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Ownership, Scale Economies and Efficiency in the Italian Water Sector

Journal of Industry, Competition and Trade volume 13, pages 399–415 (2013)Cite this article

Abstract

The Italian water sector is characterized by the presence of several water companies, with different ownership types; Fabbri and Fraquelli (Empirica 27:65–82, 2000) and Antonioli and Filippini (Util Policy 10:181–187, 2001) have analyzed the presence of economies of scale and scope in the sector while Abrate et al. (Journal of Productivity Analysis 35:227–242, 2011) have assessed the role of the heterogeneity in this sector. In recent years, the Italian water sector has been subject to a large reorganization, following the implementation of the EC Directive 60/00 for the harmonization of the pricing rules and polluting principles of the Member States. However, the reorganization of the sector is far from being accomplished, and the Italian water companies still face strong regulatory uncertainty associated with the absence of an independent authority. The lack of clear regulatory principles and the presence of almost 100 different companies managed differently across the territory requires the re-analysis of the possible sources of inefficiencies, in order to understand what kind of policy measures might be implemented to improve the performance of the water utilities and take them into account when the final tariff is fixed. This paper estimates a stochastic frontier to empirically investigate the main sources of inefficiency for a sample of 65 Italian water companies. First, this paper investigates whether a positive relationship exists between the firm’s ownership type and efficiency by using different estimation methods; second, this paper investigates whether the presence of economies of scale in the Italian water sector still exist after the merging process that recently took place as part of the sector reorganization. The estimation results show that ownership is not related to the firm’s performance and that the Italian water sector is still characterized by the presence of economies of scale. This result indicates that local communities may benefit from merging into larger water districts.

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Notes

  1. See Antonioli and Filippini (2001) for more details on the Italian pricing rules.

  2. For a review of the literature which investigates the linkages between firm’s ownership and efficiency see the Section 2 of the work.

  3. I thank an anonymous referee for the suggestion he made to check the robustness of my results through the Pitt and Lee procedure.

  4. A table with a summary of the existent literature is reported in the Appendix.

  5. A numerical comparison between the number of the companies and the number of ato is reported in the Appendix.

  6. Greene (2005) demonstrates that both the tre and the latent class models capture the heterogeneity otherwise included in the time invariant inefficiencies. Then, the inefficiencies estimated using these models are not biased and can be used to make policy prescriptions. The direct application of this method is the work by Farsi et al. (2005) who analyse the efficiency of 40 railway network in Switzerland.

  7. The pricing scheme based on the full cost recovery principle also emerge from the Water Framework Directive of the European Commission (n. 60, 2000).

  8. Before this work, no data were collected for the Italian water companies, therefore this is an innovative element introduced by my analysis.

  9. The sector is characterized by four different ownership types: (i) 100% publicly owned companies (public), (ii) 100% private companies (private), (iii) companies which are at the 51% (at least) public (mpu) and (iv) companies which are at the 51% (at least) private (mpr). I group together public and (mpu) as well as private and (mpr) in order to understand where a difference exists in the behaviour of different water companies.

  10. The Wald test rejects the null hypothesis under which all the quadratic terms could be imposed jointly equal to zero with a χ 2 = 35.92 and a p-value equals to zero.

  11. As the data on the value of capital, investments and depreciation costs are taken from the firm’s balance sheets, they are available for all the years of each firm’s life. I’ve included in my analysis only the price of capital calculated for the year 2007.

  12. These input prices have been widely used in the literature related to the estimation of the water sector inefficiencies. See, among others, Fabbri and Fraquelli (2000) and Abrate et al. (2011).

  13. I thank one of the two anonymous referees who suggested estimating Eq. 1 following the Pitt and Lee (1981) approach. This method and the results are described in the following section. A shortcoming of the Battese and Coelli approach (and, generally, of the mle estimation approach) is that some specific assumption on error and inefficiency distributions should be undertaken by the researcher. However, this approach overwhelms the modified ols estimates since it does not imply an inefficiency measure that can be subject to mis-specification in the final data. Following this approach In order to fulfil such requirements, the following must hold:

    1. 1.

      v i \(\sim N\left( 0,\sigma _{v}^{2}\right) \)

    2. 2.

      u i \(\sim N^{+}\left( \mu ,\sigma _{u}^{2}\right) \)

    3. 3.

      v i and u i are independently distributed from each other.

  14. No comparisons are possible with Abrate et al. (2011) as their work aims to evaluate the impact of the heterogeneity on the efficiency estimation using the authorities planned investment. So no elasticities are estimated in their model.

  15. I thank one referee for this suggestion.

  16. The parallelism assumption is rejected with χ 2 = 1.82 and a p-value = 0.077; the Wald test accepts the null hypothesis that ownership is not different from zero with χ 2 = 2.06 and a p-value = 0.1102.

  17. In the classical estimation the null hypothesis of the jointly insignificance of the ownership dummies in the inefficiency distribution is accepted with a χ 2 = 0.26 and a p-value = 0.6113.

  18. See Section 2 and Table 5 in the Appendix for a complete review on this topic.

  19. See Teeples and Glyer (1987) and Bhattacharyya et al. (1994) among others.

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Acknowledgements

I thank Mike Tsionas, Richard Tol, Pierpaolo Pierani, Simon Cowan, Maddalena Barbieri, two anonymous referees, participants at the conferences at the University of Turin, WIEM conference in Warsawa, MeM, ESRI and EWEPA11 for helpful comments and suggestions. Remaining errors and expressed views are my own.

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  1. Economic and Social Research Institute (ESRI) and Trinity College Dublin, Dublin, Ireland

    Valeria Di Cosmo

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Appendix

Appendix

Table 5 ato and number of companies
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Table 6 Existing literature
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Table 7 Data summary
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Di Cosmo, V. Ownership, Scale Economies and Efficiency in the Italian Water Sector. J Ind Compet Trade 13, 399–415 (2013). https://doi.org/10.1007/s10842-012-0131-z

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