Article

Beyond Leakage: Non-Revenue Water Loss and

Economic Sustainability
Eleonora Santos

Centre of Applied Research in Management and Economics, School of Technology and Management, Polytechnic
University of Leiria, 2411-901 Leiria, Portugal; [email protected]

Abstract: Water loss in urban supply systems poses significant challenges for water utility companies
worldwide, affecting both sustainable access to clean water and the financial viability of utility
operations. This study analyzes the evolution of water losses in high-level supply systems from 2017
to 2021 in Portugal, focusing on its implications for the profitability of water utility companies across
NUTs II regions. Drawing on data from various sources, including the National Information System
for Water Resources, PORDATA, ERSAR, and ORBIS, this analysis identifies trends, patterns, and
potential factors influencing water loss dynamics. Key components of the analysis include calculating
average annual losses, examining unbilled water percentages, and conducting regression analysis
to quantify the impact of water loss on profit margins. The findings contribute to the literature on
water loss management and financial performance in the water utility sector, offering insights for
policymakers, water utility managers, and stakeholders to enhance financial sustainability and reduce
water losses.

Keywords: economic sustainability; corporate performance; non-revenue water loss; water

management; urban supply systems

1. Introduction
Water Infrastructure Asset Management (WIAM) is crucial for ensuring the reliabil-
ity and sustainability of water supply and sanitation services globally. Effective WIAM
Citation: Santos, E. Beyond Leakage:
initiatives are essential for addressing challenges and adapting to evolving trends in the
Non-Revenue Water Loss and
Economic Sustainability. Urban Sci.
water sector. Studies by Amaral, Alegre, and Matos [1] and Sehring et al. [2] emphasize the
2024, 8, 194. https://doi.org/
importance of key international WIAM initiatives and successful approaches in various
10.3390/urbansci8040194
contexts. The American Water Works Association (AWWA) and the International Water
Association (IWA) classification scheme provide a standardized framework for assessing
Academic Editor: Luis Hernández-
water losses by dividing non-revenue water (NRW) into physical losses, commercial losses,
Callejo
and unbilled authorized consumption. These metrics are instrumental for water utilities to
Received: 24 June 2024 measure and address water losses, thereby improving operational efficiency and financial
Revised: 22 October 2024 performance [3]. Effective use of such frameworks is critical for a rigorous assessment of
Accepted: 30 October 2024 WIAM initiatives aimed at tackling water loss challenges.
Published: 1 November 2024 Governance structures also play a significant role in the efficiency and performance
of urban water utilities. Research by Barbosa, de Lima, and Brusca [4] and García-Rubio,
González-Gómez, and Guardiola [5] explores how governance mechanisms, including own-
ership models, impact the operational efficiency of water service providers. Understanding
Copyright: © 2024 by the author.
the interplay between governance frameworks and utility performance is essential for de-
Licensee MDPI, Basel, Switzerland.
signing effective policies and interventions that enhance water service delivery. However,
This article is an open access article
implementing comprehensive WIAM strategies and advanced technologies can be complex
distributed under the terms and
conditions of the Creative Commons
and costly, posing challenges, particularly for regions with limited resources [4,5].
Attribution (CC BY) license (https://
Efficiency assessment and improvement strategies are central to optimizing water
creativecommons.org/licenses/by/
infrastructure assets and enhancing service delivery. Various methodologies, including
4.0/). frontier approaches and dynamic analysis techniques, are used to evaluate the efficiency of

Urban Sci. 2024, 8, 194. https://doi.org/10.3390/urbansci8040194 https://www.mdpi.com/journal/urbansci

Urban Sci. 2024, 8, 194 2 of 16

water utilities [6,7]. Additionally, sustainability and resilience have become key priorities
in water management, given the growing challenges of water scarcity and climate change.
Research by Schilling et al. [8] and Tzanakakis, Paranychianakis, and Angelakis [9] high-
lights the importance of adopting sustainable water management practices and building
resilient infrastructure systems. Incorporating Objectives and Key Results (OKRs) align
water management practices with the Sustainable Development Goals [10–12], and innova-
tive financing and community engagement are crucial for extending piped water networks
and monitoring water access inequalities [11–16]. Nevertheless, balancing economic sus-
tainability with infrastructure investment remains challenging as high costs and complex
financing models may limit the effectiveness of some sustainability initiatives [10–12].
The differences between public and private utilities have significant implications for
water infrastructure management. Public utilities typically prioritize universal access and
affordability, while private utilities often focus on financial performance and efficiency.
This distinction affects how each type of utility approaches water loss management and
infrastructure investment [17]. In Portugal, government subsidies support water companies,
particularly in less populated or remote regions, helping to balance the financial challenges
of maintaining infrastructure and meeting environmental regulations [18]. However, while
subsidies can support essential services, they may create dependency and impact the
incentives for private utilities to invest in long-term infrastructure improvements [19].
Non-revenue water (NRW) presents a critical challenge for water utilities globally,
leading to financial losses and reduced system efficiency. The reduction in NRW and the
digitalization of water supply systems are essential for contemporary water management,
particularly in light of the pressures of climate change and urbanization. Sustainable
engineering practices have emerged as pivotal strategies for addressing these issues. By
adopting comprehensive frameworks that prioritize sustainability throughout all phases
of water supply operations, utilities can effectively minimize waste and enhance resource
efficiency, thereby significantly contributing to NRW reduction [20]. Strategies such as
leakage prevention and network rehabilitation are crucial for addressing NRW and enhanc-
ing system efficiency. The implementation of EU regulations aimed at evaluating water
losses and optimizing energy efficiency in water supply systems also presents its own
set of challenges. Discrepancies in regulatory compliance across regions underscore the
necessity for standardized methodologies to assess and mitigate water losses effectively.
This approach not only addresses NRW but also promotes broader sustainable water man-
agement practices, laying a crucial foundation for utilities to invest in technologies that
enhance system performance and reduce operational costs [21]. Emerging decision support
systems and innovative technologies play a vital role in reducing NRW and improving
water system sustainability and resilience. The COVID-19 pandemic has complicated
NRW dynamics by altering traditional water consumption patterns, necessitating adaptive
management strategies that respond to these changes. Digitalization facilitates real-time
monitoring and responsiveness within water supply systems, which is essential for tackling
unexpected challenges while maintaining efficient NRW management [22]. Investment
in green technology innovation is also vital for reducing NRW. Evidence shows positive
correlations between technological advancement and operational efficiency in water treat-
ment companies, indicating that prioritizing eco-friendly technologies enables utilities to
mitigate NRW effectively and bolster overall system resilience [23]. However, the rela-
tionship between water losses and unbilled water can be complex, influenced by various
factors such as measurement errors and unauthorized consumption. While increased water
losses often correlate with higher unbilled water, this relationship may be complicated by
other factors, necessitating a comprehensive approach to managing and reducing unbilled
water. Lastly, economic assessments of urban water utilities are crucial for developing effec-
tive NRW reduction strategies. Research indicates that economically viable interventions
can significantly decrease water losses while improving service delivery. Implementing
performance-based metrics is recommended to enhance leakage control and resource man-
Urban Sci. 2024, 8, 194 3 of 16

agement, further reinforcing the case for digitalization and data-driven decision-making in
the water sector [24].
A notable example of successful WIAM principles is Singapore’s water management
system, which is frequently cited as a model of best practice [25]. Singapore’s approach,
known as the “Four National Taps” strategy, integrates local catchment water, imported
water, recycled NEWater, and desalinated water. The city state invests heavily in advanced
technologies for water treatment and infrastructure management, such as the state-of-
the-art membrane technology used in the NEWater plant [25,26]. Singapore’s focus on
enhancing the resilience of its water infrastructure, including the construction of the Marina
Barrage for stormwater management, has significantly improved its water sustainability
and infrastructure performance [25,26]. The city has effectively engaged the public in water
conservation efforts, further contributing to its high level of water sustainability [25].
Future research and innovation are necessary to address emerging challenges and
opportunities in WIAM. Studies by Farouk, Rahman, and Romali [27] and Pathirana, Heijer,
and Sayers [28] identify non-revenue water reduction and smart infrastructure solutions
as promising areas for development. Analyzing water losses and unbilled water provides
valuable insights into the economic and managerial implications of water loss management.
In this context, using data from various sources such as the National Information
System for Water Resources, PORDATA (www.pordata.pt accessed on 8 June 2024), ERSAR
(Water and Waste Services Regulation Authority at www.ersar.pt/pt accessed on 8 June
2024), and ORBIS, our study aims to analyze the evolution of water losses in high-level
supply systems from 2017 to 2021 and assess their implications for the profitability of water
utility companies in Portugal by NUTs II regions. By examining trends in water losses
and unbilled water percentages across different companies, we seek to identify patterns,
correlations, and potential factors influencing these dynamics. The analysis involves
several key components. Firstly, we calculate average annual losses for each company
over the study period and compare them to identify trends and variations. Additionally,
we analyze the percentage of unbilled water, a critical indicator of distribution system
efficiency, and its relationship with actual water losses. Furthermore, we conduct regression
analysis to quantitatively assess the impact of unbilled water, along with other relevant
variables, on the profit margins of water utility companies. By employing both ordinary
least squares (OLS) and quantile regression techniques, we aim to provide a comprehensive
understanding of the economic and managerial implications of water loss management.
The findings of this study are expected to contribute to the existing literature on water
loss management and financial performance in the water utility sector. Moreover, the
insights gained from this analysis can inform policymakers, water utility managers, and
stakeholders about the importance of implementing effective strategies to reduce water
losses and enhance financial sustainability in the water sector.

2. Data and Methods

2.1. Data
Region Description and Network: This study focuses on analyzing water losses and
unbilled water (UW) across several water utility companies in Portugal from 2017 to 2021.
The companies include EPAL (Empresa Portuguesa das Águas Livres, S.A.), Águas de
Santo André, Águas do Algarve, Águas do Centro Litoral, Águas do Douro e Paiva, Águas
do Norte, Águas do Vale do Tejo, Águas do Vouga, Águas Públicas do Alentejo, and ICOVI
(Iniciativa Comum de Valorização de Infraestruturas). Each company operates within
distinct regions of Portugal, reflecting regional variability in water management practices
and infrastructure. In Portugal, most urban areas served by the water utility companies,
such as EPAL and Águas do Algarve, have metered connections, though coverage may
vary in more rural regions where non-metered connections still exist. Meter readings are
typically conducted either automatically, through advanced metering infrastructure, or
manually by technicians, depending on the company’s infrastructure and the region. In
areas with more advanced systems, readings are often synchronized and occur monthly
Urban Sci. 2024, 8, 194 4 of 16

or quarterly for billing purposes, while manual readings may lead to variability in timing.
This creates some uncertainty in the data, as metering inaccuracies, data recording delays,
undetected leaks, and illegal connections can distort the true figures for water losses and
unbilled water. These factors contribute to discrepancies and make comparisons across
different regions challenging.
Data Collection: Data on water losses and unbilled water percentages were obtained
from ERSAR (Entidade Reguladora dos Serviços de Águas e Resíduos), the regulatory body
overseeing water and waste services in Portugal. The data cover the period from 2017 to
2021 and include annual figures for each company.
Water losses refer to the volume of water that is lost between the point of supply and
delivery to consumers, encompassing both physical losses (e.g., leaks, pipe bursts, and
overflows) and apparent losses (e.g., metering inaccuracies, theft, or unauthorized con-
sumption). The data on water losses and unbilled water percentages from 2017 to 2021 were
obtained from ERSAR, the regulatory body overseeing water and waste services in Portugal.
ERSAR collects these data annually from each water utility company, ensuring compliance
with national standards and auditing their operational metrics. While the majority of the
data are directly measured, certain activities—such as flushing, which involves the use of
water to clean and maintain the distribution network—require estimation due to the lack
of precise measurement tools. These estimates introduce a degree of uncertainty into the
overall figures, as the exact volume of water used during such maintenance processes is
difficult to quantify. Therefore, reported water loss figures may include approximations,
particularly in cases where utilities rely on operational data or industry norms to estimate
non-billed water usage.

2.2. Methods
Calculation of Unbilled Water (UW): Unbilled water is defined as the volume of water
delivered into the distribution system but not accounted for in the billing system. It includes
losses due to leaks, measurement errors, unauthorized consumption, and other factors. The
calculation involves converting all units to m3 /(km·year) for consistency across years and
companies. The use of m3 /km/year as a metric for water loss is justified in this analysis
due to its ability to standardize water losses across different utility companies and regions
with varying pipeline lengths and distribution network sizes. This unit measures water loss
relative to the length of the distribution network (in kilometers) and per year, allowing for
consistent comparisons over time and between utilities with different scales of operation.
It provides a straightforward way to track losses in terms of volume lost per unit length
of pipeline, which is particularly useful when dealing with diverse infrastructure, as seen
with the various Portuguese utility companies.
On the other hand, metrics like the Infrastructure Leakage Index (ILI), though widely
used, are more complex and require detailed knowledge of each system’s theoretical
minimum losses, making it harder to compare systems with differing age, quality, and
operational conditions. ILI focuses on the efficiency of a system relative to its potential,
while m3 /km/year is a more direct and operationally relevant measure of actual losses
over time, which is more applicable in contexts where annual water loss trends are the
focus. Using m3 /km/year also simplifies cross-company comparisons, given the variability
in network conditions across Portugal, and allows a clearer representation of annual
performance across the utilities studied. For each year, the total volume of unbilled water is
expressed as a percentage of the total water supplied by the utility or provider, calculated
using the formula:

volume of unbilled water

Percentage of unbilled water = × 100 (1)
Total volume of water supplied

Statistical Analysis: Statistical analyses were conducted to explore correlations be-

tween water losses and unbilled water percentages across the studied companies. Pearson
Urban Sci. 2024, 8, 194 5 of 16

correlation coefficients were calculated to examine the strength and direction of relation-
ships. Significant correlations were identified based on a significance level of 5%.
Data: The analyzed data are presented in Tables 1 and 2 below, providing insights into
water losses (Table 1) and unbilled water percentages (Table 2) for each company from 2017
to 2021.

Table 1. Water Losses (m3 /(km·year)).

Company Region 2017 2018 2019 2020 2021

EPAL Lisbon 10,402 9974 10,460 11,461 12,622
Águas de Santo André Alentejo 803 803 253 693 2372
Águas do Algarve Algarve 2007 135 529 985 949
Águas do Centro Litoral Centro 3983 3321 1174 1898 1793
Águas do Douro e Paiva North 3879 4416 4866 4343 4307
Águas do Norte North 693 657 451 474 511
Águas do Vale do Tejo Lisbon 912 1095 949 876 949
Águas do Vouga Centro 292 182 130 36 292
Águas Públicas do Alentejo Alentejo 1788 1387 1277 1168 1022
ICOVI Centro 1095 876 805 876 1058
Source: own calculations from data collected from ERSAR.

Table 2. Unbilled water (%).

Company 2017 2018 2019 2020 2021

EPAL 5.9% 5.9% 5.9% 6.55% 7.2%
Águas de Santo André 1.0% 1.1% 0.0016% 2.4% 3.8%
Águas do Algarve 3.5% 2.8% 0.16% 0.48% 0.8%
Águas do Centro Litoral 3.9% 3.4% 0.25% 1.375% 2.5%
Águas do Douro e Paiva 2.3% 2.5% 0.27% 1.485% 2.7%
Águas do Norte 4.7% 3.7% 0.3% 1.65% 3.0%
Águas do Vale do Tejo 6.1% 7.4% 0.74% 3.07% 7.4%
Águas do Vouga 1.9% 1.7% 0.19% 1.045% 1.9%
Águas Públicas do Alentejo 11.5% 9.5% 0.83% 4.565% 8.3%
ICOVI 6.4% 69.5% 63.4% 63.4% 63.4%
Source: ERSAR.

Table 1 provides an overview of water losses (measured in m3 /(km·year)) for several

water utility companies across different regions from 2017 to 2021. EPAL in Lisbon shows
a general upward trend in water losses over the years, reaching its peak in 2021. Águas
de Santo André in Alentejo experienced a significant increase in 2019, indicating potential
operational changes or anomalies. This significant increase in unbilled water could be
justified by the inherent uncertainties associated with estimating water used for operational
activities, such as flushing. As the majority of these activities are not directly measured,
utilities often rely on estimates to account for the water used, leading to possible variations
in reported figures. In 2019, operational changes, such as intensified flushing or system
maintenance, could have contributed to the rise in unbilled water. Additionally, the lack of
precise measurement tools for such activities means that approximations may have played
a role in this observed anomaly, reflecting either an actual increase in operational water use
or variations in reporting methodologies.
Águas do Algarve exhibited a spike in 2019 followed by a decrease in subsequent years,
suggesting fluctuating conditions or management strategies. Águas do Douro e Paiva and
Águas do Norte in the North both saw peaks in 2019, possibly reflecting regional challenges
or infrastructure issues. Águas do Centro Litoral in Centro showed variability with a
noticeable decrease in 2019. Overall, the data underscore regional disparities and varying
trends in water loss management among these utilities, highlighting the need for targeted
strategies to improve efficiency and reduce losses across different operational contexts.
Urban Sci. 2024, 8, 194 6 of 16

Non-revenue water loss involves quantifying and addressing both components: Un-
billed Water: This includes water used for firefighting, flushing, or other operational uses
that are necessary but not metered for billing purposes. Efficient management involves
accurately estimating or metering such uses to reduce unnecessary consumption. Leakage:
it occurs due to physical losses from the distribution network, leading to wasted water and
potential damage to infrastructure. Managing leakage requires a comprehensive approach
that combines proactive maintenance, timely repairs, and modernizing aging infrastructure
to reduce water losses. Proactive maintenance involves regular inspection and upkeep of
the water distribution network to identify potential problem areas before significant leaks
occur. Timely repairs ensure that once a leak is detected, it is addressed swiftly to prevent
further water loss. Modernizing infrastructure—such as replacing old pipes and installing
more efficient materials—can greatly reduce the frequency of leaks, particularly in older
systems. A leak detection strategy is a critical component of managing leakage, utilizing
advanced technologies like acoustic sensors, pressure monitoring, and smart meters to
locate leaks early, often before they become visible on the surface. These technologies
enable continuous monitoring of the network, allowing for real-time identification of leaks
and anomalies, thus reducing both water loss and repair costs. By combining these ele-
ments, water utilities can effectively reduce unbilled water, improve system efficiency, and
extend the lifespan of their infrastructure. Addressing non-revenue water comprehensively
is crucial for water utilities to improve efficiency, reduce operational costs, and ensure
sustainable water management practices.
To determine the proportion of water that is being delivered into the distribution
system but not captured in the billing system, expressed as a percentage of the total
water supplied, is crucial for water utilities and providers to assess the efficiency of their
distribution system, identify areas of non-revenue water, and implement strategies to
reduce losses and improve revenue collection.
We analyse the levels of unbilled water (UW) for each company each year. The
calculation of unbilled water refers to the estimation or measurement of water that is
produced or treated but not recorded as revenue due to various reasons, such as metering
inaccuracies, administrative errors, or deliberate non-metered uses. Unbilled water is
typically expressed as a percentage of total water produced or treated.
Examples of unbilled unmetered consumption include the following: Firefighting:
Water used by fire departments for extinguishing fires, which is often unmetered due to
emergency response needs. Flushing: Water used for flushing public toilets, which may
not be individually metered in some systems. Street Cleaning: Water used for cleaning
streets, which may be necessary for maintaining cleanliness but not directly billed or
metered separately.
These examples illustrate instances where water consumption is necessary for public
safety, sanitation, or operational needs but is not directly measured for billing purposes.
Addressing unbilled unmetered consumption involves strategies such as estimating or
metering these uses more accurately, implementing conservation measures, and improving
overall efficiency in water distribution systems.
The analysis of unbilled water (UW) from 2017 to 2021 reveals variations across
different companies. In general, Águas de Santo André consistently demonstrates lower
UW values, while ICOVI consistently exhibits higher UW values. One likely reason is the
state of ICOVI’s infrastructure, which may be older or less maintained compared to other
companies like Águas de Santo André. Aging pipes, more frequent leaks, and delays in
maintenance could contribute to higher physical water losses. Additionally, operational
inefficiencies within ICOVI, such as slower response times for repairs or less efficient water
management practices, could exacerbate these losses. Another contributing factor could
be metering inaccuracies or the presence of non-metered connections, particularly in rural
or less developed areas served by ICOVI. If a significant portion of connections are either
not metered or inaccurately metered, the volume of water supplied may be underreported,
inflating UW figures. EPAL and Águas do Vale do Tejo also show relatively high UW
Urban Sci. 2024, 8, 194 7 of 16

values over the years. However, there are fluctuations in the rankings of other companies,
indicating variations in their performance regarding unbilled water over the years.
Table 3 shows the significant correlations between unbilled water and water losses
present in companies located in the North, Centro and Alentejo regions.

Table 3. Significant negative correlations between unbilled water and water losses.

Company Coeficient t-Statistic p-Value

1 −0.5881 * 0.2970 0.045
2 −0.5165 * 0.3729 0.032
3 −0.7626 * 0.1338 0.020
4 −0.8864 * 0.0452 0.015
5 −0.7665 * 0.1306 0.040
6 −0.8703 * 0.0550 0.022
7 −0.8038 * 0.1012 0.035
Notes. * Significance at 5% level.

A strong and negative correlation between actual water losses in the network and
the amount of unbilled water underscores the importance of adopting a comprehensive
approach in managing and reducing UW, considering not only physical losses in the
network but also other factors contributing to unaccounted water.
We collect financial data for the 7 companies that show a strong negative correlation
between unbilled water and water losses, from ORBIS and analyse the financial perfor-
mance from 2017 to 2021. The objective is to analyse, ceteris paribus, the impact of UW on
profit margin and to quantify it. Table 4 shows the basic statistics.

Table 4. Summary statistics.

Variable Obs Mean Std.Dev. Min Max

Id 35 4 2.0 1 7
Year 35 2019 1.43 2017 2021
Region 35 2.71 1.50 1 5
Profit Margin 35 13.14 14.37 0 46
Return on
35 13.62 15.01 0 50
Equity
Current Ratio 35 1.74 1.26 0 5
Unbilled
35 2.61 2.61 0 11.5
Water
Water Losses 35 175,157 467,333.70 36 1,900,000
Turnover 35 56,700.46 52,010.16 7290 189,733
Gross Income 35 4290.82 3924.06 −717 14,062
Net Income 35 3083.02 2794.52 266 10,112
Toal Assets 35 492,158.30 581,132.30 9720 1,884,519
Solvency
35 16.97 15.36 1 72
Ratio
Employees 35 180.91 165.62 14 596

The distribution of variables within the dataset provides several insights:

Profit Margins (profmg) and Return on Equity (roe). These metrics demonstrate
considerable variability, with standard deviations exceeding their respective means. This
variability suggests significant disparities in profitability and returns among the observed
companies, ranging from minimal to substantial.
Current Liquidity Ratio (curr). Variability in liquidity ratios indicates differences in
short-term financial stability among companies, impacting their ability to meet immediate
financial obligations.
Urban Sci. 2024, 8, 194 8 of 16

Unbilled Water (unbil). The variability in the percentage of unbilled water indicates
differences in billing accuracy and efficiency across water utility companies. High levels of
unbilled water may signify revenue loss and operational inefficiencies.
Losses (loss). The wide range of loss values underscores the financial impact of wa-
ter leakage and inefficiencies within distribution systems. The high standard deviation
relative to the mean suggests considerable variability in loss magnitudes among the ob-
served companies, or the water loss numbers in the sample are inadequate, e.g., because
of uncertainties.
Turnover. Variations in turnover reflect differences in revenue generation, indicating
varying levels of sales activity and financial performance.
Gross Income (rb). Variability in gross income highlights differences among companies,
influencing their financial resilience and ability to reinvest in operations.
Net Income (netinc). Differences in net income signify variations in profitability,
affecting overall financial performance and sustainability.
Total Assets (tass). The significant spread in total asset values highlights varying
scales of operation and asset bases among water utility companies, indicating differences
in infrastructure and resources.
Solvency Ratio (solv). Variability in solvency ratios indicates differences in financial
stability and risk among companies, impacting their ability to meet long-term obligations.
Employment (empl). The standard deviation exceeding the mean implies substantial
variability in employment levels across the observed companies, reflecting differences in
workforce size and organizational structure.
A stepwise regression is performed to choose the variables to include in the regression
model to estimate the impact of unbilled water on profit margin, where:

Profit before tax

Profit margin = × 100 (2)
Operating Revenue

2.3. Model Summary

The regression analyses employed two distinct variable selection methods: stepwise
regression with a p-value threshold of 0.2 for both inclusion and exclusion (pr(.2)) and
stepwise regression with a p-value threshold of 0.2 for entry and stay (pe(.2)). These ap-
proaches yielded findings that shed light on their economic implications. The pr(.2) method
emphasized identifying variables that significantly contribute to explaining variations in
the dependent variable throughout the regression process. In contrast, pe(.2) prioritized
retaining variables that consistently demonstrated statistical significance, underscoring
their persistent impact on economic outcomes. Both methods provided valuable insights
into the factors influencing economic phenomena within the analyzed framework, offering
a nuanced understanding of variable selection in regression analysis and its implications
for economic interpretation.
In the stepwise regression analyses, the following key findings emerge regarding their
economic implications:
• Overall Model Significance: Both models exhibit high overall F-statistics, indicating
strong statistical significance in explaining profitability margins.
• R-squared Values: The models show robust explanatory power, with approximately
97.81% and 97.30% of the variance in profitability margins explained by the variables
included in each respective model.
• Current Ratio (curr): An increase in the current ratio is found to be associated with
higher profitability margins, holding other variables constant. This suggests that liq-
uidity and the ability to cover short-term obligations positively influence profitability.
• Net Income (netinc): Higher levels of net income correspond to slightly higher prof-
itability margins, indicating that companies with stronger financial performance tend
to achieve better profitability.
Urban Sci. 2024, 8, 194 9 of 16

• Turnover (turn): There is a slight negative relationship observed between turnover and
profitability margins. As turnover increases, profitability margins decrease slightly,
reflecting potential challenges in managing operational costs as business activity
scales up.
• Unbilled Water (unbil): Increased levels of unbilled water are consistently linked to
lower profitability margins. This underscores the financial impact of water losses and
inefficiencies in revenue collection.
• Solvency (solv): Higher solvency ratios generally correlate with increased profitability
margins, although the significance of this relationship varies across the different
regression analyses.
• Return on Equity (ROE): A higher return on equity is associated with higher prof-
itability margins. This metric highlights the efficiency of equity utilization and man-
agement’s ability to generate returns for shareholders.
• Loss: The impact of water loss is not found to be statistically significant in either
regression model. This suggests that while water loss is an operational concern, its
direct influence on profitability margins may be mitigated or overshadowed by other
financial and operational factors.
These insights provide a nuanced understanding of how financial metrics and oper-
ational efficiencies interact to influence financial performance in publicly owned water
utilities, even though they are not profit-oriented. Financial ratios like the current ratio and
solvency remain crucial for assessing their financial stability and operational viability. The
inclusion of solvency and the insignificance of water loss further underscore the complexity
of factors affecting financial performance. Additionally, the size of water utilities and the
amount of investment significantly impact their competitiveness, with larger companies
benefiting from economies of scale and better access to capital [18,29]. This combination
allows for enhanced operational efficiency and competitiveness, highlighting the need for
further investigation into strategies that can improve financial health within the sector
We chose to perform regression using ordinary least squares (OLS) with robust stan-
dard errors and quantile regression to examine the impact of unbilled water on profit
margins. OLS with robust standard errors is a variation of OLS that accounts for potential
heteroscedasticity in the data, providing more reliable estimates when the assumption of
constant error variance is violated. This method is particularly useful for small sample
sizes, like ours with 35 observations.
OLS Regression with Robust Standard Errors. This approach provides estimates of the
average impact of unbilled water on profit margins across the sample while also addressing
potential issues of heteroscedasticity. It assumes a constant relationship between variables
across all quantiles.
Quantile Regression. By using this method, we were able to analyze how the impact
of unbilled water on profit margins varies across different quantiles. This gives us a more
comprehensive understanding of the relationship, especially if there are variations in the
impact at different levels of profit margins.
Given that our sample size is 35 observations, it is essential to consider the limitations
of our analysis. With a relatively small sample size, we need to be cautious about drawing
generalizable conclusions, as it may affect the reliability and precision of our estimates.
The model is:
PROFMGIt = β0 + β1 ROEit + β2 CURRit + β3 UNBILit + β4 lOSSit + β5 sOLVit + µit (3)
Expected sign of variables:
1. ROE (Return on Equity): Expected Sign Positive
A positive ROE indicates efficient utilization of equity capital to generate profits.
Higher ROE suggests better profitability and financial health, which can lead to increased
profit margins. Therefore, an increase in ROE is expected to have a positive impact on
profit margin.
Urban Sci. 2024, 8, 194 10 of 16

2. CURR (Current Liquidity Ratio): Expected Sign Positive

A higher current liquidity ratio indicates better short-term financial stability and
liquidity. Companies with higher liquidity ratios are better positioned to meet immediate
financial obligations, which can lead to improved operational efficiency and financial
performance. Therefore, an increase in the current liquidity ratio is expected to have a
positive impact on profit margin.
3. UNBIL (Unbilled Water): Expected Sign Negative
Unbilled water represents inefficiencies in revenue collection and potential revenue
loss for water utility companies. Higher levels of unbilled water typically indicate chal-
lenges in billing accuracy and distribution system integrity, which can reduce revenue
streams and negatively impact profit margins. This is because unbilled water represents
a portion of water produced and supplied that is not generating income, whether due to
leaks, unauthorized use, or metering issues. However, an increase in unbilled water may
not always signal inefficiencies; it could also reflect more proactive flushing of the network,
where water is deliberately used to clean and maintain the distribution system, contributing
to unbilled water but enhancing long-term system integrity. Additionally, an increase in
fire incidents could lead to higher unbilled water as large volumes are used in firefighting,
which are not billed to customers. Similarly, issues with metering accuracy, such as mal-
functioning meters or non-metered connections, can contribute to higher unbilled water if
the actual water usage is underestimated. Each of these factors could influence the reported
levels of unbilled water, complicating the direct relationship between unbilled water and
profit margins, depending on the operational and external conditions at play.
4. LOSS (Water Losses): Expected Sign Negative
Losses in the water distribution system represent inefficiencies and operational chal-
lenges for water utility companies. Higher levels of losses lead to increased costs associated
with water production, distribution, and infrastructure maintenance, which can result in
decreased revenue streams and reduced profit margins. Therefore, an increase in losses is
expected to have a negative impact on profit margin.
5. SOLV (Solvency Ratio): Expected Sign Positive
Solvency ratio measures the financial stability and risk management capabilities of
water utility companies. Companies with higher solvency ratios have stronger balance
sheets and lower financial risk exposure, which can lead to increased investor confidence
and operational stability. Therefore, an increase in the solvency ratio is expected to have a
positive impact on profit margin.

3. Results
Table 5 summarizes the results from both estimators.

Table 5. Summary results of models (1) and (2).

Variable (1) OLS Estimator (2) Quantile Estimator

ROE 0.654 *** (11.18) 0.675 *** (9.95)
CURR 3.256 *** (9.31) 3.430 *** (6.04)
UNBIL −0.565 ** (−4.09) −0.676 * (−2.73)
LOSS −0.00000155 * (−2.38) −0.00000113 (−0.83)
SOLV 0.0941 (1.99) 0.0608 (0.85)
_cons −1.295 (−1.35) −1.032 (−0.75)
Adj. R-squared 0.968 -
N 35 35
Notes. _cons is constant; t statistics in parentheses. * p < 0.05, ** p < 0.01, *** p < 0.001.

The coefficients from the OLS estimator generally exhibit higher magnitudes com-
pared to those from the quantile estimator, indicating greater sensitivity to changes in the
Urban Sci. 2024, 8, 194 11 of 16

independent variables. In terms of efficiency, the OLS estimator shows higher t-values
for most variables compared to the quantile estimator, suggesting superior efficiency in
estimating the coefficients.
Comparing the impact of variables across both estimators:
• ROE (Return on Equity): Both estimators demonstrate a positive impact on profit
margin (profmg). An increase in ROE is associated with higher profit margins.
• CURR (Current Ratio): Similarly, both estimators indicate a positive relationship with
profit margin, suggesting that higher current ratios correlate with higher profit margins.
• UNBIL (Unbilled Revenue): Both estimators reveal a negative impact, though with
slight differences in magnitude. This implies that higher levels of unbilled revenue are
linked to lower profit margins.
• LOSS (Net Loss): Both estimators suggest a negative impact, but the quantile estimator
does not find it statistically significant. This indicates that higher net losses tend to
decrease profit margins, with varying effects across different quantiles.
• SOLV (Solvency): The OLS estimator suggests a positive impact, whereas the quantile
estimator shows a smaller, statistically insignificant impact. This suggests that higher
solvency may lead to higher profit margins, though this relationship may not hold
uniformly across different quantiles.
Previous research has emphasized the economic implications of water management
practices and financial performance in utility sectors [18–20,28]. Specifically, efficient water
management strategies, including minimizing unbilled revenue and reducing operational
losses, have been shown to enhance profitability and sustainability [6,10,30]. These studies
underscore the importance of effective asset management and conservation initiatives in
optimizing financial outcomes within the water utility sector [7,10,28].
The regression results highlight that unbilled water (unbil) significantly impacts profit
margins (profmg) across both OLS and quantile estimators. Specifically, the OLS estimator
coefficient of −0.565 (t = −4.09) indicates that, holding other variables constant, a one-unit
increase in unbilled water is associated with a decrease in profit margin by approximately
0.565 units. Similarly, the quantile estimator coefficient of −0.676 (t = −2.73) reinforces this
negative association, albeit with a slightly higher impact.
These findings underscore the criticality of managing unbilled water effectively to
enhance financial performance. Strategies aimed at reducing unbilled water through
infrastructure upgrades and improved operational efficiencies are essential for mitigating
revenue losses and sustaining profitability [5,10,31,32].
The analysis provides insights into the economic relationships between water man-
agement practices and financial performance in the utility sector. Effective management of
variables such as ROE, CURR, and UNBIL can significantly influence profitability and sus-
tainability, highlighting the importance of strategic decision-making and resource allocation
in water utility management [14–16].
Unbilled water represents water that is lost or unaccounted for in the distribution
system, leading to revenue losses for water utility companies. As the regression results
suggest, a higher level of unbilled water is associated with a decrease in profit margin.
The analysis of the negative impact of unbilled water on profit margins is relevant for
publicly owned water utilities, albeit with some distinctions in focus. While these utilities
may not operate primarily to generate profit, they still face significant financial pressures
related to operational efficiency, sustainability, and service delivery. A coefficient of −0.717
indicates that unbilled water represents a substantial financial burden, leading to revenue
losses that can hinder the utility’s ability to fund necessary infrastructure upgrades and
maintain service quality. Publicly owned water utilities must also consider other financial
metrics, such as the current ratio and solvency, which reflect their ability to meet short-term
obligations and maintain overall financial health. High levels of unbilled water can strain
cash flow, impacting these ratios and potentially limiting access to funding or investment
opportunities. Moreover, effective management of unbilled water is crucial for maintaining
public trust and fulfilling regulatory requirements. Public utilities often operate under a
Urban Sci. 2024, 8, 194 12 of 16

mandate to provide reliable service to their communities, and high unbilled water levels
can undermine their ability to meet this obligation.
In conclusion, while the direct link between unbilled water and profit margins may be
less pronounced for publicly owned utilities, the implications of unbilled water on financial
health, operational efficiency, and service quality remain critical. The need for effective
management strategies to mitigate unbilled water is equally important for ensuring the
long-term sustainability and performance of these utilities.
Managerial Implications. Water utility companies should implement strategies to
minimize unbilled water, such as improving infrastructure, detecting, and repairing leaks,
and combating unauthorized water use. By reducing losses, companies can enhance rev-
enue streams and improve profitability. Investing in advanced metering and monitoring
technologies can help companies identify and address unbilled water more effectively.
These technologies enable real-time monitoring of water flow, detection of leaks, and pre-
cise measurement of consumption, thereby supporting loss reduction efforts. Enhancing
operational efficiency in water distribution and management processes can contribute
to reducing unbilled water. This may involve optimizing water network design, imple-
menting efficient billing, and metering systems, and enhancing workforce training and
supervision. Given the significant impact of unbilled water on profit margin, companies
should incorporate measures to mitigate revenue losses into their financial management
strategies. This may include budgeting for infrastructure upgrades, allocating resources for
leak detection and repair programs, and establishing performance metrics to track progress
in reducing unbilled water.
The regression results underscore the importance of addressing unbilled water as a
critical factor in improving the financial performance and sustainability of water utility
companies. Implementing effective loss reduction strategies and investing in technology
and operational improvements are key steps towards mitigating the negative impact of
unbilled water on profit margin and ensuring long-term profitability and viability.

4. Discussion
The management of water resources is significantly influenced by the operational
structures of water utilities [33], which can be broadly categorized into public and private
entities. Public water utilities are typically owned and operated by government entities,
with a primary focus on providing affordable water services to all residents rather than
maximizing profits. This can lead to a commitment to equity in service delivery but may
also result in underinvestment in infrastructure due to budget constraints and political
factors. Conversely, private water utilities operate as profit-driven entities, which can foster
greater efficiency and innovation due to competitive pressures. They may have more access
to capital and technological advancements [29], allowing for quicker adoption of modern
practices, such as digitalization and leakage management technologies. The implications
of these differences are significant for the findings of this paper, particularly regarding
NRW reduction and the adoption of sustainable practices. Public utilities may struggle
with slower decision-making processes and bureaucratic constraints, hindering their ability
to swiftly implement innovative solutions for NRW management. On the other hand,
private utilities, driven by the need to maintain profitability and efficiency, might more
readily adopt practices that reduce water losses, such as advanced metering infrastructure
and proactive maintenance strategies [34]. Thus, while private utilities may have more
immediate access to capital and are often more flexible in adopting innovative practices,
public utilities—when supported by effective governance and investment—can achieve
comparable, if not superior, outcomes in terms of service equity, infrastructure investment,
and non-revenue water (NRW) reduction.
In addition, legislative contexts, such as the EU Directive 2020/2184, also play a critical
role in shaping how public and private utilities manage their resources. This directive
mandates the publication of leakage rates for all but the smallest utilities, creating an envi-
ronment of accountability and transparency [35]. For public utilities, this requirement can
Urban Sci. 2024, 8, 194 13 of 16

enhance pressure from stakeholders, including citizens and local governments, to improve
efficiency and reduce NRW. However, these utilities might face challenges in meeting the
standards set forth by the directive if they lack the necessary resources or political will [34].
For private utilities, the EU Directive may serve as both a challenge and an opportunity.
While they must ensure compliance with stringent regulations, the requirement to publish
leakage rates can enhance their reputation and foster trust among consumers [36]. More-
over, the transparency imposed by the directive can stimulate competitive practices that
lead to better performance and innovation in NRW management [37].
Furthermore, flow meters, including large gauge models, are crucial for accurately
measuring water flow in utility systems. However, significant inaccuracies can occur due
to various factors, leading to errors in water balance calculations, particularly for non-
revenue water (NRW) and unbilled water (UW) assessments. These inaccuracies can arise
from several sources, including installation errors, maintenance issues, and the inherent
limitations of the technology used [38].
One common issue is the calibration of flow meters, which can drift over time. If
not regularly calibrated, flow meters may provide inaccurate readings, resulting in either
overestimations or underestimations of actual water usage. Furthermore, factors such as
pressure fluctuations, temperature variations, and the presence of air bubbles or sediments
can also affect the accuracy of flow measurements [39]. Research indicates that inaccuracies
in flow meter readings can vary widely depending on the type and condition of the meter.
For instance, older mechanical meters may have an accuracy range of ±5% to ±10%,
while modern electromagnetic or ultrasonic meters can achieve accuracies of ±1% to ±2%
under optimal conditions [40]. However, if a meter is poorly maintained or installed, these
accuracy levels can worsen significantly.
To estimate the impact of these inaccuracies on reported NRW and UW figures, one
might consider a hypothetical scenario where a flow meter inaccurately reports a water
flow rate that is 10% lower than the actual flow. If a utility reports an NRW of 20% based
on these readings, the true NRW could be significantly higher. For example, if the actual
water supplied is 1,000,000 L but the flow meter reports only 900,000 L due to inaccuracies,
the NRW calculation could reflect a misleadingly low figure, ultimately affecting resource
management strategies and policy decisions [41].
Thus, to improve the reliability of NRW and UW calculations, utilities should invest
in regular calibration and maintenance of flow meters, utilize advanced measurement
technologies, and implement quality assurance protocols [42]. By acknowledging and
addressing the potential inaccuracies in flow measurement, utilities can enhance the accu-
racy of their water balance calculations, leading to more effective management of water
resources [43]. Based on this analysis, Águas de Santo André consistently exhibits lower
water losses and unbilled water (UW) compared to other companies, suggesting superior
distribution system efficiency and management practices. In contrast, EPAL and Águas
do Douro e Paiva consistently show higher levels of water losses and UW, indicating
potential inefficiencies in their distribution systems. Regionally, companies in the North
region generally experience lower water losses and UW than those in the Centro and Alen-
tejo regions, reflecting varying regional water management practices and infrastructure
efficiencies [44,45].
The economic impact of water losses on companies’ profitability margins involves
several theoretical considerations:
Cost Considerations: Water losses incur direct costs including the water’s value,
infrastructure repairs, and operational expenses related to detection and mitigation.
Revenue Implications: High water losses can diminish revenue by reducing billed
water volumes, directly impacting profitability margins.
Operational Efficiency: Companies with high losses may operate less efficiently, incur-
ring additional costs like increased energy usage and labour expenses, further squeezing
profit margins.
Urban Sci. 2024, 8, 194 14 of 16

Investment and Sustainability: Investments in leak detection technology and infras-

tructure upgrades, while initially costly, can lead to long-term cost savings and improved
efficiency, ultimately boosting profitability.
Regulatory and Stakeholder Pressures: Compliance with water conservation regula-
tions and meeting stakeholder expectations for sustainability can influence management
strategies, affecting profitability.
Market Competition and Pricing: High water losses can escalate service delivery
costs, challenging companies to balance competitive pricing with operational efficiency to
maintain profitability.
However, this analysis has limitations. It may not fully encompass all contextual
factors like regulatory frameworks, socio-economic conditions, and environmental influ-
ences that impact water management practices and financial performance. This study’s
timeframe limitations may also restrict insights into long-term trends. Addressing these
limitations through comprehensive, longitudinal studies would enhance understanding of
the complex interplay between water management practices, financial performance, and
regional dynamics in the water utility sector.

5. Conclusions
This study investigates the impact of unbilled water on profit margins in the Por-
tuguese water utility sector from 2017 to 2021 using ordinary least squares (OLS) regression
with robust standard errors and quantile regression. The analysis reveals a consistent
and significant negative relationship between higher levels of unbilled water and lower
profit margins across both OLS and quantile estimators. Specifically, the OLS coefficient of
−0.565 (t = −4.09) and the quantile estimator coefficient of −0.676 (t = −2.73) underscore
the financial implications of inefficiencies in revenue collection and distribution system
integrity. Effective management strategies, including the implementation of advanced
metering technologies, infrastructure improvements, and operational optimization, emerge
as critical steps to mitigate revenue losses and enhance operational efficiency in the water
utility industry. These measures not only support financial sustainability but also contribute
to long-term profitability.
Regional analyses highlight significant disparities in water losses and unbilled water
among Portuguese water utility companies, with Águas de Santo André demonstrating
consistently lower losses, indicative of efficient management practices. In contrast, EPAL
and Águas do Douro e Paiva exhibit higher losses, reflecting operational challenges. Re-
gional comparisons further underscore better performance in the North region relative to
the Centro and Alentejo regions. Addressing these disparities requires targeted investments
in infrastructure, advanced metering technologies, and robust regulatory frameworks to
incentivize efficiency improvements and mitigate losses.
This study contributes novel insights into water management by quantitatively ana-
lyzing variations in water losses and unbilled water across Portuguese regions and com-
panies. The findings provide replicable metrics for assessing and benchmarking water
utility performance, informing policy decisions aimed at reducing losses and enhancing
operational efficiency.
Policymakers are urged to prioritize infrastructure investments in regions with higher
losses, incentivize efficiency through regulatory frameworks, and empower water utility
personnel with training and resources. Stakeholder engagement and public awareness
campaigns are crucial for promoting water conservation and accountability, essential for
sustainable water management practices.
Future research should emphasize longitudinal studies to track water loss trends,
comparative analyses to identify best practices across regions, and assessments of emerging
technologies for effective water management. Understanding the scalability and effective-
ness of these technologies will guide investment decisions and policy formulation, ensuring
robust and efficient water supply systems.
Urban Sci. 2024, 8, 194 15 of 16

Funding: This research is financed by National Funds of the FCT—Portuguese Foundation for
Science and Technology within the project «UIDB/04928/2020» and under the Scientific Employment
Stimulus-Institutional Call CEECINST/00051/2018.
Data Availability Statement: Data is publicly available at National Information System for Water
Resources at https://snirh.apambiente.pt; PORDATA at www.pordata.pt, ERSAR (Water and Waste
Services Regulation Authority at www.ersar.pt/pt (accessed on 8 June 2024).
Conflicts of Interest: The author declares no conflict of interest.

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