Understanding performance change of the water industry: how do size and patterns of output mix associate with efficiency?

ABSTRACT

The water and sewerage industry in England and Wales had undergone several reforms since its privatization. To evaluate to what extent they had impacted on the performance of water companies, an input distance function and its derived cost share equations was estimated. This allowed measuring technical efficiency, economies of scale and cost complementarities between water and sewerage services over the period 1991–2016. The results indicate that an average water and sewerage company (WaSC) reported a technical efficiency score of 0.731 which means that its inputs could be reduced by 26.9% over time. It is also shown that an average WaSC operated under decreasing economies of scale. Cost complementarities between water and sewerage connected properties were found. This implies that WaSCs could benefit from remaining integrated, i.e. providing both water and sewerage services.

KEYWORDS:

• Cost complementarities
• efficiency
• economies of scale
• input distance function
• water and sewerage industry

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Following Abrate and Erbetta’s (2010) approach, cost complementarities between outputs are defined as the variation of marginal cost of production of one good or service due to the production of an additional unit of other goods or services. The concept of cost complementarities between outputs employed here and in Abrate and Erbetta’s (2010) study differ from the more thorough concept of economies of scope as defined by Baumol, Panzar, and Willing (1982) (Pulley and Humphrey 1993).