Estimation and evaluation of productivity change and its drivers in the English and Welsh water sector: a stochastic cost frontier approach

ABSTRACT

Estimating productivity change and its determinants is of great importance when measuring the performance of a firm. A true random effect cost model was employed to measure the cost efficiency of water companies in England and Wales from 1993 to 2016. Subsequently, total factor productivity change was estimated and decomposed into cost-efficiency change, technical change, scale efficiency change, output effect and residual price effect. The results indicate that the English and Welsh water industry increased its productivity over the period examined at a rate of about 2.1%, and it was influenced primarily by technical change. The price reviews appear to have a positive impact on the productivity of water-only companies during the whole period examined. In the case of water and sewerage companies, the 1994 and 1999 price reviews had a positive impact on productivity, whereas the last two price reviews had an adverse impact.

KEYWORDS:

• Performance indicators
• productivity growth
• costs
• regulation
• water and sewerage industry

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Alternative regulatory models to price-cap regulation applied in other countries are: i) Revenue cap where it sets the allowed revenue that a company can recover over a particular period; ii) Rate-of-return regulation allows the water to establish a level of remuneration on the investments carried out, which is approved by the regulatory authority; and iii) Yardstick competition, or regulation by comparison, is based on an assessment of the performance results of the regulated operator in comparison with those of other operators from the same sector and the respective financial consequences (Marques 2010).

2. Other studies by Saal, Parker, and Weyman-Jones (2007) and Molinos-Senante, Porcher, and Maziotis (2017a) and Molinos-Senante and Maziotis (2018b) used a translog input distance function and a true-fixed cost frontier model, respectively, to measure technical or cost efficiency and productivity growth. Erbetta and Cave (2007) measured technical and allocative efficiency in the English and Welsh water industry by using both SFA and data envelopment analysis techniques; however, they did not compute TFP growth.