The Effects of Consolidation amongst Japanese Water Utilities: A Hedonic Cost Function Analysis

In many parts of the world, water is supplied by very small, local undertakings. In recent years, there has been a move to consolidation of these utilities in a number of countries. This paper looks at the economic effects of consolidation of Japanese water utilities in the period 1999-2006 using translog cost functions with a hedonic output specification. The results clarify what factors have been most affected in terms of the cost structure of the water utilities after consolidation. Overall, the finding is that consolidation has had some beneficial impact on cost effectiveness, but that the result is surprisingly limited. This appears to be because cost savings from an improvement in the use of scarce water resources have been offset by extra expenditure on supplying water to areas with lower population density.