Private versus Municipal Frontier in the Water Industry

It has been discussed whether it is fair to compare the larger municipal water companies to the smaller private water companies (Forsyningssekretariatet 2013b). The private firms tend to be smaller, have volunteer employees, and a lower level of customer service (Forsyningssekretariatet 2013b). Municipals tend to be the opposite; they are larger, have paid workers and a higher level of customer service (Forsyningssekretariatet 2013b). Therefore, it is interesting to see if one category generally does better than the other (i.e., is a private firm that operates with volunteers, who may not be as skilled or water knowledgeable as the paid employee, more efficient)?

Please note that this analysis is only regarding water companies since all the sewage companies have a municipal ownership.

A great difference in the efficiency potentials was shown when we looked in the details from the previous analysis regarding RTS and frontiers. Using those results, we wanted to investigate the impact the difference in ownership has on the efficiency potentials. To clarify the difference in the efficiency potential of each company, the efficiency potential has been multiplied by its DOiPL to achieve the efficiency potential in DKK. Then the amounts in DKK have been summed for the municipal companies, as well as for the private companies. The results listed below are based on allowing the private companies on the efficient frontier to grasp the full market.

Table 8: Potential Market Savings within the Water Companies

In DKK CRS VRS

Municipal 731,103,430 365,210,804 Private 136,885,685 120,984,058 Total 867,989,115 486,194,862

Remark: CRS is Constant Returns to Scale, VRS is Variable Returns to Scale

As seen and previously mentioned, there is a great difference in the scale model used. However, we can also see that the majority of potential market savings lie within the municipal firms regardless of the scale assumption. We have noted that in general, the DOiPLs for municipal firms are higher than of private (e.g., the DOiPL mean for municipal is 14,454,118 DKK and 2,006,668 DKK for

private, but a pattern of higher efficiency potentials for municipals was also found). For example, the mean of the efficiency potentials (under the scale assumption CRS (F1) constituted of private water companies) was 60.44% for the municipal companies and 52.59% for the private companies. We recognize that the results might not be as extreme if only municipal companies constituted the efficient frontier. However, these results lead us to investigate the ownership relationship influence on the efficiency potentials further.

The way that the Water Department takes the ownership relation into consideration, is by excluding the private companies from constituting the frontier. However, we thought that separate analyses of the two groups might be applicable instead.

Thus, the first analysis was a DEA allowing private companies to constitute the efficient frontier (as previously done in the returns to scale analysis) and we used this in determination of the efficiency potentials.

The second analysis was a DEA only allowing municipal companies to constitute the efficient frontier (the Water Department’s approach), and we used this in determination of the efficiency potentials. Lastly, two completely separate DEAs have been performed; one solely containing the private water companies and one only containing the municipal water companies; in this way the municipal companies are only benchmarked against other municipal companies, and likewise for the private companies. For all the analyses the scale assumption CRS and the first band in regard to the efficient frontier are used. The results are presented in the graphs below.

Figure 8: Distribution of Water Companies' Efficiency Potentials Depending on the Chosen Frontier Companies

Remark: Together M/ P are results with the frontier consisting of only municipal/private companies, but efficiency potentials were found for all companies. Separate shows the efficiency potentials of the private companies as well as the municipal companies, found by the separate analyses earlier mentioned.

This shows that all three approaches result in different efficiency potentials. In general, the firms seem more inefficient when having private companies as their frontier (the blue part of figure 8).

When the municipal companies constitute the frontier, the companies appear to be more efficient (the purple part of figure 8).

0 2 4 6 8 10 12 14 16 18 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 TogetherP Separate TogetherM

When two separate DEAs have been completed (the green part of figure 8), the efficiency potentials still seems to be somewhere in the middle of the two other approaches, although closest to the results of having the private companies constituting the efficient frontier. Thus, the Water Department’s approach puts the companies in a best light out of these three options.

This means that some of the private companies that showed up as inefficient in the separate analysis (or having the private companies allowed on the frontier) now show up as efficient or at least less inefficient.

The fact that the efficiency potentials are higher when allowing private firms to constitute the frontier is also seen when looking at total market potential savings, as displayed in the table below.

Table 9: Potential Market Savings of the Water Companies Depending on the Chosen Frontier Companies

In DKK TogetherM Separate TogetherP Municipal 502,563,718 502,563,718 731,103,472 Private 88,685,831 136,885,692 136,885,692 Total 591,249,550 639,449,410 867,989,164

.

This analysis revealed that the importance regarding municipal versus private lies within the frontier. When the municipal firms constitute the frontier, the market savings is lowest compared with having separate analyses or private firms constituting the frontier. This means that the Water Department’s choice of municipal-frontier is the mildest for the companies and worst for the consumers. With the scale assumption CRS and the use of the first frontier there might be some truth to the fact that an equal comparison (private versus municipal) of the companies may not be fair. Going forward, our analyses allow private firms on the frontier in order to capture the full market.