Investigating the key factors influencing the profitability of Romanian public water supply and sewerage services

Aivaz, Kamer-Ainur et al. Article Investigating the key factors influencing the profitability of Romanian public water supply and sewerage services Amfiteatru Economic Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Aivaz, Kamer-Ainur et al. (2025) : Investigating the key factors influencing the profitability of Romanian public water supply and sewerage services, Amfiteatru Economic, ISSN 2247-9104, The Bucharest University of Economic Studies, Bucharest, Vol. 27, Iss. 70, pp. 1209-1220, https://doi.org/10.24818/EA/2025/70/1209 This Version is available at: https://hdl.handle.net/10419/328043 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Amfiteatru Economic recomandă AE Vol. 27• No. 70 • May 2025 1209 INVESTIGATING THE KEY FACTORS INFLUENCING THE PROFITABILITY OF ROMANIAN PUBLIC WATER SUPPLY AND SEWERAGE SERVICES Kamer-Ainur Aivaz 1, Dorin Jula 2, Octavia Moise 3, George Banghiore 4, Diane Paula Corina Vancea 5 and Andreea Simona Săseanu 6 1),5) Ovidius University of Constanta, Constanta, Romania 2) Institute of Economic Forecasting, Romanian Academy, Ecological University, Bucharest, Romania 3),4) Romanian Academy, School of Advanced Studies of the Romanian Academy, Doctoral School of Economics of the National Institute of Economic Research Constantin C. Kirițescu, Bucharest, Romania 6) Academy of Economic Studies, Bucharest, Romania Please cite this article as: Aivaz, K.A., Jula, D., Moise, O., Banghiore, G., Vancea D.P.C. and Săseanu A.S., 2025. Investigating the Key Factors Influencing the Profitability of Romanian Public Water Supply and Sewerage Services. Amfiteatru Economic, 27(70), pp. 1209-1220. DOI: https://doi.org/10.24818/EA/2025/70/1209 Article History Received: 16 March 2025 Revised: 8 May 2025 Accepted: 5 June 2025 Abstract This paper explores the dynamics of the public water supply and sewerage service in Romania, focusing on the relationships between different operational, commercial and financial variables and their impact on the operating profit rate. The aim of the paper is to analyze the interactions, both in the short and in the long term, between these economic variables, using an advanced econometric methodology, by applying the ARDL (Autoregressive Distributed Lag) model. The analysis was carried out on a dataset of 11 annual cycles, allowing to assess the stability and dynamics of the relationships studied. The results indicate a positive correlation between water infrastructure expansion and the rate of profit, suggesting that investments in network length can contribute to the economic growth of the sector. In contrast, tariff increases showed a long-term negative impact on the profit rate, reflecting consumers' sensitivity to price changes. Efficient management of non-revenue water and damage reduction were also found to be key to improve financial performance and increase sustainability. The paper provides an in-depth understanding of market mechanisms and can support the development of more effective public policies for water resource management in the context of current socio-economic and environmental challenges.  Autor de contact, Andreea Simona Săseanu – e-mail: [email protected] This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2025 The Author(s). AE Investigating the key factors influencing the profitability of romanian public water supply and sewage services 1210 Amfiteatru Economic Keywords: water supply management, profitability, PMG/ARDL modeling, tariff impact, infrastructure, sustainability. JEL Classification: C19, D49, E21, H41, Q25. Introduction Whether we are environmentally oriented or not, sustainability is now a topic that needs more attention. It is concerned to obtain profit while conserving natural resources, and economic and political decision-makers need to understand that their organizations will not be able to survive (on their own) if they do not pay more attention to how they use often limited resources (Jora et al., 2020). Within Romania's current economic landscape, the public water supply and sewerage service plays an important role, both in terms of the essential services it provides and in terms of its economic impact on the operators involved. This study aims to explore the economic dynamics of this sector, focusing on the analysis of the operating profit rate for the water activity over the period 2013-2023. By identifying trends and fluctuations, the research intends to provide a broad perspective on the efficiency and profitability of regional water operators across the country. While investigating key variables such as the number of pipeline failures, which may reflect the technical condition and infrastructure investment needs, the study also pays particular attention to consumption measurement tools such as meters installed at economic agents and institutions as well as at household consumers. These are essential indicators for billing efficiency and cost recovery. The length of water networks is also analyzed in the context of the extension and maintenance needed to ensure a quality service. The total operating expenses of the water activity and the revenues generated from the same activity are also analyzed to determine how they influence sector profitability. Furthermore, the study also addresses the issue of non-revenue water, which is key to understanding systemic losses and overall efficiency. The average water tariff and operating rate of return on water activity are examined to understand the impact of pricing policies on the financial sustainability of operators. Through this comprehensive analysis, the research aims to identify correlations and trends that can be used to formulate policy recommendations for optimizing the performance of the water supply sector, thus contributing to a better understanding of the economic context and to the development of sustainable public policies. In addition to the introduction of many specific factors influencing the profitability, the novelty of this study lies in the use of the PMG/ARDL (Pooled Mean Group/Autoregressive Distributed Lag) econometric model. This is a panel analysis that combines the flexibility of modeling in time and space with the ability to distinguish between short-run and long-run dynamics. Amfiteatru Economic recomandă AE Vol. 27• No. 70 • May 2025 1211 1. Literature review Recent studies emphasize that implementing sustainable practices can lead not only to improved environmental protection but also to enhanced financial performance for corporations. Ameer and Othman (2012) highlight that firms that adopt high-performing sustainable practices experience better financial performance, an observation that underscores the importance of integrating these practices into the strategic planning of water companies. In well as the financial aspects, resource efficiency is becoming essential for the long-term sustainability of the sector. A number of studies suggest that improved indicators of water use contribute to more efficient conservation and increased productivity, an important issue for Romanian water operators facing challenges related to making consumption more efficient and minimizing losses (Pereira, Cordery and Iacovides, 2012). Roca and Searcy (2012) show that corporate sustainability reports, through the indicators they reveal, provide an important assessment basis for transparency and commitment to sustainable practices. In a similar context, Ahi and Searcy (2015) discuss the importance of introducing a mathematical model for assessing sustainability in green and sustainable supply chains, emphasizing the need for an accurate and diversified performance assessment that also includes water and energy consumption aspects. Wada and Bierkens (2014) introduce a new indicator, the water resource sustainability index that assesses the unsustainable use of water resources at the global level, a relevant perspective for assessing the impacts of excessive water extraction in Romania. The adoption of relevant global and local indicators, such as those proposed by D'Inverno, Carosi and Romano (2021), which integrate sustainability and quality of service measures in performance assessment, can support Romanian regional water operators to improve not only their economic efficiency but also their contribution to sustainable development goals. The review of the literature in the field of water supply management highlights a growing interest in performance assessment of water and wastewater infrastructures and private sector involvement in this field, which are essential for understanding the complexities associated with efficient and sustainable water resources provision. Recent studies add new insights into the ways in which public-private partnerships (PPPs) and R&D investments can influence the performance and sustainability of water services (Chan and Ameyaw, 2013; Chan et al., 2015; Cheung and Chan, 2011). In another register, Trujillo and Estache (2005) discuss infrastructure performance in developing and transition economies, emphasizing the importance of structural reforms for increasing productivity in utilities. These issues are important for understanding how policies and regulations can influence the efficiency of the water supply sector (Xu, Chen, Zhu, & Zhu, 2022). These studies, through their geographic and thematic diversity, illustrate the complexity of water resource management and the need for an integrated approach that combines technical expertise, innovation, and sensitivity to the socio-political context to promote water management practices that are both efficient, equitable and sustainable. 2. Dates and methodology The aim of this study was to analyze the shortand long-term interactions between economic, financial and environmental variables that influence the profitability of public water supply and sewerage services. To this purpose, the following objectives were set: a) to identify the economic, financial and environmental factors that may influence the AE Investigating the key factors influencing the profitability of romanian public water supply and sewage services 1212 Amfiteatru Economic profitability of public water supply and sewerage services; b) to investigate the shortand long-term dynamic relationships between the selected variables, using the ARDL model. To achieve these objectives, we formulated the following research hypotheses: Hypothesis 1: The enlargement of the water supply and sewerage infrastructure is positively correlated with the increase in profitability of the sector in Romania. Hypothesis 2: There is a negative relationship between increased tariffs for water services and their accessibility to the population. Hypothesis 3: The implementation of modern technologies in water resources management leads to a significant improvement in efficiency and a reduction in non-revenue water. One of the most important financial indicators used is the operating profit rate for the water activity (RPr), which measures the percentage of profit earned from the operating revenues of the water activity. This indicator is essential for assessing the efficiency with which resources and expenditure are managed in water activities. The average water tariff (WT) is another relevant financial indicator, representing the average price per cubic meter charged to consumers. It directly influences the total operating revenues for the water activity (VE), which together with the total operating expenses for the water activity (CE) complete the financial picture of the sector. Analyzing these variables allows us to understand not only the cost structure, but also the capacity of the sector to generate sufficient revenues to cover expenses and to invest in maintenance and expansion of services. From a technical perspective, the total length of water networks (LRA) provides insight into the extent of infrastructure that needs to be maintained and upgraded. At the same time, the number of pipe failures (AvC) is a critical indicator of the technical condition of the network, reflecting the frequency and severity of incidents that may affect the continuity and quality of water supply service. Non-revenue water (NRW), expressed as a percentage, indicates the volume of water lost through leakage, theft or inaccurate metering and is a barometer of the efficiency and integrity of the network. In terms of the commercial variables, the number of meters installed at Consumers, Economic Agents and Institutions (CAE) and Household Consumers (CCC) are essential for monitoring water consumption and accurate billing. They help to optimize revenues and reduce non-revenue water, while ensuring transparency and equity in relations with consumers. The combination of these indicators provides a solid basis for assessing the performance of the public water supply and sewerage service and for identifying opportunities to improve efficiency and sustainability. This detailed analysis not only supports the formulation of appropriate policies and strategies, but also facilitates the dialog between the stakeholders involved, from regulators and operators to final consumers. The indicators used in this analysis, which includes all regional public operators in Romania (43 operators), have been extracted from the Benchmarking Reports of these regional operators corresponding to the period 2013-2023. Regarding the nature of the data series, subject to the small size in time of the analyzed series, unit root tests reject the null hypothesis (as a joint process, or as individual processes) at the p < 10-4 threshold for the AvC (pipeline failures) and NRW (non-revenue water) series. For the remaining data series, the tests do not reject the unit root null hypothesis, and all tests reject the unit root for the series calculated by differencing. Although the tests are not all concordant, the uncertainty generated by the non-concordance Amfiteatru Economic recomandă AE Vol. 27• No. 70 • May 2025 1213 of the unit root tests in the panel does not generate problems for the econometric modeling, as long as all tests reject the non-stationarity hypothesis for the differenced series, i.e. the series are not I(2), and the models used are of the Pooled Mean Group/Autoregressive Distributed Lag Models (PMG/ARDL) type. Using econometric models, we evaluated the impact of some system variables on the operating profit rate for the water activity (RPr). The profit rate is calculated (equation 1) based on the total operating revenue (VE) and the total operating expenses of the water activity (CE). VE CE RPr 100 VE   (1) Since the linear correlation coefficients between the number of meters at business and institutional consumers (BEC) and the number of meters at household consumers (HCC) exceed 0.8 (Table 1), we constructed separate models so that the variables on BEC, HCC are not simultaneously in the model including the length of the network. Table no.1 Correlation coefficients RPR CAE CCC LRA AVC NRW TM CE VE RPR 1 0.159 0.082 0.124 0.060 -0.015 0.009 0.068 0.149 CAE 0.159 1 0.859 0.839 0.657 0.061 0.110 0.887 0.890 CCC 0.082 0.859 1 0.832 0.614 0.031 0.237 0.809 0.800 LRA 0.124 0.839 0.832 1 0.714 -0.030 0.147 0.863 0.868 AVC 0.060 0.657 0.614 0.714 1 0.116 0.103 0.740 0.734 NRW -0.015 0.061 0.031 -0.030 0.116 1 0.078 0.046 0.031 TM 0.009 0.110 0.237 0.147 0.103 0.078 1 0.253 0.232 CE 0.068 0.887 0.809 0.863 0.740 0.046 0.253 1 0.991 VE 0.149 0.890 0.800 0.868 0.734 0.031 0.232 0.991 1 Source: Authors' calculations in EViews The PMG/ARDL econometric model used represents an advanced approach to panel data analysis that combines the flexibility of modeling over time and space with the ability to distinguish between short-run and long-run dynamics. This methodology is very useful in the context of economic studies that analyze multi-year effects across different entities or groups (in our case regional operators), allowing a detailed analysis of how variables interact over time. The ARDL model allows the separation of long-run relationships from short-term (conjunctural) relationships, and the data series can be stationary, or nonstationary, integrated of order 1. By using the PMG/ARDL model to study the water supply sector, we can observe not only the immediate effects of changes in policy or market conditions, but also how these changes influence the sector in the long term. 3. Results Starting from the general form of the PMG/ARDL model described by Pesaran, Shin and Smith, (1999, p. 625), in the form transformed by Jula and Jula (2019, pp. 265-270), for the profit rate, we obtained the following model: AE Investigating the key factors influencing the profitability of romanian public water supply and sewage services 1214 Amfiteatru Economic RPrit = αi·[RPri,t-1 – β1LRA i,t-1 – β2TMi,t-1 – β3NRWi,t-1 – β4(AvC/LRA) i,t-1] + [γ1,id(RPri,t-1) + γ2,id(LRAi,t) + γ3,id(LRAi,t-1) + γ4,id(NRWi,t) + γ5,id(NRWi,t-1) + γ6,id(TMi,t) + γ7,id(TMi,t-1) + γ8,id((AvC/LRA)i,t) + γ9,id((AvC/LRA)i,t-1] + μi + δt + et (2) where: RPr = operating profit rate for the water activity (%) LRA = total length of water networks (hundreds of km) TM = average water tariff (RON/m3) NRW = non-revenue water (%) AvC = pipe failures (hundreds of failures) αi= cointegration coefficient (i.e. equilibrium adjustment coefficient) β1,..., β4= coefficients in the long-run relationship γ1,i, ..., γ9,i = coefficients in the short-run dynamics equation μi= individual (time invariant) specific fixed effects δt= specific fixed effects in time (cross-section invariant) e = idiosyncratic error. The estimation results of the PMG/ARDL (1,1,1,1,1,1,1,1) model are summarized in regression equation (3). (3) The long-run equilibrium relationship is: RPrt = 0.9716·LRAt – 1.1938·TMt – 0.4364·NRWt – 0.9696·(AvC/LRA)t (4) All the coefficients in the long-run equilibrium equation (equation 4) are significant at a threshold < 10-4, and the error correction coefficient (-0.5159) is negative, subunit and statistically significant (likewise at a threshold < 10-4). This means that an equilibrium level perturbation is absorbed in the system in less than two years (1/0.5159 ≈ 1.94). The coefficients for the impact of the total length of water networks (LRA), the share of non-revenue water (NRW) and the number of pipeline failures (AvC) on the rate of return (RPr) are as expected. Increasing the total length of water networks (LRA) by 100 km is associated, as a long-run relationship, with an increase in the profit rate by almost one percentage point (the estimator is 0.97 percentage points). We explain this dynamic by the fact that the length of the water network is positively correlated (Table1) with the number of meters at household Amfiteatru Economic recomandă AE Vol. 27• No. 70 • May 2025 1215 consumers (CCC) and at consumers of economic agents and institutions (CAE), and these variables influence total operating revenues (VE). The ARDL model constructed for these variables is summarized in equation 5. (5) The long-run relationship between the total length of water networks (LRA) and the number of meters (CAE and CCC) is: LRAt = 0.6915·CAEt + 0.1139·CCCt (6) The parameters in the long-run equilibrium equation (equation 7) are significant at a threshold < 10-4, and the error correction coefficient (-0.3269) is negative, subunit and statistically significant (likewise at a threshold < 10-4). This means that a disturbance in the equilibrium level is absorbed in the system in about three years (1/0.3269 ≈ 3.06). In the short-run dynamics equation, only the free term (intercept) is significant. Model (4) provides support for the intuition about the positive direction of the link between LRA and RPr, at least, as a long-run relationship. In the short run, the impact coefficient of LRA on the profit rate is statistically insignificant. This could be the effect of inertia in adapting water transportation infrastructure. The average tariff per cubic meter of network water (TM) is negatively associated, as a long-run relationship, with the profit rate (the impact coefficient is -1.19, according to equation 4). A possible explanation for this result could be the negative relation, both in the long run and as a conjunctural impact, between the number of households requesting the installation of meters (CCC) and the dynamics of the tariff per cubic meter of water. This relationship estimated by an ARDL model is summarized in equation (7). (7) All model coefficients are significant at the 0.05 threshold. The error correction coefficient is negative, subunit (-0.8079) and statistically significant. The speed of recovery from an imbalance is high (1/8079 ≈ 1.24 years). The relationship (equation 8) in the long run is: CCCt = -0.002·TMt (8) The negative coefficient in the long-run equation (-0.002) and the negative coefficient in the short-run dynamics equation (conjunctural impact, -2.3153 in equation 7) suggest the negative reaction of domestic consumers to the increase in the per cubic meter tariffs of water in the network. AE Investigating the key factors influencing the profitability of romanian public water supply and sewage services 1216 Amfiteatru Economic The ARDL-type relationship between the number of meters for business and institutional consumers and the average tariff per cubic meter of water in the network is unstable (the cointegration coefficient is negative, but over unitary: -1.1335). Under these conditions, we estimated a simple cointegration model between the two variables. The results are described in equation 10. As in the case of household consumers, this result also confirms the negative, long-run, reaction of consumers to increases in network water tariffs. (9) To complement the arguments regarding the negative long-term impact of the dynamics of the average network tariff on the rate of return, we analyze the link between the number of connected consumers (CCC and CAE) and the total revenues from the exploitation of the water activity (VE). The ARDL model is summarized in equation 10. (10) The coefficients in the long-run equilibrium relationship are statistically significant at a threshold < 10-4, and the error correction coefficient is negative and subunit (-0.2748). The long-run stable relationship is: VEt = 8508.95·CAEt + 187.09·CCCt (11) This result suggests a positive impact of the number of connected consumers (households and non-households) on the total operating revenue of the water activity through a long-run link. In the short-run dynamics equation, the only statistically significant coefficient is that of the trend variable. The coefficients attached to the variables d(CAE) and d(CCC) are not statistically significant but, steady state, have the expected sign, i.e., positive impact on the revenue dynamics. For d(CAE), the steady-state impact is 2312.4 - 1045.9 = 1266.5 > 0, and for d(CCC): 2903.5 - 79.7 = 2823.8 > 0. In conclusion, the negative long-run effect of the increase in the average network water tariff on the operating rate of return for the water activity is explained by the adverse reaction of potential consumers to the price increase, associated with the positive relationship between the evolution of revenues and the number of meters for household and non-household consumers (economic agents and institutions). This effect can be amplified if there are alternatives for consumers (e.g. private drilling, reservoirs). In addition, beyond the elasticity of demand, the negative relationship between tariff increases and the rate of profit could also be due to the use of the amounts collected to finance investments in network modernization, which increases the cost of capital and reduces the rate of profit. Returning to the relationship between tariff changes and the rate of profit (equation 3), we note that in the short-term dynamics equation, tariff increases have a positive impact on the