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Water supply: costs and performance of water utilities. Evidence from Switzerland

Congress: 2008
Author(s): Andrea Baranzini, David Maradan, Anne-Kathrin Faust
Haute Ecole de Gestion de Genève Campus de Battelle, Bâtiment F, 7 route de Drize, CH – 1227 Carouge-Genève, Suisse

Keyword(s): water utilities, benchmarking, cost function, data envelopment analysis, performance, efficiency
AbstractThe main general objective of this paper is to assess and to compare practices in the water supply sector in Switzerland. The project possesses two interrelated specific objectives: > Firstly, it analyses the main determinants of the costs of water supply. >Secondly, it develops different measures of the economic efficiency of water utilities, while highlighting its determinants. In order to achieve those objectives, we accessed a new and unexploited database on the Swiss water utilities. This very reach database counts more than 1’200 observations over 5 years and offers detailed and precise information on the type of the water production process, the characteristics of the network and the costs of water supply. Such database presents an original opportunity to analyse the cost of water supply and to determine the water utilities efficiency. Such a study has never been done in Switzerland. This article is based on two methodologies. Firstly, it applies the stochastic cost function approach in order to explore the determinants of water supply cost, their structure and composition. Thanks to this approach, we are able to differentiate those factors which are outside the control of the water utilities (e.g. topology of the region and customer density) from those which are under control and can be managed by the utilities (e.g. production factors). Given the cost function, we are able to fully characterise the water production process, e.g. in terms of economies of scale and marginal costs, which are important determinants in water policies, such as planning and water tariffs. The cost function approach is completed by a “data envelopment” analysis (DEA), which is a linear programming based technique for measuring the relative performance of organisational units. Such technique estimates the water supply production frontier from the best observed practices and from it various efficiency measures may be computed. In a first step, the efficiency scores, defined as the distance between each production unit and the frontier, are estimated. The second step of the analysis consists in exploring the determinants of the efficiency scores and their relative significance in order to qualify the efficiency of water production units. The results from the DEA analysis are particularly useful for the water managers, e.g. in benchmarking analysis.
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