Discussion Paper No. 146 of 2013 on Cost Efficiency and Scale Economies of Kenya's Water Service Providers

Abstract

Kenya has adopted Integrated Water Resources Management and instituted water sector reforms, which have led to commercialization of water supply and sanitation (WSS) services to enhance sustainability in the management of waterresources and improve water supply efficiency. Inefficiencies in water utilitiesare a major cause of poor access to WSS. This study seeks to estimate which size of water service providers is operationally efficient and to establish an optimal size after determining the impact of key sector variables on the cost structure of the Kenya’s WSPs. A variable cost function with outputs, input prices and network characteristics is formulated as a transcendental logarithmic mode land estimated using panel stochastic frontier analysis. Results show that the volume of water produced and treatment level, prices of inputs (materials and administration), the number of connections, unaccounted for water, staff productivity and also the population density per connection influence the running costs and affect the cost efficiency of WSPs. The cost efficiency across WSPs regardless of the size is nearly nonexistent at around 1.1 percent and economies of scale, output and customer density are consistently present only in the medium and large WSPs. The very large and small firms exhibit negative economies of scale and should not be expanded further. Instead, the small WSPs may be merged to form medium or large firms. These exhibit positive economies and serve an average of 800,000 people each year. The very large ones may be retained at their current size.