Summary Quantitative studies of water and sanitation utilities: A benchmarking literature survey

This paper delves into the world of quantitative studies of water and sanitation services (WSS), shedding light on the intricate evaluation methods used to assess the performance of WSS utilities. With a staggering 190 studies utilizing cost or production functions, the analysis focuses on various key aspects that impact the efficiency and effectiveness of these essential services.

The studies explore the scale, scope, and density economies of utilities within specific countries or regions. By examining the influence of ownership on efficiency, researchers aim to uncover the optimal structures that lead to improved performance in the delivery of water and sanitation services.

One of the critical areas of focus is the examination of incentives associated with various governance systems, including external regulation. By understanding the power dynamics at play, researchers can identify the most effective mechanisms for driving performance improvements within WSS utilities.

Performance assessment, particularly through benchmarking, plays a pivotal role in identifying areas for improvement and setting standards for excellence in the water sector. This process is essential for driving innovation, efficiency, and sustainability in the delivery of water and sanitation services, especially in developing countries facing unique challenges.

As the global community continues to grapple with the complex issues surrounding water resource management and access to WSS, the insights gleaned from these quantitative studies are invaluable. By leveraging data-driven approaches and rigorous analysis, researchers and policymakers can work towards building a more resilient and equitable water sector for all.

This paper performs a literature update of quantitative studies of water and sanitation services (WSS). There are 190 studies that use cost or production functions to evaluate the performance of WSS utilities. The studies examine the scale, scope or density economies of utilities in a particular country or region, the influence of ownership on efficiency, the existence and power of incentives associated with different governance systems (including external regulation), and performance assessment (benchmarking).

The water sector is significant in terms of public policy issues raised by water resource management and access to WSS, especially in developing countries. However, the literature on WSS utilities does not fully reflect the importance of the sector. Economists and other analysts have tended to focus on quantitative studies of cost or production functions, with attention growing dramatically in recent years. However, of the 213 researchers publishing the 120 articles identified in this census, two-thirds only authored or co-authored one article. This pattern suggests that many scholars "dip into" the sector, but only a few engage in sustained research on WSS utilities.

The paper presents some patterns regarding quantitative methods adopted over time and major trends in results. It also presents some concluding observations. The majority of these studies were published in academic or policy journals (63%), followed by Working Papers (about 13%), reports (10%), book chapters (7%), and Ph.D. dissertations (5%).

The study focuses on the cost function of water utilities in England and Wales, arguing that regionalization does not necessarily lead to a lowering of average costs for state enterprises. The first empirical study was by Ford and Warford (1969), who identified two dozen studies in the 1970s and 1980s. Since 2000, 132 studies have been added to the overall literature, about 70% of the total amount to date. This increase is likely linked to the increase in regulation of network industries in the late 90s, which began applying incentive regulation and benchmarking tools to firms delivering water and sanitation services. The new public management philosophy promoted more market orientation in the public sector, leading to greater cost-efficiency for public organizations. The development of new quantitative techniques and software allowing for easy computation of benchmarking models was also important for research in the area. The number of academic studies published in water utilities has grown significantly since 1969, with Business and Economics Journals dominating the results. However, other sources are less accessible or represent early stages of research, with reports comprising about 10% of all quantitative studies of water utilities.

The study of water services (WSS) utilities is complex due to the complexity of technology, institutional and geographic context, and the need for data availability. Researchers often choose to move on to other fields after their first quantitative study of operators in this sector. The majority of the studies are single-authored, with over one-third being single-authored. Over 40% have two authors, and only four studies have more than three authors.

The largest author category consists of academics (86% of the studies), followed by Water-Related Institutions (11%) and International Organizations (3%). Studies by researchers at Water-Related Institutions are usually carried out under the auspices of sector regulators. The pattern of countries covered in quantitative studies depends on data availability and intrinsic interest in particular hypothesis-tests and performance comparisons. Europe has the greatest number of studies, with 94 studies, approximately half of the total. The Americas represents about one-third, with the majority from the U.S. and Canada (81%). Africa has only three published quantitative studies, mainly due to data availability.

The majority of the papers were published in English, with the U.S. and U.K. being important countries and most English-language journals having greater visibility and better reputations.

Quantitative techniques are divided into parametric and non-parametric methods for estimating efficiency in water utilities. Parametric methods use an economic function for the production or cost technology, while non-parametric methods use mathematical programming to define the technology. In the literature of water quantitative studies, 58% use parametric methods and 34% use non-parametric ones, with 8% using both methods. Non-parametric studies often use data envelopment analysis (DEA), with the most common inputs being labor, operational expenditures, capital expenditures, capital stock, and total cost.

Explanatory factors are used by analysts to consider the operational environment of water utilities, with the Tobit regression second stage being the most used procedure. Parametric methods use total cost, variable cost functions, other functions, and production functions. Estimation methods most often employed are ordinary least squares (OLS) and seemingly unrelated regression (SUR).

Quantitative studies address issues related to market structure, ownership, incentives, and performance. The four objectives that tend to be pursued via studies of cost or production functions are market structure, ownership, incentives, and performance. The results correspond to the major aim of each article, as most have more than one objective.

The study focuses on the impact of market structure, ownership, and incentives on water utilities. It identifies 61 papers addressing these issues, with 47 studies focusing on market structure analysis. The results are mixed, depending on the average size of water utilities in the sample. Some studies examine efficiency gains associated with economies of scope, such as savings from joint provision of drinking water supply with wastewater or other activities like piped gas, electricity, or urban waste.

Vertical integration of water and wastewater utilities is also examined, with 21 studies addressing economies of scope, 7 related to verticalization, and nine supporting the existence of economies of density. The analysis of water utilities' market structure is mostly based on parametric methods, with only one study applying non-parametric methods.

Ownership influences efficiency, with 47 studies focusing on this issue. 18 studies concluded that private water utilities were more efficient than public ones, while 12 found public water utilities to be more efficient than privates. However, the literature on all sectors is mixed, with some economic theories supporting the superior performance of the private sector.

Incentives play a crucial role in the water industry, with 42 studies addressing yardstick comparisons via benchmarking techniques. Most studies conclude that regulation has improved the efficiency and productivity of water utilities, while others simulate more strict regulatory methods using benchmarking to set tariffs or supervise service quality.

Despite the potential benefits of benchmarking practices, most studies do not find positive impacts on performance, suggesting the need for further research to monitor the outcomes of such reforms.

The literature review focuses on the use of benchmarking to measure the performance of water utilities and identify best practices. It found 66 studies in the literature, most of which aim to determine the relative efficiency of utilities in a particular country, region, or cross-country sample. Some studies propose, apply, or compare new models, such as allocative efficiency, additive models, and bootstrap procedures. Some researchers investigate the potential for using rankings to develop incentives, often taking service quality into account. Most of these papers are carried out by non-academic authors.

The decision-relevance of such rankings is a topic worthy of further investigation. If the results are not robust to different model specifications or time periods, the rankings will be called into question if they are actually used in regulatory proceedings. There seems to be a creative tension between academics who seek to add "bells and whistles" to economic and other quantitative studies and practitioners who must be able to communicate the results to key stakeholder groups. Studies are fairly limited on topics like quality of service, financial sustainability, and determinants of economic efficiency.

In conclusion, the literature survey provides an impressionistic overview of the results and points to areas for future research. Three key conclusions are highlighted: few analysts engage in sustained research in this field, data availability affects the pace and pattern of publication, and policy importance of water utility performance increases interest in comprehensive performance studies.

The water industry has been a subject of extensive research, with various studies examining the impact of economic regulation on efficiency and productivity. The Stochastic Frontier Analysis (SFA) and Data Envelopment Analysis (DEA) are two major techniques used by researchers to study water service efficiency. The two major techniques were created in 1977 and 1978, respectively, but their regular use in WWS studies occurred somewhat later.

The Water Services Regulation Authority (Ofwat) replaced the Office (Director General) of Water Services (2006) in 2006. In the first twenty years, about 80% of studies were performed in the U.S., but by 2009, this percentage decreased to 20%. There seems to have been a shift away from Americans to researchers from other regions of the world providing cutting-edge research on the topic.

The literature contrasting the strengths and limitations of parametric and non-parametric methods is vast. For example, Berg (2010) explains how economists approach cost or production function studies and how performance scores can be used to develop incentives for managers.

Benchmarking studies are sometimes classified into frontier and non-frontier, depending on whether the construction of the technology uses best practice or average values. The influence of congestion efficiency on the performance of European seaports performance is also a significant topic in the literature.