An empirical analysis of efficiency in the Italian water service

The following empirical work examines the impact of a potential restructuring of the Italian water industry, considering a sample of 37 companies and 22 contiguous hypothetical mergers providing water in Italy from 2005 to 2009. With particular attention to the water industry cost efficiency is analyzed by using a parametric methodology: a Translog cost function has been estimated through the SURE model, in order to evaluate the behaviour of returns to scale. Small companies seem to benefit of economies of scale, while the biggest operators encounter diseconomies of scale. Focusing thus on a hypothetical consolidation of the sector, for a sample of 22 contiguous mergers, we apply the not-parametric Data Envelopment Analysis (DEA) in Bogetoft and Wang (2005), corrected for the bias through bootstrapping, to examine the potential efficiency gains from mergers. By decomposing the merger gains into a technical effect, a harmony effect and a scale effect, the results show – on average - high efficiency improvement potentials and relevant scale economies for small mergers. The lowest size to have diseconomies of scale is almost similar in the two applications (45930 users for DEA-VRS bias-corrected model, 37000 users for the Translog cost function estimate for 37 Italian water companies).