Quo vadis efficiency analysis of water distribution? A comparative literature review

Abstract

Recognizing the growing importance of scientific benchmarking in water distribution, we provide a comprehensive survey of the available literature. We begin with a discussion about the (limited) use of benchmarking in the regulation of UK water utilities, and then extend the analysis to regulated water sectors in other countries. We find no clear impact of public or private ownership; instead, the institutional settings appear to be a dominant driver of efficiency. Quality and structural variables are significant parameters; and water losses and population density are also important drivers. Analysis reveals that economies of scale only exist in fragmented water industries, whereas economies of density are omnipresent. We find evidence suggesting important economies of scope (e.g. between water and sewerage). Finally, we summarize the tensions that exist in attempting to measure efficiency in the water industry and draw conclusions about how to improve efficiency analysis in the future.

Introduction

Water distribution is increasingly coming under scrutiny by regulators, policymakers, business, and the research community. While early applications of benchmarking techniques have been practiced in the UK, in this decade we observe an increasing use of water benchmarking world-wide. The natural monopoly character of water distribution, the need for fair prices, and the generally large number of observations has favored the diffusion of efficiency analysis. As applied methods grow more sophisticated, technical issues now dominate. Recognizing the growing role of scientific benchmarking in water distribution, this paper provides a survey of the available literature and studies. Fig. 1. shows that benchmarking of water distribution is now practiced throughout the world, even in less-regulated Africa and Asia.¹ One can distinguish the single-country studies for developed countries and South America, from the cross-country analyses for less-developed countries e.g. in Africa, Asia and Central America. This trend reflects the data availability and sources of data. In countries where reliable data is available, cross-country studies are more rare, to avoid the empirical problems of comparing different operating environments.

The majority of the studies we selected were published during the last ten years and represent frontier studies evaluating efficiency differences. Few are purely econometric, estimating cost functions. While our focus and starting point is on water distribution, we also look at studies evaluating possible interactions with sewerage, electricity and gas provision. Furthermore, some studies deal with water supply rather than distribution, meaning that such firms also treat and extract water.

The paper is structured as follows: Section 2 concerns the use of water benchmarking in regulation and assesses the approach adopted by Ofwat, the UK regulator that already implemented a new regime of environmental, water quality and price cap regulation after the privatization in 1989. Section 3 compares the studies with respect to the role of public and private ownership. Section 4 reports on the results of studies using structural variables and quality indicators. Section 5 presents the findings related to economies of scale, density and scope in water benchmarking, and Section 6 reviews the complexity of water operations and the efficiency analysis on that sector. Section 7 concludes.