- 15 -

<u>Table 2. Estimated Cost Function of Water-Sector PPP Operation</u>

|||OL|S|||S|UR||
|---|---|---|---|---|---|---|---|---|
||Coef.|Std.Err.|Coef.|Std.Err.|Coef.|Std.Err.|Coef.|Std.Err.|
|βYw|0.3260|0.0223 <sup>***</sup>|0.3388|0.0238 <sup>***</sup>|0.3349|0.0197 <sup>***</sup>|0.3502|0.0211 <sup>***</sup>|
|βYs|0.1743|0.0135 <sup>***</sup>|0.1728|0.0139 <sup>***</sup>|0.1902|0.0103 <sup>***</sup>|0.1945|0.0106 <sup>***</sup>|
|βYwYw|0.0412|0.0015 <sup>***</sup>|0.0426|0.0017 <sup>***</sup>|0.0438|0.0014 <sup>***</sup>|0.0448|0.0016 <sup>***</sup>|
|βYwYs|-0.0046|0.0015 <sup>***</sup>|-0.0042|0.0015 <sup>***</sup>|-0.0052|0.0013 <sup>***</sup>|-0.0049|0.0014 <sup>***</sup>|
|βYsYs|0.0147|0.0009 <sup>***</sup>|0.0144|0.0010 <sup>***</sup>|0.0149|0.0008 <sup>***</sup>|0.0151|0.0009 <sup>***</sup>|
|βWL|-0.2411|0.1203 <sup>**</sup>|-0.2301|0.1235 <sup>*</sup>|-0.7480|0.0466 <sup>***</sup>|-0.7522|0.0466 <sup>***</sup>|
|βWLWL|0.0981|0.0127 <sup>***</sup>|0.0983|0.0133 <sup>***</sup>|0.1121|0.0044 <sup>***</sup>|0.1126|0.0044 <sup>***</sup>|
|βWLWM|-0.0952|0.0119 <sup>***</sup>|-0.0943|0.0125 <sup>***</sup>|-0.1025|0.0046 <sup>***</sup>|-0.1022|0.0047 <sup>***</sup>|
|βYwWL|-0.0027|0.0015 <sup>*</sup>|-0.0026|0.0015 <sup>*</sup>|-0.0024|0.0009 <sup>***</sup>|-0.0024|0.0009 <sup>***</sup>|
|βYwWM|0.0021|0.0018|0.0017|0.0018|0.0005|0.0012|0.0005|0.0012|
|βYsWL|-0.0033|0.0010 <sup>***</sup>|-0.0031|0.0011 <sup>***</sup>|-0.0037|0.0004 <sup>***</sup>|-0.0035|0.0004 <sup>***</sup>|
|βZw|0.3512|0.1024 <sup>***</sup>|0.3408|0.1056 <sup>***</sup>|-0.1338|0.0328 <sup>***</sup>|-0.1551|0.0351 <sup>***</sup>|
|βZs|-0.0309|0.0175 <sup>*</sup>|-0.0364|0.0188 <sup>*</sup>|-0.0280|0.0152 <sup>*</sup>|-0.0444|0.0163 <sup>***</sup>|
|βZwZw|0.0363|0.0083 <sup>***</sup>|0.0406|0.0088 <sup>***</sup>|0.0414|0.0077 <sup>***</sup>|0.0469|0.0081 <sup>***</sup>|
|βZwZs|0.0054|0.0045|0.0052|0.0046|0.0052|0.0040|0.0055|0.0041|
|βZsZs|-0.0044|0.0011 <sup>***</sup>|-0.0038|0.0015 <sup>**</sup>|-0.0052|0.0010 <sup>***</sup>|-0.0057|0.0013 <sup>***</sup>|
|βYwZw|-0.0142|0.0037 <sup>***</sup>|-0.0169|0.0041 <sup>***</sup>|-0.0165|0.0034 <sup>***</sup>|-0.0193|0.0037 <sup>***</sup>|
|βYwZs|-0.0050|0.0035|-0.0043|0.0037|-0.0032|0.0031|-0.0022|0.0032|
|βYsZw|-0.0042|0.0016 <sup>***</sup>|-0.0049|0.0016 <sup>***</sup>|-0.0047|0.0015 <sup>***</sup>|-0.0056|0.0015 <sup>***</sup>|
|βYsZs|-0.0003|0.0001 <sup>**</sup>|-0.0003|0.0001 <sup>**</sup>|-0.0001|0.0001|-0.0001|0.0001|
|βWLZw|-0.0482|0.0097 <sup>***</sup>|-0.0491|0.0099 <sup>***</sup>|-0.0046|0.0025 <sup>*</sup>|-0.0045|0.0025 <sup>*</sup>|
|βWLZs|0.0046|0.0017 <sup>**</sup>|0.0046|0.0017 <sup>***</sup>|0.0013|0.0007 <sup>*</sup>|0.0013|0.0007 <sup>*</sup>|
|βWMZw|0.0462|0.0094 <sup>***</sup>|0.0457|0.0096 <sup>***</sup>|0.0042|0.0031|0.0023|0.0032|
|Type(Affermage)|||0.1803|0.1347|||0.1014|0.1219|
|Type(Concession)|||0.1533|0.0890 <sup>*</sup>|||0.1823|0.0815 <sup>**</sup>|
|Type(Lease)|||0.0564|0.1103|||0.0557|0.1005|
|Type(Management)|||0.1679|0.0953 <sup>*</sup>|||0.2206|0.0860 <sup>***</sup>|
|Constant|4.3154|0.9540 <sup>***</sup>|4.0391|0.9816 <sup>***</sup>|8.8622|0.3047 <sup>***</sup>|8.6990|0.3209 <sup>***</sup>|
|No. of Obs.|306||306||306||306||
|R-squared|0.9891||0.9893||0.9863||0.9865||
|_F_-statistics|1110.78||947.62||||||
|Chi square|||||31777.2||32735.3||

Note that *, * and *** denote the 10 percent, 5 percent and 1 percent significance levels, respectively. The divestiture case is used as a baseline.

The implied cost elasticity with respect to production is calculated in Table 3. They are all evaluated at the sample means. The cost elasticity of water production is much higher than that of sewerage treatment. A 1-percent increase in water production would raise the operating cost by 0.7 percent. On the other hand, a 1-percent increase in sewerage operation would result in only a 0.1 percent increase in costs. These elasticities seem to generate considerable economies of scale in this industry.

Indeed, the estimated overall scale effect, which is defined in Equation (4), implies that the water-sector PPP operation would be likely to exhibit economies of scale on average. When