Efficiency in South African water utilities: a comparison of estimates from DEA, SFA and StoNED

Climate change has brought renewed and increasing attention to the productivity and efficiency of the water sector. This has stimulated interest, which has manifested itself in the increased application of statistical tools to measure the productivity and efficiency of water utilities. Policymakers in developed countries are already making use of statistical analyses of water systems for determining productivity and efficiency. For efficiency analysis to be useful to policymakers, the various approaches used should produce estimates that are consistent in identifying the best and worst firms, as well as overall rankings of firms in terms of their efficiency levels. Generally, data envelopment analysis (DEA) and stochastic frontier analysis (SFA) are the most common frontier analysis techniques used to measure the productivity and efficiency of water utilities. DEA places less emphasis on the shape of the frontier and is credited for its axiomatic properties that can accommodate a multiplicity of inputs and outputs, as well as its ability to consider returns to scale. On the other hand, SFA decomposes deviations from the frontier into random noise and inefficiency terms. These tools are not direct competitors, but complement each other, due to their respective advantages. In the recent years, a new efficiency analysis technique, the stochastic non-parametric envelopment of data (StoNED) emerged in the literature. StoNED combines the axiomatic, non-parametric, piecewise linear DEA-style frontier with a stochastic SFA-style treatment of inefficiency and noise. Thus, it is more robust to both model misspecification and noise. In this study we compare efficiency scores from DEA, SFA, and StoNED, using the South African water sector as a case study. More precisely, the study investigates the consistency of efficiency scores obtained from these three efficiency analysis techniques in the context of a water sector from a developing country. We estimate cost efficiency based on cross-sectional data from 102 South African water utilities in the period 2013/14. Thus, the study extends existing studies that compare frontier analysis methods by introducing a robust semi-non-parametric methodological tool. This methodological cross-checking process using three methodological tools provides more robust, reliable and useful information and diagnostics for regulatory analysis and policymakers. This is an innovative approach, and to the best of our knowledge this is one of few such studies; and, the first cross-checking process using three methods; to be applied to the water sector. Furthermore, this is the first application of the StoNED approach to the water sector. The results suggest that the StoNED method (based on the methods of moments estimator) outperforms SFA and DEA. However, based on the pseudo-likelihood estimator, SFA outperformed StoNED. Overall, the results suggest moderate consistency across the three methods. Based on the findings, we conclude that our study presents a robust approach to efficiency analysis in water utilities.

Working paper 780
1 April 2019
SHARE THIS Policy Brief / Working Paper PUBLICATION:

Related South Africa’s Cities and Growth Spatial Challenges and Policy Interventions Content

Request for Proposals: The role of cities as drivers of growth and employment
Background Urbanization in South Africa is expected to reach 80% by...
Call for Work
South Africa’s future will be decided in our cities
Discussion Document 14 South Africa’s cities face multiple, overlap...
Dieter von Fintel, Justin Visagie, Ivan Turok, Takwanisa Machemedze, Claus Rabe, Sebastian Galiani, Edward Glaeser
Discussion Document
Monitoring South Africa’s metropolitan economies: A survey of the data landscape
Discussion Document 13 Disparities in data across different metropo...
Dieter von Fintel
Discussion Document
Cities, productivity and Jobs in SA: Problems and potential
Discussion Document 12 Cities contribute to national prosperity bec...
Ivan Turok, Justin Visagie
Discussion Document
Place-based economic policies: international lessons for South Africa
Discussion Document 11 Place-based policies are designed to support...
Harris Selod, Claus Rabe
Discussion Document
What luminosity data can and cannot reveal about South Africa’s urban economies
Discussion Document 10 As novel types of data are becoming availabl...
Takwanisa Machemedze
Discussion Document
Crime: A policy-oriented survey
Discussion Document 9 South Africa has a reputation for having high...
Sebastian Galiani
Discussion Document
Virtual CDE Workshop on SA Cities and Growth
Urban economics has provided powerful insights into how the charact...

Search Resources

Ground Floor Brookside Building
11 Imam Haron Road
Claremont, 7700
Cape Town

PostNet Suite # 109
Private Bag X1005
Claremont 7735
Cape Town

Get Social