Abstract
Evaluating the performance and analyzing the cost drivers of water utilities is of great interest for water regulators and water sector managers. This study uses a quadratic cost function to investigate the existence of economies of scale and scope in the Chilean water and sewerage industry over the period 2010-2017. We also estimate and decompose productivity growth into technical change and scale efficiency change. Technical change is further broken into pure, non-neutral and scale-augmenting technical change. The results indicate that cost savings can be achieved by increases in the scale of production and the separation of water and sewerage services. Productivity progressed favorably throughout the whole period at an annual rate of 8.4%, which was attributed to the scale effect, the adoption of new technologies and a good allocation of resources. Some policy implications are finally discussed based on our findings.
Highlights
Drinking water services were traditionally provided to people by public utilities [1]
The results indicate that Pure Technical Change (PTC) was the major driver of technical change (TC) whereas the impact of Non-neutral technical change (NNTC) and Scale-augmenting technical change (SATC) was negligible
Water companies and regulators need to understand what drives costs in the water industry so that they could adopt policies and strategies to deliver water and sewerage services to customers in a sustainable and affordable manner. As part of this process, the evaluation of the cost structure of the sector and its productivity growth becomes of great importance
Summary
Drinking water services were traditionally provided to people by public utilities [1]. The privatization of the water utilities as natural monopolies requires the establishment of regulator to guarantee the protection of customers and environment, and the financial sustainability of the water companies. The concept of natural monopoly in the water industry is associated with the optimal industry configuration (economies of scale and scope) and efficiency and productivity. Economies of scale show how output change when there is an increase in inputs [4]. Increasing economies of scale exist when an increase in the production of more output (e.g., through mergers and acquisitions) leads to a lower increase in production costs [5]. Economies of scope may exist due to cost savings from the joint production of different types of services (e.g., water and sewerage services) [6].
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