Newsletter and Technical Publications
<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
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"
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
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
* Excerpted from: Tyson, 1991