The Effects of Competition Policy on TFP Growth: Some Evidence from the Malaysian Electricity Supply Industry

Abstract

The main objectives of this paper are to measure total factor productivity (TFP) growth in the electricity supply industry in Peninsular Malaysia from 1975 to 2005 and to assess the impact of private entry reforms upon TFP in this industry. Prior to 1995, a government-linked, vertically-integrated electricity utility, Tenaga Nasional Berhad (TNB), was essentially the sole operator. However, since 1995 privately-owned Independent Power Producers (IPPs) have also begun generating electricity, all of which is purchased by TNB under fixed Power Purchase Agreements (PPAs). The introduction of IPPs has reduced the need for TNB to find finance for new power plants. It has been argued that the participation of IPPs in the electricity generation industry should also facilitate improvements in industry productivity; however this proposition is yet to be tested. In this study we calculate TFP growth using Törnqvist index methods, finding that there is no direct evidence of productivity improvements attributable to the privatization. Furthermore, it is not clear that consumers have benefited from this, since the PPAs have generally been quite generous to the IPPs in terms of risk sharing and prices paid.