Efficiency and Productivity in the UK Water industry
The water and sewerage industry in England and Wales is characterised by a series of natural monopolies. Due to the lack of market competition, water companies may not have the same incentives to be as efficient as in other competitive industries and is therefore regulated by Ofwat to ensure that they carry out their functions efficiently and effectively to protect the interest of customers.
As part of the regulatory process the efficiency of the companies is examined through comparative efficiency analysis. The source of cost inefficiency is assumed to include management (or technical inefficiency) as well as allocative inefficiency from over employment of particular factors of production and/or over-investment in capital projects. Welsh Water is a declared NFP entity and offers itself as a case study for the evaluation of the relative efficiency of its utility provision against that of the profit maximising water utilities in England and Wales.
The aim of the project is to identify the degree and sources of cost inefficiency using parametric and non-parametric methods.
The project will involve the estimation of relative cost and technical efficiency functions in the water industry using specific non-parametric methods such as bootstrap Data Envelopment Analysis, and Multi-directional Efficiency Analysis to identify differences in the patterns of inefficiencies between the NFP provider and the profit maximising provider. Dynamic non-parametric methods will be used to identify the existence of intertemporal allocative efficiency.
The investigation will also employ Stochastic Frontier Analysis and aim to tackle the problem of decomposing cost inefficiency into its technical and allocative components. A general method has alluded the literature but specific cases utilising Bayesian estimation techniques have been published. Due to the structure of the water industry as a vertically integrated utility the project will involve analysis of production, network and service efficiency. The aim of the project is to produce a suite of models that can be utilised at a company level to target areas for efficiency improvement and at the industry level to understand the relative operating efficiency of companies. In a broader perspective, the analysis will contribute to the debate of the privatisation vs nationalisation of utilities. The analysis will utilise both publicly available data and internal company data to model and identify the cost drivers for the company and the industry as a whole.
While the maintained hypothesis is that NFP or public sector utilities are no less cost inefficient than privately owned utilities, the ethos of a NFP firm is different and has a stronger community focus. Experience shows that even profit oriented firms have cost inefficiencies. Therefore the source of inefficiencies in a publicly owned or NFP utility may be different from privately owned utilities. Welsh Water offers itself as a case study of efficiency analysis of public sector or a NFP natural monopoly.
The project will be focused on the efficiency and cost drivers within the English and Welsh Water and Sewerage industry.
The successful applicant will be jointly supervised by the Regulatory Economist at Dwr Cymru and also have the opportunity to undertake a summer placement.
Knowledge exchange will take place with regards to understanding the nature of the sector and the regulatory framework. There will be opportunity to visit Welsh Water’s sites and engage with Area Managers as part of the contextual training.