Abstract
The water and sewerage industry of England and Wales was privatized in 1989 and subjected to a new regime of environmental, water quality and RPI+K price cap regulation. This paper estimates a quality-adjusted input distance function, with stochastic frontier techniques in order to estimate productivity growth rates for the period 1985–2000. Productivity is decomposed so as to account for the impact of technical change, efficiency change, and scale change. Compared with earlier studies by Saal and Parker [(2000) Managerial Decision Econ 21(6):253–268, (2001) J Regul Econ 20(1): 61–90], these estimates allow a more careful consideration of how and whether privatization and the new regulatory regime affected productivity growth in the industry. Strikingly, they suggest that while technical change improved after privatization, productivity growth did not improve, and this was attributable to efficiency losses as firms appear to have struggled to keep up with technical advances after privatization. Moreover, the results also suggest that the excessive scale of the WaSCs contributed negatively to productivity growth.
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Notes
This study is concerned only with the industry in England and Wales. Water and sewerage services in Scotland and Northern Ireland remain state owned.
The property of symmetry of the second order terms is imposed in estimation.
In developing the model presented here, we tested a variety of alternative stochastic frontier specifications without fixed effects, but rejected these models given the superiority of the time varying inefficiency model specified here.
This finding is reinforced by noting that the average and median firm specific scale elasticities were respectively 0.886 and 0.863 and 84 percent of these estimates were less than 1.
Since x3 has been used as a numeraire, the labor elasticity can be recovered as \({e_{3}= 1-e_{1}-e_{2}^{.}}\).
Firm specific estimates of technical change are calculated as \({\psi _1 +\psi_2 (t+0.5)+0.5\left[ {(\sum_m^{M-1} {\eta_m \left({\ln {\mathop x\limits^\sim}_{m,i,t} +\ln {\mathop x\limits^\sim}_{m,i,t+1} } \right)} +\sum_k {\kappa_k \left({\ln y_{k,i,t} +\ln y_{k,i,t+1} } \right)} } \right]}\) Given normalization of the data around the sample average, the technical change that would be achieved by a hypothetical unchanging sample average firm can be calculated as ψ1 + ψ2 (t + 0.5).
This conclusion is reinforced by considering the absorption of the water only company Northeast Water, by Northumbrian Water. In the first year after the merger, Northumbrian Water experienced an estimated scale effect of −6.9 percent. This can be interpreted as indicating that Northumbrian Water’s overall TFP fell by almost 7 percent because of the increase in scale resulting from the merger.
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Saal, D.S., Parker, D. & Weyman-Jones, T. Determining the contribution of technical change, efficiency change and scale change to productivity growth in the privatized English and Welsh water and sewerage industry: 1985–2000. J Prod Anal 28, 127–139 (2007). https://doi.org/10.1007/s11123-007-0040-z
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DOI: https://doi.org/10.1007/s11123-007-0040-z