Water Supply: Costs and Performance of Water Utilities: Evidence from Switzerland

Abstract

In this paper, we assess the economic efficiency of Swiss water utilities. To reach this aim, we accessed a new and unexploited database, which counts 330 water utilities, representing about 55% of the drinking water distributed in Switzerland. The database spans over six years (2000)(2001)(2002)(2003)(2004)(2005) and offers information on the type of the water production process, the characteristics of the network and the costs of water supply. This database presents an original opportunity to analyse the cost of water supply and to determine the efficiency of the water utilities. Such a study has never been done for Switzerland. We apply a stochastic cost function approach to measure cost inefficiency and to investigate the impact of environmental characteristics outside the control of the water utilities (e.g. type of water and customer density) on costs and inefficiency measures. Our results show that environmental factors have a significant influence on costs. Including exogenous variables in the analysis lowers industry inefficiency scores and provides indicators of managerial performance.

The Cost Structure of Water Utilities in Switzerland

“…In our project, in addition to incorporating new data and additional variables, we are actually extending the approach presented in this paper in several directions. Firstly, we are comparing water distribution utilities by using stochastic cost frontiers (see Baranzini, Faust and Maradan, 2008). Secondly, we will also measure and discuss the performance of Swiss water utilities by applying a non parametric approach using data envelopment analysis (DEA).…”

“…We estimate a translog cost function for Swiss water utilities and from it we measure marginal costs as well as economies of customer density and scale, which are important determinants of water policies, such as production planning and water tariffs. This paper is part of an on-going research project on the analysis of the costs and the measurement of the efficiency of Swiss drinking water utilities (see a companion paper by Baranzini, Faust and Maradan, 2008).…”