Estimating Opex Productivity Growth in English and Welsh Water and Sewerage Companies:

Transcription

1 ABSTRACT Esmang Oex Producv Grow n Engls and Wels Waer and Sewerage Comanes: avd S. Saal* and Sco Red** *Ason Busness Scool Brmngam B4 7ET Uned Kngdom Emal:.S.Saal@ason.ac.u ** Regulaon and Prvasaon Pracce Sone and Webser Consulans Tennson House Grea Porland Sree London W1W 5PA Emal: Sco.Red@sawgr.com Ts aer emlos a qual adjused quas-fxed caal ranslog varable cos funcon o rovde esmaes of average annual oerang cos (oex) roducv grow for Engls and Wels waer and sewerage comanes (WaSCs). However n order o analze e mac on roducv grow of bo canges n WaSC oerang caracerscs wc nclude mandaed nvesmens n drnng waer and sewerage reamen qual as well as e sgnfcan genng of rce ca regulaon afer 1995 also develos a framewor wn wc sandard roducv measures can be emloed o analze ese ssues. Te resug roducv grow esmaes and er decomoson sugges a wle average annual oex roducv grow as deced moderael from 2.02 o 1.76 ercen over regulaor genng aears o ave ad a small sascall sgnfcan osve mac on oex roducv grow. Moreover as e ne mac of canges n bo waer and sewerage servce caracerscs also ndcaes a small osve mac on oex roducv our resuls sugges a overall WaSC oex roducv grow raes ave no been dermenall nfluenced b mroved drnng waer and envronmenal qual sandards.

2 1 1. Inroducon and Movaon Incenves o mrove effcenc and e delver of ger qual and envronmenal sandards ave been e allmars of e regulaon of e waer and sewerage ndusr n England & Wales snce s rvazaon n Ts aer examnes ow bo economc and envronmenal regulaon n s erod ave nfluenced roducv grow n e ndusr. We esmae a qual adjused quas-fxed caal soc ranslog varable cos model from wc we derve esmaes of oerang cos (oex) roducv grow. Te aer also develos a meodologcal aroac a s sued o roducv measuremen n a cangng oerang envronmen. We sow a n a anel conex e sandard racce of focusng on e roducv grow of a oecal samle average frm wll resul n based esmaes of annual average roducv grow f e caracerscs of e average frm and/or e roducv arameers relaed o ese caracerscs ave canged over me. Pror o 1989 e waer and sewerage ndusr n England & Wales was organzed as 10 ublcl owned regonal waer auores (RWAs) rovdng waer sul and sewerage servces and 29 rvae and call muc smaller sauor waer comanes (SWCs) w resonsbles for waer sul onl. 1 W rvazaon e 10 RWAs became waer and sewerage servce comanes (WaSCs) oldng searae aonmens as waer sul and sewerage underaers for geograc areas equvalen o ose of e redecessor RWAs. Te os-rvazaon srucure for e WaSCs reserved e orzonall and vercall negraed oeraons of e RWAs aloug e regulaon of drnng waer and envronmenal sandards was reaned n e ublc secor under e ausces of e rnng Waer Insecorae (WI) and Naonal Rvers Auor (NRA). In 1995 e NRA was subsequenl subsumed wn e Envronmen Agenc (EA). In e os-rvazaon erod ere as been a degree of consoldaon n e secor oug no n resec of e 10 WaSCs. Consoldaon as been caracerzed b aron n e number of smaller rvae waer onl comanes (WoCs) wc ave deced from e orgnal 29 o e curren 12 roug a combnaon of aeovers b WaSCs or mergers w oer WoCs. B 2003 e WaSCs accouned for abou 81% of conneced cusomers 82% of waer volumes delvered as well as 100% of sewerage roeres served. 2 We erefore focus exclusvel on e WaSCs n s aer as e accoun for e vas major of waer and sewerage acves n England and Wales. 1 A e me of rvazaon e SWCs were also ransformed no waer onl comanes (WoCs) wc became normal ublc lmed labl comanes subjec o rce ca and qual regulaon. Ts removed drec conrols on maers suc as dvdend olc. 2 A rvazaon e WaSCs accouned for 75% of conneced waer roeres and 77% of waer

3 2 Te raonale for e srucure of regulaon for e ndusr can be exlaned n erms of e ree sources of mare falure commonl observed n waer and sewerage secors: monool ower asmmerc nformaon abou roduc qual and envronmenal exernales (for dscusson of e regulaon of mare falures n e waer secor conex see Ballance and Talor 2004). Te WaSCs are geograc monooles wn er areas of aonmen gvng rse o e need for economc regulaon o roec consumers from e oenal abuse of monool ower. Economc regulaon resdes w e Offce of Waer Servces (Ofwa) wc ses erodc rce cas exressed as lms on e annual rae of cange n average rces n e form RPIK. RPI s e real rce ndex and measures general nflaon n e econom. 3 Te K facor reflecs a number of facors bu s rmarl comosed of an effcenc facor X and a Q facor o reflec ger coss resug from meeng new drnng waer qual and envronmenal sandards. 4 Snce s frs rce revew n 1994 Ofwa as develoed a comarave comeon aroac based on economerc modeg of un coss o nform e seng of s X facors. Te X facors are based on a rooron of e coman-secfc scoe for effcenc mrovemen denfed roug e comarave assessmens aloug e deal of Ofwa s meodolog as canged a successve rce revews n and 2004 (see Ofwa and 2004) n e w s judgmens abou e ncenves o mrove effcenc. Te economc regulaon of e rvazed waer ndusr can be dvded no dsnc regulaor erods reresened b e erm of e successve rce conrols. In e frs regulaor erod from rvazaon o 1995 rce cas were se b e Governmen and no Ofwa 6. As argued b Saal and Parer (2001) e average annual WaSC K facor of 5 ercen er annum durng s erod was relavel lax and was desgned o ensure e success of e rvasaon floaon. Aloug ese nal cas ad been se for 10 ears n 1993 Ofwa sgnalled s nenon o rese rce cas afer fve ears. Te resug 1994 rce revew se volumes delvered. 3 Snce ecember 2003 monear olc n e UK s now based on an nflaon arge of 2 ercen as measured b e Consumer Prce Index (CPI) raer an a 2.5 ercen arge as measured b e RPI. Ts cange as been jusfed on e grounds a e CPI s a beer measure of general macroeconomc rce rends oug waer coman lcenses wll connue o use RPI a leas unl (Ofwa 2004). Snce our samle erod ends before s sf n macroeconomc olc we do no consder e ssue furer. 4 Ofwa s rce seng formula also ncludes oer facors suc as e (ne) coss of connecng new cusomers o e ssem and meeng new demands and e cos of agreed cusomer servce enancemens. However e X and Q facors are e domnan nfluences on e overall K facors see for examle e deermnaons ssued b Ofwa n e erod snce 1994 (Ofwa ). 6 Te regulaor accounng ear for e WaSCs commences on Arl 1 s and ends on Marc 31 s. We ave erefore adoed e convenon of referrng o accounng ears based on e calendar ear n wc e end.

4 3 sgnfcanl ger rce cas w an average WaSC K facor of 1.40 ercen for e erod from 1996 o In e 1999 rce revew rce cas were furer gened and for e frs me rces fell n real erms over e erod w average K facors of ercen er annum. 7 Of mos neres o e movaon for s aer e effecve X facor for oal oex exendures for an average WaSC n e and 2004 revews resecvel averaged and 1.41 ercen. 8 Te regulaon of e oer sources of mare falure as ad an moran nfluence on ndusr erformance snce rvazaon. Bo e WI and EA ave mandaed drnng waer and envronmenal mrovemens requred b e waer comanes for eac rce conrol erod. Te qual regulaors la a voal role n Ofwa s rce seng rocess roug s recommendaons o Governmen on e scale of e requred mrovemens oug e ulmae decson-mang owers res w Governmen (see for examle EFRA (2004)). In racce Ofwa s olc as been o onl mae allowance n rce lms for exendure requred o mee new sandards were s s requred b Mnseral gudance and e qual regulaor as aroved e nvesmen rojecs or oeraonal soluons roosed b e waer comanes. Ts emaszes a nvesmen exendure n arcular s no full a maer of dscreon for e waer comanes. urng e 1993 o 2003 erod WaSC nvesmen relang o new drnng waer qual sandards as been of e order of 5.8 bllon n 2003 rces or 31% of oal caal nvesmen n waer sul for e same erod. Invesmen o mrove envronmenal qual as been overwelmngl concenraed n e sewerage servce o mee e requremens of EU waer qual drecves. 11. In e erod nvesmen 7 Te real rces reducons were concenraed n e frs ear of e erod roug e so-called P 0 adjusmens (see Ofwa 1999) 8 Ofwa(2004) ndcaes a e requred average sc X facor emloed for base oex n waer was 2.4 ercen n e 1999 revew and 1.4 ercen n e 2004 revew. For base sewerage oex Ofwa (2004) ndcaes a e requred sc oex facor was 3.1 ercen n 1999 and 1.3 ercen n However n bo e 1999 and e 2004 Fnal deermnaons Ofwa acuall emloed X facors for base waer and sewerage oex and qual enancemen relaed waer and sewerage oex. We erefore calculae an esmae of Ofwa s average oal sc oex X facor as a weged average of ese four X facors. Tus for examle n e 2004 rce revew ese X facors resecvel averaged and 1.75 ercen er annum. As ese es of oex resecvel accouned for and 2.5 ercen of ancaed oex durng e rce ca erod a weged average of Ofwa s oex X facors elds a oal esmaed requred sc oex X facor of 1.41 ercen er annum. 11 Examles nclude: Te Bang Waer recve 76/160/EEC Te Sewage Sludge recve 86/278/EEC 4 Te Urban Wase Waer Treamen recve 91/271/EEC and Te Nraes recve 91/676/EEC.

5 4 exendure was around 9.4 bllon n 2003 rces or 48.2% of oal sewerage caal nvesmen over e same erod. Gven e resence of ese regulaor ressures o mrove bo oerang effcenc and qual sandards n e os-rvazaon erod several moran researc quesons can be denfed. Te frs s w regard o ow muc of e oex roducv grow observed n e os-rvazaon erod can be arbued o canges n e oerang envronmen (ncludng qual) faced b e WaSCs and ow muc can be arbued o sfs n underg cos relaonss. As se ou n s aer answerng s queson requres careful consderaon and use of an arorae meodolog for e measuremen of oex roducv grow and s deermnans. A second researc queson relaes o e effcac of e RPIK regulaor regme. We consder weer e regulaor ressures o mrove effcenc roug e seng of X facors based on comarave comeon as rovded a osve and susaned smulus o roducv mrovemens over and above ose rovded b oer facormoreover w regulaor genng n bo 1994 and 1999 we can drecl exlore weer ger oex X facors ave a measurable mac on oex roducv grow. Evdence n resec of s queson sould rovde moran nsgs abou e effcac of Ofwa s aroac o ncenve regulaon. Fnall gven e sgnfcan levels of nvesmen o mrove drnng waer and envronmenal qual we exlore wa e resug mac on roducv erformance as been. More secfcall we es weer ger drnng waer and envronmenal sandards ave ad a dermenal mac on oex roducv grow or f e evdence suors a

6 5 Porer e oess n wc qual regulaon as been a smulus o oex roducv grow (see Porer 1991). Te remander of s aer s organzed as follows. In e nex secon e researc meodolog s se ou. Te emrcal secfcaon and resuls are en reored and nerreed. Te aer en concludes b summarzng e man fndngs. 2. Meodolog In order o esmae WaSC oex roducv grow raes we emlo a quas-fxed caal ranslog model of oerang coss (oex). 15 Garca and Tomas(2001) rovdes a recen waer ndusr alcaon of a smlar model and demonsraes a s arcularl well sued o e caracerscs of waer comanes. In our alcaon a quas-fxed caal ranslog model no onl allows for e fac a e WaSCs are mulle ouu roducers of waer and sewerage servces bu s also conssen w e argumens of Saal and Parer (2001) a e WaSCs ave relavel lle conrol over er caal socs a leas n e sor run. Terefore n e conex of e WaSCs caal socs sould be consdered quas-fxed for a leas wo reasons. Frsl e ecnolog used n waer servces can be ndvsble and assocaed w ver long servce lves and erefore s dffcul for frms o var er caal socs n e sor run. Secondl gven a e WaSCs face legal oblgaons o connec cusomers o e ssem as well as e nvesmen rograms agreed w e WI and EA n order o mee qual sandards even curren nvesmen levels canno be seen o be full under WaSC conrol. A quas-fxed caal ranslog cos model can be descrbed b e followng varable cos funcon ssem: (1) H H Y Y Y K Y K K K W Y W K W W W Y K W C q q z l l l v v v K ) ( = ι λ ϕ ξ ς σ θ π µ κ η γ ϕ χ β α δ 15 Translog oal cos funcons ave been more wdel emloed n e analss of waer ndusr coss w Km (1987) Km and Clar (1988) Km and Lee (1998)Fabr and Fraquell (2000) Saal and Parer (2000) and Mzuan and Uraam (2001) rovdng several examles. However wle n our onon e quas-fxed naure of waer ndusr asses maes quas-fxed varable cos models more arorae suc models are less frequen n e leraure w Baacara e al (1995) and Garca and Tomas(2001) rovdng ranslog examles and Anonol and F (2001) rovdng a Cobb ouglas examle.

7 6 (2) S = α γ v Wv η K κ Y µ v were s a frm ndex s a me ndex s a frm dumm s an ndex for dfferen varable nu rces s an ndex for dfferen quas-fxed caal es s an ndex for dfferen ouu es and an ndex for newor envronmenal and/or oer exogenous caracerscs nfluencng oerang coss. S s e resecve nu s sare n varable coss w e cos sare equaons derved b emlong Seerd s Lemma and C s a frm s oex. Ts generc model ncludes e sandard nu rce (W) ouu (Y) caal (K) and me () varables and neracons beween ese varables. However also ncludes e less sandard edonc (H) varables wc are assumed o be exogenous condonng facors suc as newor caracerscs envronmenal and/or edonc caracerscs measured n levels. Tese varables are ncluded o ae no accoun caracerscs oer an ouus rces and caal socs wc ma ave a sgnfcan nfluence on oex coss bu can also be assumed o be ousde of full WaSC manageral conrol. 16 Esmang oex roducv grow Frm secfc oex roducv grow raes ( P annual me-deenden sf n e varable cos funcon: ) can be measured as e negave of an (3) P = ( C ) = ϕ 1 ϕ2 µ W σ K ξ Y ι H Ts equaon reveals a oex roducv grow can be broen no several comonens. Tus ϕ reresens an underg rae of neural ecncal cange common o all frms µ σ W K 1 ϕ 2 measures e conrbuon of varable nu augmenng ecncal cange measures e mac of ecncal cange wc mroves caal s conrbuon o oex roducv grow measures e mac of ouu augmenng ecncal ξ Y cange nfluencng e coss of roducng ouus and ι H measures e mac on oex roducv grow caused b ecncal cange wc sfs e cos mac assocaed w e 16 Suc exogenous condonng facors ave been emloed ofen n e waer leraure gven e need o conrol for sgnfcan dfferences n oerang envronmen. Km (1987) Baacara e al (1995) Km and Lee(1998) Fabbr & Fraquell (2000) Mzuan and Uraam (2001) and Garca and Tomas(2001) rovdng several examles. In rncle e H varables could be modeled w a full neracve ranslog secfcaon. However gven e alread large number of neracve arameers for e WaSCs couled w e relavel low number of observaons was necessar o emlo a modeg sraeg a lmed e condonng facors o a non-neracve secfcaon.

8 7 exogenous condonng facors. I sould be noed a w e exceon of e neural ecnologcal cange comonen bo e magnude and sgn of eac of ese comonens s nfluenced b bo e esmaed roducv arameers and a gven frm s nu rce caal ouu and edonc condonng varables. Ts glgs a no onl roducv arameers bu canges n ouu levels and oer caracerscs ave an nfluence on roducv grow raes. Economerc secfcaon and s mac on esmaed roducv grow Gven s oue of e generc model we now urn o a bref dscusson of s economerc secfcaon and esmaon. Frs as economc eor suggess a cos funcons sould be omogenous of degree one n nu rces s necessar o mose s omogene ono e ssem of equaons. Ts s accomlsed b esmang e above ssem afer drong one cos sare equaon and one se of nu rce neracon erms. Ts moson of omogene requres a e nu rces and varable cos varables mus be dvded b e droed nu rce before ang logs. Secondl we emlo anoer sandard ecnque of ranslog modeg wc s o normalze e daa abou s full samle mean before esmang e model. As we do s for all e varables exce for me s mles a e elasc of cos for a gven varable a e begnnng of e samle can be observed as e drec non-neraced coeffcen wle e esmaed annual rend cange n s elasc can be observed as e coeffcen on e neracon beween and e relevan varable. Fnall n order o conrol for frm secfc caracerscs no oerwse conrolled for n e model e daa was furer ransformed b emlong e fxed effecs wn ransformaon before esmang e models w Seemngl Unrelaed Regresson ecnques. As s does no drecl nfluence e calculaon of roducv raes n e model we wll no dscuss furer. W e assumon of bo omogene mosed and afer normalzaon abou e means a frm s oex roducv grow rae a me can be calculaed as: (4) P = ϕ ϕ µ σ ξ ι were 1 2 Wnorm = j _ ( W W W W j ) Knorm = ( K K ) Ynorm = ( Y Y ) Hnorm = ( H H ) Wnorm j Knorm Ynorm Hnorm In mos alcaons s normalzaon as e subsanal advanage ransformng e model s arameers and ereb allowng e read calculaon of e roducv grow rae a me for a oecal samle average frm: (5) P = ϕ SamleAverage 1 ϕ2

9 8 However as we ws o esmae average annual roducv raes for e WaSCs s moran o noe wo moran caracerscs of P SamleAverage. Frs gven e normalzaon of e daa abou s means P SamleAverage no longer reresens e underg rae of neural ecncal cange common o all frms bu can nsead be nerreed as e esmaed rae of oal oex roducv grow for a frm w samle average caracerscs. Secondl as e samle average caracerscs are based on e daa n all ears n e anel e do no cange over me. P SamleAverage wll erefore gve a based esmae of annual average roducv grow f as e case n e waer and sewerage ndusr e average caracerscs of frms ave canged subsanall over me. Wn e conex of Ofwa s regulaon of e WaSCs P SamleAverage rovdes a useful esmae of oex roducv grow. Ts s because Ofwa mus no onl consder e assumed oex exendure a would be requred f e qual of waer servces dd no mrove bu mus also accoun for enancemen oex wc s new oex exendure a resuls because of mrovemens n qual. As P SamleAverage s calculaed b oldng all varables exce for me consan a e samle average ndcaes e oex roducv grow a would be obaned f e oecal samle average frm never exerenced a cange n an of s oerang caracerscs. As a resul f s comared o more a comreensve measures of oex roducv grow s ossble o decomose e mac of canges n all oerang caracerscs on WaSC oex roducv grow from ose wc would ave occurred n e absence of canges n oerang caracerscs. Moreover as Ofwa s regulaor meodolog aes no accoun facors suc as ancaed rends n nu rces as well as e mac on oex of mandaed qual mrovemens wen seng oex X facors a comarson of P SamleAverage would be of neres o regulaors. P SamleAver age o ese more comreensve measures of oex roducv grow Ts s because would be llusrave no onl of e mac of qual canges on oex roducv grow bu also of e mac of canges n all oenal WaSC caracerscs a ma nfluence oex roducv grow Suc comreensve annual average roducv grow raes wc mus nclude e mac of canges n e samle average caracerscs can be readl obaned b sml calculang e frm secfc roducv esmaes obaned from (4) and en deermnng e annual average of ese esmaes. Ts aroac allows e analss of e dsrbuon of frm secfc roducv grow raes and s also useful because ndcaes e secfc oex roducv grow esmaes of acual frms n e samle raer an a oecal samle average frm.

10 9 An alernave aroac s o generae oex roducv grow esmaes for e annual average frm. Wle s aroac as e dsadvanage of beng based on a oecal frm no onl allows for canges n e caracerscs of e samle average frm bu also allows for a eorecall conssen decomoson of ese canges. In racce also elds smlar average roducv esmaes o ose obaned w frm secfc caracerscs. Ts aroac can be mlemened b subsung e frm secfc caracerscs n (4) w e annual average caracerscs eldng: (6) P AnnualAver = ϕ ϕ µ σ ξ ι were age Wavg = 1 2 j Wavg ( W W j W W j ) Kavg = ( K K ) Yavg = ( Y Y ) Havg = ( H H ) Kavg Yavg Havg B defnng l as e number of ears beween wo annual average roducv esmaes s smlarl sragforward o exlan cange n annual average roducv grow raes as a funcon of model arameers and canges n e caracerscs of e annual average frm. 17 (7) P = P = lϕ 2 AnnualAverage j AnnualAverage l µ ( Wavg Wavg ) σ ( Kavg Kavg ) ξ ( Yavg Yavg ) ι ( Havg Havg P l l l l ) Exresson (7) can be readl emloed o denf e source of canges n oex roducv grow. As lϕ s sml e cange n (5) measures e cange n annual 2 average oex roducv grow a would occur n e n e absence of an cange n e average frm s caracerscs. In conras e remanng erms measure e roducv mac of canges n e average frm s caracerscs over me. Tus for examle f caal augmenng ecnologcal cange s resen n e model e mac of s on e samle average frm s alread caured n e exresson lϕ. However f e caal soc of e 2 average frm n a secfc ear canges relave o e samle average a furer cange n roducv grow can be arbued o ese canges and wll be caured b e σ ( Kavg Kavg l) erm. Pu dfferenl (7) reveals a canges n annual average oex roducv grow resul from wo dfferen sources. Te lϕ erm reresens e cange n base oex roducv 2 grow a would occur f e average frm s caracerscs dd no cange. In conras e remander of e exresson reresens e average frm s abl o resond o canges n s envronmen. If s second effec s osve (negave) n aggregae mles a e ne 17 I sould be noed a as e samle average erms wll dro ou n s exresson e dfference are grow raes n average annual caracerscs measured n log dfferences.

11 10 mac of canges n e average frm s oerang envronmen ave a roducv enancng (reducng) effec. Tesng e srucural sabl of e oex roducv arameers As e waer and sewerage ndusr as seen consderable canges n s regulaon and oer oenal deermnans of roducv grow over e erod we ave esed our models for srucural sabl. In e generc model s s accomlsed b esng weer e me rend and e me neracon arameers were sgnfcanl dfferen n e and erods. As ese erods were cosen o reflec wen dfferen regulaor rce revews were n effec ese ess ma ndcae weer e regulaor revews ad an mac on roducv grow. However we mus noe a oer facors wc concde w e mng of e regulaor revews ma also conrbue o a sascall sgnfcan sf n e roducv arameers. Tese srucural sabl ess were accomlsed b frs defnng wo dumm varables w equal o one for all ears afer 1995 and equal o one for all ears afer Re g 2 Re g Ineracons w ese dumm varables were en added o e ranslog ssem w furer dscusson of s exended generc ranslog model beng omed n e neres of brev. Focusng on and e mac of ese neracon arameers on P SamleAverage P AnnualAverage esmaed oex roducv grow raes for e generc ranslog model can noneeless be demonsraed n (5 ) (6 ) and (7 ) as follows: (5 ) P SamleAverage = ϕ1 ϕ2 ϕre g 2Re g 2 ϕre g3re g3 P AnnualAverage (6 ) ( µ µ ) Wavg ( ) g Re g 2 µ g Re g3 σ σ g Re g 2 σ Re 2 Re 3 Re 2 Re g3 Re g3 ( ξ ξ Re g 2 ξ Re g3 ) ( g g ) Yavg ι ι Re 2 ι Re 3 Havg P = P = ( C ) Re g 2 = ϕ ϕ ϕ Re g3 AnnualAverage l 1 2 Re g 2 Re g 2 ϕ Re g3 Re g 2 Re g3 Re g3 lϕ2 µ ( Wavg Wavg l ) σ ( Kavg Kavg l ) ξ ( Yavg Yavg l ) ι j (7 ) [ ϕre g 2( Re g 2 Re g 2 l ) ϕre g3( Re g3 Re g3 l )] ( µ g g Wavg g l g Re 2 µ g Re 3 ) ( µ g Re 2 µ g Re g3 l ) Re 2 Re 3 Re 2 Re 3 Wavg l ( σ g g Kavg g l g l Kavg l ) Re g 2 Re 2 σ Re g3 Re 3 ) ( σ Re g 2 Re 2 σ Re g3 Re 3 ) P = ( ) ( ξ ) g Re g 2 ξ g Re g3 ) Yavg ( ξ g Re g 2 l ξ g Re g3 l ) Re 2 Re 3 Re 2 Re 3 Yavg l ( ( ι g g g l g l l ) z g Re 2 ι g Re 3 ) Havg Re 2 Re 3 ( ι Re g 2 Re 2 ι Re g3 Re 3 ) Havg z AnnualAverage ( Havg Kavg Havg l )

12 11 Te nerreaon of e modfed oex roducv grow esmaors s sragforward w e addonal erms reflecng srucural canges n e underg roducv grow arameers. Tus for examle for K e oeszed roducv arameer s µ n µ n and µ µ n Smlarl e µ Re g 2 µ Re g 2 Re g3 roducv grow rae for an uncangng frm w samle average caracerscs s ϕ1 ϕ 2 n ϕ1 ϕ 2 ϕ n and Re g 2 ϕ1 ϕ2 ϕre g 2 ϕ n Re g Te nerreaon of (7 ) s as follows. Te frs e s dencal o (7) and reresens e oal cange n annual average roducv grow raes wc would ave occurred n e absence of srucural cange n e roducv arameers. As above lϕ2 measures e roducv exerenced b e uncangng samle average frm and e oer comonens measure e mac of canges n e annual average frm s caracerscs a would ave occurred n e absence of srucural cange n e underg roducv arameers. In conras es wo o sx reresen e oal cange n e annual average roducv grow wc can be arbued o srucural cange n e roducv grow arameers. Lne 2 reresens e mac of s srucural cange on e uncangng samle average frm wle e las four es of (7 ) reresen a furer cange n annual average annual roducv a s arbuable o canges n e annual average frm s caracerscs bu s also arbuable o canges n e underg roducv grow arameers. Ts decomoson allows a clear dsncon o be drawn beween roducv grow a would ave occurred n e absence of canges n frm caracerscs roducv a s arbuable o suc canges and a wc s arbuable o srucural cange n e roducv grow arameers. Moreover s decomoson s arcularl useful as can measure e ne mac of srucural cange n e roducv grow arameers on roducv grow raes. Tus f e oal cange n oex roducv grow raes a can be arbued o arameer cange s osve s ndcaes a srucural canges ave ad a osve mac on roducv grow raes. In conras f e oal cange n roducv grow raes a can be arbued o arameer cange s negave suggess a srucural canges reflec reducons n oenal oex roducv grow raes. 3. Emrcal Secfcaon and Resuls Ts sud emlos daa avalable for wc as been rmarl drawn from e regulaor reurns of e WaSCs o Ofwa (Ofwa 2003). Tese reurns rovde daa no onl on e coss ouus and nus of e WaSCs bu also rovde a rc source of furer

13 12 exogenous caracerscs a ma nfluence e cos srucure of arcular WaSCs. Te overall qual of Ofwa s regulaor daa s evdenced b e fac a we were onl requred o emlo exernal sources for ree of e daa seres dscussed below. However dese e overall qual of Ofwa s daa onl ncludes a oal of 11 ears of daa for e 10 WaSCs locaed n England and Wales. 18 Moreover gven e organzaonal resrucurng of Wels Waer comable labor rce daa s no avalable for e ears endng afer 2001 and our oal samle s furer lmed o 108 observaons. 19 Our modeg aroac as erefore been drven b e necess o secf a arsmonous model wle noneeless full exlong Ofwa s regulaor daabase n order o adequael denf e deermnans of WaSC oex roducv grow. We ave roceeded b mlemenng e generc model descrbed above wle also nsurng e excluson of exraneous varables and arameers. In arcular e modeg rocess ncluded e rgorous esng of e varous arameers nfluencng roducv grow as denfed n (6 ). Tus for examle wle esng e sabl of e oex roducv arameers found a e srucural cange arameers for e full neracve ranslog arameers were jonl sgnfcan a e 95 ercen confdence level for bo e and erods we furer esed ndvdual arameers and excluded ose arameers wc were no ndvduall sascall sgnfcan a e 90 ercen level. Smlarl we rgorousl esed e edonc varables o deermne no onl weer e conrbued sgnfcanl o e model bu weer er mac ad sfed over me. As we wll see below s rocess suggess a wle man of e edonc varables are moran ndcaors of oerang caracerscs wc nfluence oex coss mos of e relaed arameers ave no sfed sgnfcanl over me and erefore do no nfluence esmaed roducv grow. 20 Ulmael s modeg rocess resuled n a robus model w 44 arameers a conrolled for bo waer and sewerage connecons and srucural cange n e roducv grow 18 Man of e daa seres avalable from Ofwa s regulaor reurns are sml no avalable before A researcer s erefore faced w eer emlong ese more robus daa for e erod afer s dae and secfng a arsmonous model w s daa wc s e aroac we ave aen ere or emlong a more lmed se of daa for wc re 1993 comable daa s avalable. Ts laer aroac wc as been aen b Saal and Parer ( ) n order o analze e mac of rvazaon on WaSC erformance s noneeless arorae gven a e urose of er sudes was o analze e mac of rvazaon on WaSC erformance. 19 In 2002 and 2003 e average salar observed for Wels Waer rose sgnfcanl as a consequence of e Glas Cmru ae-over and e conracng ou of oeraons. Te sauor accouns for Glas Cmru onl reor salares ad o Glas Cmru emloees and s does no accurael reflec e average rce ad of labor nus as muc of a cos s now refleced n e ousourcng conracs. To avod dsorng e mean labor rce n e WaSC daa ese wo observaons were excluded from e samle. 20 We do noe a once s fnal model was secfed we furer esed and rejeced e oeses a an of ese excluded varables conrbued sgnfcanl o e fnal model secfcaon.

14 13 arameers. We erefore urn o a descron of e varables a were ncluded n s fnal secfcaon before resenng our resuls. Secfng e Translog Model: Ouus Caal Socs and Varable Inus We deermned a a ranslog model w wo ouus wo caal socs and wo varable nus wc was augmened o accoun for exogenous oerang caracerscs was mos arorae for our daa se. Ts model ncludes wo ouus a reflec e scal volume of waer sul and sewerage reamen rovded b WaSCs. Te volume of waer delvered wc s a measure of waer suled o cusomers ne of dsrbuon ssem leaage s our waer servce ouu (Y 1 ). Equvalen sewerage oulaon wc esmaes reamen load as resdenal oulaon lus ndusral effluen as a oulaon equvalen and s e sandard measure for sewerage reamen load n England and Wales s our sewerage servce ouu (Y 2 ). In rncle we could model e WaSCs as avng a sngle omogenous caal soc comrsng bo waer and sewerage caal asses as Saal and Parer ( ) dd due o daa lmaons. However as e waer sul and sewerage newors are ndeenden ssems could be consdered enuous o assume a e assocaed caal socs are omogenous even f sgnfcan cos neracons beween e wo ssems exs. We erefore coose o model e waer caal soc (K 1 ) and e sewerage caal soc (K 2 ) searael as our models clearl ndcaed a sgnfcan dfference n er mac on WaSC oex. Tese measures of fxed scal caal soc are based on e nflaon adjused modern equvalen asse (MEA) curren cos accounng valuaons of e relacemen cos of caal asses and are avalable from e WaSCs regulaor accouns. 21. Wle a more dsaggregaed secfcaon of WaSC oex coss ncludng nus suc as elecrc and conraced ou servces would be desrable s no ossble o emlo suc a modeg aroac and we ave erefore assumed a oal oex coss are deermned b e cos of labor (W 1 ) and e cos of oer nus (W 2 ). Ts modeg coce was nfluenced b e lmed number of observaons avalable and e resug need for a arsmonous 21 Gven a frequen revaluaons of e MEA valuaons ave occurred beween 1993 and 2003 ese daa seres would exb sgnfcan arbrar jums n measured scal caal f we dd no adjus e MEA caal seres o accoun for ese canges. Terefore afer consulaon w Ofwa was assumed a e MEA valuaons for e ear endng 2003 were e mos accurae esmaes as e embod all revous revaluaons of e MEA caal socs. Ne nvesmen values were en calculaed for eac ear bu valued a 2003 rces. Tese ne nvesmen values were based on e ne mac of dsosals addons nvesmen and derecaon b deermnng ne nvesmen values as declared n eac ear. Adjused MEA caal soc values were en obaned for ears endng ror o 2003 b ssemacall subracng s ne nvesmen value from e MEA values for 2003 and eac revous ear o oban an adjused MEA caal soc seres for e enre samle erod. Te resug ear endng and ear begnnng fgures were en averaged n order o rovde a more accurae esmae of average caal soc avalable o e frms n a gven fnancal ear.

15 14 secfcaon. However also refleced e fac a e regulaor accounng gudees emloed b Ofwa do no mae raccall ossble o derve oex cos sares for a more dsaggregaed classfcaon of nu coss. aa for labor rces (W 1 ) was sourced drecl from e sauor accouns of e aoned waer comanes w e average nomnal rce for labor nus comued as oal salares and remuneraon dvded b full me equvalen emloees. 22 Gven s defnon as oal oex coss less labor coss oer nu coss reflec a comose se of eerogeneous nus. Gven s eerogeneous naure mung a rce for s caegor of nu s dffcul and we erefore follow e lead of Garca & Tomas (2001) and consruc a rce ndex for oer nus (W 2 ) as a un cos of oer nus relave o an aggregae ouu ndex wc caures e relave quan of bo waer servce and sewerage servce ouus. Hedonc Varables Te rncal urose of e ncluson of edonc varables s o conrol for exogenous nfluences on oex durng e samle erod. 23 Gven e sgnfcance of EA and WI mandaed qual mrovemen rograms afer rvazaon e frs wo edonc measures were adoed o measure e subsanal ncrease n drnng waer and envronmenal qual over e erod. 24 A relave measure of drnng waer qual (Q 1 ) was frs calculaed b emlong daa from WI (2003) and earler reors o deermne e ercenage of a WaSC s drnng waer sul zones a were full comlan w 16 dfferen drnng waer sandards. 25 As WI sul zones are defned based on a maxmum oulaon of Q 1 could en be emloed o calculae e esmaed oulaon n full comlan WI zones as H = 1 Q1Po1 were Po1 s a WaSC s waer sul oulaon. Te subsanal rogram of caal nvesmen snce WaSC rvazaon as n large ar been concenraed on e exenson of secondar level sewage reamen o mee EU envronmenal sandards. Terefore rends n secondar reamen sould rovde a measure of 22 Gven e overall qual of Ofwa s mandaed regulaor daa reorng s wor nong e one moran exceon o s s e lac of a regulaor requremen for comanes o reor daa on emlomen or oal coss of emlomen. Ts oversg wc maes dffcul o esmae mos sandard economerc models necessaes e use of e sauor annual reor daa menoned n e man ex. 23 Several alernave edonc varables were rejeced from e secfcaon due o sascal nsgnfcance and are erefore no furer dscussed n e man ex. Tese ncluded dsrbuon losses (leaage) e number of meered roeres e number of roeres a rs of sewerage floodng rade effluen volumes and e volume of waer sourced from underground sources. 24 Te average WaSC s ercenage of waer sul zones a were full comlan w drnng waer sandards (Q 1 ) ncrease from 58% n 1993 o 79% n Over e same erod e ercenage of conneced sewerage oulaon recevng secondar reamen (Q 2 ) ncreased from 69 o 97 ercen. 25 Te 16 arameers are colforms faecal colforms colour urbd odor ase drogen on nrae

16 15 e mrovemen n envronmenal qual as WaSCs ave nvesed o mee rsng sandards. As daa on e ercenage of conneced sewerage oulaon recevng secondar reamen (Q 2 ) s onl avalable n Ofwa s regulaor daa snce 1997 daa for e ears 1993 o 1996 was obaned from daa comled b e Waer Servce Assocaon and ublsed n WSA(1997) and earler edons. Te esmaed oulaon recevng a leas secondar reamen of sewerage s en calculaed as H = Q 2 2Po2 oulaon. I sould be noed a wle H 2 were Po2 s a WaSC s conneced sewerage s e mos conssen sewerage qual ndcaor avalable for e enre erod s measure b defnon canno caure furer mrovemens assocaed w e consderable ncrease n e erar reamen of sewerage. As a resul s measure ma no full conrol for all of e drec mac of ncreased sewerage reamen qual on oex. 26 A smlar qual relaed edonc varable s e number of conneced waer servce roeres w waer ressure below e reference level se b Ofwa (H 3 ). Imrovemens n waer ressure requre subsanal exendure on leaage conrol and mroved ssem desgn and managemen. Moreover mroved ressure was an moran qual arameer ursued b Ofwa n e ears followng rvazaon. Terefore as e average ercenage of WaSC roeres w low ressure as droed from 0.96 o 0.06 ercen beween 1993 and 2003 we exec H 3 o be negavel relaed o oex coss. Prevous researc b Anonol & F (2001) and Garca and Tomas (2001) ave suggesed a because of e cos of mananng newor connecons e number of conneced roeres s an moran deermnan of waer ndusr coss w e laer aer emlong s ouu n addon o an ouu measure wc caures e scal volume of waer sul. As e revous leraure as suggesed a conrolg for connecons s moran wen esmang waer ndusr cos funcons we ave erefore ncluded e number of bo conneced sewerage roeres (H 4 ) and conneced waer servce roeres (H 5 ) as edonc varables. An exensve leraure as ncluded measures of e dens of oeraons as an moran deermnan of waer ndusr coss. 27 Te fnal edonc varables o be ncluded n our secfcaon are erefore sewerage servce dens (H 6 ) defned as oulaon er lomeer of nre alumnum ron manganese lead PAH Tralomeanes and oal escdes. 26 Sewerage reamen lan comlance w numercal consen orders s a oenal alernave measure. However as consen orders ave been rogressvel gened over me ncreases n e ercenage of lans a are comlan dramacall underesmaes acual mrovemens n sewerage reamen qual. 27 Tese sudes nclude Km(1987) Km and Clar(1988) Baacara e al(1995) Cubbn and Tzandas(1998) Km and Lee(1998) Fabbr and Faquell(2000) Tanassouls(2000 & 2002) Garca and Tomas(2001) Anonol and Fl(2001) Mzuan and Uraam(2001) and Esace and

17 16 sewer and waer servce dens (H 7 ) defned as oulaon er lomeer of waer man. 28 However we noe a wle e varous oer edonc varables ave been ncluded n e fnal model secfcaon as logs of varables a are measured n levels H 6 and H 7 are rao varables and ave been drecl enered n our emrcal secfcaon. Nevereless can be readl sown a f we allow s modfcaon o e generc model descrbed n (1) e elasc of oex w resec o sewerage servce dens (H 6 ) and waer servce dens (H 7 ) can sll be resecvel deermned as λ 6 and λ Te Esmaed Model Te arameer esmaes for e esmaed model are resened n Table 1. We frs focus brefl on e elasc of oex cos w resec o e ranslog and edonc varables for e samle average frm a e begnnng of our samle erod. α 1 suggess a n e samle base ear e elasc of oex w resec o e rce of labor was Ts labor elasc s conssen w our execaons w regard o labor s conrbuon o oex exendures n 1993 wc s before e comleon of e rocess of labor seddng a as caracerzed e os rvazaon era (Saal and Parer 2001). (Table 1 abou ere) χ1 and χ 2 ndcae a e oex elasc w resec o waer delvered and equvalen sewerage reamen oulaon for e samle average frm were resecvel and n Ts resul suggess a oex coss are consderabl more resonsve o ncreases n waer ouu an sewerage ouu. However f we also consder e λ 1 λ2 λ3 λ4 and λ 5 Ross(2002). 28 Alernave dens varables defned as oulaon er servce area were found o be sascall nsgnfcan ereb ndcang a e dsrbuon of oulaon along servce mans s a more arorae dens measure. Gven e relavel large sze of e WaSCs wc all nclude nonconguous urban areas servce area ma be an narorae denomnaor because wll nclude varng amouns of sarsel oulaed land area wc are no conneced o e waer or sewerage newors. Anoer common dens measure emloed n e leraure s sml e leng of e sewerage or waer newor measured n logs. However as e MEA caal soc daa dscussed above ncludes waer mans and e sewerage newor as ar of e caal soc we feel a e drec ncluson of s varable would nvolve an narorae double counng of newor asses n our model secfcaon. Noneeless we esed s alernave secfcaon and found dd no sgnfcanl nfluence our overall resuls. 29 Ts s e case because ceers arbus e secfed relaons beween oex coss and H 6 for. examle s ( C ) = λ 6 H 6 ι H Gven s can be sown a e elasc of oex w resec o sewerage dens s λ 6 H 6 ι H. Te normalzaon of e daa abou s means mles a H 6 = 1 for e samle average frm. Terefore e rejecon of e ι arameers as sascall nsgnfcan n e model below ndcaes a s elasc wll equal all ears. λ 6 for e samle average frm n

18 17 arameers wc ndcae e elasc of oex coss w resec o e logged edonc varables we see a sgnfcanl ger oex cos elasces are assocaed w e sewerage edonc varables. Tus λ1 and λ 2 are resecvel.010 and.033 ndcang a e elasc of oex w resec o oulaon recevng secondar reamen of sewerage was subsanall ger an a for esmaed oulaon n zones wc are full comlan w drnng waer sandards. Smlarl λ4 and λ 5 are resecvel and ereb ndcang a e elasc of oex w resec o conneced sewerage roeres was over wo and a alf mes larger an a for esmaed conneced waer roeres a e begnnng of e samle erod. Fnall λ 3 wc rovdes an esmae of e oex elasc w resec o e number of roeres below mnmum ressure levels s esmaed o be and gl sgnfcan. As execed s arameer suggess a reducng e number of below ressure roeres as a sgnfcan osve mac on oex. Consderng λ6 and λ 7 reveals a for e samle average frm e esmaed elasces of oex for sewerage servce and waer servce dens are resecvel and Tese resuls sugges a ceers arbus ncreases n WaSC sewerage dens resul n reduced oex coss wle n conras ncreased waer dens resuls n ger oex coss. We would nerre ese arameers as suggesng a ger dens reduces sewerage oex because faclaes e use of larger more effcen reamen lans wle n conras ger waer dens generall mles greaer coss because waer wll generall need o be gaered and ransored from ousde a more urbanzed area mg ger oex coss. Ts s conssen w e fndngs of Km and Clar (1988) wc argues a for waer sul comanes economes of scale n waer reamen are more an counerbalanced b dseconomes of scale n waer dsrbuon. β1 and β 2 measure e elasc of oex w resec o caal and are resecvel and aloug onl β2 s sascall sgnfcan. However σ 1 and σ 1 Re g 2 ndcae a e esmaed elasc of oex w resec o waer caal for e samle average frm as mroved from a e begnnng of e samle o n 2003 and can be sown a s elasc became sascall sgnfcanl dfferen from zero n Ts would sugges a WaSC nvesmens n waer caal are oex savng and a s effec as ncreased over me. Moreover as σ 1 Re g 2 s sascall sgnfcan bu σ 1 s no s cange could be arbued o regulaor genng. σ σ 2Re g 2 and σ 2Re g3 sugges a for e samle average frm e esmaed elasc 2 of oex coss w resec o sewerage caal ncreased from n 1993 o 0.33 n 2000

19 18 before decng o 0.29 b 2003 and can be sown a s elasc was sascall greaer an zero n ever ear of e samle. Moreover wle e sascall nsgnfcan σ 2Re g 2 ndcaes a e deeroraon of e sewerage caal elasc ma ave been σ reversed afer e 1994 rce revew e 2Re g3 arameer ndcaes a s mrovemen onl became sascall sgnfcan afer e 1999 rce revew. Overall ese resuls rovde evdence o sugges a sewerage caal nvesmens connue o exer consderable uward ressure on oex coss uward ressure wc as onl been moderael reduced b regulaor genng. Wle our esmaed sewerage caal elasc volaes e sandard economc assumon a ncreased caal nvesmen sould resul n reduced varable coss s no surrsng gven e envronmenal regulaon of e WaSCs and e mandaor caal nvesmen rograms e ave been requred o mlemen. If ncreased sewerage nvesmens ave been drecl assocaed w e reamen of revousl unreaed or mnmall reaed sewerage loads oex coss wll ncrease n resonse o new sewerage nvesmen because of ncreased energ reamen cemcal sludge dsosal and oer on gong coss assocaed w sewerage reamen. 30 Analss of daa avalable n Table 35 and Table 36 of e regulaor reurns o Ofwa also srongl suggess a e osve sgn of our caal elasc measure sould no be unexeced n e conex of e WaSCs. Tese ables rovde Ofwa s deermnaon of e sources for oerang and caal exendures dsngusng beween base servce rovson wc effecvel olds qual levels consan and qual enancemens wc measure e mac of mandaed qual mrovng caal nvesmens Ofwa arbued onl 7.7% of 2003 WaSC oal waer servce oex of 1.23 bllon o drnng waer qual enancemens wc occurred afer In conras 42.5% of oal sewerage oex of 1.18 bllon could be arbued o sewerage relaed qual nvesmens a occurred afer As dealed above e mac of qual drven nvesmen rograms on acual caal nvesmen was muc more balanced. 31 Taen ogeer ese fgures sugges a wle sewerage qual enancemens requre sgnfcan ncreases n oex and caal socs e mac of drnng waer qual mrovemens are consderabl more focused on caal nvesmen. Tus we are reasonabl 30 Garca and Tomas (2001) also fnd osve caal elasces n e Frenc waer ndusr and arbue s o overcaac. I sould be noed a as sewerage newors (bu also reamen lans) esecall are desgned o ave over-caac o andle sorm-flows s ma be anoer oenal exlanaon for e conssen osve caal elasc esmaes. Unforunael suable caac ulzaon measures wc would allow furer exloraon of s ssue are no avalable. 31 aa on e sare of oex arbuable o qual enancemen s onl avalable from 1996 wle caal exendure arbuable o qual enancemen s avalable from 1993.

20 19 confden a e osve sewerage caal elasc found n our model ma reflec e real a for e WaSCs ncreased sewerage caal nvesmen leads o ncreased oex raer an e subsuon of oex. We can draw some furer neresng conclusons w regard o e mac of caal nvesmen on oex coss from θ 2 1 and 21. Te negave and sgnfcan θ 2 1 θ arameer suggess a ceers arbus nvesmen n sewerage caal causes a reducon n e oex elasc assocaed w waer delver. Smlarl e 1arameer suggess a ceers arbus nvesmen n waer caal causes a reducon n e oex elasc assocaed w equvalen sewerage oulaon. Ts suggess a oenal econom of scoe a accrues from qual enancng caal nvesmen. 32 Tus wle e sascall nsgnfcan 1 2 arameer suggess a ere s no evdence of scoe economes drecl relaed o scal ouus e 2 1 θ and θ arameers sugges a suc scoe economes ma be relaed o caal 1 2 exendures. Esmaed Producv Grow and e Imac of Canges n WaSC Caracerscs θ 2 ς We now urn our aenon o esmaed oex roducv grow for e samle average frm before consderng more comreensve measures a ae no accoun e mac of canges n WaSC caracerscs. φ 1 ndcaes a a frm w e consan caracerscs of e samle average frm would ave aceved oex roducv grow of 2.23% er annum a e begnnng of e samle erod. φre g 2 ndcaes a e samle average frm s roducv grow was 0.20% ger durng an would ave been n e absence of srucural cange. As s corresonds o e erod followng e 1994 rce revew ma reflec a osve mac from regulaor genng. However a se decrease s also evden afer e 1999 rce revew as e φ Re g3 arameer ndcaes a e samle average frm s roducv grow was 0.11% lower n an would ave been n e absence of s furer srucural cange. Gven ese oosng srucural breas s moran o noe a e samle average frm s roducv grow raes was sll 0.09% ger durng an would ave been n e absence of srucural cange n e roducv grow arameers. 32 Ts would be e case f for examle qual enancng caal nvesmen a a WaSC s sewerage reamen wors resuled n reduced reamen requremens a a waer reamen lan downsream from e sewerage wors. Smlarl f e relacemen of lead sul mans resuled n e cessaon of e need o add osorous o drnng waer n order o reduce e uae of lead from suc mans sewerage reamen oex could oenall be subsanall reduced. Ts would be e case as would no longer be necessar for sewerage reamen wors o remove s osorous wc can be resonsble for deeroraons n rver qual.

21 20 However dese s overall osve srucural sf a frm w e caracerscs of e samle average frm would ave faced a erssen dece of 0.08% er annum n oex roducv as ndcaed bφ 2. Te ne mac of e φ 1 φ 2 φre g 2 andφre g3 arameers s demonsraed n Table 2. Te samle average frm s oex roducv grow s sown o be osve and sascall dfferen from zero n all ears bu decng from a mean value of 2.15% n 1993 o 1.44% n Tese resuls sugges a f we assume a WaSC oerang caracerscs ave no canged we mus also conclude a oenal oex roducv raes ave been decng. (Table 2 abou ere) However wle P SamleAverage rovdes a useful esmae of roducv grow f we ws o assume a oerang caracerscs are consan wll rovde a based esmae of annual average roducv grow f ose caracerscs ave alered subsanall and/or roducv arameers relaed o ese caracerscs ave canged over me. We erefore frs consder ow ese arameers ave sfed before reorng e resug mac on esmaed annual roducv grow raes. µ 1 ndcaes a e elasc of oex w resec o labor coss as deced consderabl wc s conssen w e subsanal subsuon awa from labor and owards oer nus a as occurred n e ndusr. Moreover as we were able o rejec e resence of an srucural breas n µ 1 we can also conclude a ere as no e been an sgnfcan sf n e oenal for suc subsuon. σ As dscussed above σ 1 and 1Re g 2 ndcae a e negave elasc of oex w resec o waer caal as become sronger over me and esecall afer Te decng rend n s elasc means a subsanal roducv gans ave been aceved roug subsuon of oex w caal nvesmen n waer sul. Te ne mac of e sewerage caal arameers σ 2 σ 2 Re g 2 and σ 2Re g3 as resuled n a osve conrbuon o oex roducv snce However e ne roducv mac of sewerage caal nvesmen was negave durng Ts reflecs e fac a e WaSCs osve elasc of oex w resec o sewerage caal ncreased beween 1993 and 2000 before decng. Ts osve ouu elasc ndcaes a new sewerage nvesmens led o ncreased oex coss raer an e subsuon of oex coss. Gven s e sf n sgn n e roducv grow arameers afer 2000 mus be carefull nerreed for reall ndcaes a e negave mac of new sewerage caal nvesmen on oex coss as become less mared. Tus wle our evdence suggess a e WaSCs ave reduced e amoun of oex assocaed w new sewerage caal nvesmen s onl began afer Ts ma be

22 21 assocaed w a regulaor genng on oex a e 1999 rce revew requrng more focus on caal subsuon oorunes n e sewerage busnesses. Gven ese rends n e sewerage caal elasc new sewerage caal as no been a sgnfcan conrbuor o oex roducv grow raes and ad a small negave mac over e enre erod. Wle e esmaed elasc of oex w resec o conneced sewerage roeres was for a e begnnng of e samle erod 4 ι suggess a s elasc deced b er ear and ad erefore decreased o b Ts mg sugges a sgnfcan roducv grow as been aceved roug new ecnologes and effcenc mrovemens relaed o e manenance of sewerage connecons. As dscussed above e esmaed elasc of oex w resec o oulaon recevng secondar reamen was a e begnnng of e samle erod. However 2 ι suggess a s elasc as been decng b er ear and ad decreased o b Ts would ml a wle ncreasng sewage reamen levels once led o ncreases n oex b 2003 e are reducng oex (ceers arbus). Ts arameer sf mles a e mac of mroved sewage reamen qual as been assocaed w an ncrease n oex roducv grow raes. Te ξ 2 ξ 2Re g 2 and ξ2re g3 arameers sugges a e elasc of oex w resec o equvalen sewerage oulaon ncreased n all ears and e rae of ncrease became sgnfcanl ger afer As a resul e elasc of oex w resec o sewerage oex for e samle average frm ncreased from o b e end of e samle erod. ξ Te ξ1 and 1Re g 2 arameers ml a e oex elasc w resec o waer delvered for e samle average frm a frs deced bu afer 1995 began ncreasng o b Ts suggess a b e end of e samle erod e roducv arameers assocaed w bo our scal ouu varables were avng a negave mac on oex roducv grow raes an mac a can be arbued o a consderable ncrease n oex assocaed w bo waer delver and sewerage reamen. Gven s dscusson of e roducv arameers relaed o frm caracerscs we now ae no accoun er nfluence on annual average oex roducv grow b reorng esmaes based on e caracerscs of e average WaSC n eac ear ( P AnnualAverage ) n Table 3 and alernave esmaes based on annual averages of frm secfc esmaes( ) n Table 4. (Table 3 and 4 abou ere) Table 3 suggess a for e average WaSC n eac ear e se cange n roducv grow from aears o be susaned w oex roducv grow raes sang wn e narrow band of 1.91% o 1.98% n ever ear beween 1996 and Moreover s wor nong a muc of e fall n oex roducv grow a occurred n 2002 was P

23 22 recovered n e subsequen ear wen e esmaed oex roducv grow rae for e annual average WaSC was 1.76%. I s wor furer nong a as wr Cmru s (Wels Waer) esmaed frm secfc oex roducv grow rae was above e samle average s excluson from e samle n e las wo ears of e samle erod s lel o exaggerae e acual dece n e esmaed annual average oex roducv grow. A comarson beween Table 2 and Table 3 els o denf e overall conrbuon o oex roducv grow of canges n e caracerscs of e average WaSC relave o e samle average. Ts s also sown n Fgure 1 wc llusraes e rend n all ree of our average roducv measures. From 1996 ese cangng caracerscs ave allowed e annual average WaSC o manan oex roducv grow n excess of 1.75% er annum n all ears oer an In conras f e WaSCs caracerscs ad no canged e would ave exerenced a sead dece n roducv grow a would ave onl been emorarl slowed b e srucural brea a occurred afer Ts suggess a e underg rocess of roducv grow a caracerzes e WaSCs as allowed em o resond osvel o canges n er oerang envronmen. (Fgure 1 abou ere) Te average annual frm secfc esmaes resened n Table 4 are que smlar o esmaed oex roducv grow for e annual average WaSC. Nevereless e do rovde furer evdence of e dsrbuon of frm roducv grow around e average esmaes. Te coeffcen of varaon for e esmaed frm secfc oex roducv grow rae suggess a oex roducv grow raes converged unl Wle e dverged moderael afer s e subsequenl converged agan suggesng a mos frms ave aceved raes of oex roducv grow relavel close o e average rae n a gven ear. (Table 5 abou ere) Table 5 summarzes e canges n esmaed annual average WaSC oex roducv grow for eac of e rce revew erods ( and ). Ts sows a a sascall sgnfcan dece occurred before e frs regulaor rce revew. Ts was followed b an ncrease n e rae of oex roducv grow n e erod followed b a sascall sgnfcan dece n e erod. 33 However s neresng o noe a over e enre erod e % reducon n oex roducv grow s no sascall sgnfcan. As a resul f we ae no accoun canges n average WaSC caracerscs we canno rejec e assumon of sable oex roducv grow raes for e annual average WaSC n e range of 1.76%-2.02% over e enre erod. Tese raes can be comared o 33 As above we cauon e reader o noe a s sascall sgnfcan dece ma be nfluenced b