Determining the contribution of technical change, efficiency change and scale change to productivity growth in the privatized English and Welsh water and sewerage industry: 1985–2000 David S. Saal Æ David Parker Æ Tom Weyman-Jones Published online: 21 June 2007 Ó Springer Science+Business Media, LLC 2007 Abstract The water and sewerage industry of England and Wales was privatized in 1989 and subjected to a new regime of environmental, water quality and RPI+K price cap regulation. This paper estimates a quality-adjusted input distance function, with stochastic frontier techniques in order to estimate productivity growth rates for the period 1985–2000. Productivity is decomposed so as to account for the impact of technical change, efficiency change, and scale change. Compared with earlier studies by Saal and Parker [(2000) Managerial Decision Econ 21(6):253–268, (2001) J Regul Econ 20(1): 61–90], these estimates allow a more careful consideration of how and whether privatiza- tion and the new regulatory regime affected productivity growth in the industry. Strikingly, they suggest that while technical change improved after privatization, productivity growth did not improve, and this was attributable to effi- ciency losses as firms appear to have struggled to keep up with technical advances after privatization. Moreover, the results also suggest that the excessive scale of the WaSCs contributed negatively to productivity growth. Keywords Water  Productivity  Efficiency  Privatization  Price cap regulation  Environmental qualify JEL Classification D24  L95  L33  L51 1 Introduction The English and Welsh water and sewerage industry was privatized in 1989 as part of the Thatcher government’s larger privatization program. 1 The state owned Regional Water Authorities (RWAs) became public limited compa- nies, while simultaneously, 29 private water companies, which previously had highly regulated capital structures, also became quoted companies. After privatization the industry was therefore composed of 10 Water and Sewer- age Companies (WaSCs) providing both water supply and sewerage services and 29 Water only Companies (WoCs). This study is concerned only with the performance of the WaSCs. However, the exclusion of the WoCs from the research does not significantly detract from the results, because only WaSCs were subject to privatization and they dominate the industry accounting for all sewerage services and 90 percent of water customers. At privatization a new regulatory regime was introduced not only to provide economic regulation given that WaSCs and WoCs remained monopoly suppliers in their local areas, but to provide environmental and drinking water quality regulation. Water quality is now policed by the Drinking Water Inspectorate (DWI) and the Environment Agency (EA). Improvements in quality standards have D. S. Saal (&) Economics and Strategy Group & Centre for Perfomance Measurement and Management, Aston Business School, Aston University, Birmingham B4 7ET, UK e-mail: D.S.Saal@aston.ac.uk D. Parker Cranfield Centre for Competition and Regulation Research, Cranfield University School of Management, Cranfield MK43 0AL, UK e-mail: david.parker@cranfield.ac.uk T. Weyman-Jones Department of Economics, Loughborough University, Loughborough LE11 3TU, UK e-mail: T.G.Weyman-Jones@Lboro.ac.uk 1 This study is concerned only with the industry in England and Wales. Water and sewerage services in Scotland and Northern Ireland remain state owned. 123 J Prod Anal (2007) 28:127–139 DOI 10.1007/s11123-007-0040-z