Estimation and evaluation of productivity change and its drivers in the English and Welsh water sector: a stochastic cost frontier approach

Abstract

Estimating productivity change and its determinants is of great importance when measuring the performance of a firm. A true random effect cost model was employed to measure the cost efficiency of water companies in England and Wales from 1993 to 2016. Subsequently, total factor productivity change was estimated and decomposed into cost-efficiency change, technical change, scale efficiency change, output effect and residual price effect. The results indicate that the English and Welsh water industry increased its productivity over the period examined at a rate of about 2.1%, and it was influenced primarily by technical change. The price reviews appear to have a positive impact on the productivity of water-only companies during the whole period examined. In the case of water and sewerage companies, the 1994 and 1999 price reviews had a positive impact on productivity, whereas the last two price reviews had an adverse impact.