Nonparametric Benchmarking of Japanese Water Utilities: Institutional and Environmental Factors Affecting Efficiency

Abstract

Although the Japanese water sector is economically and socially important, few empirical studies are available to help analysts and policy-makers understand the performance patterns in the industry. This study applies data envelopment analysis to 5,538 observations of 1,144 utilities that supplied drinking water between 2004 and 2007. With a comprehensive census of utilities, the present study controls for many factors affecting efficiency: region, prefecture, ownership/governance, water source, vertical integration (purchased or produced alone), water or integrated system, production, treatment, transport and distribution of water), peak factor, per capita consumption, customer density, water losses, monthly water charge, outsourcing, subsidies, gross prefecture product, and time. Thus, this study derives comprehensive conclusions regarding efficiency patterns in Japan. The analysis finds that the average level of inefficiency (weighted by volume) is 57% in the constant return to scale model, but only 24% for the (more flexible) variable return to scale model. Improving sector efficiency and transferring funds to more innovative sectors rather than using scarce funds to subsidize water distribution would benefit citizens. Thus, the application of advanced quantitative techniques to Japanese water utilities improves the understanding of efficiency patterns and underscores the importance of in-depth studies of the individual factors examined in this study.