Total factor productivity assessment of water and sanitation services: an empirical application including quality of service factors

Abstract

Assessing the productivity change of water companies provides relevant information for both water regulators and companies’ managers. Past research has illustrated that different indicators and indexes have been applied although not all of them are equally reliable. Thus, this study evaluates the total factor productivity (TFP) change and its drivers employing the Luenberger-Hicks-Moorsteen productivity indicator (LHMPI) including, for the first time, quality of service variables as undesirable outputs. Moreover, unlike the previous studies, LHMPI was decomposed into three drivers; namely technical change, technical efficiency change and scale efficiency change. Our empirical application conducted on a sample of Chilean water companies over 2007–2018 embracing full private water companies (FPWCs) and concessionary water companies (CWCs). Results evidenced that, on average, TFP increased at an annual rate of 2.2%, mainly due to outputs rise. The main driver of productivity growth was scale efficiency change suggesting that adjustments in the water companies’ scale of operations could lead to lower operational costs. It was also evidenced that FPWCs performed better than CWCs over the period analyzed.