Productivity and Price Performance in the Privatised Water and Sewerage Companies of England and Wales

Aston Business School Research Institute is the administrative centre for all research activities at Aston Business School. The School comprises more than 70 academic staff organised into thematic research groups along with a Doctoral Programme of more than 50 research students. Research is carried out in all of the major areas of business studies and a number of specialist fields. For further information contact: Aston Business School Research Papers are published by the Institute to bring the results of research in progress to a wider audience and to facilitate discussion. They will normally be published in a revised form subsequently and the agreement of the authors should be obtained before referring to its contents in other published works. Abstract After the ten Regional Water Authorities (RWAs) of England and Wales were privatised in November 1989, the successor Water and Sewerage Companies (WASCs) faced a new regulatory régime that was designed to both promote economic efficiency and improve water quality. Moreover, the new regulatory régime was designed to encourage the capital investment needed to improve water quality. The industry's economic regulator, the Office of Water Services (Ofwat), implemented a unique RPI + K pricing system which was designed simultaneously to compensate the WASCs for efficient capital investment programs, encourage gains in operating efficiency, and maintain fair prices for customers. It is now over ten years since privatisation. This paper evaluates how successful privatisation with economic regulation has been in raising productivity. Estimates of labour and total factor productivity (TFP) growth, derived with quality adjusted output indices, suggest that while substantial reductions in labour usage have occurred, TFP growth has not improved relative to the pre-privatisation period. Moreover, a total price performance (TPP) index, attributable to Jorgenson and Griliches (1967), indicates that increases in the quality adjusted output price of water and sewerage services in England and Wales have been substantially greater than increases in input costs. These results are consistent with economic profits having increased considerably since 1989.