Economies of vertical integration and economies of scope in the water and sewerage sector: Some comments in the light of international empirical evidence

Journal title ECONOMIA PUBBLICA
Author/s Anna Bottasso, Maurizio Conti
Publishing Year 2021 Issue 2021/3
Language Italian Pages 40 P. 89-128 File size 351 KB
DOI 10.3280/EP2021-003005
DOI is like a bar code for intellectual property: to have more infomation click here

Below, you can see the article first page

If you want to buy this article in PDF format, you can do it, following the instructions to buy download credits

Article preview

FrancoAngeli is member of Publishers International Linking Association, Inc (PILA), a not-for-profit association which run the CrossRef service enabling links to and from online scholarly content.

In this paper we address two very relevant issues in the economic debate on the optimal configuration of the water and sewerage industry. In particular, it dis-cusses the international empirical literature that has analyzed the existence of possible economies of scope arising from the joint management of retail and wholesale water services. In this regard, the majority of the studies reviewed tend to identify the existence of non-negligible economies of vertical integration, es-pecially in the case of small and medium-sized operators. In addition, empirical evidence is reviewed regarding the presence of economies of scope between the wastewater treatment and disposal service and the remain-ing parts of the Integrated Water Service chain. From these works it seems to be possible to conclude that economies of scope exist between (some of) the com-ponents of the water and sewerage chain for small and medium sized compa-nies. In particular, such economies would be present in the segments where it is easier to share certain production factors, in addition to technical-managerial expertise, such as the segment related to water purification and that of wastewater treatment and disposal. Finally, the paper discusses the applicability of these results to the Italian case

Keywords: water industry, economies of scope, vertical integration

Jel codes: L51, L95

  1. Abrate G., Bruno C., Erbetta F. Fraquelli G and Giolitti A. (2017). Efficiency in the consolidation of the Italian water industry. Water Resources Management, 31: 2447-2463.
  2. Acutt M. and Reid S. (2012). In whose hands? Exploring vertical integration in the water industry. ICS Consulting.
  3. Amato A. and Conti M. (2005). The economics of the water industry. Technology, ownership and efficiency. Milano: FrancoAngeli.
  4. Armstrong M., Cowan S. and Vickers J. (1994). Regulatory reform. Economic analysis and British experience. MIT Press
  5. Baumol W.J., Panzar J.C. and Willig R.D. (1982). Contestable markets and the theory of industry structure. New York: Harcourt Brace Jovanovich.
  6. Bottasso et al. (2011). The appropriateness of the poolability assumption for multiproduct technologies: Evidence from the English water and sewerage utilities. International Journal of Production Economics, 130: 112-117.
  7. Carvalho P., Cunha Marquez R. and Berg S. (2012). A meta-regression analysis of benchmarking studies on water utilities market structure. Utilities Policy, 21: 40-49.
  8. Carvalho P. and Cunha Marquez R. (2014). Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods. European Journal of Operations Research, 234: 292-307.
  9. Carvalho P. and Cunha Marquez R. (2015). Estimating Size and Scope Economies in the Portuguese Water Sector Using the Most Appropriate Functional Form. The Engineering Economist, 60: 109-137.
  10. Carvalho P. and Cunha Marquez R. (2016a). Estimating size and scope economies in the Portuguese water sector using the Bayesian stochastic frontier analysis. Science of the Total Environment, 544: 574-586.
  11. Carvalho P. and Cunha Marquez R. (2016b). Computing Economies of Scope Using Robust Partial Frontier Nonparametric Methods. Water, 8: 82.
  12. Correia T. and Marques R. (2011). Performance of Portuguese water utilities: how do ownership, size, diversification and vertical integration relate to efficiency?. Water Policy, 13: 343-361.
  13. Daraio C., Simar L. (2007). Advanced robust and nonparametric methods in efficiency analysis: methodology and applications. Studies in Productivity and Efficiency. Springer.
  14. Fabbri P. and Fraquelli G. (2000). Cost and structure of technology in the Italian water industry. Empirica, 27: 65-82.
  15. Fernández D., Londoño G., 2010. Análisis de economías de escala y alcance en los servicios de acueducto y alcantarillado en Colombia. Desarrollo y Sociedad, Secondo semester, 145-182.
  16. Ferro G. (2017). Literature review. Global study on the aggregation of water supply and sanitation utilities. World Bank Group.
  17. Fraquelli G., Piacenza M. and Vannoni D. (2004). Scale and scope economies in multi-utilites: evidence from gas, water and electricity combinations. Applied Economics, 36: 2045-2057.
  18. Fraquelli G. and Moiso V. (2005). The management of cost efficiency in the Italian water industry. Hermes, Working Paper 8.
  19. Garcia S. and Thomas A. (2001). The structure of municipal water supply costs: Application to a panel of French local communities. Journal of Productivity Analysis, 16: 5-29.
  20. Garcia S., Moreaux, Reynaud A. (2007). Measuring economies of vertical integration in network industries: an application to the water sector. International Journal of Industrial Organization, 25: 791-820.
  21. Grossman S. and Hart O. (1986). The costs and benefits of ownership: a theory of vertical and lateral integration. Journal of Political Economy, 94(4): 691-719.
  22. Guerrini A., Romano G., Leardini C., and Martini M. (2015). The Effects of Operational and Environmental Variables on Efficiency of Danish Water and Wastewater Utilities. Water, 7: 3263-3282.
  23. Guerrini A. & Romano G. & Campedelli B. (2013). Economies of Scale, Scope, and Density in the Italian Water Sector: A Two-Stage Data Envelopment Analysis Approach. Water Resource Management, 27: 4559-4578.
  24. Guerrini A., Romano G. and Leardini C. (2018). Economies of scale and density in the Italian water industry: A stochastic frontier approach. Utilities Policy, 52: 103-111.
  25. Hart O. and Moore J. (1990). Property rights and the nature of the firm. Journal of Political Economy, 98(6): 1119-1158.
  26. Hayes K. (1987). Cost structure of the water utility industry. Applied Economics, 19: 417-425.
  27. Hunt L. and Lynk E., (1995). Privatization and Efficiency in the UK Water Industry: an Empirical Analysis. Oxford Bulletin of Economics and Statistics, 57(3).
  28. Kim H. and Clark R. (1988). Economies of scale and scope in water supply. Regional Science and Urban Economics, 18: 479-502.
  29. Kim H. (1995). Marginal costs and second best pricing for water services. Review of industrial organization, 10.
  30. Lynk E. (1993). Privatization, Joint Production and the Comparative Efficiencies of Private and Public Ownership: The UK Water Industry Case. Fiscal Studies, 14(2).
  31. Panzar J. (1989). Technological Determinants of Firm and Industry Structure. in Schmalensee R. and Willig R. (eds). Handbook of Industrial Organization, Volume I, Elsevier.
  32. Malmsten M. and Lekkas D.F. (2010). Cost analysis of urban water supply and waste water treatment processes to support decisions and policy making: application to a number of Swedish communities. Desalination and Water Treatment: Science and Engineering, 18: 327-340.
  33. Marques A. and De Witt K. (2011). Is big better? On scale and scope economies in the Portuguese water sector. Economic Modeling, 28: 1009-1016.
  34. Martins R., Fortunato A. and Coehlo F. (2006). Cost structure of the Portuguese Water Industry: a Cubic Cost Function Application. Universidade de Coimbra, Facultade de Economia. Grupo de Estudos Monetários e Financeiros, Estudos do GEMF, No. 9.
  35. Martins R., Coelho F. and Fortunato A. (2012). Water losses and hydrographical regions influence on the cost structure of the Portuguese water industry. Journal of Productivity Analysis, 38(1): 81-94.
  36. Molinos-Senante M., Maziotis A. (2017). Estimating Economies of Scale and Scope in the English and Welsh Water Industry Using Flexible Technology. Journal of Water Resource, Planning and Management, 143(10).
  37. Molinos-Senante M., Maziotis A. (2018). Flexible versus common technology to estimate economies of scale and scope in the water and sewerage industry: an application to England and Wales. Environmental Science and Pollution Research, 25: 14158-14170.
  38. Nauges C.; van den Berg C. Economies of density, scale and scope in the water supply and sewerage sector: A study of four developing and transition economies. J. Regul. Econ., 34, 144-163.
  39. Pollit M. and Steer S. (2012). Economies of scale and scope in network industries: lessons for the UK water and sewerage industries. Utilities Policy, 21: 17-31.
  40. Prosperetti L. and Ranci P. (1995) Criteri economici nella gestione delle risorse idriche, in Malaman R. (ed). La gestione delle risorse idriche. Bologna: il Mulino.
  41. Prieto Á, Zofio J., Álvarez I. (2009). Economías de escala, densidad y alcance en la provisión pública de infraestructura básica municipal. Hacienda Pública Española, 190: 59:94.
  42. REF Ricerche (2016). Il grossista industriale: da garante dell’approvvigionamento idrico a finanziatore delle opere. Laboratorio SPL-Collana acqua.
  43. ReOPEN SPL (2019). Assetti organizzativi e gestionali del servizio idrico integrato.
  44. Saal, D. and Parker, D. (2001). The Impact of Privatization and Regulation on the Water and Sewerage Industry in England and Wales: a Translog Cost Function Model. Managerial and Decision Economics, 21: 253-268.
  45. Saal .S., Arocena P., and Maziotis A. (2011a). The Cost Implications of Alternative Vertical Configurations of the English and Welsh Water and Sewerage Industry. Aston University ACCIS Working Paper 8.
  46. Saal, D.S., Arocena P., and Maziotis A. (2011b). Economies of Integration in the English and Welsh Water only Companies and the Assessment of Alternative Unbundling Policies. Aston University ACCIS Working Paper 7.
  47. Saal D., Arocena P., Maziotis A. and Triebs (2013). Scale and Scope Economies and the Efficient Vertical Configuration of the Water Industry: A Survey of the Literature. Review of Network Economics, 12: 1.
  48. Stone & Webster Consultants (2004). Investigation into Evidence for Economies of Scale in the Water and Sewerage Industry in England and Wales. Birmingham, Office of Water Services.
  49. Torres M. and Morrison P. (2006). Driving forces for consolidation or fragmentation of the US water utility industry: a cost function approach with endogenous output. Journal of Urban Economics, 59: 104-120.
  50. Urakami T. and Tanaka T. (2009). Economies of scale and scope in the Japanese water industry. mimeo.
  51. Urakami T. (2007). Economies of vertical integration in the Japanese water supply industry. Jahrbuch für Regionalwissenschaft , 27: 129-141.
  52. Williamson O.E. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press.
  53. WRc (2002). Study on the application of competition rules to the water sector in the European Community. Report prepared for the European Commission.

Anna Bottasso, Maurizio Conti, Economie di integrazione verticale ed economie di scopo nel settore idrico e fognario: alcune considerazioni alla luce dell’evidenza empirica internazionale in "ECONOMIA PUBBLICA " 3/2021, pp 89-128, DOI: 10.3280/EP2021-003005