Estimating technical efficiency and allocative distortions of water companies: evidence from the English and Welsh water
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RESEARCH ARTICLE
Estimating technical efficiency and allocative distortions of water companies: evidence from the English and Welsh water and sewerage industry María Molinos-Senante 1,2 & Alexandros Maziotis 1,3 & Andrés Villegas 4 Received: 30 March 2020 / Accepted: 22 June 2020 # Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Regulated water industries need to improve their technical efficiency and allocate their resources efficiently. This is the case of the water industry in England and Wales which was privatized in 1989, and the method of price cap regulation was implemented. This study uses an input distance function system approach to estimate the technical efficiency and distortions in the choice of input mixes for the English and Welsh water and sewerage companies (WaSCs) over the years 1991–2016. The results indicated that an average WaSC was 75.3% technically efficient which means that inputs could be reduced by 24.7% keeping the level of output constant. On average, the input mix was considered to be allocated inefficiently as there was an over-utilization of capital and other inputs relative to employment. Moreover, the low degree of substitutability among inputs implied that reducing allocative inefficiency could be costly. The findings of our study is of interest to policy makers who want to implement effective policies to improve efficiency in the water industry. Keywords Technical efficiency . Allocative distortions . Input distance function system . Water industry . England Wales
Introduction There are several reasons for promoting the participation of the private sector in the water industry such as the need to attract private funding to improve the infrastructure, reduce inefficiencies, and enhance quality of service (Craig 2009). A recent study by Marques and Simões (2020) concluded that Portuguese private water utilities present better performance than public water utilities. In this context, an interesting case study is the English and Welsh water and sewerage industry Responsible Editor: Philippe Garrigues * María Molinos-Senante [email protected] 1
Departamento de Ingeniería Hidráulica y Ambiental, Pontificia Universidad Católica de Chile, Avda. Vicuña Mackenna, 4860 Santiago, Chile
2
Centro de Derecho y Gestión de Aguas, Pontificia Universidad Católica de Chile, Avda. Vicuña Mackenna, 4860 Santiago, Chile
3
Department of Business, New York College, Athens, Greece
4
Departamento de Ingeniería Comercial, Universidad Técnica Federico Santa María, Avda. Santa María, 6400 Santiago, Chile
which was privatized in 1989. Since then, several capital investment programs have been carried out to reduce water losses and to improve the quality of service, drinking water quality, and environmental standards (McEldowney 2014). The method of regulation imposed for the water and sewerage companies (WaSCs) and water only companies (WoCs) was in the form of price caps which is a highly powered incentive scheme. To evaluate whether the regulated water companies have improved their
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