Measuring the efficiency of wastewater services through Data Envelopment Analysis

Abstract

Efficient water management is a priority in the European Union, since the operational efficiency of many water utilities is very low compared to best practice. Several countries are restructuring the water industry to save costs. Larger-scale operations and vertical integration are promoted to achieve scale and scope economies; however, the literature is not unanimous that such economies exist. There is also little evidence of the effect of customer density on costs. This article offers some insights into this matter, analysing the Danish water industry by a two-stage Data Envelopment Analysis approach to investigate the effects of size, scope and density in the wastewater industry. The results show that the Danish wastewater industry is positively affected by vertical integration and higher population density: firms that serve more than 100 person per km of sewer and combine water and wastewater services achieve better efficiency. Size does not have any significant influence on global efficiency, although technical pure efficiency decreases statistically with firm size.