Ownership and Performance in Water Services Revisited: Does Private Management Really Outperform Public?

Since the late 1970s, water services have been privatised in some developed countries in an attempt to improve performance. However, after three decades of privatisations the superiority of private management is being called into question and several cities are returning to public provision. In this paper we revisit the relationship between ownership and performance in urban water services management using directional distance functions, metafrontiers and Data Envelopment Analysis (DEA) techniques. The technical efficiency in the provision of water delivery services in a sample of Spanish municipalities is assessed at the level of the management of specific production factors; moreover, we discuss whether differences in efficiency between private and public decision units are due to either different capabilities of managers (managerial efficiency) or different technological restrictions (ownership efficiency). Our main finding is that private management is more efficient in the use of labour input, mainly because of the technological restrictions faced by public management units, such as legal and institutional restrictions. Conversely, private management appears to be less efficient at managing operational costs.

[1]  Sebastian Galiani,et al.  Water for Life: The Impact of the Privatization of Water Services on Child Mortality , 2004, Journal of Political Economy.

[2]  G. Grossi,et al.  Do ownership and size affect the performance of water utilities? Evidence from Estonian municipalities , 2013 .

[3]  Lee Yoong Hon,et al.  Productivity, Efficiency and Privatization in the Malaysian Water Industry , 2014 .

[4]  F. González‐Gómez,et al.  Outsourcing and Efficiency in the Management of Rural Water Services , 2013, Water Resources Management.

[5]  Andrés J. Picazo-Tadeo,et al.  Does service quality matter in measuring the performance of water utilities , 2008 .

[6]  Andrés J. Picazo-Tadeo,et al.  An intertemporal approach to measuring environmental performance with directional distance functions: Greenhouse gas emissions in the European Union , 2014 .

[7]  P. Emmenegger.  Job security regulations in Western democracies: A fuzzy set analysis , 2011 .

[8]  D. Aigner,et al.  P. Schmidt, 1977,?Formulation and estimation of stochastic frontier production function models,? , 1977 .

[9]  F. González‐Gómez,et al.  Assesing Performance in the Management of the Urban Water Cycle , 2011 .

[10]  F. González‐Gómez,et al.  Reconsidering privatisation in the governance of water in Spain , 2009 .

[11]  Lawrence M. Seiford,et al.  Data envelopment analysis (DEA) - Thirty years on , 2009, Eur. J. Oper. Res..

[12]  Corrado lo Storto,et al.  Are Public-Private Partnerships a Source of Greater Efficiency in Water Supply? Results of a Non-Parametric Performance Analysis Relating to the Italian Industry , 2013 .

[13]  Philipp Terhorst,et al.  Re-municipalisation in the early twenty-first century: water in France and energy in Germany , 2013 .

[14]  Stéphane Saussier,et al.  Public-Private Partnerships and Prices: Evidence from Water Distribution in France , 2006 .

[15]  R. Coase.  The Nature of the Firm , 1937 .

[16]  Factors explaining local privatization: a meta-regression analysis , 2009 .

[17]  W. J. Conover,et al.  Practical Nonparametric Statistics , 1972 .

[18]  D. Mbuvi.  Utility reforms and performance of the urban water sector in Africa , 2012 .

[19]  David A. McDonald,et al.  Remunicipalisation : putting water back into public hands , 2012 .

[20]  O. Hart,et al.  The Proper Scope of Government: Theory and an Application to Prisons , 1996 .

[21]  David Parker,et al.  The comparative impact of privatisation and regulation on productivity growth in the English and Welsh water and sewerage industry, 1985-99 , 2004 .

[22]  Rui Cunha Marques,et al.  A Meta-Regression Analysis of Benchmarking Studies on Water Utilities Market Structure , 2011 .

[23]  G. Battese,et al.  Metafrontier frameworks for the study of firm-level efficiencies and technology ratios , 2008 .

[24]  F. González‐Gómez,et al.  The privatisation of urban water services: theory and empirical evidence in the case of Spain , 2015 .

[25]  Felipe Barrera-Osorio,et al.  Does Society Win or Lose as a Result of Privatization? The Case of Water Sector Privatization in Colombia , 2007 .

[26]  Claude Menard,et al.  Contractual choice and performance: the case of water supply in France: the case of water supply in France , 2000 .

[27]  Bettina Campedelli,et al.  Factors affecting the performance of water utility companies , 2011 .

[28]  John S. Liu,et al.  A survey of DEA applications , 2013 .

[29]  Mildred E. Warner,et al.  Does privatization of solid waste and water services reduce costs? A review of empirical studies , 2008 .

[30]  Bernardino Benito,et al.  Explaining differences in efficiency: an application to Spanish municipalities , 2010 .

[31]  Giulia Romano,et al.  Measuring and comparing the efficiency of water utility companies: A data envelopment analysis approach , 2011 .

[32]  R. Färe,et al.  Profit, Directional Distance Functions, and Nerlovian Efficiency , 1998 .

[33]  A. Estache,et al.  How Different Is the Efficiency of Public and Private Water Companies in Asia , 2002 .

[34]  Xavier Fageda,et al.  Why do local governments privatise public services? A survey of empirical studies , 2007 .

[35]  Qi Li.  Nonparametric testing of closeness between two unknown distribution functions , 1996 .

[36]  Martin Cave,et al.  Regulation and Efficiency Incentives: Evidence from the England and Wales Water and Sewerage Industry , 2007 .

[37]  Simon Porcher,et al.  Efficiency in the public and private French water utilities: prospects for benchmarking , 2013 .

[38]  David S. Saal,et al.  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 , 2007 .

[39]  R. Färe,et al.  Theory and Application of Directional Distance Functions , 2000 .

[40]  I. García‐Sánchez,et al.  Efficiency Measurement in Spanish Local Government: The Case of Municipal Water Services , 2006 .

[41]  S. Grosskopf,et al.  Efficiency and Ownership: Further Evidence , 1986 .

[42]  D. Hall,et al.  Public resistance to privatisation in water and energy , 2005 .

[43]  Rangesan Narayanan,et al.  Specification and estimation of the effect of ownership on the economic efficiency of the water utilities , 1995 .

[44]  Susan Feigenbaum,et al.  Public versus Private Water Delivery: A Hedonic Cost Approach , 1983 .

[45]  R. Shepherd.  Theory of cost and production functions , 1970 .

[46]  Germà Bel i Queralt,et al.  Is Private Production of Public Services Cheaper than Public Production? A meta-regression analysis of solid waste and water services , 2009 .

[47]  Jorge Guardiola,et al.  WHY DO LOCAL GOVERNMENTS PRIVATIZE THE PROVISION OF WATER SERVICES? EMPIRICAL EVIDENCE FROM SPAIN , 2011 .

[48]  A. Guerrini,et al.  Ownership, Investment Policies and Funding Choices of Italian Water Utilities: An Empirical Analysis , 2013, Water Resources Management.

[49]  E. Pérard.  Water supply: Public or private? , 2009 .

[50]  David Parker,et al.  The impact of privatization and regulation on the water and sewerage industry in England and Wales: a translog cost function model , 2000 .

[51]  T. Moreira,et al.  Public Versus Private Water Utilities: Empirical Evidence for Brazilian Companies , 2005 .

[52]  Abraham Charnes,et al.  Measuring the efficiency of decision making units , 1978 .

[53]  Antonio Estache,et al.  Efficiency Effects of 'Privatization' in Argentina's Water and Sanitation Services , 2003 .

[54]  M. Farrell.  The Measurement of Productive Efficiency , 1957 .

[55]  W. Cooper,et al.  Data Envelopment Analysis: A Comprehensive Text with Models, Applications, References and DEA-Solver Software , 1999 .

[56]  O. Williamson.  The Economics of Internal Organization: Exit and Voice in Relation to Markets and Hierarchies , 1976 .

[57]  Rui Cunha Marques,et al.  Quantitative studies of water and sanitation utilities: a benchmarking literature survey , 2011 .

[58]  Emanuele Lobina.  Remediable institutional alignment and water service reform: Beyond rational choice , 2013 .

[59]  A. C. Pigou.  Economics of welfare , 1920 .

[60]  W. Douglas Morgan.  Investor Owned VS. Publicly Owned Water Agencies: AN Evaluation of the Property Rights Theory of the Firm , 1977 .

[61]  J. A. Gómez-Limón,et al.  A metafrontier directional distance function approach to assessing eco-efficiency , 2013, Journal of Productivity Analysis.

[62]  Qi Li,et al.  Nonparametric testing of closeness between two unknown distribution functions , 2009 .

[63]  P. Marin.  Public Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries , 2009 .

[64]  W. Crain,et al.  A Test of the Property-Rights Theory of the Firm: Water Utilities in the United States , 1978, The Journal of Law and Economics.

[65]  Elliott Parker,et al.  An Examination of the Effect of Ownership on the Relative Efficiency of Public and Private Water Utilities , 1994 .

[66]  K. Meier,et al.  Comparing Public and Private Management: Theoretical Expectations , 2011 .

[67]  W. Niskanen.  Bureaucracy and representative government , 1971 .

[68]  A. U.S.,et al.  FORMULATION AND ESTIMATION OF STOCHASTIC FRONTIER PRODUCTION FUNCTION MODELS , 2001 .

[69]  W. Meeusen,et al.  Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error , 1977 .

[70]  Michael Zschille,et al.  The performance of German water utilities: a (semi)-parametric analysis , 2011 .

[71]  Xavier Fageda,et al.  Is Private Production of Public Services Cheaper Than Public Production? A Meta-Regression Analysis of Solid Waste and Water Services. , 2010 .

[72]  João Ricardo Faria,et al.  The Game Academics Play: Editors Versus Authors , 2005 .

[73]  A. Popov,et al.  Does Private Sector Participation Improve Performance in Electricity and Water Distribution? , 2008 .

[74]  C. Kirkpatrick,et al.  An Empirical Analysis of State and Private-Sector Provision of Water Services in Africa. , 2006 .

[75]  Antonio Estache,et al.  Sector Organization, Governance, and the Inefficiency of African Water Utilities , 2002 .

[76]  Andrés J. Picazo-Tadeo,et al.  The role of environmental factors in water utilities’ technical efficiency. Empirical evidence from Spanish companies , 2009 .

[77]  M. García-valiñas,et al.  Is the price of water for residential use related to provider ownership? Empirical evidence from Spain , 2013 .

[78]  Léopold Simar,et al.  On Testing Equality of Distributions of Technical Efficiency Scores , 2006 .

[79]  David K. Lambert,et al.  Ownership and sources of inefficiency in the provision of water services , 1993 .

[80]  Rui Cunha Marques,et al.  Measuring the efficiency of water utilities: a cross-national comparison between Portugal and Italy , 2012 .

[81]  Patrick C. Mann,et al.  Ownership and Water System Operation , 1976 .

[82]  Emmanuel Thanassoulis,et al.  Price-cap regulation in the English and Welsh water industry: a proposal for measuring productivity performance , 2016 .

[83]  Andrés J. Picazo-Tadeo,et al.  Accounting for operating environments in measuring water utilities’ managerial efficiency , 2009 .

[84]  Andrés J. Picazo‐Tadeo,et al.  Do Labour Societies Perform Differently to Cooperatives? Evidence from the Spanish Building Industry , 2011 .

[85]  Joan V. Robinson,et al.  The Nature of the Firm , 2004 .

[86]  Emanuele Lobina,et al.  Public Sector Alternatives to Water Supply and Sewerage Privatization: Case Studies , 2000 .

[87]  F. González‐Gómez,et al.  Do ideological and political motives really matter in  the public choice of local services management? Evidence from urban water services in Spain , 2012 .

[88]  Guillermo Sabbioni,et al.  Efficiency in the Brazilian sanitation sector , 2008 .

[89]  Rangesan Narayanan,et al.  TECHNICAL EFFICIENCY OF RURAL WATER UTILITIES , 1995 .