What Determines Efficiency? An Analysis of the Italian Water Sector

The Italian water sector has encompassed major changes since mid?90s when law 96/94 has entered into force. Next to private participation, integration of services and growth in production scales, the reform was intended to revolutionize the traditional financial model almost fully based on public funds. Although citizens, politicians and experts on water services have been debating for a long time on the impact of the reform on the industry, as well as on the fairness of a tariff system inspired by the concept of full cost recovery, we are still on a state of uncertainty. The final purpose of this paper is to provide regulators with guidelines that could be used to revise water tariffs in a way that may be cost?efficient, sustainable and fair to the most. According to the analyses, which rely on firm?specific Xinefficiency scores, despite a satisfactory mean level of performance, in the period under investigation, efficiency improvements have been limited. Moreover, the results demonstrate that both the ownership structure and politics do have an impact on the efficiency of the firms: in particular, public shareholding and centreright local governments negatively affects firms’ performances. To this respect, we think that a more effective regulation would also have the side effect of loosening the ties between politicians and managers.