Evaluating trends in the performance of Chilean water companies: impact of quality of service and environmental variables

Abstract

In monopoly services that provide drinking water, it is of paramount importance to evaluate the total factor productivity (TFP) change of water companies. Most of the previous studies have computed the Malmquist productivity index (MPI) by applying non-parametric methods. By contrast, following a pioneering approach, in this study, we estimated the MPI using a parametric method that allows us to decompose TFP change into a larger number of drivers, including exogenous and quality of service variables. An empirical application for the Chilean water industry over 2007–2015 was conducted. We found that productivity change estimates were variable across years, differentiating a first period (2007/11) in which productivity declined and a second period (2011/15) in which TFP notably improved. In both periods, scale efficiency change and input mixed effect were the main drivers of productivity change, illustrating the importance of operation scale in water companies’ performance. The decomposition of the TFP change in a large number of drivers is essential to propose incentives and measures to promote productivity across time.