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Do ownership and size affect the performance of water utilities? Evidence from Estonian municipalities

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Abstract

Concerns regarding rising water and sewerage prices have generated a renewed interest in measuring and assessing water utility performance. An efficiency analysis can serve as a basis for price setting decisions. This article examines the influence of ownership structure and corporate size on the efficiency of Estonian water companies, and assesses the empirical efficiency gaps through the lens of corporate governance and natural monopoly theories. To assess efficiency and the influence of ownership and corporate size on efficiency, we use a Data Envelopment Analysis and truncated regression with maximum likelihood estimation as well as an ANOVA test. The study sample consists of 43 water utilities, serving more than 68% of the Estonian population. One main finding of the study reveals that ownership structure does not affect the efficiency of Estonian water utilities, while efficiency does increase with corporate size: large water utilities outperform small utilities. An additional conclusion is that the Estonian water sector is too fragmented.

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Notes

  1. Efficiency can be stated in technical terms or in economic terms, the former being a necessary condition for the latter. Farrell (1957) explicitly decomposed productive (economic) efficiency into components of technical efficiency and allocative efficiency. The Farrell decomposition is a fundamental cornerstone of the theory of efficiency measurement.

  2. Vinnari and Hukka (2007) provide a thorough overview of water company privatization and its results in Tallinn.

  3. According to the Commercial Code, private limited companies with share capital less than 25,560 Euros are not required to form a supervisory board (Commercial Code 2009).

  4. Starting from 1 November 2010, all Estonian water companies operating in wastewater collection areas with a waste load of more than 2,000 population equivalents are obliged to present their price proposals to the Estonian Competition Authority for approval. By that time the Competition Authority was required to work out initial principles of price calculation for the water companies (Monopolidele hinnapiirangute kehtestamise seadus 2010).

  5. In case of present sample, variables such as physical environment, source of water or population density did not exhibit any significant variation in data and the variables turned to be statistically non-significant in testing.

  6. Here and hereinafter terms ‘size’ and ‘scale’ are used interchangeably.

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Acknowledgments

We would like to thank the three anonymous reviewers and the journal editor for providing us with valuable comments that helped improve our work. This study was conducted as a part of the research project ETF7621 financed by the Estonian Science Foundation.

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  1. Faculty of Economics and Business Administration, University of Tartu, 4 Narva Road, 51009, Tartu, Estonia

    Peeter Peda & Margo Liik

  2. Department of Business and Social Studies, University of Siena, Piazza San Francesco 8, 53100, Siena, Italy

    Giuseppe Grossi

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Peda, P., Grossi, G. & Liik, M. Do ownership and size affect the performance of water utilities? Evidence from Estonian municipalities. J Manag Gov 17, 237–259 (2013). https://doi.org/10.1007/s10997-011-9173-6

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