6 Analyses
6.2 Second-Stage Analyses
6.2.5 Economies of Scope
When comparing the efficiency potentials between not including the density correction, and including the density correction, the average efficiency potentials drop at most 4%-points. The maximum difference in efficiency potentials of 17%-points is between North Jutland to the Capital region with no density correction. Almost the same difference is seen in the efficiency potentials when including the density correction. This means that the Capital region is considered the most inefficient regardless of correcting for density. As with the water companies analysis, this could indicate that the density correction is not actually serving its purpose.
It is noticed that regardless of sewage or water, the inefficiencies are highest in the Capital region.
This leads us to believe that maybe costs in general are higher in this region, the model does not compensate sufficiently (underlining conditions may not be specified enough) or the Capital region firms are just inefficient compared to other regions.
We looked at the potentials for the single product firms versus multi-product firms for both sewage and water.
Below are the results of the multi-product water companies:
Figure 15: Efficiency Potentials of the Water Companies
The following figure presents the results of the multi-product sewage companies:
Figure 16: Efficiency Potentials of the Sewage Companies 0
5 10 15 20
0-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 66-70 71-75 76-80 81-85 86-90 91-95 96-100
Percentage of companies
Intervals of Efficiency Potentials in Percentage Single Product Multi-product
0 5 10 15 20
0-5 6-10 11-15 16-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65 66-70 71-75 76-80 81-85 86-90 91-95 96-100
Percentage of Companies
Intervals of efficiency Potentials in Percentage Single Product Multi-product
From these graphs we can see that the results do not present any apparent sign of economies of scope. It can be seen that with the water companies, there are more single product firms in intervals with lower efficiency potentials (0-20%).
However, the single product firms are the least efficient (66-95%). In regard to the sewage companies, a mix of single and multi-products firms are efficient (0-20%), and the single product firms are inefficient (56-80%). Regardless of whether they are single or-multi product, the majority of the companies’ efficiency potentials still lies within the middle (20-60%) for both sewage and water companies.
Due to the lack of an apparent pattern, we wanted to investigate this further with the 95%
confidence intervals, which are presented below.
Figure 17: Efficiency Potentials of the Water and Sewage Companies
The results presented show that multi-product firms in the water industry have higher average efficiency potentials than single product firms, whereas in the sewage industry the opposite occurs as multi-product firms have lower average efficiency potentials. Also interestingly, the single product firms have approximately the same average efficiency potentials regardless of the product (water or sewage).
Thus, from this analysis there seem to be diseconomies of scope in the water industry and economies of scope within the sewage industry.
47
39 36 39
40
36
30
34 34 35
24
32
20 30 40 50
Multi-product Water Single Product Water Multi-product Sewage Single Product sewage
Efficiency Potentials in Percentage
Type of Company
Upper Bound Mean Lower Bound
However, the width of the 95% confidence intervals differs, and the confidence intervals are clearly narrower for the single product firms. This could be due to the fact that the number of firms in each category is biased towards the single product companies, since only 22 (out of 104 sewage
companies and 208 water companies) companies have both activities. This makes the results less robust than if the distribution had been more equal.
Furthermore, other factors might influence the results. It is noted that all the multi-product
companies are municipal which is why all the analyses of economies of scope includes analysis with municipal frontier companies only.
The tables below contain information on the multi-product water and sewage companies. The tables show both the number of firms in each category (size and region) but also the average of the multi-product companies’ efficiency potentials in the stated categories. The total row gives the total number of firms in each region and the average efficiency potential for the given regions. The total column shows the total number of firms in each size category and the average efficiency potential of the given size category. It should be noted that Zealand is not represented in the multi-product water/sewage industry, and therefore they are not represented in the two tables.
The table below shows the information on the multi-product water companies.
Table 13: Efficiency Potentials of the Multi-Product Water Companies Categorized on Size and Region
Region North
Jutland Mid-Jutland South
Denmark Capital Total
Size a b a b a b a b a b
Very Small 6 38% 2 47% 3 59% 1 58% 12 46%
Small 0 - 2 28% 0 - 2 49% 4 38%
Medium 1 33% 3 29% 0 - 0 - 4 30%
Large 0 - 0 - 1 22% 0 - 1 22%
Very Large 0 - 1 37% 0 - 0 - 1 37%
Total 7 37% 8 34% 4 50% 3 52% 22 40%
Remark: a stands for the number of firms and b for the average efficiency potentials.
The possible diseconomies of scope with multi-product water companies may be linked to the size factor. We can see that approximately 73% of the multi-product firms are considered to be smaller firms (very small or small). These two categories have the highest average efficiency potential out of all the categories.
North Jutland has around 32% of the multi-product water firms, and Mid-Jutland has about 36% of all the multi-product water companies, and these two regions have the lowest average efficiency potential within the multi-product water industry. The multi-product firms in South Denmark and Capital region show to have the highest inefficiency, but together they only constitute around 32%
of the multi-product water firms. Thus, they do not affect the total average of the efficiency potential for the multi-product water companies as much as the other two regions. Hence, it seems that it might be the size factor that influences the result of diseconomies of scope and vice-versa.
The following table shows the information of the multi-product sewage companies.
Table 14: Efficiency Potentials of the Multi-Product Sewage Companies Categorized on Size and Region
Region North
Jutland Mid-Jutland South
Denmark Capital Total
Size a b a b a b a b a b
Very Small 1 0 0 - 2 36% 0 - 3 24%
Small 2 38% 1 35% 0 - 1 28% 4 35%
Medium 3 17% 3 37% 1 40% 2 44% 9 32%
Large 1 29% 3 32% 0 - 0 - 4 31%
Very Large 0 - 1 21% 1 20% 0 - 2 20%
Total 7 22% 8 33% 4 33% 3 39% 22 30%
. Remark: a stands for the number of firms and b for the average efficiency potentials
Economies of scope may be seen with sewage; therefore we investigated the firm characteristics more. The size of multi-product firms is fairly evenly distributed except for the medium size companies. Approximately 41% of the multi-product sewage companies are medium size.
This group has 2%-points higher efficiency potentials on average compared to the average of all the multi-product sewage firms. The lowest average efficiency potentials are seen in the very small product companies or the very large product companies. However, the fewest multi-product sewage companies fall in to these two size categories. Thus, the tendency of economies of scope does not seem linked with size.
Clearly, as with water, North Jutland has around 32% of the multi-product firms and in the sewage multi-product industry this region has the lowest average efficiency potential compared to the remaining regions. The difference is at least 11%-points which we find noticeable and thus, the tendency of economies of scope may be affected by the regional factor or vice versa.