**1. Introduction**

270 Current Issues of Water Management

Department of Health Services, DHS (2001). "California Health Laws Related to Recycled

Freeman A..Myrick(1993). The Measurement of Environmental and Resource Values.

Hanemann, Michael W., 1991."Willingness To Pay and Willingness To Accept: How Much Can They Differ?" The American Economic Review 81 (3 ), June :635-647 Hanemann, W. M., 1984." Welfare Evaluations in Contingent Valuation Experiments with Discrete Responses." American Journal of Agricultural Economics. 66:332-341. Idelovitch E., Icekson T.N., Avraham O., and Michail M. (2003). "The long-term

Juanico, M. (2008). "Israel as a case study", Chap. 27, in Jimenez and Asano (Ed.) Water reuse, an international survey of current practice, issues and needs, pp483-502. Khan and Roser (2007). "Risk assessment and health effect studies of indirect potable reuse

Environmental Engineering, University of New South Wales, Australia. Law, I. B. (2003). "Advanced Reuse- From Windhoek to Singapore and beyond", Water

McEwen, B. (1998). "Indirect potable reuse of reclaimed water", in Asano T. (Ed.)

Mekorot, Israel National Water Co. (2003). "Dan Region Project – Groundwater Recharge

Mitchell, R. C. and R. T. Carson, 1989. Using Surveys to Value Public Goods: The Contingent

Morrison, Gwendolyn C. 1998., "Understanding the disparity between WTP and WTA:

Sheikh, B., Cooper, C. and Israel, K. (1999). "Hygienic evaluation of reclaimed water used to

Smith, V. K., 1993. "Nonmarket Valuation of Environmental Resources: An Interpretive

State of California (1978). "Wastewater Reclamation Criteria", Title 22, Division 4, California

State of Forida (2004). "2003 Reuse Inventory", Department of Environmental Protection,

Swayne, M., Boone, G., Bauer, D. and Lee, J. (1980). "Wastewater in receiving waters at

Water Pollution Control Federation (1989). "Water Reuse (2nd Edition)", Manual of Practice

Division of Water Resources Management, Tallahassee, Florida.

USEPA (2004). "Guidelines for Water Reuse", EPA 625/R-04/108, Washington, D.C.

SM-3, Water Pollution Control Federation, Alexandria, Virginia.

Valuation Method. Washington, D. C. : Resources for the Future.

http://www.mde.state.md.us/assets/document/WatRuse07-7%20Gelot.pdf

http://www.epwu.org/wastewater/fred\_hervey\_reclamation.html

Resources for the Future, Washington,, D. C.

Technology Water Supply, Vol. 3, No. 4, pp. 239-246.

Library, Vol.10, Technomic Publishing, Lancaster, PA.

with Municipal Water", Brochure of Introduction.

Appraisal" Land Economics, 69(1):1-26.

Engineering Section. Berkeley, California.

Agency, Washington, D.C.

2001 Edition.

El Paso Water Utilities (2007).

Vol.30(5), pp31-36

59:189-194.

pp261-7.

Department of Water Resources of Georgia (2007).

Water", State of California, Department of Health Services, Sacramento CA, June

performance of Soil Aquifer Treatment (SAT) for effluent reuse", Water Science

schemes", Center for Water and Waste Technology, School of Civil and

Wastewater Reclamation and Reuse. Chapter 27. Water Quality Management

endowment effect, substitutability, or imprecise preferences?" Economics Letters

irrigate food crops – A case study", Water Science and Technology, Vol.40 (4-5),

Code of Regulations, State of California, Department of Health Services. Sanitary

water supply abstraction points", EPA-60012-80-044, US Environmental Protection

The analysis of the current German Benchmarking approach and an extension with efficiency analysis techniques seems to be a very specific topic at first sight. However, at second sight it turns out that this question is relevant for many European countries. The reason is that many countries share a similar structure of their water sector which then implies similar challenges.

A first similarity in most European countries is that local governments are the responsible bodies for providing water services. They can decide if they want to perform the service themselves or if they contract it out to private companies. Figure 1 shows that they predominantly transfer the task to publicly owned companies. It is worth noting that Figure 1 displays the percentage of *population served* by either a public, a private or a mixed operator. If it would show the number of companies then the percentage of private companies in relation to all would diminish drastically. The same holds true if the term "privatization" would be specified more clearly. In Germany, for example, it ought to be distinguished if a company is only formally privatized, which means that the shareholders remain public, or if a company is really materially privatised.

A second observation for the various European countries is that the water sector is very fragmented.1 EUREAU (2009, p. 94) is counting 600,000 jobs for more than 70,000 water services operators. On average a water service provider would employ less than 10 people. The structure is thus mainly publicly organized and rather fragmented.

At the same time, tariffs are now supposed to cover all costs.2 In addition, immense investments will be needed in many European countries to fulfill the various European Directives.3 Both developments will lead to significantly higher water prices in the future. It

<sup>1</sup> The Netherlands, England/Wales or Scotland are examples of countries where rather large companies prevail.

<sup>2</sup> This cost recovery principle is introduced in Art. 9 of the Water Framework Directive 2000/60/EC.

<sup>3</sup> A good description of the various important European directives is available under

http://ec.europa.eu/environment/water/water-dangersub/76\_464.htmDirectives.

Analysis of the Current German Benchmarking

**Actual value**

**Deviation**

**Comparison of key indicators**

Fig. 2. Concept of Benchmarking (BDEW, 2010, p.4)

characterized by a continuous process to learn from the best.

figure.

**Benchmark**

Approach and Its Extension with Efficiency Analysis Techniques 273

techniques like Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) as means to better analyze data. In the fourth section we introduce the employed database. Section five displays the best models to explain cost differences for small, middle and large water service providers in the distribution of water in Germany – something which has never been done for the German water supply sector. In section six we practically describe what kind of information a company, which is participating in such an enhanced benchmarking approach, can expect. The paper ends with a brief conclusion and outlook.

Benchmarking can be defined as "the process whereby a company compares and improves its performance by learning from the best in a selected group" (BDEW, 2010, p. 4). 36 of such, so called *process benchmarking* projects are carried out in the German water and wastewater sector (ATT et al., 2011, p. 94ff.). Parts of the value chain are analyzed in detail mainly between a limited number of companies. Up to 20 companies are participating in the various projects (ATT et al., 2011, p. 94ff.). The concept is displayed in the following

**ANALYSIS**

**Quantifiable Concrete measures** Short, medium and long-term **Non-quantifiable measures**

**Implementation**

**Future actual value (after realisation)**

To be investigated, Currently not explainable

**Non-variable**

**Deviation from benchmark**

**BENCHMARKING**

The process starts out with a comparison of key indicators. For each single company the deviation between its actual value and the benchmark is determined. The different factors which may explain the difference are then intensely discussed between the specialists of the companies for the particular process. Quantifiable measures which are then implemented shall diminish the gap between own value and benchmark. The relative efficiency of the company within this particular process increases. Process benchmarking is, therefore,

The 36 water and wastewater programmes have approximately 12 participants, on average. Very often the same companies take part in several projects covering different processes. For

**FEEDBACK**

**2. Current benchmarking in the German water supply sector** 

**Hypothetical potential**

can be expected that the public in many European countries will hold the companies accountable to show that they are performing efficiently.

Fig. 1. Ownership structure of European water service providers 2008 (EUREAU, 2009, p. 93)

The provision of water supply is a natural monopoly which implies that companies are not sanctioned if they are inefficient. A water utility regulator and the economic regulation of water supply and wastewater companies is thus an important issue which is discussed internationally.4 The problem, however, is that in countries with a very fragmented structure of the industry a complex economic regulatory framework, like in England & Wales or Scotland, is not applicable for the majority of providers. At the same time, privatisation is not always worth considering: a precondition for a successful privatisation is that public authorities have the knowledge and the data to supervise the private service provider. Otherwise, a public monopoly is only transferred into a private one (Newberry, 2003, p.4). Many European countries are thus considering a third approach: benchmarking. Such a benchmarking system compares companies with one another according to certain indicators. It generally serves two purposes: First, it shall be a measure to increase transparency in the sector. Displaying reports which are publicly available are supposed to enhance accountability of companies. Second, performance benchmarking systems evolve which analyze certain processes within the company in more detail and give, therefore, insight to companies where they could enhance their efficiency.5

The main question for this paper is to analyze the potential of benchmarking. We will use the German experiences with the current approach and will answer the question if the current system can be enhanced by applying efficiency analysis techniques. Can we expect that such an enhanced benchmarking will imply that a regulator is redundant?

The remainder of this article is structured as follows. In the following, second, section we will briefly present the concept of benchmarking as well as the current use of benchmarking in Germany. Its deficiencies imply the need, in the third section, to portray alternative

<sup>4</sup> International regulatory approaches for water and wastewater services are portrayed in Marques (2010).

<sup>5</sup> For a short portray of European benchmarking approaches see Marques/De Witte (2007).

can be expected that the public in many European countries will hold the companies

Fig. 1. Ownership structure of European water service providers 2008 (EUREAU, 2009, p. 93)

The provision of water supply is a natural monopoly which implies that companies are not sanctioned if they are inefficient. A water utility regulator and the economic regulation of water supply and wastewater companies is thus an important issue which is discussed internationally.4 The problem, however, is that in countries with a very fragmented structure of the industry a complex economic regulatory framework, like in England & Wales or Scotland, is not applicable for the majority of providers. At the same time, privatisation is not always worth considering: a precondition for a successful privatisation is that public authorities have the knowledge and the data to supervise the private service provider. Otherwise, a public monopoly is only transferred into a private one (Newberry, 2003, p.4). Many European countries are thus considering a third approach: benchmarking. Such a benchmarking system compares companies with one another according to certain indicators. It generally serves two purposes: First, it shall be a measure to increase transparency in the sector. Displaying reports which are publicly available are supposed to enhance accountability of companies. Second, performance benchmarking systems evolve which analyze certain processes within the company in more detail and give, therefore,

The main question for this paper is to analyze the potential of benchmarking. We will use the German experiences with the current approach and will answer the question if the current system can be enhanced by applying efficiency analysis techniques. Can we expect

The remainder of this article is structured as follows. In the following, second, section we will briefly present the concept of benchmarking as well as the current use of benchmarking in Germany. Its deficiencies imply the need, in the third section, to portray alternative

4 International regulatory approaches for water and wastewater services are portrayed in Marques

that such an enhanced benchmarking will imply that a regulator is redundant?

5 For a short portray of European benchmarking approaches see Marques/De Witte (2007).

accountable to show that they are performing efficiently.

insight to companies where they could enhance their efficiency.5

(2010).

techniques like Data Envelopment Analysis (DEA) and Stochastic Frontier Analysis (SFA) as means to better analyze data. In the fourth section we introduce the employed database. Section five displays the best models to explain cost differences for small, middle and large water service providers in the distribution of water in Germany – something which has never been done for the German water supply sector. In section six we practically describe what kind of information a company, which is participating in such an enhanced benchmarking approach, can expect. The paper ends with a brief conclusion and outlook.
