Productivity growth and price regulation of Slovenian water distribution utilities

This paper aims to analyse the price regulation method and performance of thewater industry in Slovenia. A stochastic cost frontier model is employed to estimate and decompose the total factor productivity (TFP) growth of water distribution utilities in the 1997-2003 period. The main goal is to find out whether the lack of proper incentives to improve performance has resulted in the low TFP growth of Slovenian water distribution utilities. The evidence suggests that cost inefficiencies are present in water utilities, which indicates considerable cost saving potential in the analysed industry. Technical change is found to have positively affected the TFP growth over time, while cost inefficiency levels remained essentially unchanged. Overall, the average annual TFP growth in the analysed period is estimated to be only slightly above zero, which is a relatively poor result. This can largely be contributed to the present institutional and regulatory setting that does not stimulate utilities to improve productivity. Therefore, the introduction of an independent regulatory agency and an incentive-based price regulation scheme should be seriously considered in order to enhance the performance of Slovenian water distribution utilities.