Is big better? On scale and scope economies in the Portuguese water sector

The 'big is better' idea has recently been challenged in network industries. Scale economies are considered finite so that for the individual utility an optimal scale of operations arises. A similar observation yields for scope economies as joint production is not predicted univocally anymore. In the water sector, scale economies and joint production are preferred. Nevertheless, several countries are restructuring the sector in order to improve the scale and scope of operations. This article intends to provide some insights into this matter. We analyze the Portuguese water market structure using non-parametric techniques with data from the year 2005. After surveying the literature on scale and scope economies, we discuss the peculiarities of the Portuguese water sector. The paper confirms the natural monopoly features. Although scope economies are absent, it highlights scale economies. The optimal scale of the utilities is located between 160,000 and 180,000 inhabitants. As such, the Portuguese water sector optimally counts 60 water utilities.

Research Highlights► This paper uses a non-parametric model for performance measurement which is not standard. ► It uses the novel concepts of conditional and robust frontiers to develop the model. ► Returns to Scale (RTS) are incorporated in the non-parametric model. ► The optimal market structure and the RTS of the separate utilities are discussed. ► Using the obtained insights, the Portuguese water market structure is deeply analyzed.