We were selected by Ofwat, the economic regulator for the water and sewerage sectors in England and Wales, to examine historical data relating to productivity and unit cost trends, for both operating expenditure and capital expenditure. This work was commissioned as part of the 2009 price control review. The final report (PDF, 190 pages) was published in October 2008.
For operating expenditure, we used two main data sources: data on the operating expenditure of regulated water and sewerage companies; and data relating to changes over time in unit costs and productivity in other industries.
For capital expenditure, our analysis comprises quantitative and qualitative elements. We examined the cost base submissions that companies make to Ofwat; these submissions contain estimates, at different points in time, of the unit costs of specific capital projects. We also examined changes over time in published output price indices for the construction industry and for certain parts of the manufacturing industry. In addition, we engaged an engineering firm to provide a bottom-up analysis of the sources of productivity improvements affecting water and sewerage capital expenditure.
We also carried out a review of recent academic literature on efficiency and productivity in water and sewerage and studies by other consultancies on expenditure trends in other regulated industries.
The approach we took drew on proposals set out in a research project we carried out for UKWIR in 2007.