**1. Introduction**

Many European cities are facing the challenges of having to massively overhaul their urban water infrastructures. Ageing and overburdened systems first installed in the 19th century are challenged by increasing environmental standards imposed by European regulation. Water legislation in the European Union is defined by the Water Framework Directive (WFD) and its various daughter directives. These directives form the legal frame for European, national and regional policies for water protection. The Marine Strategy Framework Directive, the Nitrates Directive and the Floods Directive further support these. Furthermore, the 'Water Industry Directives' (Urban Waste Water Treatment, Drinking Water Directive, and the Bathing Water Directive) provide complementary legislative tools for the safe management of sewage, the protection of drinking and bathing waters. These pieces of legislation form the core of water policy in the European Union and each address separate issues within the water sector. As these issues are still closely interrelated, these directives mutually impact compliance [1] (p. 5). The Urban Waste Water Treatment Directive (UWWTD) is of particular note for the purposes of this paper, as it has been utilized to legally challenge cities within the European Union that do not comply with the required standards.

These standards are closely tied to the precautionary principle. The precautionary principle is one of the core principles of the WFD and is established in article 11. The precau-

**Citation:** Grafe, F.-J.; Mieg, H.A. Precaution and Innovation in the Context of Wastewater Regulation: An Examination of Financial Innovation under UWWTD Disputes in London and Milan. *Sustainability* **2021**, *13*, 9130. https://doi.org/ 10.3390/su13169130

Academic Editor: Haywantee Ramkissoon

Received: 6 July 2021 Accepted: 5 August 2021 Published: 15 August 2021

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**Copyright:** © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/).

tionary principle is "a guiding principle that allows decision-makers to adopt precautionary measures even when scientific uncertainties about environmental and health impacts of new technologies or products remain" [2]. The precautionary principle itself is subject to ongoing debates: there are numerous voices that claim that the precautionary principle hinders innovation and only triggers new risks due to uncertain side effects [3]. While, it is also known from research that carefully selected environmental regulations can lead to innovation [4]. There is a discrepancy in how the precautionary principle is being put to use: there is an emphasis on making use of the principle by applying it to the factors that trigger its application, there is less guidance on how to implement precautionary measures that prevent this triggering in the first place [2]. Thus, the precautionary principle by means of the WFD enacts immense influence over the way we organize and manage our cities' water systems: it triggers punitive measures in case key factors are not met, but it does not prescribe precautionary measures that would help cities maintain good standing with those factors. There is a certain consensus that the implementation of the precautionary principle can preferably be done by means of Responsible Research and Innovation (RRI). RRI is a conceptual framework for integrative research policy, primarily at the EU level [5]. From the EU side, the principle of democratic governance is emphasized above all, namely that "societal actors work together during the whole research and innovation process in order to better align both the process and its outcomes with the values, needs, and expectations of European society." [6]. Authors of RRI (e.g., [7]) at the same time emphasize aspects of responsiveness, for example, anticipation as the ability to consider alternatives and to ensure reversibility.

The ensuing situation presents cities with an enormous task: in order to avoid these legal challenges, cities have to invest immense sums beyond their financial capacity into their water infrastructure. This 'infrastructure gap' engages a variety of actors that develop different strategies for bridging it. Arguably, this raising of environmental standards under the precautionary principle might foster a particular kind of innovative milieu that strives to overcome the infrastructural challenges at hand [4]. A key area here is the question of finance and the emergence of new financial arrangements to bridge the gap. Within the literature this process is most commonly discussed in the context of the financialization of urban infrastructure, with a variety of long-term implications for urban development, politics and policy (see for example [8–11]).

Two cities that were subject to legal proceedings under the UWWTD are London in the United Kingdom and Milan in Italy. By example of these two cases, this article will detail how the precautionary principle affects urban water infrastructure provision, and how the regulation of the primary risk of pollution can both trigger innovation and create secondary risks within the highly integrated urban water infrastructure sector. This balancing of risks and innovation in a multi-risk environment is one of the key challenges for the precautionary principle in the infrastructure sector, where the regulation of one aspect might lead to the introduction of regrettable substitutions elsewhere; this is particularly significant in an environment in which the way we finance water infrastructure development is fundamentally changing (see for example [12,13]). The overall challenges of integrating water services more closely with long-term urban planning objectives has been recognized as one of the key issues for improving European water policy [1]. Koop and Leeuwen emphasize this point and helpfully provide a comprehensive perspective on the resulting needs for good water governance [14] (see Table 1). This contribution investigates by example of these two cases whether the precautionary principle by means of the UWWTD instigated social innovation in the water infrastructure development process and if so, which particular innovations we can identify.

**Table 1.** Good water governance. Adapted from Koop and van Leeuwen 2017 [14].

#### **Good Water Governance**

1. Develop a shared long-term vision between stakeholders.

2. Involve civil society and the commercial sector, along with stakeholders: recognizing that citizens and private businesses can individually contribute to success.

3. Manage the process and expertise: to address the complexity of the challenge, conflicting interests, and the need to remain focused on a long-term vision.

4. Stop excessive focus on technology development: recognizing that good governance is equally essential for success.

5. Make data accessible and share knowledge.

6. Carry out a thorough cost–benefit analysis and remove financial barriers: success is not dependent on simply providing more money. Limited finance can drive innovation, improve stakeholder cooperation, and help leverage new funding sources.

7. Monitor implementation: legislation and a good strategy must be supported by a

demonstration that implementation and achievements progress as intended

#### **2. Methods**

This article is based on two case studies that were conducted for the RECIPES project (recipes-project.eu). The data is based on 15 interviews (can be found in Supplementary Material) with experts and practitioners in the fields of finance and water infrastructure provision, as well as on a document analysis of 224 documents issued by relevant institutions related to the two sites (see Table 2). The cases were selected for their similarities with regard to the legal issues surrounding the failure to comply with the UWWTD and their very different approaches for implementing the verdicts. The following presents an overview over key aspects of the two cases (also see Figure 1).

**Table 2.** Document analysis data.



**Figure 1.** Timeline of the cases.

#### *2.1. London*

The 2010 legal case against the United Kingdom centered around the overflow of the sewage system into the river Thames in case of minimal rainfall [15,16]. The case argues that under the UWWTD London does not provide adequate infrastructure for the prevention of pollution. As a consequence, the city was presented with the challenge to fix the problem and present a solution that was both capable of coping with the difficult postfinancial crisis funding situation as well as the long-term infrastructural challenges present in London. A strategic study was implemented by the Environmental Agency, Thames Water (TW), Department for Environment, Food and Rural Affairs (DEFRA, the responsible ministry) and the Greater London Authority to determine appropriate solutions [17]. Funding allocation for the different involved sciences was questioned later on, as the results were biased towards large-scale engineering solutions [18]. The selected solution was the adaptation of the water system to and the construction of a 25 km tunnel under the River Thames that effectively acts as a secondary sewer system that catches the overflow of the first when it becomes overburdened. Construction is ongoing and the cost is estimated at GBP 4.2 billion total. Controversies around the project relate to a lack of transparency in selection process following the strategic study, a weak tender process, a questionable financial model as well as challenges to the entire raison d'être of the project, since its services are projected to be no longer necessary (see [8,19]).

#### *2.2. Milan*

The legal case brought against Italy in 2000 for Milan's ongoing dumping of untreated waste water into the river system, handles a similar issue, however it is larger in scale. The legal case results from previous cases against Italy for the failure to implement the UWWTD into national law and points out the immense structural changes that had to be implemented in cities across Italy (see [20–22]). Milan was at the time the last major European city still dumping untreated waste water. Due to these proceedings, Milan has been the subject to an infringement procedure by the EU Commission. A reason for the EU Commission's hesitance to impose a pecuniary sanction was most likely due to the belated awarding of construction contracts to private consortia. Milan had to construct two completely new purification plants and implement major upgrades in a third between 1999 and 2006. The awarded BOT (Build–Operate–Transfer) contracts were surrounded by controversy over bribery, lack of transparency and restricted competition. These events

were still very much in line with ongoing fallout from the 1990s Tangentopoli phenomena ("Bribesville", referring to corruption in public works contracts). These scandals facilitated structural changes in the operation of Milan's water sector, particularly with the transfer of the management responsibility for the integrated water system from the Municipality to MM Spa, a multiservice company fully owned by the Municipality of Milan. Even though the way these structural changes were implemented are still not free of criticism and path dependencies resulting from the BOT contracts are still strong, today, Milan's water system has emerged from this transformation process with several technological and financial innovations, that set it apart from fixes such as those that were applied in London.

#### **3. Results**

In the following we will examine the cases in more detail and explore how their different dynamics relate to processes of financial, institutional and to a lesser extent technical innovation.

#### *3.1. London: Financial Innovation in the Dark*

To understand the financial innovation within the London case, we have to shine a light on the Thames Water's (TW) trajectory and practices in recent years. Thames Water is the key actor for the Tideway Tunnel project, they supply about 9 million customers with water and are responsible for the wastewater of about 15 million customers within South-East England [23]. TW was first privatized in 1989 and has since undergone several takeovers and restructurings. This has resulted in lower credit ratings which mostly result from overleveraging of the underlying assets to finance these takeovers [15]. TW was first listed on the London Stock Exchange but has since been unlisted and employed an increasingly byzantine off-shore structure, which in 2012 consisted of 10 corporate layers between shareholders and the licensed water company. For example, the off-shore subsidiary Thames Water Cayman Island Finance Ltd. holds over half of Thames Water's GBP 10 bn long-term debt. The ultimate owner of TW is the consortium of international investment funds Kemble Holdings Limited, who mostly refinance their investment debts by securitizing household revenue streams [24].

TW financially weak position has resulted in the fact that project delivery is being implemented by a separate entity, Bazalgette Tunnel Limited (BTL), a new special-purpose company with an off-shore holding structure similar to that of TW. The financing scheme passes a proportion of the project costs on to Thames Water's costumer bills, with an estimated GBP 25 added per annum in the mid-2020s. Martin Blaiklock, an independent infrastructure finance expert states that this scheme where customers pay both during the construction phase as well as during service delivery is contrary to common investment principles, as it transfers the project completion risk from utility company to the customer [18]. He concludes that "the incentive for contractors to achieve project completion to time and cost is now much diminished, if not eliminated. Furthermore, customers cannot manage, control or mitigate such risks" (id., p. 4).

Both TW as well as BTL are regulated by Ofwat (Office of Water Services), whose main responsibility lies in the negotiation of tariffs every 5 years based on Thames Water's business plans and Ofwat's internal Regulatory Assets Base Model (RAB). The relatively weak negotiating position of the regulator has been acknowledged and has been the subject of recent politics within the United Kingdom's political process.

The documented increasing withdrawal from oversight mechanisms as well as the relatively weak position of oversight authorities has provided an environment in which financial innovation occurs 'in the dark', and at the cost of future risks [8]. The mechanism succeeds in providing the necessary financial capital but obfuscates key categories that are necessary for cities to manage their planning risks.
