An investigation of productivity, profitability, and regulation in the Chilean water industry using stochastic frontier analysis

The firms’ performance assessment for regulation requires estimating profit change and its drivers. This study estimates and decomposes profit changes into components such as output and input price changes, output growth, and markups. Using the stochastic frontier analysis, we compute the drivers of productivity change, such as technical change, returns to scale, and efficiency change. We apply the profit decomposition to several full private water companies (FPWCs), concessionary water companies (CWCs), and a public water company (PWC) in Chile over two years. Results showed that profit and total factor productivity levels increased over time at 1.967% and 1.062% per annum, respectively. Technical change, gains in efficiency, and a reduction in input prices were the main drivers contributing to positive profit growth. We also found that the PWC was more productive and profitable than private companies, with FPWCs outperforming CWCs. The results of our study can aid policymakers in understanding how resources are used, why some companies in the water industry perform better than others, and how these changes impact productivity over time.