The role of environmental factors in water utilities’ technical efficiency. Empirical evidence from Spanish companies

Abstract

This article computes input-specific scores of technical efficiency for a sample of water utilities located in the southern Spanish region of Andalusia. In addition, differences in efficiency between different operating environments are investigated. Concerning the debate about ownership and efficiency, we find that privately owned companies outperform public utilities in their management of labour. Furthermore, technical efficiency is found to be greater among firms located in highly populated areas and for utilities providing water services to tourist municipalities. Finally, no empirical evidence supporting the greater technical efficiency of consortia of water utilities, a managerial strategy strongly encouraged by regional politicians, is found.

Acknowledgements

The authors gratefully acknowledge the valuable comments from an anonymous referee. We also thank the Agencia Andaluza del Agua for funding and support in the process of data collection. Francisco Gonzalez-Gómez acknowledges the financial aid received from the Vicerrectorado de Investigación of the Universidad de Granada. Finally, Andrés J. Picazo-Tadeo acknowledges the economic aid from the Spanish Ministerio de Educación y Ciencia and FEDER (projects AGL2003-07446-C03-03, SEJ2005-01163, and AGL2006-05587-C04-03/AGR), as well as from the Generalitat Valenciana (projects ACOMP 06/047 and ACOMP 07/102). The usual disclaimer applies.

Notes

¹ Several other methodological approaches have also been proposed to compute input-specific reductions required to attain full (radial and nonradial) technical efficiency (Färe and Lovell, 1978; Färe et al ., 1983; Zieschang, 1984; Bogetoft and Hougaard, 1998; Asmild et al ., 2003). The difference between approaches is, primarily, the choice of the reference point on the frontier.

² Only recent studies have included collected sewage or the amount of water treated, in addition to water delivered, as outputs of water companies (Estache and Trujillo, 2003; Tupper and Resende, 2004).

³ In order to facilitate the economic interpretation of these indices, let us take water utility number two in our sample and input labour as an example. This decision-making unit employs 130 workers. According to its computed score of radial input-oriented technical efficiency, which is equal to 0.855, it could reduce its use of labour by 14.5%, which implies a reduction of 19 workers. In addition, computed input excess in labour for this utility would allow for a further shrinkage of 14 employees. In consequence, adding up radial reduction and input-specific excess, the aggregate reduction in labour necessary to achieve technical efficiency amounts to 33 workers, so that the efficient use of this input is 97 workers. Finally, the slack-adjusted score of technical efficiency for this water utility arises from the comparison of its efficient use of labour with actually observed use of this production factor, yielding a score of 0.747.

⁴ Low and high density are defined in relation to the sample average, so that areas of low density of population are those with a density below the average density in the sample. Conversely, high density areas are characterised by a density of population above the sample average. Figures on density of population come from the official statistics of the regional Instituto Andaluz de Estadística.

⁵ This variable is also defined by taking the sample average as reference. The intensity of tourism has been measured according to the tourism index provided by La Caixa (2004).

⁶ In addition, we have run the Kruskal-Wallis test (see Conover, 1999, for details), which generalizes the MW test for more than two samples, considering three groups of utilities, i.e. firms that only provide the service of water delivery, utilities supplying water delivery and sewage collection and, finally, utilities supplying the entire urban water cycle. Nevertheless, differences among groups were found to be statistically insignificant.