Eco-efficiency of Water Supply in Italian Cities

Sustainable management of drinking water has become a major concern of utility operators under the increasing pressure on water resources and needs to guarantee affordability and quality of water service. Generally, the water utilities efficiency has been measured employing either parametric or non-parametric techniques, adopting a production model specification of the water service which includes inputs and only desirable outputs. However, the resulting efficiency measurement is unable to evaluate the true performance of the water utilities because the production process underlying the water service provision unavoidably generates undesirable outputs, i.e., water losses, service interruptions, environmental emission, unacceptable drinking water quality. In this paper, we measure to what extent water losses affect the water utilities efficiency. Water losses generate an “opportunity cost” which increases the production cost of service. Thus, in an “eco-efficiency” perspective, water operators should minimize this cost to improve efficiency. An input-oriented non-parametric Data Envelopment Analysis (DEA) methodological framework and two model specifications of the water service are developed and compared to measure the water loss effect on utilities performance. The effect on efficiency of water losses is estimated by excluding the associated input from DEA model specification and replacing it by a virtual input that avoids having biased comparisons due to the envelopment frontier modification. A sample of 65 Italian water utilities is used to carry out the study. Findings show that water losses decrease efficiency by 3.95% and 6.85%, respectively considering the whole sample and only inefficient water utilities. That will help perform a more effective benchmarking in regulated water markets.