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Local sewage disposal in Germany: the pros and cons of privatisation

by Erich Englmann

Structural adjustment programs in the countries of the South recommend that private companies should deliver infrastructure services instead of public enterprises. Industrial countries such as Germany, faced with ever tighter public budgets, are also considering this path. Sewage disposal in Germany falls under the mandate of local authorities in the interest of public welfare. The numerous organisational set ups used are now being reconsidered.

Mandate of the local authorities

In Germany sewage disposal is a public-sector task, transferred to local authorities under the constitutions of the individual states and their pertinent legislation. It is a mandatory task which the local authorities carry out in their own area of purview. They have the right to carry out those measures necessary for public welfare in their area. How they do this is their own affair.

Being a mandatory public task, sewage disposal is not subject to any taxation at the present time as long as it is carried out by public authorities. The cost of investments, operation and other expenditures of local sewage treatment plants are passed on to the users according to the "polluter-pays principle", i.e. producers of wastewater, in the form of charges and contributions. These contributions may cover the investment costs in full or in part; the local authority of the company is responsible for decision-making. Charges are based on operating costs, the calculated costs and the sewage fees. The calculated costs depend on which part of the investment costs are not covered by the contributions, and also on the depreciation and interest payments.

Different forms of organisation

In Germany the sewage charges are calculated in direct relation to the amount of drinking water taken from the public system.

Municipalities can choose from optional types of organizational forms in order to carry out their sewage disposal mandate. These basic forms are:

· municipality - oriented enterprises.
· municipal public utility undertakings,
· the BOT (build, operate, transfer) model
· the cooperation model.

The decision for one of these models chiefly depends on the local conditions, the size of the local authority, the type of services offered and the State legislation. The following criteria play a role:

· the characteristics of the services to be offered
· the costs of services delivered
· the financing potentials
· the procedure for calculating fees.

Municipality operated enterprises

Municipality-operated enterprises are operated by the municipal administration in the scope of its overall budgets and the municipality sets the legal and organisational framework. The enterprise does not have its own specific operating assets but is administered as part of the municipal budget which is run on cameralistic principles. The municipal council takes all major decisions. Being a dependent part of the local authority administration, the municipality-operate d enterprise is subject unrestrictedly to municipal budgetary law. The full cost cover principle is applied to all expenditures. This means that all or part of the appropriations are used as a general receipts in the administrative budget, or allocated for other purposes in the assets budget.

Consequently, large quantities of outside capital are used to finance sewage investments, and reserves cannot be formed.

Municipal public utility undertaking

The municipal public utility undertaking is also a dependent of the local administration. Contrary to the municipality-operated enterprise, however, it is separated from the general budget operated as a special accounting entity from the financing viewpoint. The municipality retains full ownership and liability vis-is third parties. The utility is nevertheless organised independently and manages its own income and expenditures.

In contrast to the municipality-operated enterprise, a commercial accounting system is used, characterised by an economic plan to which the strict coverage principles of budgetary law do not apply. Municipality-operated enterprises are easier to manage on business principles and accounting is more transparent.

Build' operate and transfer model - BOT

In this BOT model the sewage disposal services are delivered by a private company against payment by the municipality. The private company either buys municipal property or builds new plants on leasehold real estate. Contracts are awarded after public tendering. The operator plans, finances, builds and runs the plant over a longer time period (20 - 30 years) at its own risk and on the basis of an operating contract entered to with the municipality. The owner and operator of the facility is therefore no longer the municipality but the private enterprise. This operator calculates a set sewage treatment tariff (DM/m³ sewage) which can only be adjusted on the basis of defined indexed clauses. The municipality retains responsibility for the public disposal of sewage. It is also still responsible for charges.

The cooperation model

The cooperation model, similar to the BOT model, is based on the maximum transfer of tasks. Instead of the purely privately-run company this model is a mixed private company (limited company) in which the municipality has a majority holding. The company can place orders with third parties for the construction and also for the maintenance of sewage plants. At least part of these operations are usually placed with the municipality's co-shareholder company. Similar to the BOT model, the aim is that a private company, the co-shareholder - builds and operates the sewage plant. The chief difference to the BOT-model is that the municipality, through its majority stockholding in the joint company, can directly influence how services are rendered, and has better access to the sewage plants, which remain the property of the joint company. The cooperation model therefore combines private capital, know-how and greater flexibility with an adequate influence-taking by the municipality.

Pat recipes don't exist

Some 70 % of Germany's 16,000 municipalities perform their sewage disposal mandate through municipality-operated enterprises. Some 150 local authorities have contracted private operators to carry out these tasks, although mainly in Germany's new states in Eastern Germany.

No pat recipes are on hand to help a municipality decide what is the most suitable model. The decision on the best form of organisation for municipal sewage disposal must be taken on the basis of objective criteria for each individual case. A detailed analysis has to be made on the basis of financial and operating figures and in the light of local conditions.

To assess which model is most suitable, priorities must be given to

- flexibility of operations
- transparency of costs for the citizen (fees, appropriations)
- optimisation of business management.

Municipality-operate d enterprises are not easy to organise in day-to-day management, and have proven to have some disadvantages. They may indeed even generate higher costs for the consumer.

The municipal public utility undertaking is more flexible than municipality-operat e d- enterprises and its accounts are more transparently organised. However, the earmarking of receipts from sewage charges limits the general scope of action of the local authority.

The advantage of the BOT model rather than a completely non-privatised solution is that services are rendered in the light of market-oriented incentives for more efficient technical solutions. Another advantage of this model is that a functioning sewage disposal system can be set up relatively quickly even in an administration that only disposes of limited capacity. The disadvantage are the very complex contracting necessary, the municipality's loss of control potential and the long-term binding to one operator

All the abovementioned situations also apply to developing economies, particularly the fact that a decision on which specific form of organisation is most suitable can only be taken in each individual case, to fit in with local conditions and on the basis of a business analysis of costs. If limited or even no capacity is available in the administration to carry out sewage disposal operations, it could be more advantageous to incorporate private companies in order to establish a functioning sewage disposal system more quickly, perhaps based on the BOT model. This demands, however, that a functioning water management authority is set up.


Les travaux d'ipement en infrastructures, dans le secteur de l'assainissement notamment, doivent-ils e pris en charge par des entreprises priv? Compte tenu de contraintes budgires grandissantes, cette question est discutm en Allemagne. Cette approche est proposaux pays en dloppement dans le cadre des programmes d'ajustement structurel. L'auteur parvient a conclusion que la solution optimale pour le secteur de l'assainissement en Allemagne rdait dans une rrtition des tes entre l'Etat et le secteur privIl est d'avis qu'une privatisation de ce secteur art enti doit e exclue.


Conviene dejar servicios pos tales como la eliminacie aguas residuales en manos de empresas privadas? Este es un tema muy debatido en Alemania actualmente, debido a la creciente escasez de fondos pos. Ademas, es una solucion que se recomienda a los paises en desarrollo querealizan programas de reajuste estructural. El autor llega a la conclusie que, en Alemania, la mejor solucion para la eliminacie aguas residuales es repartir las responsabilidades entre entidades publicas y privadas. Asimismo, rechaza la idea de una privatizacion absoluta.