Liberalisation and Privatisation of the German Water Industry, Progress or Setback?

Introduction

In European comparison, Germany provides a particularly high quality of drinking water supply and sewage [6]; however talks about price liberalisation or even industry privatisation are being discussed since years. For several years the EU and the German Federal Ministry of Economics are demanding that the German water market should be privatized and liberalized [1]. This was prompted by a World Bank study in 1995, in which although the high technical standard of the German water supply was recognized, it was also noted was that the water prices are too high and that the German water industry is not sufficiently active on the global market.[10]

Another reason for this demand for Privatization and liberalization is the GATS (General Agreement on Trade in Services). The GATS is an agreement among the member states of the World Trade Organisation on the free trade in services. The services sector, which includes the Water market, should be open to global competition [4].

However can this even be accomplished and if so, how should the German state go about this? Water supply and sewage in Germany has traditionally been in the hands of the local councils, due to the right of self-government according to Article 28, Para 2 German constitution. In recent years, there has been an increasing push of private enterprises into the water market. The private enterprises purchase shares or entire council water supply facilities [1, 2]. However to introduce competition will be rather difficult, since the German water sector is very decentralised and due to the high number of local network monopolies.

So the question arises, whether the regulatory framework should be altered and whether the current strong public orientation of the German water sector ought to be relaxed in order to create vertically integrated water companies, regulated by a single entity, thus creating competition and so affecting water quality, allocation and efficiency in the German water market?

This report aims to critically evaluate the efficiency of the German water industry in regards to operation and structure, and how liberalisation will affect these. To achieve this, firstly there will be a general overview of the German water sector and its framework. Secondly the report will analyse the approaches of privatisation and liberalisation. This will then be evaluated followed by a conclusion.

German Water Industry Overview

The Institutional Framework

Germany is one of the few countries which are rich in freshwater resources. Thus, Germany has a more than adequate supply of water, so water is not currently viewed as a scarce resource. [10]

The water supply in Germany, unlike other infrastructure sectors, has a competition law exception. It is defined by European legislation, German national legislation and the water law