Africa faces increasingly critical resource constraints in its efforts to extend water services of acceptable quality to the vast majority of its people. The inefficiency of water utilities is often identified as one of the major factors in explaining the slow progress and the many setbacks in improving access to water and water distribution. Yet, is understanding of the situation adequate for economic regulators to introduce explicit performance incentives in the regulation of utilities operators in African countries?
This World Bank policy research working paper analyses the determinants of the efficiency levels reached by twenty-one African water utilities. Efficiency is assessed through the estimation of a production frontier for the water sector in Africa. The paper also quantifies the joint effect of various institutional sources of inefficiencies and in particular assesses the costs of the interaction between inefficiency and major institutional problems, in particular governance problems affecting many African countries. The results of the study provide preliminary evidence on the performance of water utilities. The findings suggest that many of the water utilities operate at technical efficiency levels well below a best-practice frontier that is determined by the relatively efficient ones from the group. Only about 12.9 per cent of the water utilities operate efficiently as compared to their peers. This finding supports the commonly held view that Africa’s water sector operates at unacceptable levels of technical inefficiency. What is surprising is the extent of the problem.
The main problems are caused not by the water sector itself. Governance issues and the weakness of institutions contribute to explaining the bad performance of the water sector. Other conclusions are:
- Continuing the public or private financing of the water sector without significant efficiency improvements is a major waste of scarce resources in the region
- Efficiency savings exceed revenue from user fees which implies that average tariff levels continue to be higher than they would be if firms were operated efficiently
- The impact of technological improvement on the performance of the water industry in Africa is quite limited
- Privatisation of the water supply service is positively linked to efficiency.
Improvement in the efficiency of the water sector should go a long way to financing the need to improve access and quality of water production and distribution. The policy implications can be summarised as follows:
- Water should become more accessible and more affordable
- Private operators should be given priority in financing water sector improvement
- The problems of corruption and good governance need to be addressed at the same time as water sector improvement.
