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<International Source Book On Environmentally Sound Technologies
for Wastewater and Stormwater Management>

6.6.2 Institutional framework

The institutional frameworks existing in Western Europe vary as much as the countries themselves. The differences have their root in traditions; the legal framework; the ways in which big projects are financed in the country; and how and how effective money is raised, invested and recovered, and the finances controlled. They further derive from the perception of what is a public service and what is not; from the distribution of roles between the public and the private sectors and their respective strengths and weaknesses in the country, and, last but not least, from politics and political control.

In the following Sections, three different frameworks are described. The first may be considered the traditional approach. The other two frameworks command a great deal of interest in other parts of the world, viz.: the French experience in the management of water supplies and sewerage systems by private firms, and the privatization of the sector in England and Wales in 1989.

The traditional approach

Wastewater management grew out of other communal functions in almost all of the countries in Western Europe, among them the function of drainage. Still today on the continent, wastewater management is part and parcel of the management of municipal services in perhaps half of the municipalities. But the trend is away from this type of institutional framework because of the perennial lack of resources and the risk of political interference which have been plaguing wastewater management in many of the countries irrespective of their political color. While still within the municipal framework, about one third of the systems are now operated outside the municipal budget. In this case, they operate under a separate budget and must properly account income and expenditures but are still dependent in the legal and financial context. A gradual change-over to more financial independence has occurred in some very large European cities, e.g. Berlin and Hamburg in Germany where, in the overall, only little more 50% of the more than 10 000 STPs are still adhering to the traditional approach (see Figure 6.11).

Figure 6.11: Development of organization forms in Germany

Source: ATV, 1999

 

From here onwards, entirely different models are being explored but not applied yet much in Europe. All involve increasing roles of the private sector. One model foresees operation and maintenance through private firms under a services contract; in this model, ownership of the facility rests with the municipality. Intermediate stages of privatization may involve the sharing of responsibility between the municipality and a private firm under a management contract with or without the municipality being the major shareholder; full contracting-out of all operations under a mixed equity contracts or a concession; or, finally, full privatization. These stages can be observed in France and in England and Wales and will be discussed below. Continental European countries may use these scenarios but in order to do so, they would first need to modify some of their existing policies and legal frameworks.

The French experience*

Like in its neighboring countries, wastewater management in France is basically responsibility of the municipalities (there are more than 30000). They have a choice to manage the facilities themselves or rely on private companies. This type of arrangement has been a part of France’s history for more than a century beginning with water supply and gradually expanding to comprise the full gamut of urban public works. Five companies stand out viz. Companie Général des Eaux, Société Lyonnaise des Eaux.  Société Générale et Lyonaise des Eaux, Société d´Aménagement Urbain et Rural, and Companie de Services et d´Environnement which together serve almost 80% of the population and more the 50% of the municipalities with water. The exception are the small municipalities because the law provides that management of water supplies within municipal budgets is not longer consented if their population is more than 3000. What has been said for water supplies applies fully also to the management of wastewater though still to a lesser degree.

Water supply and wastewater collection, treatment and disposal is considered a unit financially. Income and expenditure must be balanced. Rates are based on metering rather than other yardsticks. It follows that money for the management of wastewater can be raised by one and the same company if it is contracted for both services, as is increasingly the case.

The French system involves three partners but has fewer central controls than systems in England and Wales which are discussed below. They are the elected officials at the level of the municipalities, the user, and the private company. To fully appreciate this triangular relationship it is important to understand the status of elected officials at the local level of government in France, including the majors of the big cities. The more important the "monopoly" of the private company, the more will success or failure determine the outcome of local elections, and this variable represents the basic difference between France and in England and Wales where a central authority is supervising the service provider. Yet, the State also play a supervising role in France, partly through the Ministry of Environment and its Direction de l´Eau, and the Directions Régionale de l´Envirennement, partly through the River Basin Authorities created in 1994 which have power to set forth water policy and to coordinate between conflicting interests. The State also grants subsidies for construction, and these may be instrumental in ensuring compliance with both social and environmental policy and standards.

Once the municipality decides to delegate the operation of its system to a private company, a key instrument in the monitoring of the delegation is the contract signed between the municipality and the service provider. The contract is time-limited, and its provisions with respect to the services to be provided, responsibilities, liabilities and conditions of payment are governed by Law. The contract is the regulator to ensure that the service provider will live up to its obligation as regards service continuity and equal access in the spirit of social justice. Scholars of the system point out that the negotiation and re-negotiation of the contract is the decisive variable which makes the system work, and that self-regulation is possible.

There are other means of control. Firstly, service providers cannot act like a commercial enterprise because they are held not to exploit the monopoly. Secondly, competition among the service providers is strong, and reputation is a major factor in the their competitiveness Thirdly, the quality of the service rendered is a decisive factor in addition to the service fee.

Lorrain distinguishes four contractual settings each of which has implications for the responsibility and the commitment of the actors; he most suitable one from among them must be chosen (Lorrain 1997). With "limited delegation" only, the service provider operates on behalf of the authority on the basis of an operations or a management services contract. If a more substantial portion of the services is "partially delegated" the duration of the contract is increased because the operator is expected make capital investment, assume risks while at the same time, enjoying a larger degree of freedom of action. In this case, the operator's remuneration is derived from the authority rather than the consumer, and the authority retains ownership of the facilities.

"Total delegation" either by a leasing agreement or a concession takes the case still further. Under French law, the service provider operates at its own risk, fixes prices, decides on the programme of the facility, and is in charge of hiring and hiring policy. The provider must take all the measures to provide the service and ensure continuity, including new investment. The authority remains the owner of all assets which are then handed over at the end of the contract in the case of non-renewal. Finally, in the case of "privatization" the assets are sold to the provider who assumes responsibility for the complete works as is the case in England and Wales since the privatization of all water and wastewater services in 1989. Under this scenario, perpetual rights are vested in the operator while the local authority monitors performance.

In comparison with the British example, the practice in France is more flexible: for an individual case, any of the situations described above may be chosen in accordance with the local conditions. Further, locally elected officials, including the majors of big cities will dominate the decision making process rather than the State. Now that about 80% of the population are served by private companies in France, the system has begun to expand into other countries of Europe.


* Excerpted from Lorrain, 1997

Privatization in England and Wales*

Under the Water Act 1989, all wastewater management in England and Wales was fully privatized. Ten regional water bodies were awarded separate "Appointments" as water undertaker and/or sewerage undertaker. The Appointment is an operating license for a minimum period of normally 25 year. The companies had to acquire the facilities. They are the sole owner and operator. However, if there is a breach by the undertaker of its general duty to supply water or provide sewerage, measured vis-a-vis UK and EU standards, the Appointment may be removed by order of the High Court at the request of the Secretary of State.

Within Europe, the privatization of wastewater management in England and Wales was a unique event because it was a nation-wide delegation of responsibilities to the private sector and was carried-out within a very short time. The ten companies were given full responsibility, accountability and power for long-term planning, implementation and operation. In the process of privatization, shares in the 10 companies were offered for sale to the general public and institutional investors in December 1989, and subsequently, were quoted on the London Stock Exchange where they have been traded freely ever since.

There were many reasons behind the decision to privatize. Among other things, was the political difficulty in raising, through general taxation, the substantial sums needed for investment in sewerage and sewage treatment. This has resulted in significant river pollution from inadequate combined sewer overflows, inadequately treated effluents and other problems such as structural and hydraulic deficiencies in the collection systems, especially in towns and cities which had grown rapidly since the 19th century. Recognition of the European standards for wastewater and drinking water treatment made it only too obvious that very significant capital investments, together with higher operating costs, would be required in the coming years. It has been observed that the public sector was too weak to address a problem of that magnitude for two reasons, at least, viz, treasury control of investment and borrowing and indirect control of prices all of which may look good on paper but cannot attract investment nor enhance consumer satisfaction; and political control resulting in short term policies for long term needs, sudden changes and sometimes political interference.

There had been a major reorganization in 1974 when the several thousand different local authorities or other public bodies responsible for water and sewerage were "nationalized" and reorganized in 10 water authorities. Although this gave the new authorities responsibility for the full range of water services and the aquatic environment, these authorities were still in the public sector and controlled by government with respect to investment and the price charged to finance the investment.

At that time, it was recognized that a number of inescapable requirements must be met whether water or sewerage business is in the public or private sector, viz.:

  • The undertakers have a monopoly and, hence, have to be regulated.
  • The service has to be provided safely, efficiently, economically and profitably.
  • Effluent quality has to be improved to meet UK and EU standards, and the expectation of the general public.
  • The higher expenditure to meet these standards will need to be financed by higher charges.
  • Methods of charging need to be found so that the charge levied is as closely related to the benefit received.

Accordingly, the holders of an Appointment are tightly regulated at three levels by a Director-General of Water Services; a National Rivers Authority (which is the Environment Agency since April 1996); and a Drinking Water Inspectorate (not relevant for sewerage undertakers). These are the key regulators - there are other regulatory bodies with responsibilities for specific areas of business activity. In this system, Government (or the European Community) sets the standards; independent regulators check on compliance with the standards; and the private companies finance and implement projects to meet the standards.

The regulatory system is oriented on the interests of the customer. It ensures that customers are charged a fair price for service, that work needed to meet customer expectations can be financed, and that there is a reasonable return to shareholders. The reorganization of 1989 was a major undertaking carried out in a very short time. Thus, it is not surprising that the regulatory system appears stronger and more centralized than that in France where the role of the private sector has grown gradually over a period of more than 100 years.

The system works if each party fulfills its proper role, i.e.:

  • The companies are required to give information to the Director-General for Water Services on the whole range of performance of their assets, e.g. the numbers and proportion unsatisfactory of combined sewer overflows, treatment works and sea outfalls, together with information on the flooding of sewers. They have to furnish underground asset management plans, including an estimate of the expenditure required to maintain and improve sewerage networks over at least a 15 year period. A report must also be made on actual expenditure and achievement in each financial year compared with the plan. Other conditions of the Appointment relate to charges, infrastructure charges and charges schemes.
  • The Director-General has primary duty to ensure that functions are properly carried out throughout England and Wales, that the undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions. In exercising this primary duty, he must protect the interest of consumers and potential customers in respect of the charges and other terms of supply; promote economy and efficiency on the part of the undertakers; and facilitate effective competition between bodies holding Appointments as undertakers.

The main instrument of economic regulation is a price limitation formula set out in the conditions of the Appointments. This formula limits increases of principal charges made by the companies for the services they render. The percentage weighted average annual increase is limited to the sum of the percentage movement in the retail price index plus an adjustment factor, which may be positive, negative or zero. The factor was set in 1989 for an initial period of 10 years ending on 31 March 2000. The Director-General will carry out periodic reviews at 5 yearly intervals. The current investment programme totals more the 28 billion British Pound up to the year 2000. It may be expected that the already massive investment programme will increase.


* Excerpted from: Tyson, 1991

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