Technical efficiency in the Malaysian water sector: A stochastic frontier approach

The inception of deregulation in the Malaysian water sector can be traced back to the late 1980s although up until the early 1990s, privatization involved the treatment of the water segment only. Previously, both the water distribution and treatment segments were done by the respective states’ public water agencies although the arrangements differed among the 13 states in the country. Further, the privatization approach to state water management was also different among the states that are involved, with some having privatized all segments while some continued with a private-public arrangement, i.e., having privatized the water treatment process but the distribution of water remained publicly-owned. However, there are also fully privatized states while others are fully state-run. Interestingly, water privatization has involved some of the richer and more developed states – the states of Selangor, Johor and P.Pinang among them. We define states as privatized in terms of those that are fully privatized or corporatized. Given the many problems that have been highlighted in the sector despite more than 20 years since the start of the privatization initiative, a reform of the state water management system is perhaps timely and not surprisingly, already underway. The fact that there remains a dearth of empirical research on this industry motivated our interest in this area in the first place. In any case, our paper investigates the effects of privatization and in the process, also identifies the best practiced entities among the state water operators, both private- and publicly-owned ones. To do this, we undertake an empirical analysis of the efficiency in the Malaysian water sector using the approach of stochastic frontier analysis (SFA) for the period of 1999-2008. In this method, we take a cost function approach to measuring the technical efficiency of the state water utilities in the country and found the Pulau Pinang water company to be the most efficient state water utility in the Malaysia water sector although a significant relationship between efficiency and ownership cannot be conclusively ascertained from the statistical evidence of this paper thus suggesting that there may not be much difference between the performance of the private entities and the state-owned ones. The latter is consistent with the existing evidence and studies in other developing countries thus highlighting the limitations of the privatization initiative and at the same time lend support for a reform on the sector, which incidentally, is already on-going. Finally, we also found some scant evidence of little technological improvement thus indicating the problem of capital investment inadequacy over the period analyzed. Classification JEL: P12, N22