Technical inefficiency effects in a stochastic production function for managerial incentives in public water utilities

Performance of state-owned water utilities in developing countries is often weak. This study estimates the impact of managerial incentives upon efficiency using a stochastic frontier production function with revenue water as the output. The empirical analysis utilises unbalanced panelled data consisting of revenue water, connections, operating expenditure, water delivered and staff, from Uganda's 19 National Water and Sewerage Corporation (NWSC) sub-utilities for a 9-year period, 2002–2010. The inefficiency effects are modelled as a function of utility-specific variables: service coverage, level of financial incentives, target difficulty, and year of observation. While financial incentives and increased service coverage improve efficiency, targets (such as the reduction of non-revenue water) that are perceived as excessive by employees may reduce it. The findings suggest some policy implications: utility managers in the public water sector need to incorporate monetary incentives and increase service coverage to reduce non-revenue water. However, targets need to be set with great care and with transparency.