Measuring the marginal costs of reducing water leakage: the case of water and sewerage utilities in Chile

Water leakage in the urban water cycle involves relevant economic, social, and environmental negative impacts. Thus, reducing water leakage is a key challenge for both water regulators and water companies. This study estimated the evolution (2007–2015) of the marginal cost of improving the quality of service in terms of water leakage in the Chilean water industry, which involves full private, concessionary, and public water companies. In water companies, management skills and efforts play an important role in meeting water leakage targets. Thus, this study employed a cost frontier model where it was assumed that unobserved management ability interacts with output and water leakage factors. The results reveal high levels of cost efficiency for the average water company. Management increases outputs and reduces water leakage and, thus, has a positive impact on costs and efficiency. The marginal cost of reducing water leakage is higher for the public water company than for private and concessionary water companies. The average estimated marginal cost of reducing water leakage was 0.349 €/m3, which means that a water company has to spend an extra 0.349 € in operating costs to avoid a cubic meter of water leakage. Some policy implications were discussed based on the results of this study.