The impact of model specification and environmental variables on measuring the overall technical efficiency of water and sewerage services: Evidence from Chile

Abstract

The measurement of efficiency of water utilities is a valuable tool for water regulators and managers to provide services in a sustainable way. Understanding the sources of inefficiency could support business decision making process. In this study we employ the most recent advanced panel data stochastic frontier models to estimate the level of overall technical efficiency of water services in Chile. These econometric models allow incorporating heterogeneity across water utilities and different sources of inefficiency, persistent and transient. The results showed that technical efficiency scores were sensitive to model specification. When efficiency is distinguished between persistent and transient efficiency, it is found that industry performed well in its daily operations, i.e., high transient efficiency. However, mean persistent efficiency was low indicating that industry needed structural transformations to improve performance. Thus, inefficiency in the Chilean water industry is a long run issue. Private water utilities appeared to be more efficient than public water utilities.