Performance assessment of water companies: A metafrontier approach accounting for quality of service and group heterogeneities

Abstract

The assessment of water companies’ efficiency, productivity and quality of service is part of the process to set water tariffs and therefore, is relevant for regulators and customers. However, the water industry involves several heterogeneous water companies. Following a pioneering approach, this study estimates productivity change and its drivers considering the non-homogeneous nature of the water companies and incorporating quality of service variables as undesirable outputs. In doing so, the metafrontier Malmquist Luenberger productivity index was estimated for a sample of English and Welsh water and sewerage companies (WaSCs) and water only companies (WoCs) over the years 2001–2018. Results reveal that WoCs performed slightly better than WaSCs as WaSCs did not manage to adopt best industry's practice. By contrast, WoCs exhibited notable technical progress. From a policy perspective, we linked the results from productivity change with the regulatory cycle of the English and Welsh water industry. It is found that the 2004, 2009 and 2014 price reviews appeared to have a positive impact on industry's productivity. The methodological approach followed in this study is of great interest for water regulators as it shows how to integrate both quality of service variables and water companies’ heterogeneity in productivity change assessment.