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Economies of scale in Peru’s water and sanitation sector

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Abstract

This paper quantifies economies of scale in Peru’s water and sanitation (W&S) sector based on a five-year panel (2006–2010) that examines 39 water services providers. Our findings highlight the lack of economies of scale in the Peruvian W&S sector as a whole. Cost savings are possible through water volume increases (Economies of Production Density) and a higher provision density (Economies of Customer Density), but not via an increase in the number of served municipalities (overall Economies of Scale). Some agglomerations are possible, yielding cost reductions of up to 9 %.

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Notes

  1. See the link to access the full text.

  2. See the link http://faolex.fao.org/docs/pdf/per129262.pdf to access the full text.

  3. In an early version of this paper we tried to analyze economies of scope between water and sanitation outputs but we came across issues of co-linearity when we included both services. Corton (2011) also finds this problem. One possible explanation is that in many cases cubic meters of wastewater collected are estimated as a fraction of the water consumed.

  4. On this issue see Bottasso et al. (2011).

  5. We consider these as environmental variables or control variables, interchangeably.

  6. See García and Thomas (2001), Torres and Morrison-Paul (2006), Filippini et al. (2008) and Destandau and García (2014).

  7. Torres and Morrison-Paul (2006) refer them to as “economies of volume” and Bottasso and Conti (2009) as “economies of output density”.

  8. An extension of the provision area without increasing the number of connections accordingly would imply that the number of new customers crowds-out an equal number of old ones or that the extension goes to an area with no connection to be served.

  9. We use the median to avoid a potential bias that the biggest SSP (SEDAPAL in Lima) could drag on mean values. This procedure is also used in Filippini et al. (2008).

  10. See Resolution 010-2006-SUNASS-CD.

  11. Data available in http://www.sunass.gob.pe/websunass/index.php/sunass/supervision-y-fiscalizacion/indicadores-de-gestion/indicadores-promedio.

  12. See http://www.sunass.gob.pe/websunass/index.php/eps/estudios-tarifarios.

  13. We tried three alternatives to measure Lc. The first measure was served surface (in square kilometers), which would have been the best option, but full data was unavailable. The second measure was network length but this variable was highly correlated with connections. The third measure was the number of localities (as reported by the Tariff Studies).

  14. Information on risk free rate and country risk premium is available in Section 37 of http://www.bcrp.gob.pe/estadisticas/cuadros-de-la-nota-semanal.html and the evolution of the exchange rate Soles/Dollar is available in Section 41. The share of debts is the ratio between debts and debts + equity, obtained from annual benchmarking reports by SUNASS.

  15. See SUNASS—Informe 0278-2014/SUNASS-120-F.

  16. There are three varieties of treatment that are increasingly costly given their complexity and the volume to treat: primary treatment (solid sedimentation), secondary treatment (the solidification of dissolved organic material) and tertiary treatment (ponds, micro-filtering or disinfection). Unfortunately, available information does not allow us to distinguish among them so we assumed treatment was the same across SSPs.

  17. The cost specification from Eq. (5) assumes that quality and environmental variables enter directly into the cost function and they interact with the remaining arguments. Conversely, the hedonic approach defines a cost function as \(C = C\left( {\phi \left( {y,q} \right), w, e} \right)\), where \(y\) is the output, \(q\) is the quality attributes vector \(q_{l} = q_{1} , \ldots , q_{L}\) and \(e\) is the set of environmental variables \(e_{r} = e_{1} , \ldots , e_{R}\), thus \(z = \left\{ {q,e} \right\}\) (Zoric, 2006). This makes it necessary to separate the arguments of \(\phi\) from other explanatory variables. Hence, the quality-adjusted output is represented as \(\ln \phi = \ln y + \mathop \sum \limits_{l} \lambda_{l} \ln q_{l}\).

  18. Given that the constraints imposed in this case are non-linear, we estimate the non-linear SUR model.

  19. We follow Filippini et al. (2008) in stacking input prices at their median values, letting the other variables take their actual values.

  20. There are at least four differences that may explain the result: the sample period, the number of SSPs, the estimation procedure, and the controls used in the regressions. Checking all these differences is beyond the scope of the paper.

  21. This case corresponds to the Forest SSP EMAPA San Martin (economies of scale of 1.037) and EMAPA Moyobamba (1.052) with cost savings of 9.3 %.

  22. For example, a merger between EMAPA San Martin (1.037) and SEDAPAR (0.943) would result in a 2 % reduction in costs (SEDAPAR weighs 83 % of the consolidate SSP); but a merger between EMAPA Moyobamba and SEDAPAR would result in a slightly increase in costs by 0.1 % (in this case SEDAPAR weighs 95 percent of the consolidate SSP).

    A merger between EMAPA VIGSSA (1.095) and EMAPISCO (0.943), both from the Ica region, would result in a 2.3 % reduction in costs (EMAPA VIGSSA weighs 30 % of the consolidate SSP); but a merger between EMAPA VIGSSA and SEMAPACH (0.855) would result in a slightly increase in costs by 3.4 % (in this case EMAPA VIGSSA weighs 18 % of the consolidate SSP).

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Acknowledgments

We thank the thorough review of two anonymous referees. An early version of this paper was part of Augusto Mercadier’s MA Dissertation at Universidad Nacional de La Plata, under Walter Cont’s supervision. It was also presented at the annual congress of the “Asociación Argentina de Economía Política”. We thank Ricardo Bebczuk, Federica Brenner, Ariel Casarin, Emilio Lentini, Inés Asís del Valle, Joaquín Coleff, Mariana Marchionni, and Guillermo Cruces. The usual disclaimer applies.

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Authors and Affiliations

  1. ERAS and Universidad Nacional de La Plata, Callao 982, 1023, Buenos Aires, Argentina

    Augusto C. Mercadier

  2. FIEL and Universidad Nacional de La Plata, Córdoba 637, 1054, Buenos Aires, Argentina

    Walter A. Cont

  3. Universidad del CEMA (UCEMA) and CONICET, Córdoba 374, 1054, Buenos Aires, Argentina

    Gustavo Ferro

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  1. Augusto C. Mercadier
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  2. Walter A. Cont
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  3. Gustavo Ferro
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Correspondence to Augusto C. Mercadier.

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Mercadier, A.C., Cont, W.A. & Ferro, G. Economies of scale in Peru’s water and sanitation sector. J Prod Anal 45, 215–228 (2016). https://doi.org/10.1007/s11123-016-0468-0

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