Total Factor Productivity, Annual User Charges, Capital Stocks and Cost Allocation: A Synthesis

Total factor productivity (TFP) is an increasingly popular method of measuring the productivity of Government Trading Enterprises (GTEs) over time. It is important that the productivity changes reflect real improvements in productivity, rather than the particular treatment of financial items such as the written down value of assets. The annualised cost of capital (or annual user charge) is an important component of the measurement of TFP. This article compares three alternative methods of calculating an annual user charge (current cost accounting, the economic carrying charge and the discount weighted average tariff). Each method of calculating the annual user charge is combined with three methods of calculating the capital stock (deflated written down value, deflated replacement cost and the deflated value of the annual user charge). The trend in the input index is influenced by the method used and, in turn, affects the evolution of TFP. This is particularly important in GTEs where assets tend to be large, and asset additions or replacements occur infrequently. To demonstrate the importance of this, a case study of Transperth's electrification of its urban passenger rail system is presented. The study shows that estimates of productivity varied by up to 20 per cent within three years of the assets being replaced.