Public And Private Participation In The Water And Wastewater Sector

by Cledan Mandri-Perrott

Overview

Public and Private Participation in the Water and Wastewater Sector provides practical guidance on applying Public Private Partnership structures within the constraints of European legislation, with examples on how to ensure consistency with EU procurement, competition law and the Water Framework Directive. It reconciles the need for adequate regulation within the context of a monopoly provision of service – a major concern of the European competition policy. 


The purpose of this book is to provide practical guidance on how to introduce a Public Private Partnership (PPP) as a strategy towards helping meet the demands for massive capital investments and improved management and performance in the water and wastewater sector. The introduction of PPPs within a European context needs to be assessed against compliance with basic EU law principles related to Competition and the Water Framework Directive. International legal structures in the management, distribution and treatment of water are discussed. There is a brief overview of the present realities of European integration, the political and legal aspects involved in the water sector and two cases in which a viable solution was reached and which form the basis of this research. The book examines the general principles of EU law in terms of competition and procurement and how other directives have an impact on PPP. It then assesses the specific rules applicable to PPP in the EU context, and their implications in designing water PPPs. The book concludes with a review of two case studies (the City of Sofia, Bulgaria and the City of Tallinn, Estonia) that show how the Public Private Partnership structure chosen provides a sound legal basis and a viable way to achieve compliance with Community law and the Water Framework Directive, thus assisting the process of accession to the EU for each country. 


Public and Private Participation in the Water and Wastewater Sector: Developing Sustainable Legal Mechanisms is principally aimed at supporting municipal, provincial, and central governments and other policy makers seeking to improve water services. It is a must read for policymakers and practitioners seeking to navigate through the intricacies of EU legislation and the complexities of public private partnerships. The principles addressed in this book will also be useful outside the European context.   


See also: Private Sector Participation in Water Infrastructure, Organisation for Economic Co-Operation and Development (OECD), 2009; Public Private Partnerships in the Water Sector, Innovation and Financial Sustainability, Cledan Mandri-Perrott and David Stiggers, 2012 

Product Details

ISBN-13:	9781843391180
Publisher:	IWA Publishing
Publication date:	03/11/2009
Series:	Water Law & Policy Series
Pages:	164
Product dimensions:	6.12(w) x 9.25(h) x 0.75(d)

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CHAPTER 1

Introduction

The past few decades have seen a growing awareness of the planet's fragile ecological balance. Water resources are being stretched to their limits and are putting pressure on urban centres worldwide. Nevertheless, there is a growing consciousness of the need for peoples to unite to achieve policies that will assure the protection of this precious resource and the environment within their economic framework. This herculean task of unifying peoples in different parts of the world might be considered viable in say, Latin America, where there is a vast expanse of land with a common language, and a common imprint of five hundred years of Spanish. However, perhaps the most striking example is the unification of Europe, with its wide range of languages, religions, and eternal history of war, constant changes in national boundaries and a host of idiosyncrasies hardly conducive to unification. Recently, the European Union has successfully grown from its original 6 members to 27 members today. This unification is a remarkable feat and is fast becoming a reality.

It is in the context of European unification that this book will be discussing viable international legal structures in the management, distribution and treatment of one of the most vital, if not the most vital, element for the sustenance of humankind – water.

The realities of European integration

The fact that the European Union has successfully grown from 6 to 27 members is remarkable. However, the requirements for entry are stringent and demand careful consideration, both on behalf of the EU and particularly for those countries aspiring membership – the Accession Countries. Environmental standards are being set across the European Union and Accession Countries have to comply with these. Furthermore the EU requires its members to adhere to a common approach to the environment, which crucially includes the provision of water and wastewater services and its management by member countries. Accordingly, countries' public authorities are increasingly looking at partnering with the private sector in the form of Public Private Partnerships (PPP) as an instrument that can be used to obtain improved infrastructure. These partnership structures must fully conform to the requirements of the EU law and the principles of transparency, fairness, etc as well as to European Water Framework Directive (WFD).

Can the public and the private sector collaborate or partner to assist Accession Countries?

The importance of the public and the private sector partnering through Public Private Partnerships (PPPs) will be discussed, as well as how the approach seeks to find pragmatic and sustainable solutions to the key problem of reconciling the need to meet accession criteria with the massive funding requirements for water utility infrastructure. Since the private sector plays an important role in accessing funds and bringing management, technical and commercial expertise to existing water utilities, PPP structures are seen as a possible mechanism to ensure compliance with accession criteria and with the WFD's basic principles. At the same time, European legislation at the Community level does not explicitly provide for 'public private partnerships' or PPPs. There are no strict definitions for PPP within Community legislation although some countries or member states (including accession countries) have created specific tools to coordinate and promote PPPs.

Despite the fact that EU does not explicitly allow for detailed PPP legislation, partnering between the public and private sector involves developing adequate legal frameworks that deliver the services and standards required, yet at the same time are flexible, creative, manageable and sustainable. Sustainability itself will depend – amongst other things – upon an adequate balance of risk between the parties. Given these constraints, this book, from the perspective of the water and wastewater sector, looks at providing sector practitioners in Accession Countries with a series of practical tools to use effectively the concept of 'partnering' with the private sector to address some of the current limitations of the public sector particularly with regard to improving management and financing capacity. In addition the book provides a link with the EU legislative context by assessing whether the structures that aim to introduce the private sector have a sound legal basis and can help to achieve compliance with Community law and directives, and consequently to assist the accession process.

Data presented in this book has been collected through an examination of the historical evolution of the EU, its existing laws, and the EU's approach to the provision of water and wastewater services, as well as the structures available to the private sector in the provision of water services. Given that the EU's position on PPPs has significantly evolved in recent years, the latest 'official' stance is presented in this book, but the reader is advised to check current legislation on this matter. A review of literature on water issues from various disciplines including legal, political, economic and social development has been included. Existing contractual documents have been used as the basis for analysis in the two case studies.

Chapter 2 provides a short overview of the historical context in which European integration developed and how expansion has evolved and is currently being managed. The legal and institutional enlargement structure used to integrate Countries into the EU will also be discussed.

This book argues that in a number of cases the introduction of the private sector through the creation of a Public Private Partnership (PPP) may be used effectively as an instrument to mitigate the public sector's limitations in the provision of services to required standards, the mobilisation of financing (both public and private) and thus assists Accession Countries meet accession criteria. Chapter 3 examines the motivation for involving the Private Sector, looks at the basic principles of project finance and provides an overview of the different options and commensurate risk allocation of PPP structures and techniques available. Some of the benefits of PPP involvement are also discussed in this chapter.

In most countries, specific regions are served with water and wastewater services provided by a single entity. Structuring utilities as 'natural monopolies' helps to achieve universal accessibility and affordability and concentrate investment into one single infrastructure network. Inevitably, citizens have no choice but to receive service from this sole provider. The resulting combination of vital services and monopoly pricing power requires some form of 'regulation'. In Chapter 4, we examine the basic principles of regulation but from an economic perspective in order to ensure that services are provided in an effective way and at an affordable price. So whilst monopolies may represent the best way to achieve universal access at the lowest investment cost, on the other hand, if left unchecked would not set price or supply services in an efficient manner. Reconciling these conflicting interests requires regulation to allow for efficient investment while also compensating for the absence of market forces. Under this chapter we develop the first framework for analysis of the two case studies presented in this book. Practical understanding of the significance of the regulatory issues is achieved by identifying a series of regulatory design considerations whose inclusion is a necessary means for developing a framework for effective and sustainable PPP structures in Accession Countries.

Chapter 5 is concerned with EU legislative framework. We examine the impact European Law principles have on the provision of water and wastewater services. In the water sector, water services tend to be offered by a single entity in a monopoly fashion. Given this monopolistic situation and the fact that the services provided have major economic and social impacts that put the service provider at an undue advantage with respect to the consumer/costumer, it is important that abuses do not occur. EU Competition law is concerned with this situation. Accordingly, it is suggested that a series of tests may be developed to assess any abuse of a dominant position, to determine the extent of public involvement, to identify which would be the relevant market(s), to see how much assistance has been given by the State and to devise a regulatory mechanism to support the Competition principles. This forms the second framework for analysis of the book's case studies.

Notably, within Community law there are no prescriptions at law for PPP relationships nor, in fact, whether a public authority should enter into a PPP. The decision to provide an economic activity is squarely in the hands of the public authority. If it wishes to delegate a part or the whole of this activity to a third party it is the prerogative of the public authority. Accordingly, in this chapter we review the impact Community law may have on developing PPP structures. This will be used later on as a framework for analysis for the case studies developed in this book. In the absence of a uniform legal framework for PPPs at European level and in view of the heterogeneity of national laws the question arises, whether uniform provisions are needed to safeguard transparency and effective competition between market participants.

Furthermore, in what regards the water and wastewater sector, it will be shown how the EU sets the required result in a 'directive', but that it is up to each state to create its own legislation to achieve that desired outcome. In this general context, the particular directive affecting the water and wastewater sector – the Water Framework Directive (WFD) – is examined, its main principles, objectives and evolution explored. Particular emphasis has been placed on the principles of water quality, management by river basin, monitoring and reporting requirements and management of the water and wastewater process through the principle of cost recovery. This forms the first element in the framework for analysis of this book.

Chapter 6 brings together the three elements of the multi-criteria framework based on three key factors driving PPP in the water and wastewater sector in Accession Countries. These are the European Competition Law, Regulation and the Water Framework Directive. These will be used as the basis for examining the two relevant case studies in Sofia-Bulgaria and Tallinn-Estonia.

Application of the methodological framework to the case studies

Having discussed the evolution of the EU, its law, and the available options to provide sustainable PPP structures, we provide a detailed analysis of two case studies and respective PPP structures in Chapters 7 and 8: Sofia-Bulgaria and Tallinn-Estonia. The multi-criteria framework (EU Competition Law, Regulation and WFD) is then systematically applied to each country's chosen form of PPP. By combining both theoretical and practical data, an assessment is made of the effectiveness with which each country deals with accession criteria (WFD), the legality of the chosen structure, existing contractual terms and it is overall.

Conclusions

The book concludes that for both the City of Sofia, Bulgaria and the City of Tallinn, Estonia, the PPP structure chosen provides a sound legal basis and a viable way to achieve compliance with Community law, the basic principles of economic sector regulation and the WFD, thus assisting the accession process of each country. This investigation places significant emphasis on the regulatory aspects of the provision of water services, and as such, examines them in detail. Both case studies used are recent contracts still in their infancy, but the book suggests through the methodological framework used to analyse each contract that both contracts have been effective and successful in helping Estonia and Bulgaria meet the accession criteria. However, full effectiveness cannot be really measured until these contracts are more mature.

Notwithstanding the above, the book provides a mechanism for analysing aspects to be considered when designing PPPs, or for assessing the suitability and viability of the PPP alternative.

The general conclusion drawn from these two examples is that PPP contracts should be flexible, creative, manageable and sustainable if they are to effectively act as a vehicle to achieve EU accession criteria. Furthermore, among a number of lessons to be learnt and applied to other Accession Countries, is that each case is unique and its idiosyncrasies should be considered carefully.

Areas for future research

As mentioned above, it is too early to generalize about the effectiveness of PPP structures. The framework used in this book can be expanded to help design structures and explore their possibilities and limitations in the drive towards compliance with the WFD and eventual accession to the EU. It is outside the scope of this book to analyse the ways in which the limitations can be addressed. For example; How could the public sector restructure to create the same advantages as one of the PPP structures examined? How to balance the profit motivation of the private sector with government's obligation to provide services to the poor? How are subsidies managed? This investigation does not explore how other EU Directives affect the provision of water services. Similarly, the book does not delve deeply into the regulatory aspects of setting tariffs.

CHAPTER 2

The impact of European Union accession on water utilities

2.1 EU AND ITS IMPLICATIONS FOR THE WATER SECTOR OF ACCESSION COUNTRIES

This chapter provides a brief history of the development of the European Union and the basic principles that underpin such a union. The evolution of the European Union will be discussed and in particular the manner in which enlargement of the EU is being developed and managed. The principal focus is to provide a framework by which Accession Countries are integrated into the enlargement process of the Union. Accordingly, the European Commission has developed various mechanisms in support of the Accession Countries. The accession process will be examined and the reasons behind the implementation of the criteria, developed by the European Union, that have to be met by Accession Countries.

2.2 CONTEXT OF EUROPEAN INTEGRATION

In order to fully understand the impact of European integration we have to be aware of the context in which it occurs. Understanding this partly hinges on the historical, political, cultural and economic contexts that have led to its formation. Moreover, it is important to understand how events such as the collapse of the Soviet Union and the liberalisation of Eastern and Central Europe (including Eastern Germany) have been instrumental in driving European integration. However, apart from these macro factors, there were other important reasons, not the least being to prevent war through economic and military integration. These in turn resulted in a recognition that European economies are inextricably linked and could not be successfully managed independently. In order to manage these joint economies, it became evident that there was a clear need to establish a legal instrument to be recognised by all Member Countries. This higher authority would be empowered to develop policies which, although they might temporarily affect an individual country adversely, had the greater good of all countries at heart. There was also recognition that a European union of various countries could only work together in an environment characterised by unrestricted and fair internal trade. At the same time, it was acknowledged that social well-being was intertwined with economic development.

Furthermore, as social consciousness grew and Europe became more economically stable, it became evident in the 1980s that there was an increasing emphasis on environmental issues. The history of the European Union can be traced through the various treaties that address all these issues in preparation for its enlargement and management. Leading up to 1965 there were a number of European institutions all acting in a disparate manner. There was a clear need to integrate the European Coal and Steel Community (ECSC), European Economic Community (EEC) and Euratom as a single unit with simplified administrative structures. In this regard, the Merger Treaty was signed on 8 April 1965, the result of which was only one Council, one European Commission and one European Court of Justice. After this the European Community saw an unprecedented enlargement in its membership and as such, in its sphere of influence that culminated in the signing of the Single European Act (SEA) in February 1986. This treaty sought to allay the concerns of the Member Counties, which were gradually shifting from mass unemployment in the mid 1970's and early 1980's, to a growing concern about the degradation of the natural environment. It can be seen that before the SEA, the response to environmental concerns was at a national level. Clearly with each country developing its own standards this became one of the key motivational drivers to avoid a diffuse and uncoordinated approach to environmental issues. This haphazard approach seriously threatened the growth of a genuinely common market of goods and services in the EEC. Thus, the SEA extended EEC competence to enable it to legislate for the whole area of the Community on environmental matters, including areas of health, safety, consumer protection, public procurement, excise and duties, frontier controls, research and technical development. Although the SEA allowed for greater powers to be conferred to the EEC, it was not until the Treaty of Maastricht on the European Union, signed on 7 February 1992, that an effective and integrated measure to deal with environmental concerns was fully developed. This treaty is very significant as it intended to extend further competencies of the Community by creating two new "pillars" outside the legally binding formal decision-making process of the other Communities (EC, ECSC and Euratom). These comprised of a common foreign and security policy pillar, and co-operation in home affairs and justice. In addition, the Treaty of Rome amended the EEC to create simply the European Union. This marked a legal recognition that activities and competencies of the former Economic Community ranged far beyond its original economic goals.

(Continues…)

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Table of Contents

Table of Abbreviations, ix,
Acknowledgements, xi,
About the Author, xii,
Abstract, xiii,
1 INTRODUCTION, 1,
2 THE IMPACT OF EUROPEAN UNION ACCESSION ON WATER UTILITIES, 9,
3 PUBLIC PRIVATE PARTNERSHIP AS AN INSTRUMENT TO EU ACCESSION, 21,
4 A SUMMARY ON ECONOMIC REGULATION AND ITS IMPLICATIONS ON PPPS IN THE EU, 37,
5 EUROPEAN LEGAL FRAMEWORK AND ITS IMPLICATIONS ON PPP, 49,
6 FRAMEWORK TO ACHIEVE CONSISTENCY BETWEEN A PPP STRUCTURE AND EU LAW, 73,
7 THE SOFIA, BULGARIA CONCESSION CONTRACT, 79,
8 TALLINN, ESTONIA PARTIAL DIVESTITURE/SALE CONTRACT, 99,
9 CONCLUSIONS, 121,
ANNEX 1: Framework 1: EU Competition Law, 127,
ANNEX 2: Framework 2: Regulatory framework for Analysis, 129,
ANNEX 3: Framework 3: Water Framework Directive (WFD), 131,
ANNEX 4: Diagrammatic Representation of Test, 135,
BIBLIOGRAPHY, 137,