Accounting for service quality to customers in the efficiency of water companies: evidence from England and Wales

Abstract

This paper investigates the role of service quality to customers in the efficiency assessment of water companies in England and Wales. To achieve this, data envelopment analysis techniques are employed to compute the technical efficiency of the water companies following two approaches: (i) traditional assessment based on quantity variables (without the inclusion of service quality variables) and (ii) alternative assessment considering quantity and service quality variables as undesirable outputs. The analysis covers 22 water and sewerage companies and water only companies providing drinking water services. The results indicate that the traditional efficiency assessment reveals a high level of technical efficiency, suggesting that the English and Welsh water industry is mature and that one of the challenges it faces is improving service quality. When introducing service quality variables in the evaluation, the average scores of technical efficiency slightly decrease. This suggests that, on average, water companies do not necessarily provide high quality of service, meaning that the traditional efficiency assessment favours their performance. Quality of service supplied to customers within a water sector matters and should be taken into account during the benchmarking process as it could assist regulated companies and regulators to improve performance and incentives, respectively.