Returns to scale in water and sanitation: estimates for Latin America

Abstract

Most countries around the world are strongly debating ways to yield more equitable access and a more efficient provision. One issue linked to efficiency is the achievement of scale economies in the industry and the optimal dimension of water and sanitation providers. Changes in the industrial structure of the sector, through mergers in highly atomized services, the breakup of very concentrated services, or the property discussion (private versus public) are major issues. These decisions have often become politicized because of the social complexity of the sector. Empirical findings of the different models reveal the existence of increasing returns to scale in Latin American water provision based on an ADERASA database (a 2005 cross section of 90 providers in 14 countries). The study of returns to scale incorporates a technical argument into the discussion because–as our study suggests–the prescription could be to agglomerate small providers.