1. General framework conditions for the organisation of the waste management industry in Germany... 2

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1 Page 1 of 1 A comparison of relevant organisational structures in the German waste management industry by Armin Halbe and Mathias Morgenstern, ECONUM Business Consulting Table of Contents 1. General framework conditions for the organisation of the waste management industry in Germany Characteristics of typical organisations responsible for the public sector function as such General Exercising their own function Intermunicipal cooperation Transfer of responsibilities to third parties Characteristics of typical organisational structures responsible for performing the (disposal) services General Public sector organisational structures Private sector organisational structures without third party involvement Private sector organisational structures with third party involvement Outsourcing vs. in-house service in public sector organisational structures Monetary comparison Quality criteria Summary... 9

2 Page 2 of 2 1. General framework conditions for the organisation of the waste management industry in Germany The framework conditions that are relevant for the waste management industry in Germany are stipulated in the Life Cycle Management and Waste Act [Kreislaufwirtschafts- und Abfallgesetz (KrW-/ AbfG)] and the pertinent laws of the individual Federal States. A selection of key points for the organisation of the waste management industry is listed below: General priority of waste recycling and recovery over disposal, Definition of the disposal obligations for public sector disposal organisations (primarily urban and rural districts which, as local authorities, exercise the sovereignty over their territory), Obligation of disposal for waste owners and/or generators, Fundamental obligation to transfer private household waste and waste from other origins and intended for disposal to a public entity, as well as the matching obligation of disposal of such waste by public sector disposal organisations, No obligation to transfer to a public entity, for purposes of disposal, waste intended for recycling / recovery and originating from other areas (in particular commercial / industrial waste for recycling / recovery) and thus no obligation of disposal of such waste by public sector disposal organisations, Obligation of return for certain types of waste (e.g. sales packaging waste, scrap electronics, waste batteries and oil) and matching obligation of acceptance on the part of the manufacturer(s) and/or retailer(s) of the pertinent products, and thus no obligation of disposal of such waste by public sector disposal organisations, No obligation to transfer to a public entity certain types of private household waste intended for recycling / recovery insofar as non-profit (e.g. charity second hand clothing) collections are concerned, or if commercial/industrial collections (e.g. for profit second hand clothes, waste paper) were authorised so that in these cases there is no obligation of disposal of such waste by public sector disposal organisations. Accordingly, there is essentially a triumvirateof competence and responsibilities in the German waste disposal industry: Public sector competence essentially for all waste intended for disposal and for private household waste for recycling or recovery, Competence and responsibility of manufacturers and / or retailers for certain products (sales packaging, electronic appliances, batteries, oil), Competence and responsibility of waste owners and / or generators and thus substantially liberalised structures, primarily in the area of waste intended for recycling / recovery and obtained from other origins / commercial and industrial operations. We will now more closely examine the area of public sector waste disposal competence and the pertinent organisational structures. Two types of organisations are involved: Organisations responsible for the public sector function as such (Item 2), Organisations responsible for performing the (disposal) services (Item 3).

3 Page 3 of 3 2. Characteristics of typical organisations responsible for the public sector function as such 2.1 General Public sector disposal enterprises have the following fundamental options in the organisation of their waste disposal competences / responsibilities, in particular within the scope of the implementation of their planning, steering, billing and control functions: Exercising their own function, intermunicipal cooperation, i.e. joint exercise of the functions together with other public sector disposal enterprises, Transfer of responsibilities to third parties. 2.2 Exercising their own function When exercising their own functions, the commissioned agencies generally choose organisational structures that are typical of the public sector. The organisational structures frequently found in practice differ from one another in respect to their degree of independence from the local or regional authority: Local government corporation = legally, economically and organisationally nonautonomous part of the administration of a local or regional authority, Owner operated municipal enterprise = legally non-autonomous part of the administration of a local or regional authority with its own business management (independent administration of a separate set of assets with independent accounting and financial management according to the principles of commercial accounting) and organisational independence (operational management, Works Council), Public service organisation = a legally, economically and organisationally independent public sector organisational structure possible in some Federal Lands. From an organisational point of view, the abovementioned organisational structures have the following advantages and disadvantages: In the local government corporation the organisational complexity is relatively low. Close integration of the local government corporation in the municipal authority s administration leads on the one hand to the greatest possible opportunities for the local or regional authority to exercise its influence, but on the other hand also to comparatively longer decision-making paths. In contrast to the local government corporation, the owner operated municipal enterprise is characterised by shorter decision-making paths and greater transparency and success monitoring because of its commercial accounting approach. The disadvantages are somewhat weaker opportunities for the local or regional authority to exercise its influence and somewhat higher organisational complexity. The special charm of public service organisations consists in their own legal capacity and the related significantly higher degree of independence as compared to both the local government corporation and the owner operated municipal enterprise. The constructs of this organisational structure fundamentally offer good conditions to foster flexibility, economic transparency and rapid decision-making. A slight downer in this organisational structure tend to be lesser opportunities for the local or regional authority to exercise its influence and a comparatively high organisational complexity.

4 Page 4 of Intermunicipal cooperation Two or more local or regional authorities can, as public sector disposal enterprises and in order to meet their disposal obligations, also create an intermunicipal consortium. The organisational structure selected is frequently that of a cooperative, or a joint waste management authority. This special purpose association is legally, organisationally and economically independent. This independence offers relatively high flexibility, economic transparency and shorter decision-making paths. However, there are fewer opportunities for the local or regional authority to exercise its influence. 2.4 Transfer of responsibilities to third parties. Public sector disposal enterprises can also fully or partially transfer their responsibilities to a third party ( 16 Para. 2 KrW-/ AbfG). In that case, the third party then exercises the function of the public sector disposal enterprise under its own responsibility for a limited period of time. This transfer of obligations is sometimes practiced in Germany in connection with waste for disposal originating from other areas of provenance. The public sector obligations are then mostly assumed by private sector businesses (almost always structured as a GmbH [i.e. private limited company]), in which the local or regional authority usually but not necessarily owns stock (majority or minority holdings). These companies often work closer to the market and can thus regularly better serve the needs of the other areas of provenance, and more particularly also the commercial and industrial businesses.

5 Page 5 of 5 3. Characteristics of typical organisational structures responsible for performing the (disposal) services. 3.1 General In addition to the definition of an organisational structure for the exercise of the public function, the public sector disposal enterprises must also decide, if exercising their own function independently or via an intermunicipal cooperation (special purpose cooperative), in what way (own service or outsourcing) and in which organisational structure they will carry out the actual performance of the services (collection, transport / conveyance, recycling / recovery, disposal etc.) In part, public sector disposal enterprises perform the services themselves (in-house services). In practice, this includes but also Public sector organisational structures (local government corporations, owner operated municipal enterprises, public service organisations, cooperatives) in the rule within the scope of an identical organisational structure for the exercise of the public sector function and for the performance of the service, private sector organisational structures (almost always structured as a GmbH [i.e. private limited company]), with and without third party involvement as a second organisational unit in addition to that intended for the fulfilment of the public sector function, introduced by the public sector disposal enterprise as an agent ( 16 Paragraph 1 KrW-/ AbfG) for the performance of the services. Public sector disposal enterprises sometimes award some or all of the services to be performed to third parties in the private sector (outsourcing), which are then also involved as agents for the performance of the services in accordance with 16 Paragraph 1 KrW-/ AbfG. 3.2 Public sector organisational structures In addition to the evaluations of the individual public sector organisational structures from an organisational point of view (Items 2.2 and 2.3), in business management and economic terms the following relevant characteristics are also significant as concerns the performance of the service: Business flexibility, in particular in regard to investments and personnel, tends to be greater in the legally independent organisational structures, i.e. in the public service organisations and the cooperatives, than in the owner operated municipal enterprises, and significantly greater than in local government corporations. The organisational structure of the cooperative usually has in its favour the potential profitability advantages (economies of scale) connected with a larger deployment area. Digression: The profitability advantages in a larger area are especially relevant as concerns the disposal of residual waste and in this category, the quantities for disposal are on the decline. The reasons are, on the one hand, issues of delimitation between waste for recycling and waste for disposal, which are often used and misused by commercial and industrial businesses in order more and more often to dispose of their waste declared as recyclable outside of the public sector waste disposal facilities. On the other hand, waste is separated ever more efficiently in Germany, which leads to lower volumes for disposal. To ensure the capacity utilisation and thus profitability of the waste disposal facilities it is therefore particularly important to collaborate in an appropriate manner in e.g. a cooperative or via public sector agreements or government contracts.

6 Page 6 of 6 Not least because of the abovementioned points, in the last few years an enhanced trend towards legally independent organisational structures, i.e. public service organisations and/or cooperatives, or at least towards owner operated municipal enterprises, which enjoy a certain degree of economic self-sufficiency, has become apparent in public sector organisational structures with in-house services. Local government corporations providing in-house services are becoming rarer. 3.3 Private sector organisational structures without third party involvement The pro s and con s of the involvement of private sector organisational structures (without third party participation) in the provision of services as compared to public sector organisational structures will be discussed below from a business operational and organisational as well as from a fiscal point of view. Setting up a GmbH [private limited company] (the typical owner operated private sector service provider legal structure for the German waste management industry) involves a comparatively high one-time creation effort as well as ongoing formal and organisational effort. In addition, the public sector disposal enterprise has only indirect possibilities to influence the process. Points in favour of the GmbH are the depolitisation of the decisionmaking process resulting from its independence (including, essentially, meetings not open to the public) and, generally, a higher degree of flexibility and agility. In regard to staff, the enterprise has the option to separate itself from the public sector service legislation and to introduce a more performance-based remuneration system in order to exercise a positive influence as concerns the employees qualifications and motivation. From the economic viewpoint it must essentially be taken into account that private sector enterprises are frequently exposed to more unfavourable financing conditions than those available to public sector organisations within the scope of their municipal credit conditions. Companies organised under the private sector regime are also usually practically unable to obtain the same favourable insurance conditions available to public sector organisations within the scope of their municipal damage compensation. From a fiscal point of view it must be taken into account that, in contrast to public sector enterprises acting for the government, private sector organisational structures are subject to VAT and also to taxes on profits (corporation tax, corporate income tax). Although VAT liability has the advantage, in the case of large investments and because of the set-off deductibility provision, that only costs net of VAT need be financed, ultimately, however, the tax liability will almost always lead to disadvantages for private sector organisational structures. In particular VAT liability leads to higher costs, because items that do not comprise a deductible component, such as personnel costs and insurance, are nonetheless billed to the end user (fee or dues / service subscription payer) subject to additional VAT. The duty to pay income tax also results in charges, as at least a minimum profit must be declared. The trade income tax liability in particular results in additional burdens for businesses paying high rates of interest on debt capital, as part of the long-term debt interest is not deductible and is subject to taxation. The tax disadvantages of the private sector organisational structures are at present being examined by the European Court of Justice, and the current German government coalition (consisting of the CDU-CSU-FDP parties) is also discussing the possibility of an equalisation of the fiscal framework conditions. Ultimately, it is especially the fiscal disadvantages that have led to public sector disposal enterprises very rarely making use of the GmbH structure for the provision of their own services without the involvement of third parties from the private sector.

7 Page 7 of Private sector organisational structures with third party involvement The participation of third parties from the private sector in municipal disposal industry companies (PPP model) is widespread in Germany. It is often implemented for the following reasons: Improvement / strengthening of the capacity utilisation of disposal facilities by means of waste quantity generation / market development in the commercial / industrial (non-government) area, Development of improved purchasing options, Procurement of know-how, Enhancement of the profitability pressure, Generation of capital inflows. However, in this organisational structure, the sometimes diametrically opposed interests of the public and private sector partners often have a negative impact. The private sector partner s profit orientation, with the goal of obtaining the highest possible dividends / draws from the company, is regularly opposed to the public sector interest focusing on a high quality, sustainable and simultaneously profitable service that is assured over the long term. Because of the framework conditions around the legal principles governing public contract awards, it has become apparent in practice that the PPP model is only a transitional organisational structure that is limited in time. As these legal principles mandate that the disposal / service contracts frequently concluded simultaneously with the equity participation transaction be once again put out to tender, the local / regional authority is often initially faced with the issue to either sell its remaining shares in a timely manner prior to the expiry of the contract, or to repurchase the shares already sold. 3.5 Outsourcing vs. in-house service in public sector organisational structures There follows a comparison of the outsourcing of services to third parties in the private sector with the in-house service performance of a public sector organisation, based on a number of relevant criteria. The ultimate question in this mostly controversial and frequently discussed issue is the evaluation, within the German waste management industry, of the traditional business economics decision of whether to make or buy. In addition to monetary criteria (Item 3.5.1), quality criteria (Item 3.5.2) also play a role in the comparison Monetary comparison The following comparison refers, specifically, to waste logistics services we have now been examining in regard to their profitability for almost 20 years. In this process, we frequently analyse the cost differentials in the performance of such services on an outsourcing basis by a private sector company (GmbH) in comparison with a public sector enterprise (local government corporation, owner operated municipal enterprise, public service organisation or cooperative) in normal circumstances and under functional competitive conditions. We have represented the cost blocks that are, in our view, essential as an argument balance sheet. The graphic shows the cost advantages and disadvantages from the point of view of a public sector enterprise. The left hand side shows the cost blocks that lead to lower costs (as compared to outsourcing to third parties in the private sector). The right hand side shows the cost blocks that lead to higher costs in municipal enterprises than in private sector companies.

8 Page 8 of 8 If the cost blocks are examined in detail, it becomes apparent that the blocks on the left hand side (non-profit nature, tax advantages and structural cost advantages [e.g. sales, insurance]) in aggregate lead to a cost advantage on the part of the municipal enterprise of approx. 25 to 40%. Empirical Values Cost impact from the point of view of a municipal enterprise - + Non-profit nature - 2% to 10% Up to 35% higher personnel costs +- 0% to 17% No VAT liability - 19% No prepaid tax [VAT] deductibility Approx.+ 9% No business-/ corporate taxation -1 % to 4 % Structural cost disadvantages -1 % to 5 % Social responsibility + 3% to 6% Comparatively higher cost in public sector administration + 3% to 6% Process / business management 0% to + 20% Under the current framework conditions the competitiveness of municipal solutions essentially depends on the efficiency of the pertinent processes and business management 1 The right hand side shows the cost blocks that render the municipal enterprise more expensive than a private sector solution. Personnel costs, which are up to one third higher, lead at a human resources cost ratio of 50% to costs that are up to 17% (average 11%) higher than those of a private sector company. As prepaid taxes cannot be deducted, this leads to cost increases of approx. 9%. The special social responsibility (e.g. the employment of performance challenged and older workers), as well as comparatively high administrative costs in public sector administration lead to higher costs as compared to a private sector waste management company. Up to this point, the cost advantage has almost already been equalised. The block Processes / Business/ Operational Management is the area that is least influenced by external factors. This block is therefore the main aspect in which municipal enterprises can leverage their influence. This is often the point at which it is decided which organisational form is ultimately more economically efficient. In practice, in the meantime, we frequently find municipal enterprises that work at least at the same efficiency level as private companies, but there are still municipal enterprises that do not attain this level Quality criteria From a quality point of view, the following typical strengths / opportunities and weaknesses / threats are frequently mentioned in regard to the outsourcing of services: Strengths / Opportunities o Know-how advantages of third parties in the private sector, o Efficiency advantages derived from organisational structure and process design, o Profitability pressure in the enterprise

9 Page 9 of 9 Weaknesses / Threats o Limited control options on the part of the municipality, o Lower flexibility in the event of changes in framework conditions (only within the scope of the stipulations permissible under the legal principles governing public contract awards and to be defined in the tender documents), o Shared responsibilities with longer information paths and additional interfaces, o Risk of lesser consideration of worker interests (e.g. very high performance pressure, low market hourly wages), o Competitive crowding out can lead to performance not meeting sustainability principles, e.g. wage dumping, quality problems, questionable environmental friendliness of the service, o Risk of failure of the competitive structure, e.g. due to marketing arrangements. 4. Summary The German waste management industry encompasses a number of different organisational structures or alternatives, ranging from public sector enterprises providing the services by themselves via a number of different solutions all the way to an essentially only steering function that outsources the services to private enterprise. It is in fact not possible to make generally valid statements concerning a specific advantage of either type of organisational alternative. In individual cases there are frequently special framework conditions that also justify particular organisational models. A number of complex, multilayered political, legal, economic, fiscal and organisational parameters must be taken into account when comparing different organisational models. Ultimately, it is always necessary to take into consideration the local framework conditions as well as the goals of the individual commissioned agencies.