Assesing the Impact of Quality of Service on the Productivity of Water Industry: a Malmquist-Luenberger Approach for England and Wales

Assessing productivity change over time and identifying its determinants is a valuable tool for water regulators when setting water tariffs. However, in a price cap regulatory framework such as in England and Wales policy makers should give attention to quality of service issues. Previous studies that assessed the productivity change of the English and Welsh water industry did not include the lack of quality of service to customers as undesirable outputs. To overcome this limitation, and as a pioneering approach, we estimated the Malmquist‐Luenberger Productivity Indicator and its components, efficiency and technical change, for the 10 water and sewerage companies and the 12 water only companies over the period 2001–2008. To explore the role of quality of service to customers on the productivity change over time, we contrasted our results with a conventional measure of productivity change namely the Luenberger productivity indicator. The findings suggest that from 2001 to 2004 water companies made significant efforts to improve the quality of the service provided to customers, whereas after 2005 companies’ performance regarding customer services was considered as poor. Results excluding quality of service variables illustrated that productivity declined during all years evaluated. However, when the quality of service was introduced in the assessment, productivity improved by 4.13 % from 2000 to 2004 whereas it declined by 16.96 % in the following years. From a policy perspective, water utility regulators need to pay attention to quality of service issues when assessing companies’ performance and setting water tariffs under comparative yardstick regimes.