Dynamic efficiency in the English and Welsh water and sewerage industry

The English and Welsh water and sewerage industry is characterised by indivisible capital which has a long service life. Previous studies of efficiency of the English and Welsh water and sewerage industry take a static framework, assuming all inputs can be adjusted instantaneously. This paper measures efficiency dynamically by incorporating intertemporal links of capital within the production function for the English and Welsh water and sewerage industry for the period 1996-2011. Dynamic DEA considers capital as a quasi-fixed input and is modelled as a contemporaneous output into current production and an input from past production. The results show that the inadequate intertemporal allocation of quasi-fixed inputs is the largest contributor of inefficiency and the ignorance of intertemporal effects leads to an over-estimation of allocative inefficiency.