply taken up and amplified what state reformers had invented well before.
Secondly, although things seem really complicated at first sight, this does not mean that
they are not organized around certain regular features, as this international comparison
has shown. Thinking about this makes it necessary to move away from a strictly limited
view of local government, to create articulations between this analysis, the state and
firms, and to situate that thinking within much bigger units, corresponding to certain
historical configurations of capitalism. By doing this, it is possible to reveal regular
features and to show how the scope of local government encompasses activities with
direct industrial and technical dimensions (such as infrastructure activities, construction
or utilities), providing us with a way to understand the different forms of present-day
capitalism.
This article therefore concludes with an invitation to initiate research that would look
at this subject on a comparative international level, situating it empirically and
theoretically at the intellectual intersections we have mentioned. There is certainly a
fairly urgent need for this, since the world is changing: boundaries are blurring, and
objects, policy principles and policy categories are shifting. In these conditions, it may
be possible to come to a better understanding of what the countries of old Europe, the
United States and Japan have in common and how they differ, as well as of the paths
being taken in an immense country like China.
Dominique Lorrain (Dominique.Lorrain@ehess.fr), CEMS, CNRS/EHESS, 54 Boulevard
Raspail, 75006 Paris, France.
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International Journal of Urban and Regional Research