Estimating potential economic savings of water utilities due to improvements on technical and allocative inefficiencies

Abstract

This research investigated both technical and allocative inefficiencies in water utilities, and its impact on production costs. Using the stochastic frontier analysis (SFA) primal system, the study delved into the Chilean water sector between 2010 and 2017. Results showed an average technical inefficiency (TI) of 0.507 and allocative inefficiency (AI) of −0.417, indicating an overemphasis on capital over operational expenditures. The economic consequences of TI and AI were approximately US$ 1297 million and US$ 237 million per annum, respectively. On an individual scale, the increase on production costs due to TI and AI were estimated at 0.390 US$/m³, 0.471 US$/m³ and 0.038 US$/m³ for full private utilities, concessionary utilities and the public utility, respectively. The results of the study evidence the need for holistic efficiency assessments to avoid biased policymaking, illuminating the prevailing trend of favoring capital expenditures, and revealing potential economic benefits for consumers.