Incorporating water purification in efficiency evaluation: evidence from Japanese water utilities

Abstract

This study attempts to show that the inclusion of water purification efforts should be another crucial dimension in the efficiency measurement. I use a Stochastic Cost Frontier (SCF) to estimate the technical efficiency of 392 Japanese water utilities in 2005. The results show that a water purification effort may increase cost, and that its inclusion in efficiency evaluation leads to some specific changes in efficiency score and the ranking of water utilities. Furthermore, this incorporation enables the impact of different qualities of source water on efficiency to be controlled. The result suggests that to encourage water purification efforts, it is crucial to incorporate purification in benchmarking.

Keywords:

• water utilities
• water purification
• stochastic cost frontier
• efficiency evaluation

JEL Classification:

• D24
• H49
• L51

Acknowledgements

The author thanks Nobuo Akai, Mototsugu Fukushige, Shin Saito, Masayuki Nakagawa, Takashi Kuramoto, Hideo Yunoue, Ryo Ogawa and some participants of annual meetings of Japan Institute of Public Finance in 2009 and International Institute of Public Finance in 2010 for their useful comments and suggestions, which have contributed to improve the quality of this article. The author is also grateful to Kohji Miyata of Murano water treatment plant for useful explanation on the definition of chemical substances in water and their purification. Financial aid from Japan Society for the Promotion of Science, Research Fellowships for Young Scientists is gratefully acknowledged.

Notes

¹In his study Uragami (2006) assumed that the price of other materials is the numeraire.

²The result for the exponential assumption is similar and available upon request.

³However, in the case of water utilities, given their characteristics, it is not clear how to determine whether this is a soft budget problem or not. It is possible that some water utilities obtain a subsidy because their circumstances make it difficult for them to operate efficiently.