Estache and Rossi estimate a stochastic costs frontier for a sample of Asian and Pacific water companies, comparing the performance of public and privatized companies based on detailed firm-specific information published by the Asian Development Bank in 1997.
They find private operators of water companies to be more efficient than public operators. Costs in concessioned companies tend to be significantly lower than those in public companies.
Estache and Rossi compare the ranking of these companies by efficiency performance (obtained from econometric estimates) with rankings by more standard qualitative and productivity indicators typically used to assess performance.
They show that rankings based on standard indicators are not always very consistent.
Productivity indicators recognize simple input-output relations, such as the number of workers per client or connection. Frontiers recognize the more complex nature of interactions between inputs and outputs. Cost frontiers show the costs as a function of the level of output (or outputs) and the prices of inputs, and are generally more useful to regulators assessing the wedge between tariff and minimum costs. Production frontiers reveal technical relations between firms' inputs and outputs and provide a useful backup when cost frontiers are difficult to assess for lack of data.
This paper - a product of Governance, Regulation and Finance, World Bank Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Gabriela Chenet-Smith, room G2-148, telephone 202-473-6370, fax 202-334-8350, Internet address gchenet@worldbank.org. Antonio Estache may be contacted at aestache@worldbank.org. (26 pages)
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