Estimation of Technical Efficiency for China's Urban Water Utilities

The purpose of this paper is to estimate levels of efficiency of China's urban water utilities and to consider its implications for regulatory policy design. To that end, several different stochastic frontier models which assume distinct assumptions on the features of efficiency term are applied to an input-oriented distance function with a panel data set. Results show that the average efficiency values range from 44% to 89%, depending on models employed. The findings suggest that the relatively low efficiency, which is the outcome of low-powered rate of return regulation, information asymmetry and participation constraint, may be the primary source of financial deficit occurred in urban water sector. Our study confirms that reforms of ownership alone cannot warrant efficiency improvement. It is recommended to identify individual utilities' performance and link it with the interests of utilities, and to combine efficiency estimation with regulation measures through several transitional steps given the context of institutional and cultural situation in China