Effects of institutional arrangements in local water supply services in Korea

Abstract

In Korea, local governments are primarily responsible for providing water supply services to citizens. Since 2004, 15 local governments have contracted this service to the Korean Water Resources Corporation (K-Water). This paper examines the effects of the two different institutional arrangements -direct public delivery versus contracting out to K-Water -on cost savings and productivity. To do so, it employs a hybrid cost function approach and uses the panel data covering the nine years from 2000 to 2008 in local governments. Empirical findings show mixed evidence on the effects of the two institutional arrangements on cost savings and productivity gains. Water supply costs are significantly lower under contracting out than under direct public delivery. However, there are no significant differences in productivity gains between the two institutional arrangements. Local water supply systems need to further reduce the average water supply costs through increasing their size and magnitude. JEL classification: H44, R50, L95, Q25