This paper examines productivity trends in the Australian utilities industry and highlights some significant issues relating to the measurement and interpretation of changes in measured productivity over time.
- Multifactor productivity (MFP) growth in Australia’s market sector has been considerably below average since 2003-04. Utilities (Electricity, Gas, Water and Waste services), have played a significant role in this, with MFP growth being strongly negative between 1997-98 and 2009-10 (MFP falling, on average, by 3.2 per cent per year).
- To better understand why, this study examined MFP at the subdivision level, with a particular focus on the two largest subdivisions — Electricity supply (ES), and Water supply, sewerage and drainage services (WSSD). MFP growth between 1997-98 and 2009-10 was negative for both ES (on average, -2.7 per cent per year) and WSSD (-4.3 per cent per year).
- Around half of the MFP decline in ES was due to an increase in the ratio of peak to average electricity demand, which lowered average rates of capacity utilisation. This was largely attributable to rapid growth in household use of airconditioners.
– Three other contributors were: cyclical investment in lumpy capital assets, which temporarily increased inputs ahead of growth in output; a shift to greater undergrounding of electricity cabling, which raised costs and the quality of output, but not the volume of measured output; and policy induced shifts away from coal-fired power to higher-cost, but less polluting, sources of new supply.
- In WSSD, two developments contributed around 80 per cent of the decline in MFP after 1997-98. First, restrictions on water demand in response to widespread drought conditions led to lower measured output. Second, stricter sewage treatment standards increased industry costs, but there was no adjustment to measured output to account for the quality improvement.
– Two other contributing factors were cyclical investment patterns, and a shift to higher-cost sources of new water supplies, particularly desalination plants, to improve water security.
- The negative influence on utilities MFP growth of two of these influences — the cyclical surge in new investment and the 2000s drought — is expected to be largely temporary. However, the remaining factors are structural, permanently raising input requirements in the industry (though in some cases bringing an increase in the quality of outputs).
- This study highlights some of the challenges involved in measuring and interpreting estimates of MFP growth in utilities. – A particular concern is the influence of changes in capacity utilisation arising from either cyclical investment patterns, or changes in the structure of electricity demand. – Also, government policies, regulatory settings and external shocks (especially the weather) can impact on the quantity or quality of measured output, and on the choice of production technology, thereby influencing estimates of MFP.