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Name:Cost efficiency and scale economies of Kenya’s water service providers
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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 water
resources and improve water supply efficiency. Inefficiencies in water utilities
are 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 model
and 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.

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