The impact of privatization and regulation on the water and sewerage industry in England and Wales: a translog cost function model

Abstract

After the ten Regional Water Authorities (RWAs) of England and Wales were privatized in November 1989, the successor Water and Sewerage Companies (WASCs) faced a new regulatory regime that was designed to promote economic efficiency while simultaneously improving drinking water and environmental quality. As legally mandated quality improvements necessitated a costly capital investment programme, the industry's economic regulator, the Office of Water Services (Ofwat), implemented a retail price index (RPI)+K pricing system, which was designed to compensate the WASCs for their capital investment programme while also encouraging gains in economic efficiency. In order to analyse jointly the impact of privatization, as well as the impact of increasingly stringent economic and environmental regulation on the WASCs' economic performance, this paper estimates a translog multiple output cost function model for the period 1985-1999. Given the significant costs associated with water quality improvements, the model is augmented to include the impact of drinking water quality and environmental quality on total costs. The model is then employed to determine the extent of scale and scope economies in the water and sewerage industry, as well as the impact of privatization and economic regulation on economic efficiency. Copyright © 2000 John Wiley & Sons, Ltd.

The role of environmental factors in water utilities’ technical efficiency. Empirical evidence from Spanish companies

“…Other studies have tested for the existence of scope economies in water utilities derived from cost reductions as the number of water services provided increases (Hayes, 1987, Lynk, 1993, Hunt and Lynk, 1995, Saal and Parker, 2000, Fraquelli et al, 2005. However, most of these papers only consider two of the services representative of the urban water cycle, water distribution and sewage collection.…”

Price-cap regulation in the English and Welsh water industry: A proposal for measuring productivity performance

“…WaSCs have carried out substantial capital investment programs related to water and sewerage treatment since privatisation (Portela et al 2011). As these were made in response to increasingly stringent environmental regulation, including European Union directives (Maziotis et al, 2009), it is assumed that quality improvements are exogenously determined (Saal & Parker, 2000). Consequently, the first step to estimate quality-adjusted indices involves the construction of quality-adjusted water and sewerage outputs.…”

A systems approach to strategic infrastructure delivery

“…Robison and Hewison (2005) stress the importance of the market, fiscal discipline, trade, investment and financial liberalisation, deregulation, decentralisation, privatisation and a reduced role for the state within neo-liberal reform strategies. Discussions continue within the body of literature around the effectiveness of privatization at achieving the intended neo-liberal reforms under which the industry was privatized (Van Den Berg, 1997;Rees, 1998;Saal and Parker, 2000;Finger and Allouche, 2002;Thomas and Ford, 2005;Prasad, 2006;Sawkins, 2012;Maziotis et al, 2012). While quality and customer satisfaction coupled with cumulative investment (£9.3 billion in the six years before privatization and £17 billion during the six years following) is considered high compared with pre-privatization (Van Den Berg, 1997;Ofwat, 2011), efficiency levels are considered low while tariffs increased by 46% in the nine years following privatization, with operating profits more than doubling (+142%) in eight years (Lobina and Hall, 2001).…”