Increasing waste production and the scarcity of natural resources are expected to aggravate with growing populations and consumption. For this reason, solutions for reducing waste and recycling and reusing materials are gaining importance. In this context, the concept of the circular economy has attracted increasing attention from policy, science, business, and civil society. The circular economy is often characterized as an “industrial economy that is restorative or regenerative by intention and design” [1
] (p. 7). In contrast to the largely linear “take-make-use-dispose” economic model, the circular economy aims to minimize waste and to keep the value of products, materials, and resources in the economy for as long as possible [2
Moving towards a more circular economy could provide many opportunities, including reduced pressures on the environment, enhanced security of supply of raw materials, increased competitiveness, innovation, growth, and jobs [2
]. However, the transition towards a circular economy is challenging, since it requires, among other things, finance, economic enablers, and technical skills, as well as fundamental changes in consumer behavior, business models, and last but not least, institutions and governance at all levels [3
]. The European Commission has addressed these issues by presenting an action plan including legislative proposals on EU waste policy, areas for actions, and specific measures to promote the implementation of the circular economy [2
]. One of the areas for action proposed in the plan is the promotion of reusing treated wastewater in agriculture.
In safe conditions, the reuse of wastewater presents an opportunity to reduce the demands on natural water resources and the discharge of pollutants to surface water bodies [4
]. Furthermore, it can increase crop yields [5
] and reduce purification levels and wastewater treatment costs [8
]. Since wastewater supplies nutrients, it can also reduce the application of mineral fertilizer and decrease fertilization costs [9
]. Concerns about the reuse of wastewater in agriculture include potential health risks for farm workers and food consumers [12
], soil salinization [14
], and the accumulation of hazardous substances in soil and crops [13
]. When reusing wastewater for irrigation, adequate risk management strategies, including the application of proper purification levels, periodic monitoring of soil and crop properties, as well as suitable irrigation, cultivation, and harvesting practices, are indispensable to minimize hazards to humans and the environment [4
Reusing wastewater in agriculture is characterized by transactions between the value chains of wastewater treatment and crop production, like the irrigation of wastewater for cultivating crops. The transactions create linkages and interdependences between the value chains due to shared resources (e.g., land), input–output relations (e.g., water and nutrients), and interdependences of activities and actors (e.g., interdependence of irrigation and crop cultivation practices and the respective providers and users of water) [9
]. As a result of such linkages and interdependences, linked regional value chains and value cycles may develop [9
]. Empirical studies show that value chains integrated within local economic cycles can reduce costs [22
] and contribute to an increment of added-value for regional economies [23
]. Findings from an added-value analysis provide evidence that linking the value chains of wastewater treatment and crop production by reusing wastewater can conserve natural resources and lead to significant cost savings, added-value gains, and a high share of local added-value [9
However, despite the benefits associated with wastewater reuse, there is still no widespread implementation of wastewater reuse applications in the European Union [27
]. Studies on the reuse of wastewater show that the challenges for implementing more reuse applications lie, among others, in the design of institutions and governance structures for reusing wastewater [27
]. At the EU level, no common standards or quality guidelines for wastewater reuse have been implemented yet [28
]. Instead, member states are expected to adopt the requirements of various EU directives correlated with water reuse applications due to health and environmental concerns [28
]. The principal directives with implications for wastewater reuse are the Water Framework Directive
and the Urban Waste Water Treatment Directive
. The Water Framework Directive
establishes “a framework for action in the field of water policy and indirectly recognizes reuse as a strategy for increasing water availability, which thereby contributes to the good quality status of water bodies” [33
] (p. 560). The Urban Waste Water Treatment Directive
concerns the quality of wastewater discharged to receiving waters and states that “treated wastewater shall be reused whenever appropriate” [34
] (p. 4). This implies that “wastewater reuse is acceptable in as much as it does not breach other EU legislation or national laws” [33
] (p. 560). Other directives containing provisions that are relevant to water reuse include the Groundwater Directive
, the Drinking Water Directive
, the Sewage Sludge Directive
, the Nitrates Directive
, the Thematic Strategy for Soil Protection
, the Bathing Water Directive
, the Freshwaters Fish Directive
, the Habitats Directive
, and the Industrial Emissions Directive
]. Remarkably, none of the directives “is directed at regulating or supporting water reuse as such” [33
] (p. 561). Moreover, the non-existence of common criteria at the EU level for managing health and environmental risks related to water reuse is a cause of mistrust in the safety of water reuse practices and thus, one of the main obstacles for water reuse in Europe [33
]. The EU Commission aims to overcome this barrier by proposing EU minimum quality requirements for water reuse in agricultural irrigation and aquifer recharge [35
]. However, the proposed requirements are still being discussed [36
] and have not yet become legally binding.
With the growing need for a transition towards a circular economy and the potential of wastewater reuse in terms of economic and environmental benefits, there is an increasing interest not only in developing common wastewater reuse criteria at the EU level, but also in appropriate governance solutions for wastewater reuse and interdependent value chains at the local scale [9
]. This requires more research on the governance structures for reusing wastewater including analysis of the specific transactions and interdependences between the value chains of wastewater treatment and crop production and analysis of the alignment of governance structures with transactions and interdependences. The alignment of governance structures with transactions is essential since misalignments can result in lower profitability and higher failure rates [37
Existing studies on the governance of wastewater reuse have analyzed different applications for wastewater, including agricultural uses as well as urban, industrial, and potable uses. The studies have focused either on collaboration and risk management [41
], or referred predominantly to the institutional challenges for the wastewater reuse sector at higher levels of governance, including regulatory and legislative issues at the national and international level [28
]. Only a few researchers have analyzed the institutional arrangements for reusing wastewater for agricultural purposes at the local level [30
]. Consequently, the empirical basis for deriving conclusions and recommendations for the governance of wastewater reuse at the local level is scant. Saldías et al. [31
] analyzed the indirect and unplanned agricultural wastewater reuse in Hyderabad (India) and found that the ambiguous objectives of institutions, fragmentation among or within institutions, and a lack of regulatory enforcement are major constraints for developing formalized practices. A study by Al-Khatib et al. [30
] investigated governance-related factors that influence the reuse of treated wastewater for irrigation in Jericho (Palestine) and identified overlapping and unclear responsibilities among actors, the absence of laws, as well as overlapping and conflicting provisions as obstacles for the reuse of wastewater. Saldías et al. [32
] explored the institutional arrangements for a self-managed agricultural wastewater reuse scheme in Western Cape (South Africa) and identified the presence of an effective policy and regulatory framework as a key requirement for the successful implementation of the scheme.
However, from an institutional economic perspective, there is a clear gap in the current research on the design of governance structures for reusing wastewater at the local level. The body of literature is lacking in the characterization of the specific transactions between the value chains of wastewater treatment and crop production according to their properties, the analysis of the governance structures regarding their features and the consideration of the interdependences between the actors involved. Furthermore, the research on wastewater reuse has not yet addressed the alignment of governance structures with transactions and interdependences between actors. As a result, the understanding of the governance structures for coordinating the specific transactions that create linkages and interdependences between the value chains of wastewater treatment and crop production is insufficient. In particular, to the best of our knowledge, no previous studies have analyzed how transactions and interdependences between wastewater providers and crop producers shape the governance structures for wastewater reuse and how the alignment between governance structures with the transactions and interdependences facilitates reusing wastewater at the local level.
The present paper seeks to address this gap by looking at the specific transactions and activities in the agricultural wastewater reuse scheme of the Wastewater Association Braunschweig (Germany) which uses treated municipal wastewater to irrigate food and energy crops. We aim to analyze empirically the interplay of the transactions and interdependences between the actors with the institutions and governance structures of the reuse scheme. In particular, the study will answer the following research questions:
How do the properties of the transactions and the interdependences of actors shape the governance structures for reusing wastewater?
How does the alignment of the governance structures with the transactions and interdependences contribute to the smooth operation of agricultural wastewater reuse schemes?
We assume that by better understanding how governance structures are shaped by transactions and interdependences between actors we can contribute to developing appropriate governance structures for wastewater reuse in a circular economy at the local scale. Moreover, understanding the alignment of governance structures with transactions and interdependences of actors may help to improve the performance of wastewater reuse schemes in a circular economy. With this paper, we seek to introduce a novel perspective in the discussion on governance structures for linked value chains—i.e., the perspective of transaction cost economics—which offers new possibilities for analyzing and interpreting circular economies.
The rest of the paper is structured as follows: Section 2
describes the conceptual and theoretical framing of the research with emphasis on the transaction cost theory. Section 3
introduces the case study and explains the methods employed for the collection and analysis of data. Section 4
presents the empirical findings from analyzing the case study, including a detailed description of the core characteristics of the actors, transactions, and institutional arrangements of the wastewater reuse scheme in Braunschweig. In Section 5
, we discuss the results according to the research questions and the lessons learned for governing transactions and interdependences between linked value chains in a circular economy. In this section, we also discuss the research design and suggest future research directions.
2. Conceptual and Theoretical Framing
The conceptual and theoretical framing of this research draws on several concepts and theories described in the following sections, including the concept of linked and interdependent value chains in a circular economy, the related concepts of transactions, institutions, and governance structures in action arenas and action situations, as well as the theory of transaction cost economics.
The concept of the circular economy is a very young research field that “still requires development to consolidate its definition, boundaries, principles and associated practices” [46
] (p. 703). A multitude of different circular economy definitions, varying with the actors and point of view, has been developed [1
] but no commonly accepted definition has become established yet [46
]. Several authors stress that the lack of a commonly accepted and shared definition could lead the circular economy discussion to a conceptual deadlock [46
]. Bearing this in mind, Kirchherr et al. [49
] encourage scholars to deliberate on the circular economy concept through the explicit adoption of a circular economy definition to facilitate cumulative knowledge development on the topic. In the study at hand, we refer to the definition of Kirchherr et al. [49
] (pp. 224–225), who describe a circular economy as “an economic system that is based on business models which replace the ‘end-of-life’ concept with reducing, alternatively reusing, recycling, and recovering materials in production/distribution and consumption processes, thus operating at the micro level (products, companies, consumers), meso level (eco-industrial parks) and macro level (city, region, nation and beyond), with the aim to accomplish sustainable development, which implies creating environmental quality, economic prosperity, and social equity, to the benefit of current and future generations.” The circular economy “is enabled by novel business models and responsible consumers” [49
] (p. 229). We adopt this definition for our research as a working definition, since it provides a brief but comprehensive depiction of the core characteristics of the circular economy concept, including its principles, operating levels, aims, and associated implications and enablers. It is important to understand that moving towards the circular economy implies “a fully systemic change, affecting all stakeholders in the value chain” [53
] (p. 12). We note that “a circular economy goes beyond the pursuit of waste prevention and waste reduction to inspire technological, organizational and social innovation across and within value chains” [53
] (p. iv).
Applying the thinking of the circular economy to water means to transform the conventional linear water use model—which is based on extracting, treating, distributing, consuming, collecting, treating, and disposing water—into a circular water use model [54
]. In such a model, “wastewater is not considered as waste but rather as a valuable non-conventional resource” [55
] (p. 229) that can generate additional added-value [9
], and that should be circulated to preserve natural resources of water and nutrients [55
]. In contrast to the linear model where water becomes successively polluted [56
], the circular water use model aims at reducing pollution [57
]. Further aims of the circular water economy are the reduction of freshwater demand, the reuse of wastewater [57
], and increased retention of water [57
]. We refer to this model but focus only on the reuse of wastewater in agriculture. Figure 1
shows the flow of water in the linear water use model, in contrast to the wastewater reuse model with crop production. The figure indicates that human water consumption is based on the treatment and distribution of water resources extracted from the natural system. After consumption, wastewater is ideally collected for treatment. Subsequently, the treated water is used in two different ways depending on the economic water use model. In the linear model the treated water leaves the economy via disposal without further use. In this case, crop production depends exclusively on extracting water from the natural system. By contrast, in the wastewater reuse model the treated wastewater circulates in the economy through various options for reuse [59
], including crop production. In this case, the figure shows that the reuse of treated wastewater is an option for turning wastewater into a resource and reducing the demand for natural fresh water resources in crop production.
Our approach for analyzing the reuse of wastewater in the circular economy is based on the concept of value chains, and focuses on the linkages and interdependences between the value chains of wastewater treatment and crop production at the local level. Value chains include “the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use” [60
] (p. 4). In the case of wastewater reuse in agriculture, several goods and services are produced, including treated water and crops. Commonly, these goods pertain to distinct value chains. In the scrutinized case of wastewater reuse in agriculture, however, the production of treated water and crops goes together. This leads us to assume linkages and interdependences between the value chains of wastewater treatment and crop production in the scrutinized case. These interdependences may be due to the joint use of resources (e.g., land), the sharing of substances through input–output relations (e.g., water and nutrients), as well as immaterial interactions and interdependence of activities and actors (e.g., interdependence of irrigation and crop cultivation practices’ respective providers and users of water) [9
The linkages and interdependences between the value chains are believed to result from different physical and social processes taking place in distinct action situations located in various action arenas (The terms “action arena” and “action situation” originate from the Institutional Analysis and Development framework (IAD) developed by Ostrom [61
]. We adopt the terms and related definitions for this research but do not further refer to the IAD framework.). An action arena is defined as the “conceptual space in which actors…make decisions, take action, and experience the consequences of these actions” [62
] (p. 20). The action arena includes one or multiple action situations and the actors who interact in the action situation regarding activities and/or transactions [62
]. The action situation refers to the “social space where participants…interact, exchange goods and services, solve problems, dominate one another, or fight (among the many things that individuals do in action arenas)” [61
] (p. 14).
In the present study, we conceptualize the agricultural reuse of wastewater as an action arena which is composed of three sub-arenas: (1) the provision of wastewater through the value chain of wastewater treatment; (2) the use of the wastewater as input in the value chain of crop production; and (3) the transference of wastewater between both value chains (Figure 2
). The actors in all three sub-arenas participate in various action situations. Action situations associated with reusing wastewater in agriculture include, for instance, provision situations in which actors provide resources and services (e.g., land, water or irrigation service), distribution situations where actors define the allocation of resources (e.g., distribution of wastewater between farmers and plots) and appropriation situations in which actors make use of resources (e.g., use of wastewater and land for cultivating crops).
The theory of transaction cost economics was chosen as the theoretical framework for understanding the alignment of transactions and governance structures in linked value chains. Researchers have used this framework to analyze various problems related to the economics of organization and contractual relationships [38
]. Transaction cost theory has also been used in many empirical studies for explaining phenomena of agricultural supply chains [64
]. The main goal of analyses based on the transaction cost theory is to assess the relative efficiency of organizing transactions while assuming that actors are rationally bound and tend to behave opportunistically. In our present research, we use the insights from the transaction cost theory to analyze the transactions and governance structures linking value chains in a circular economy for reusing wastewater and sewage sludge in agriculture. The basic unit of analysis is the transaction defined as “an exchange which occurs between two stages of the production/distribution chain as the product changes in form and/or in ownership rights” [72
] (p. 17). The transaction cost theory emphasizes that transactions are associated with transaction costs because they require information, negotiation and conclusion of agreements, monitoring and enforcing compliance with those agreements, as well as adaptation of agreements [73
Transactions differ mainly with respect to the three properties of asset specificity, uncertainty, and frequency, from which “the condition of asset specificity is the most important” [75
] (p. 366). Asset specificity matters when actors invest in specific assets and refers to “the degree to which an asset can be redeployed to alternative uses and by alternative users without sacrifice of productive value” [76
] (p. 59). The fundamental consequence of investing in specific assets is the creation of a condition of bilateral dependency which may allow actors to opportunistically siphon off the quasi-rents of the actors who made transaction-specific investments [77
]. The property of uncertainty in transactions refers to the difficulties of anticipating exogenous disturbances and to predict whether the exchange partners may behave opportunistically [78
]. Frequency indicates how often a certain transaction is repeated.
Transactions may cause interdependences between value chains, when actors or actions are affected by or depend on each other’s actions [79
]. Interdependences between value chains or actors may result “in either conflicts to be solved or opportunities for cooperation” [81
] (p. 363). In order to mitigate conflicts and to realize gain from cooperation, actions and transactions leading to interdependences need to be regularized by institutions and governance structures [81
]. “Institutions are the rules of the game of a society or, more formally, are the humanly devised constraints that shape human interaction” [82
] (p. 3). Institutions can be either formal (e.g., laws, ordinances, etc.) or informal (e.g., norms, values, and conventions). In order to implement and enforce institutions, adequate governance structures are necessary. Governance structures are conceptualized as “organizational solutions for making institutions effective, i.e., they are necessary for guaranteeing rights and duties and their use in coordinating transactions” [81
] (p. 360). The structures present distinct features such as incentive intensity, administrative control, capacity for autonomous and coordinated adaptations and contract law [77
The feature incentive intensity of a governance structure characterizes the magnitude of the motivation of the transactional partners to be efficient and adapt to changing conditions [83
]. Strong incentives are those provided by transactions in which gains from efficiency improvements flow directly to the individuals who contributed to the improvement. They stimulate individuals to innovate and increase efficiency. Weak incentives, by contrast, are those associated with transactions in which individuals can not personally lay claim to the gains from efficiency improvements [84
]. The degree of administrative control in a governance structure describes to what extent hierarchical instructions and monitoring of activities are used for directing the actor’s activities and efforts, in particular, for adapting to changes and for preventing actors from behaving opportunistically [83
]. The autonomous adaptability characterizes how easy the transactional partners can adapt to changes independently from each other within a given governance structure. By contrast, coordinated adaptability describes the supportiveness of a given governance structure towards coordinated adaptations between transacting individuals [83
Scholars categorize governance structures according to these features along a spectrum ranging from the pure, anonymous spot market to the completely integrated firm (hierarchy) [71
]. Between these two pure forms of governance structures there is a continuum of hybrid (or intermediate) types of governance structures including various forms of long-term contracting, clusters, networks, symbiotic arrangements, supply chain systems, franchise arrangements, partnerships, cooperatives and alliances among firms [70
Market governance structures are characterized by strong incentives and weak administrative control. The structures strongly support autonomous adaptations based on a strong legalistic contract law regime. In contrast, hierarchical governance structures are characterized by weak incentives and strong administrative control. They are strongly supportive to coordinated adaptations, and they are further characterized by a weak contract law regime [77
]. Hybrid governance structures show “intermediate values in all features” [76
] (p. 104) that describe markets and hierarchies. They are characterized by “semi-strong incentives, an intermediate degree of administrative apparatus, display semi-strong adaptations of both kinds, and work out of a semi-legalistic contract law regime” [76
] (p. 281). Table 1
summarizes the distinguishing features of market, hybrid, and hierarchical governance. It shows that an increase (decrease) in intensity in one feature is accompanied by a decrease (increase) of intensity in another feature.
] identified three empirical regularities within the great heterogeneity of hybrid governance structures: First, resource users in hybrid arrangements pool some of their resources but keep the associated ownership and decision rights distinct. Second, the coordination of the resource users in hybrids relies usually on contracts providing only a general framework which remains highly incomplete. Third, resource users in hybrids compete with each other as well as with other hybrid arrangements and other types of organization.
Transaction cost economists evaluate the relative cost-efficiency of coordinating transactions by assessing the fit between the properties of the transaction and the associated governance structure. They refer to the discriminating alignment hypothesis which predicts that “transactions, which differ in their attributes, are aligned with governance structures, which differ in their costs and competencies, in a discriminating (mainly transaction-cost-economizing) way” [77
] (p. 277). In other words: actors will ideally assign transactions to the governance structure that minimizes transaction costs. Yet which governance structure fits with which kind of transaction? The transaction cost theory predicts that the market is the most efficient governance structure for non-specific transactions. By contrast, if the degree of asset specificity and uncertainty increases, it will be more efficient to organize the transaction in a hybrid or even in a hierarchical governance structure. Hybrids are efficient in coordinating transactions when relation-specific investments are strong enough to “generate substantial contractual hazards without justifying integration and its burdens, and when uncertainties are consequential enough to require tighter coordination than what markets can provide” [87
] (p. 31). For transactions that are characterized by high degrees of asset specificity, transaction cost theory recommends organizing transactions in a hierarchy in order to minimize transaction costs [77
The theoretical assumption in transaction cost economics is that governance structures are chosen to fit the specific properties of transactions and to minimize transaction costs [38
]. Interdependences between actors—like in the case of the association and the farmers engaging in wastewater reuse—are believed to shape the nature and features of governance structures [81
]. Understanding how governance structures are shaped by the properties of the transactions and the interdependences of actors is of utmost interest when aiming at a circular economy characterized by value chains linked through transactions.
In the following section, we verify whether the governance structures observed in the case of the wastewater reuse in Braunschweig are consistent with the governance structures expected according to the transaction cost economic theory. We start with discussing how the governance structures are shaped by the relevant properties of the transactions and activities, including the interdependences between the association and the farmers. We then determine the governance structures (i.e., market, hybrid or hierarchy) according to their features. We then discuss how the alignment of the governance structures with the properties of the transactions and activities contributes to the smooth operation of the wastewater reuse scheme. After this, we will reflect upon the lessons learned for governing transactions and interdependences between linked value chains in a circular economy. Finally, we will discuss the research design regarding its strengths and weaknesses and suggest potential directions for future research.
5.1. Alignment of Transactions, Interdependences, and Governance Structures
Based on our findings, we argue that different governance structures coordinate the transactions and activities in the action situations of the wastewater reuse scheme in Braunschweig. The provision of irrigation services with the spreading of wastewater is coordinated in a hierarchical way, and crop cultivation with the choice of crops is close to market governance. The irrigation of croplands with the irrigation of wastewater links the value chains of wastewater treatment and crop production, and displays features of a hybrid governance structure. Table 3
summarizes the main features of the governance structures observed in the focal transactions and activities of the different action situations of wastewater reuse in Braunschweig.
5.1.1. Provision of Irrigation Services
The governance structure used for coordinating the spreading of wastewater is shaped by the properties of the activity, including the specificity of the irrigation infrastructure, the good reputation of the association regarding the quality of the spreading, and the interdependence between the association and the farmers. These characteristics constitute the need for discouraging opportunism to ensure a continued provision of high quality spreading. The governance structure chosen to fit with the properties of the spreading is characterized by weak incentives, strong use of administrative command and control, as well as a strong capacity to coordinate adaptations. These features clearly indicate that the spreading is coordinated by a hierarchical governance structure. The observation of a hierarchical governance structure corresponds with the expectations based on transaction cost theory, which leads us to assume that the governance structure for the spreading was chosen in a transaction cost minimizing way, following discriminating alignment [76
]. In particular, it becomes evident that the hierarchical governance structure responds to the high asset specificity of the activity.
The alignment of the governance structure with the properties of the spreading contributes to the smooth operation of the reuse scheme. The hierarchical coordination with weak incentives and strong administrative control prevents the association staff from behaving opportunistically. The strong administrative control compensates the weak incentives for the association staff and stimulates good operating performance, which is indispensable to spreading wastewater without causing damage to the farmer’s crops and soils. Another benefit of the alignment is that hierarchical coordination between the association staff enables the association to adapt the operations of the spreading quickly to the farmer’s ongoing cropping activities, and any changes of the weather, soil, and crop conditions. Hierarchical governance structures, like the governance structure for the spreading of wastewater, are characterized by high bureaucratic costs [77
]. In the studied case, it can be expected that the high frequency of the spreading helps the association to make the hierarchical governance structure more cost-effective. Furthermore, the interviewees reported that the frequency of the spreading have contributed to developing trust and well-established routines between the manager, the rainmasters
, and the workers. This may also help to keep the transaction costs for the spreading low, since empirical studies show that trust among actors can reduce transaction costs and improve the performance of collaborative actions between actors [100
5.1.2. Irrigation of Croplands
The governance structure used for coordinating irrigation is shaped by the properties of the transaction, including the specificity of the assets and the interdependence between the association and the farmers. The site specificity of the irrigation fields and the physical specificity of the irrigation infrastructure, along with the complementarity of the resources of water and land, increase the interest of the association and the farmers, to give continuity to the transaction and drive them to engage in long-term cooperation. The association thus commits to providing irrigation services, and the farmers commit to providing cropland for wastewater irrigation. On the operational level, the interdependence leads to an increased need for administrative control, including the necessity for monitoring operations and sharing information on the activities of irrigation and cultivation. In particular, the actors need to share information on the distribution of wastewater and nutrients, as well as the individual schedules for the activities of irrigation and cultivation. The interdependence further results in restrictions for autonomous adaptations, and the necessity to coordinate certain adaptations, such as suspending irrigation when farmers carry out pest management or fertilization measures. Last but not least, interdependence leads to the association and farmers resolving conflicts bilaterally or through arbitration, since conflict settlement via courts is not conducive to preserving mutual trust and the continuity of the spirit of cooperation.
The governance structure chosen to match with the properties of the irrigation is characterized by pooling resources with separated ownership and decision rights (e.g., land and irrigation infrastructure), incomplete contracts (e.g., absence of formal contracts) and competition between resource users (e.g., farmers regarding the available wastewater) and between other forms of organization (e.g., competition of the association with other wastewater associations). From these empirical observations, we conclude that the governance structure for irrigation corresponds to a hybrid governance structure. This finding is underpinned by the observation of semi-strong incentive intensity, semi-strong use of administrative control, and semi-strong capacity for autonomous and coordinated adaptations. The observation of a hybrid governance structure is consistent with the governance structure expected according to the transaction cost theory, which leads us to assume that the governance structure for irrigation is able to sufficiently economize transaction costs.
The alignment of the governance structure with the specificity of the irrigation and the interdependence between the association and the farmers facilitates the smooth operation of the reuse scheme. The long-term cooperation between the association and the farmers based on the permanent affiliation of the irrigated fields to the association helps to protect the investments of the association against the potential opportunistic behavior of farmers. The monitoring of operations and the information sharing, regarding the substance flows and the activities of the irrigation and cultivation, facilitates the integration of wastewater reuse into cultivation, by making actions and activities more transparent and predictable. The restriction of autonomous adaptations prevents possible independent actions of the association and the farmers from negatively influencing the cultivation and operation of the reuse scheme. The support of coordinated adaptations helps to achieve mutual consent among the association and the farmers about any adaptation of the irrigation operations to changes in the natural conditions, the cultivation plans, or the cropping activities. Last but not least, the use of arbitration, in cases where bilateral conflict resolution has failed, has proven to be efficient in solving conflicts and enhancing the legitimacy of actions.
5.1.3. Cultivation of Crops
The governance structure used for coordinating the choice of crops is marked by the uncertainty regarding the activity and the interdependence between the association and the farmers. This results in the farmers sharing information on their choice of crops and formulating agreements with the association on cultivation plans. The need for administrative control, including the need to monitor cropping patterns and to sanction violations of cultivation bans, is a further result of the uncertainty and the interdependence between the association and the farmers. Other implications of the interdependence for the governance structure include the need to restrict autonomous adaptations of the farmer’s cultivation plans and to coordinate the respective adaptations.
The governance structure used for coordinating the cultivation with wastewater shows features that are typical for market governance, like separated ownership rights, strong incentives, and the support of autonomous adaptations. Other features, such as the semi-strong use of administrative control, the restrictions for autonomous adaptations, the possibility of coordinating certain adaptations, as well as the right of the association to prescribe the cultivation plans of the farmers, are not typical for pure market governance structures, and display features of hybrid or even hierarchical governance structures. In general, market governance corresponds to prior expectations on the basis of the low asset specificity in the activity. In addition, the governance structure matches with the uncertainty and the interdependence by adopting hybrid and hierarchical features into the governance structure. This leads us to assume that the governance structure is in line with the properties of the activity, and is able to keep transaction costs low.
The alignment of the governance structure with the uncertainty and the interdependence between the association and the farmers results in various benefits which contribute to the smooth operation of the reuse scheme. The sharing of information and the agreements on the cultivation plans reduce the uncertainty regarding the farmer’s choice of crops, and allow for better planning of the operations of irrigation. This helps the association to organize the operations efficiently, and to supply sufficient water to all farmers. The monitoring of the cropping patterns and the practice of sanctioning violations of cultivation bans discourages farmer opportunism. The consultations between the farmers and the association regarding the adaptations of the cultivation plans hinder autonomous actions of farmers, that may reduce the efficiency of the reuse scheme due to misalignments between the adapted cultivation plans and the scheme’s operational requirements. Furthermore, the consultations regarding the adaptations of the irrigation schedules to the farmers’ cropping activities prevents the operations of irrigation and cultivation from interfering with one other.
5.2. Lessons Learned and Contribution to the Literature
Several lessons for governing transactions and interdependences between linked value chains in circular economies can be derived from the study of the wastewater reuse scheme in Braunschweig. The study shows that reusing wastewater in agriculture involves various transactions and activities which are characterized by specific properties. The transaction of wastewater irrigation creates interdependences between the association and farmers, which significantly shape the design of the governance structures in the reuse scheme. In particular, the findings show that interdependences can result in an increased need for administrative control, including the monitoring of activities and mutual information sharing between interdependent actors. Furthermore, the study shows that dealing with interdependences requires governance structures that can restrict autonomous adaptations and support coordinated adaptations, and bilateral conflict resolution between interdependent actors. In theory, these requirements can be best fulfilled by features typical for hybrid and hierarchical governance structures. In practice, we found that the governance structures correspond with the expectations based on theoretical thinking. In particular, the governance structure for the choice of crops exhibits features of hybrid and hierarchical governance structures, even though market governance is still the predominant governance structure for the activity, due to the low asset specificity. This may indicate that the condition of asset specificity remains the most important characteristic for determining the choice of governance [75
]. However, it may also indicate that linking value chains for reusing wastewater drives market governance structures to adopt features of hybrid and hierarchical governance structures to better cope with interdependences resulting from transactions.
Referring to the case of reusing wastewater in agriculture, we conclude that different governance structures are needed to match the different properties and requirements of the transactions and activities between linked value chains. Another conclusion we draw from the case study is that interdependences resulting from transactions increase the need for coordination between actors. Interdependences between actors should be identified and taken into account when developing appropriate governance structures for transactions between linked value chains. Last but not least, we conclude that aligning governance structures with the properties of transactions and activities potentially contributes to efficiently governing transactions and interdependences between linked value chains. A better understanding of the governance structures for coordinating transactions and interdependences between linked value chains is important for developing circular economies [9
]. Therefore, we believe that the lessons learned from the wastewater reuse scheme in Braunschweig can also enhance solution findings related to the governance of circular economies characterized by linkages and interdependences between value chains.
Our research contributes to the literature in several aspects: First, it provides a detailed characterization of the specific transactions and governance structures for reusing wastewater at the local level. Second, our study helps to understand how transactions and interdependences between actors shape the governance structures for wastewater reuse at the local level. Third, our study provides valuable insights in how the alignment of the governance structures with the transactions and interdependences of actors contributes to the smooth operation of agricultural wastewater reuse schemes. In this way, the study facilitates the understanding of governance structures for coordinating the specific transactions and activities that create linkages and interdependences between the value chains of wastewater treatment and crop production.
The findings of the study could be of use to practitioners involved in wastewater reuse schemes and for stakeholders concerned with future wastewater management practices, and the transition towards the circular economy. We believe that the findings can assist in developing appropriate governance structures for transactions between interdependent value chains, which, in turn, can help practitioners, like wastewater providers and farmers, take advantage of the economic and environmental benefits of reusing wastewater and the circular economy.
5.3. Research Design and Future Research Directions
The results of our analysis refer specifically to the case of reusing wastewater in agriculture, and may not be simply generalized or transferred without critical reflection upon other cases of linking value chains in the circular economy. However, the conceptual, theoretical, and analytical framing used in this study may potentially also be applied for studying transactions and interdependences between value chains from other sectors.
The conceptual and analytical approach of decomposing the agricultural reuse of wastewater into different action arenas and action situations proved to be a suitable guideline assistance for investigating the transactions and interdependences between the value chains of wastewater treatment and crop production. In particular, this approach helped us to better structure the analysis and to break down the complexity of reusing wastewater into manageable sets of practical activities.
The theory of transaction cost economics proved to be expedient for explaining the choice of the governance structures for the focal transactions and activities within the action situations of our conceptual framework. However, the theory is static in nature, and thus might be less useful when it comes to explaining the impact of dynamics between actors and transactions on the governance structures. The theoretical explanation of the impact of dynamic issues would facilitate future studies on linked value chains in a circular economy, since the transition from the linear economic model towards the circular economy is a dynamic process, and the characteristics of actors and transactions may change and require different governance structures over time.
Regarding the analysis of the properties of the transactions, we focused on the conditions of asset specificity, which is considered by Riordan and Williamson [75
] as the most important transaction property. Furthermore, we analyzed the conditions of uncertainty and frequency. Other authors suggest taking into account further transaction properties in order to increase the analytic content of transaction cost analysis in socioecological systems like agriculture [102
]. Hagedorn et al. [102
], for instance, proposes the inclusion of, among others, the excludability of actors, the rivalry among resource users, the degree of complexity, separability or jointness, as well as the measurability of the cost and benefits when analyzing nature-related transactions. These properties may also be relevant for the studied case, and can add explanatory power to the observed choices of governance structures.
The methods applied in this study are subject to the general limitations of qualitative research, including the more complex collection and interpretation of data, the lower robustness of the data, as well as the limited generalizability of the results [90
]. However, we argue that using a case study and semi-structured face-to-face interviews to study the transactions and interdependences between linked value chains, in depth, was appropriate for answering the research questions. We acknowledge that more empirical work on the governance of wastewater reuse schemes is needed to prove whether the findings remain valid in other cases of combining wastewater treatment and crop production.
Future research may address the challenge of measuring the cost and benefits from aligning the governance structures with the transactions and interdependences. We did not measure the costs and benefits in nominal terms, since the data required for conducting a quantitative transaction cost analysis could not be provided by the actors of the reuse scheme. Our approach is in line with many other empirical studies which confine transaction cost analysis to an application of the discriminating alignment hypothesis [71
]. Another suggestion for future studies is to focus on the dynamics in linked value chains, and to take into account the development of the characteristics of the actors, the transactions, and the governance structures over time. In addition, future work may elaborate on the specific characteristics of the interdependences between actors in linked value chains. This could include a more detailed analysis of how the degree and the type of interdependence (e.g., resource-based, technical, operational, economic) influence the choice of the governance structures.