Measuring and decomposing profit efficiency changes of water utilities: a case study for Chile

Abstract

Estimating profit inefficiency and its drivers is highly relevant for water utilities and water regulators to reduce water tariffs. We employed a novel methodological approach to compute profit inefficiency and changes to profit efficiency based on the Luenberger productivity indicator. This empirical application focused on the water industry in Chile from 2010 to 2018. Estimated average profit inefficiency was 43.6%, with the main contributor being allocative inefficiency (35.7%). In contrast, the effect of technical inefficiency was more limited (7.9%). Changes to profit efficiency differed among full private and concessionary utilities, with averages of 0.021 and 0.002, respectively.