Can public sector reforms improve the efficiency of public water utilities? An empirical analysis of the water sector in Mexico using data envelopment analysis

Privatization of public utilities has become a strategy to improve the efficiency of delivery of goods and services traditionally provided by the public sector. It is increasingly being viewed as a solution to the inefficiency of the water sector in developing countries, even if the experience of the United States shows that private water utilities are often not more efficient than public ones. We suggest that the low efficiency of public water utilities is likely to depend less on the type of ownership and more on the monopolistic market structure, on principal-agent problems and on the distorting effects of regulation. This research therefore proposes to evaluate whether public sector reforms can offer an alternative to privatization.;An empirical analysis of the reform program enacted in Mexico at the beginning of the 1990s is conducted. In particular, the impact of three reforms is analyzed: (i) the decentralization of the water services from the state to the municipal level; (ii) the separation of the regulatory from the operational functions; and (iii) the introduction of a law, which allows to cut the water when a customer does not pay.;The methodology used to compute the technical efficiency of the Mexican water utilities is Data Envelopment Analysis (DEA). The sensitivity of the obtained efficiency measures to different specifications of the technology is tested by using Banker's method and the simple bootstrapping procedure. The effect of the reforms on the efficiency measures is then evaluated by using two approaches: (i) the second step econometric regression of the DEA measures, and (ii) the non-parametric Brockett-Golany method.;We find that none of the reforms introduced in Mexico had a positive effect on the technical efficiency of the water utilities. One explanation is that these reforms did not reduce the information asymmetry between the public managers of the water utilities and the local users or regulators. Another explanation is the reforms have not introduced competitive pressures in the monopolistic water sector. It is suggested that the relative efficiency measures computed by DEA could be used for competitive benchmarking.