Firm-level inefficiency and its determinants in the Swedish water and wastewater sector

Abstract

The Swedish Water and Wastewater (WW) utilities are subject to a cost-of-service regulation with no regulatory incentives to reduce costs. An estimation of firm-level inefficiency using stochastic frontier models on a cross-sectional sample of 148 utilities from 2006 suggests that overall the sector has at least a 15% cost reduction potential. Utilities can increase efficiency by reducing network losses. The cost frontier shifts to a higher level when (1) two or more municipalities merge their WW operations and when (2) utilities receive tax subsidies.

Notes

¹The economic regulatory principles are laid out in the Law on Public Water Services (SFS 2006:412, §30).

² v_i is also assumed to be uncorrelated with all regressors in every equation.

³Amount of treated WW was evaluated as an additional output but multi-collinearity problems inflated SEs dramatically and hence it was left out of the final estimations.

⁴The 12 smallest municipalities are unrepresented, which makes the conclusions not necessarily valid for them.

⁵The maximum likelihood estimator and Limdep 9.0 are used for all estimations.

⁶Bhattacharyya et al. (1995) suggested that size and ownership in combination have an influence on efficiency.