Saturday, 23 August 2025

Queensland Report on Construction Productivity

 More recommendations and reform directions focused on regulation and planning

 


 

The Queensland Productivity Commission (QPC) released their interim report on Opportunities to Improve Productivity of the Construction Industry on 31st July. Construction productivity has recently been the subject of two other reports, with this one following the NSW Productivity and Equality Commission report Housing Supply Challenges and Policy Options in August 2024 and the Productivity Commission report Housing Construction Productivity: Can We Fix It? in February 2025. 

 

The motivating force behind the three reports is a political requirement to be seen to be doing something to address the housing crisis, which is fundamentally due to a mismatch between a long-term lack of supply of new dwellings and the high level of demand, driven by a combination of increased immigration and decreased household size. The result has been rising house prices, falling affordability, particularly for first home buyers, increased rents and very low vacancy rates. Another factor is the high level of engineering construction, due to the size and number of transport and energy projects, many of which are for the public sector. Queensland also has the effects of additional demand from the 2032 Olympic Games projects, currently estimated at $7 billion (which based on other Olympic Games will be much more).

 

The QPC report says ‘While many problems were identified, stakeholders were generally confident that better outcomes are possible. There is broad agreement amongst stakeholders, for many of the solutions identified, on how to address the problems facing the industry.’ Unfortunately, some 342 pages later, most of the problems discussed are about regulation and planning, onsite construction productivity barely gets a mention, there is no evidence stakeholders are in agreement on solutions and more information is requested for the recommendations, and how the problems will be addressed is not included because ‘Implementation issues, including prioritisation and sequencing, are not considered in this interim report but will be considered in the final report.’

 

This post starts with the QPC interim report’s terms of reference and Queensland construction productivity, then looks at the recommendations and reform directions in the report. Some of the report’s  key points on planning and approvals and regulation are covered, and other important industry issues and opportunities not addressed in the report are discussed. 

 

The Terms of Reference Were Extremely Broad

 

To understand how complex the issues surrounding  construction productivity are and why this report (and the others) are so unsatisfactory it is necessary to start with the terms of reference given to the QPC (heavily edited to key points) :

 

        Conditions in Queensland’s housing market, residential development, and non-residential construction, including housing supply and affordability;

        Key trends including input costs, prices, competition, and supply chain developments;

        Factors shaping Queensland’s productivity including legislation and regulation, industrial relations, procurement policies and labour force needs;

        Opportunities for improvement including regulatory and non-regulatory mechanisms;

        Priority areas for reform in the short, medium and long term (including labour, skills and competition, suitability and availability of qualified head contractors and sub-contractors etc.);

        Impact on small and medium scale subcontractors in regional areas and their ability to compete for government tenders due to regulatory requirements;

        Availability of labour, skills development, and matching supply with demand;

        How government procurement and contracting arrangements affect construction productivity, including Best Practice Industry Conditions (BPICs are wages and conditions on public projects introduced to encourage enlistment of workers);

        Barriers to entry, investment and innovation in the sector.

 

Including issues around government procurement and contracting allowed the QPC to address some important productivity determinants that were not in the other recent reports. However, the problem is the breadth of these terms of reference, and the loose or long-term relationship many of the others have with onsite construction productivity, which is what is being measured by the statistics. 

 

The QPC report, and the NSW and Productivity Commission reports that preceded it, are not really about construction productivity, which is being used as a stalking horse for the long-term lack of supply of new housing. These reports are more concerned with the complex, cumbersome and sclerotic planning and approvals process that deters, delays and prevents residential construction, and the effects of regulation and the building code.

 

Queensland Construction Productivity

 

The QPC found Queensland construction productivity is only 5 per cent higher than it was in 1994-95, compared to a 65 per cent increase in labour productivity in the market economy. As Figure 1 shows, the variation in aggregate productivity is explained by compositional changes due to the rapid growth and subsequent decline in heavy and civil engineering activity in the LNG investment boom.

 

Figure 1. Queensland productivity


 

This is also what a previous post on construction productivity in the states and territories found. In 2014 the Australian mining boom peaked with the value of work done reaching $80 billion in Queensland, mainly due to construction of three LNG plants. The pro-cyclical nature of construction productivity is clearly seen in Figure 2 as gross value added (GVA) per hour worked followed the fall in the volume of work, which declined by around 30 percent in Queensland [1].

 

Figure 2. Gross value added per hour worked and construction work done

Sources: ABS 5220, ABS 6150, ABS 8755.

 

The quotes below on the causes of slow productivity growth have been taken from the QPC report.

 

‘Although empirical evidence on the causes of slow productivity growth is incomplete, it suggests that regulation is likely to have played a key role’:

·      Evidence from the United States and New Zealand suggests restrictive land use regulation may have made it more difficult and expensive to construct housing and other buildings [2].

·      Research suggests there have been significant increases in the complexity of building regulation, which has increased overheads and construction costs.

·      Regulatory design, including regional variations, have created incentives that keep the industry fragmented and dominated by smaller firms, who are less likely to innovate and have lower productivity.

·      Where regulators have poor incentives or are underfunded, results in unnecessary delays, high administrative costs and poor oversight, which can undermine productivity.

 

‘Recent changes to the National Construction Code (NCC) have been adopted without a case being established that they would provide a net benefit to the community. Similarly, Queensland introduced its trust accounts framework without undertaking a regulatory impact assessment.’

 

‘While regulatory issues seem to be a key driver of poor performance over longer time periods, more recent productivity declines seem to have been materially impacted by policy choices relating to Queensland Government procurement.’ 

 

‘Insufficient attention has been given to how procurement practices or new projects are impacting the market. This has been exacerbated by poor project selection.’

 

‘Government procurement practices, particularly BPICs, have created unnecessary inefficiencies’

 

The Report’s Recommendations and Reform Directions

 

The preliminary recommendations are ‘specific reforms that the Commission is seeking feedback on.’ There are 21 recommendations, of which six are on planning and approvals, and four on the NCC and regulation. The recommendations are:  

 

·     Government procurement - recommendations 1, 2 and 3;

·     BPICs removal –  recommendation 4;

·     Planning and approvals – recommendations 5, 6 (infrastructure charges), 7, 8, 9, and 10;

·     Regulation –  recommendations 11 (NCC), 12 (building codes), 13 (minimum financial requirements), and 14 (trust accounts);

·     Modern methods of construction (MMC) – recommendation 15;

·     Worker health and safety – recommendations 16 and 17;

·     Workforce – recommendations 18 and 19 (occupational licensing), and 20 (mobility);

·     Utility connections - recommendation 21.

 

The reform directions are ‘areas where there is a clear case for action, but the Commission is seeking further information to support the development of specific recommendations.’ There are 12 reform directions, of which

 

·    Government selection and staging of infrastructure – reform direction 1;

·    The pre-qualification system – reform direction 2;

·    Re-setting industry practices and increasing competition – reform direction 3;

·    Tendering and contracting, including building information modelling (BIM) and collaborative contracts - reform direction 4;

·    Planning and zoning reform – reform direction5, 6 (community support);

·    Review of regulations – reform direction7 and 8 (QBCC);

·    Worker health and safety - reform direction 9;

·    Workforce - reform directions 10 (training), 11 (migration), 12 (labour hire).

 

There are also two requests for information, on the 2024 Energy Queensland Union Collective Agreement, and on foreign investor taxes and housing construction. 

 

If the aim really is to improve construction productivity, recommendations would be focused on improving project management, logistics and supply chain efficiency, increasing investment in machinery, equipment and software, contractual relations and the structure of the industry. While the recommendations on procurement are important, and with those on workforce development and industrial relations relevant to productivity, the majority of the QPC’s recommendations are on legislation, regulation, and the planning and approvals process. 

 

A comparison with the 2024 NSW Productivity and Equality Commission report Review of Housing Supply Challenges and Policy Options for NSW is useful. That report found barriers to housing supply included high construction and borrowing costs, capacity constraints in the construction sector, and bottlenecks in the development process, with over half of the 32 recommendations on planning. It recommended reforming planning to streamline the development process and reduce approval times, and reviewing planning policy because ‘prescriptive rules’ on land block innovation. Other recommendations included education and skills, business regulations and tax, improving infrastructure and transport, replacing stamp duty with a land tax, establishing an Urban Development Program to report on the housing market and a housing supply council to advise on housing targets, and incentives for local government to meet targets. It argued for non-regulatory approaches wherever possible, and avoiding excessive regulation. While there are many overlapping recommendations, this is a more ambitious agenda than the one envisaged by the QPC. 

 

The structure of the QPC Interim  Report echoes the Productivity Commission’s February report, which had five issues and seven reform directions. The PC’s issues were: the complex and slow approvals process; fragmentation due to regulation; the lack of innovation; the regulatory burden; and workforce issues. The reform directions were: coordinated and transparent planning approvals and appropriately funded regulators; review building regulations and the NCC’s objectives; implement ratings systems on new and existing building quality; increase diffusion of technology; public research and development funding; reduce regulatory impediments to MCC; and improve workforce mobility and flexibility. The PC suggested states should consider establishing coordination bodies to speed up the process and address delays such as the Queensland State Assessment and Referral Agency, which got two mentions but no discussion in the QPC report [3]. 

 

The Planner Productivity Problem

 

Over 45 pages the QPC details regulation of land use that ‘can be complex, restrictive, inconsistent across local governments, inconsistent between regulatory instruments and impose costly and unnecessary requirements’, a planning system that ‘is complex, difficult to navigate, inefficient and lacks transparency and accountability’, and approvals processes that ‘create uncertainty, have high transaction costs, require expensive or unnecessary modifications to building design or cause excessive delays.’ 

 

The QPC recommends an alternative development pathway for significant developments [4], amending the Planning Regulation, and reviewing the Building and Planning Acts. The Government should ‘investigate digital planning and permitting technologies to improve the efficiency, accuracy and transparency of the approval process.’ To ‘build community support for housing development’ the QPC suggests improved consultation, citizen panels, independent hearing panels, and negotiable conditions. To improve zoning financial incentives for local government might be used. 

 

It is universally recognised that the time and cost of development approvals is a problem, but that is an issue of planner productivity not construction productivity. Research from YIMBY Melbourne found ‘In 1986, for every practicing planner, Australia built around 54 homes. Now, we build fewer than nine homes per planner. A planner 40 years ago was on average responsible for the development of six times the number of homes per year than a planner working today.’ 

 

Figure 3. Planner productivity

Source: There is no planner supply shortage, YIMBY Melbourne Research Note. 

 

The Research Note concluded ‘The demand for planners has mainly increased not through an increase in construction output and project delivery, but through an increase in regulatory process and complexity.’ This is QPC’s reform direction 4, and addresses 

the problem that development projects such as new housing estates and apartment complexes can take ten years or more to complete, with most of the time spent getting approvals. 

 

Regulation and the NCC

 

The QPC says ‘evidence suggests that several regulations affecting the construction industry are not effective or efficient, and are likely to be reducing productivity. Building regulations are becoming more complex with increased risk they are impeding productivity. Reduced levels of attention are being paid to the costs of new regulation, with regulatory best practice not being followed.’

 

Figure 4. The Queensland building regulation system

 


 

The outcome is the QPC’s view that recent changes to NCC 2022 for liveable housing and energy efficiency have increased construction costs, and ‘regulatory impact analysis undertaken showed these benefits were unlikely to justify the costs they impose.’ The recommendation is for Queensland to opt out of NCC 2022 and ‘only adopt future NCC changes in Queensland codes where these have been through robust regulatory impact analysis to demonstrate they provide net benefits to the community.’ 

Under Reform direction 8 ‘consideration should be given to whether the regulatory framework underpinning the QBCC provides the right incentives for ongoing

improvements to regulatory performance.’

 

Modern Methods of Construction and BIM

 

There is a short chapter in the interim report on MMC, included in the section on regulation. The QPC argues there is no market failure and no reason for government intervention to promote MMC. The report makes some general observations about regulatory barriers to MMC, none of which are new, and did not endorse MMC as an alternative to conventional building. There is no discussion on the cyclical boom-bust nature of residential building, which makes industrialisation of modular and prefabricated housing difficult, the reluctance of most banks to finance modular and prefabricated houses, and the lack of standards or an industry quality assurance accreditation system for modular and prefabricated buildings. 

 

The QPC acknowledges the existence of the MMC program that QBuild and the Office of the Queensland Government Architect have, which is a partnership with 12 industry suppliers to supply housing in regional and remote areas. In 2023 QBuild established a training and production facility at Eagle Farm in Brisbane, and two more production facilities have since opened in Zillmere in north Brisbane, and Cairns in Far North Queensland. 

 

Although QBuild has the best developed MMC program in Australia that has produced over 500 houses, the QPC does not discuss or make any recommendation on the program. The QPC did not use the opportunity to report data from QBuild on MMC productivity, costs and time performance, or provide feedback from occupants on the build quality and  liveability of their houses, or from users of modular or prefabricated public buildings like schools and hospitals. 

 

Another oversight is the lack of discussion on the use of Building Information Modelling (BIM) or other digital tools like design for manufacture and assembly (DfMA). These are making offsite manufacturing of building modules and components more efficient and have been used for over a decade. At the end of the section on Contracting for Efficiency the QPC asks for information on ‘the key barriers to increased adoption of digital technologies, such as BIM, and the policies or practices that would allow the opportunities for digital technologies to be fully leveraged.’

 

Queensland has had a BIM mandate for public projects over $50 million since 2019, however the QPC does not think this worth mentioning or, worse, investigating. This was another missed opportunity to assess the costs and benefits of their BIM mandate, and the failure to recommend its retention and/or extension a mystery. Also, the BIM mandate is under the Queensland Department of State Development and Infrastructure, which has a 2024 Infrastructure and Workforce Productivity Plan with details on current and planned initiatives, The QPC does not refer to this plan or its effectiveness [5]. 

 

Industry Issues

 

There are other important industry issues not discussed, starting with construction costs and the volatility of the building cycle. Improving productivity through better project management and reform of the VET system are also overlooked. There is no discussion of digitisation and automation, digital tools and platforms, AI enhanced systems, and automated planning and code compliance checks. Also, industry contractual relationships and risk allocation are not considered. Subcontracting is flexible and a method to manage costs and risk, but direct employment has a smaller span of control and is more efficient. 

 

Although there is extensive coverage of building regulation and the NCC, the QPC does not discuss building defects and the lack of implementation of the 2018 report Building Confidence: Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry Across Australia recommendations on mandatory inspections and fire safety. Nor is the problem of flammable cladding in Queensland in the report, where from 2019 to 2023 there was a Safer Buildings Taskforce to advise the government on policies and actions and how to rectify combustible cladding. In August 2025 three public buildings still needed rectification and some unknown number have been rectified and removed from the online list on The Department of Housing and Public Works page, which says: ‘As of 31 May 2024:

·       976 private buildings require a solution to address cladding risk;

·       308 are potentially at risk and need to complete the checklist process;

·       345 have notified of removal or rectification.

 

Although the terms of reference were to look at other jurisdictions, there is no discussion of the NSW iCIRTsystem, developed by ratings agency Equifax, for assessing contractor and consultant capability and performance, despite clear evidence of the effectiveness of the system in NSW in improving building quality and addressing the problems of building defects and phoenixing by developers and contractors. Discussion of the 10 year latent defects insurance scheme that has started in NSW is also missing. 

 

Conclusion

 

The QPC has focused on regulation and planning as the main issues, but these are just two of the factors that affect onsite productivity, and arguably skills, technology and project management are more important. Also, while no-one disputes the importance of issues like costs, prices, competition, the supply chain, labour, skills, occupational licensing, procurement and contracting, these have been discussed and dissected over and over again. The QPC makes no new contribution to these issues.

 

The QPC’s 21 recommendations and seven reform directions are in four key areas. The first is improving government procurement policies, where well-known ideas on collaborative contracting, and selecting, sequencing, and sizing of public projects are recycled. These would all make the Queensland Government a better client and would probably increase productivity on public projects, but that can only have a small effect on the overall level of construction productivity in the state because most of the work done is for the private sector. The Queensland Government (and the other Australian Governments) have received these recommendations many times over the years. 

 

The second key area is improving land use regulations, including approvals and zoning, which are a third of the recommendations. The QPC does not directly address the reality that local government opposes new housing, although it does recommend an alternative development pathway for significant developments and reviewing the Building and Planning Acts. The issue here is planner productivity, which has fallen as regulatory complexity has increased, not construction productivity. Planning and zoning decisions have no effect on supply side issues such as the cost of construction materials and mortgage finance for new housing, providing the infrastructure needed for new developments, and the rate of conversion of approvals into commencements by developers.

 

The third key area is the regulation of building activity. The QPC recommends opting out of the 2022 NCC updates on building accessibility and thermal performance because of their cost effects, reviewing the regulatory framework and performance of the QBCC, and pausing rollout of trust accounts while investigating their costs and benefits. The QPC argues no government support for MMC is required, but regulatory barriers should be addressed. 

 

The fourth key area is improving labour market operation, mainly through reform of apprenticeship and training pathways, occupational licencing, skilled overseas migration, labour hire licensing, and allowing recognition of qualifications from interstate. These issues were recognised and had similar recommendations in the NSW and Productivity Commission reports. 

 

What the QPC report shows is that construction productivity in general, and residential productivity in particular, is being used as a stalking horse for the lack of supply of new housing. As in the previous reports from the NSW Productivity and Equality Commission and the Productivity Commission, the main focus is on a sclerotic planning and approvals process that delays and often prevents new housing. The real issue there is local government opposition to new housing and planner productivity, not construction productivity. 

 

Houses are larger and apartments smaller than a few decades ago, but how they are procured and built, and what they are made of, has not substantially changed in decades. Fundamentally, that is also why the level of productivity has not changed. While there are more electrical appliances and offsite manufacturing of trusses, windows, doors and cabinetry, the building structure and services like electricity, water and plumbing in a 1960s dwelling are those found in a new build today.

 

Construction in general and housing in particular has a well-established system of production that is efficient and flexible. It will only change if and when there is a clearly superior method of delivery that is also profitable. Tinkering with regulations, the NCC, planning and approvals processes, and occupational licensing might make a difference at the margin, but will not deliver the big improvement in productivity that is required. For that a commitment to increased digitisation and automation is necessary, with government policies, procurement and finance aligned. 

 

There are some glaring omissions in the report. The QBuild MMC has produced over 500 houses, but the QPC does not discuss or make any recommendation on the program. Queensland has had a BIM mandate for public projects over $50 million since 2019, however the QPC does not think this worth mentioning or, worse, investigating. There is almost no discussion on the use of BIM or other digital tools like design for manufacture and assembly. Construction costs and the volatility of the building cycle, improving productivity through better project management and reform of the VET system are also overlooked. Although there is extensive coverage of building regulation and the NCC, the QPC does not discuss building defects and the lack of implementation of the 2018 Building Confidence report. 

 

The productivity issues in the QPC report are not new and can be found in many other reports on the industry, although there are some that are specific to Queensland. The interim report’s recommendations are limited and most would be little more than modifications to the current system. While those may be worthwhile, because the current system can clearly be improved, there is no suggestion that a more radical approach might be needed or taken.

 

                                                            *

 

[1] The effect of the mining boom was the subject of a 2023 post on The Long Cycle in Australian Construction Productivity using GVA per person employed.

 

[2] The US research was discussed in an October 2024 post Recent Research on Construction Productivity.

 

[3] Discussed in the post Housing Productivity Report a Missed Opportunity on the  Productivity Commission’s report Housing Construction Productivity: Can We Fix It

 

[4] The QPC does not refer to the NSW Housing Development Authority, established in January 2025 to approve State Significant Developments and rezonings. By August it had approved 187 projects with over 70,000 dwellings. NSW has introduced a Pattern Book of six low and mid-rise housing designs with a 10 day approval pathway. Also in August, Victoria introduced a Single Home Code for deemed-to-satisfy houses that need no further approvals. This follows the Townhouse and Low-Rise Code introduced earlier in 2025.

 

[5] A 2021post was on BIM Mandates and  Construction Industry Policy



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Saturday, 9 August 2025

Digitisation of Australian Industry is Narrow and Shallow

 Changes in software capital expenditure and the capital stock

 



Industry investment in physical and intellectual assets is essential for building capacity and upgrading technology, and one reason for the low rate of productivity growth of Australian industry is the lack of business investment in the capital stock, which is the accumulated amount of machinery, equipment, buildings, structures, software and R&D in the economy. With investment the capital stock is upgraded and grows, and a low level of investment means slower growth in output, increasing economic inefficiency, less economic dynamism, and lower productivity.

 

Productivity is determined by the amount and quality of capital per worker, their skills and experience, and the rate of adoption of new technology. This post looks at the 2023-24 data from the Australian Bureau of Statistics for productivity, capital stock [1], and gross fixed capital formation (GFCF, i.e. capital expenditure or capex) on computer software. Because the ABS data on machinery and equipment (M&E) capital stock and GFCF includes investment in computers and information technology with all other M&E, the software data is one way of tracking the digitisation of Australian industry. 


 

Software and Labour Productivity

 

In 1987 Robert Solow made his well-known observation ‘You can see the computer age everywhere but in the productivity statistics‘, often referred to as the Solow paradox. Explanations for the paradox included measurement issues, the relatively small share of information technology (IT) in total investment, the time needed for industry to reorganise around IT, a substitution effect as computers made other capital like machinery and transport equipment more efficient, localised gains in IT manufacturing, that hard to measure service industries like finance and professional services were major adopters of IT, and the alignment of computers with bureaucracy as they created more but not always more useful work (like email chains, online forms and time wasted browsing the internet). 

 

Figure 1 shows Australia’s software net capital stock chain volume measure for All Industries (the capital stock adjusted for depreciation  and changes in prices), and the hours worked labour productivity measure for the 16 market sector industries. Up to 2021 they had similar paths as both increased at about the same rate, but over the last three years the software capital stock has grown rapidly, and much more than labour productivity, which returned to trend after the spike during COVID. There is an echo here of the late 1990s, when software capex and the capital stock increased during the early stages of the IT revolution and the internet but the rate of growth of productivity did not increase, and in fact fell in the years around 2000. 


 

Figure 1. Software capital stock and productivity

 
Source: ABS 5204 and 5260

Note: All Industries net capital stock chain volume measure, and hours worked labour productivity. 

 

There is no suggestion of causality here, with the post-2021 increase in software capital stock not reflected (yet) in the productivity index. This is different to the M&E relationship with labour productivity in Figure 2 below (from the previous post), where productivity rose with a two year lag after the increase in the M&E capital stock that began in 2006, then flattened out after M&E stopped rising in 2015, and rose again a couple of years after M&E increased in 2021. There are several reasons why the M&E capital stock has a more direct relationship with productivity: new M&E typically replaces older but similar M&E, so does not require a lot of training or reorganisation, and is unlikely to be underutilised; new M&E will usually be smarter and more automated, so increases output but requires less labour; small firms have access to the same new M&E as large firms; and diagnostic software in new M&E makes maintenance easier with less downtime. 


 

Figure 2. Machinery and equipment capital stock and productivity

 

Source: ABS 5204 and 5260

Note: All Industries net capital stock chain volume measure, and hours worked labour productivity. 

 

The differences between software and M&E are important, and explain why there is a weaker relationship between the software capital stock and productivity. First is the training and learning required with new software, particularly for large complex systems, and the time it takes to become familiar with a new system or major update. Second, underutilisation is an issue because there are often features in a software system that are not used, but have to be paid for. Third is the implementation challenge, because software and IT investments will often be disruptive and many have been expensive failures. Finally, to take full advantage of new systems will typically require reorganisation, with redesigned processes and restructured roles. Small firms find all these factors more challenging than large firms with more resources and deeper skill sets, and the weak relationship between software capex and productivity growth may be because of the large number of small firms. As an aside, these were the explanations given for the productivity slowdown around 2000, and now they will apply again in the adoption of AI by businesses [2]. 

 

The lack of a relationship between the software capital stock and labour productivity becomes more apparent when comparing their growth for different industries over 2020 to 2024. As Table 1 shows, a couple high productivity growth industries like Agriculture and Accommodation also had large software capital stock increases, but then so did negative productivity growth industries like Manufacturing and Retail trade. In a group of five industries with capital stock increases between 80% and 90%, the labour productivity growth varied from -20% for Mining to +5% for both Wholesale trade and Administrative and support services. For both productivity and capital stock changes, the aggregate outcome balances out a wide range of outcomes across industries. 

 

Table 1. Software net capital stock and productivity by industry 2020-2024



 

Software Capital Stock and Capex 

 

The top two industries in Figure 3 are Professional, scientific and technical services, and Finance and insurance services, and they accounted for 43% of total software net capital stock in 2024, showing how concentrated it is in Australia, and those two industries are 7.6% and 7.8% of industry gross value added respectively. These are service industries that have output measurement issues because they are not goods producing, which is part of the reason for the weak IT/productivity relationship. Adding Information, media and telecommunications, and Public administration and safety make up the top four industries with 51% total software net capital stock and 23.4% of industry gross value added. Also service industries. 

 

 

Figure 3. Software capital stock by industry

 

Source: ABS 5204. 

 

Software capex is also concentrated in the same four industries, and they accounted for 49% of the total in 2024. Professional, scientific and technical services, and Finance and insurance services were again by far the largest. They are followed by Information, media and telecommunications and Public administration and safety. The next four industries had between $2 and $2.5 billion software capex and accounted for another 22% of total software capex. These were Electricity, gas, water and waste, Health care and social assistance, Retail trade, and Transport, postal and warehousing. Those eight industries did 71% of software capex and are 43.7% of industry gross value added. 

 

The middle group of five industries of Construction, Education and training, Administrative and support services, Manufacturing, and Wholesale trade had 19% of capex and 18% of software capital stock in 2023-24. These industries are 25.5% of industry gross value added. 

 

The bottom five industries are Agriculture, forestry and fishing, Accommodation and food, Mining, Arts and recreation, Rental, hiring and real estate services, had 7% of software capex and capital stock in 2023-24. These industries make up 19.3% of industry gross value added, of which Mining is 10.4%. 

 


Figure 4. Software capital expenditure by industry

 

Source: ABS 5204. 


 

Tracking Digitisation with the Software Capital Stock

 

The ABS does not separate capex for computers and IT from the M&E total, so the digitisation of Australian industry cannot be tracked through the M&E data. However, there is the data for computer software that was used above, and that provides an alternative method of tracking digitisation, because investment in computing equipment will also require expenditure on software to make it run. 

 

Figures 5 and 6 have the percent change in the annual chain volume measure of the software net capital stock for each industry over five year intervals since 2000. This shows how annual capex, which varies considerably from year-to-year, accumulates over time into capital stock, and comparing the change in the capital stock in the five periods is indicative of the digitisation of Australian industry in three ways.

 

 First, twelve of the 18 industries had their biggest increase in their software capital stock in the most recent 2019-2024 period, and for those industries this was the biggest percentage change in any of the five periods. Three other industries were close to their previous peak change, that was in the 2000-2004 period. The substantial  increase in the software capital stock between 2000 and 2024 suggests an increase in the digitisation of industry. 

 

Second, for nine industries the change in their software capital stock in 2015-2019 was lower than the previous 2010-2014 period, and in another five was similar. This suggests there had been a trend of falling software capex in many industries that was reversed in the most recent period of 2020-2024.

 

Third, between 2020 and 2024 seven industries increased their capital stock by over 100%, and seven between 75 and 99%. This level of software investment across so many industries is unprecedented in Australia.  For example, in 2000-2004 Mining and Professional services both increased their software capital stock by over 100%, and in 2010-2014 Retail trade by 95%, but there has not been a software investment surge in the past comparable to the one in 2020-2024. 


 

Figure 5. Software capital stock increase by industry over five year periods

 

Source: ABS 5204. Annual chain volume measure of net capital stock.

 

Figure 6. Software capital stock increase by industry over five year periods

 

Source: ABS 5204. Annual chain volume measure of net capital stock.

 


Out of the four software-intensive industries, Professional, scientific and technical services, Finance and insurance services, and Public administration and safety all had larger capital stock increases in 2020-2024 over 2015-2019, but for Information, media and telecommunications the increase fell to half the earlier rate of change. The 150% increase for Professional services was the second largest out of all industries, behind Retail trade (where increased online shopping will have been a driver of software capex).  

 


Conclusion

 

Australian industry has greatly increased investment in computer software in recent years. Fifteen out of eighteen industries had or were close to record levels of capital expenditure on software for the five years 2020-2024, and seven of those industries increased their software capital stock by over 100%. This is a useful indicator of the increasing digitisation of industry, because the previous period of peak capex was 2000-2004, and that was followed by a decade and a half of lower capex  for most industries.

 

However, software capex and capital stock is highly concentrated in Australia. Two industries, Professional, scientific and technical services, and Finance and insurance services, accounted for 43% of total software net capital stock in 2024, and 34% of capex. Those two industries are 7.6% and 7.8% of industry gross value added respectively. With Information, media and telecommunications, and Public administration and safety, the top four industries have 51% total software net capital stock, 49% of capex, and 23.4% of industry gross value added. However, of those four industries, only Professional services with 150% had a large increase in capital stock in 2000-2024, Information, media and telecommunications increased by only 24% and the other two by around 60%. 

 

The next four industries were Electricity, gas, water and waste, Health care and social assistance, Retail trade, and Transport, postal and warehousing. Those accounted for another 22% of total software capex, 21% of capital stock, and almost 20% of industry gross value added. The largest increase in 2020-2024 capital stock was 190% by Retail trade, as increased online shopping drove software capex, and Health care had a 140% increase. 

 

A group of five industries of Construction, Education and training, Administrative and support services, Manufacturing, and Wholesale trade, had 19% of capex and 18% of software capital stock in 2023-24. These industries are 25.5% of industry gross value added. 

 

The bottom five industries of Agriculture, forestry and fishing, Accommodation and food, Mining, Arts and recreation, Rental, hiring and real estate services, had 7% of software capex and capital stock in 2023-24. These industries make up 19.3% of industry gross value added, of which Mining is 10.4%. 

 

The software intensive industries are all services, and it is notable that the goods producing industries of Agriculture, Construction, Manufacturing and Mining are in the bottom half of industries for the value of their capital stock. With the exception of Agriculture, which has the lowest capital stock but high productivity growth, the other three are among the productivity laggards in Australia, and have had little or negative labour productivity growth over the last few years. 

 

The link between productivity and software capex and capital stock is, however, a weak one. Training and learning is required for new software, there are often features in a software system that are not used, software and IT investments will often be disruptive and taking advantage of new systems needs reorganisation, redesigned processes and restructured roles. Small firms find all these factors more challenging than large firms with more resources and deeper skill sets, and one part of the explanations for the weak relationship between software capex and productivity growth may be the large number of small firms. 

 

Digitisation of Australian industry is narrow and shallow. It is narrow because two industries worth 15.4% of industry gross value have 43% of total software net capital stock, and do 34% of software capexIt is shallow because adding the next two industries gives the top four industries 51% of software capital stock, 49% of capex, and 23.4% of industry gross value added. The top eight industries account for 73% of software capital stock, 71% of software capex, and 44.7% of industry gross value. The other 12 industries that make up 45% of industry gross value (the balance is in ownership of dwellings) only account for 26% of software capex and 25% of software capital stock. 

 

An important point is  that the service industries that make up the top eight have output measurement issues because they are not goods producing, and this is another part of the explanation of the weak IT/productivity relationship. A related factor may be an increase in the number of employees working with computers due to increased use of IT, but there is no way to identify and measure any change in the quantity or quality of output due to efficiency gains. 

 

Increasing capex on software would have a marginal effect on aggregate capex. In 2023-24 total GFCF was $649 billion, with $245 billion on Non-dwelling construction the largest component, followed by $142 billion on Dwellings, $129 billion on M&E, $41 billion on Software and $27 billion on R&D. Nevertheless, raising capex on software will be a necessary element in improving Australia’s productivity growth rate because it is an important enabler of increased efficiency and leads to reorganisation of processes and organisations. Incentives to increase software capex like accelerated depreciation or tax write-offs would be effective, and could be supported with other policies to increase training and skills development. Targeting small and medium sized firms would greatly increase the effectiveness of such policies.

 

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[1] Capital stock in the current year is last year’s stock minus depreciation plus new investment. The volume measure of Net capital stock is adjusted for depreciation due to wear and tear from use and changes in prices. 

 

[2] On 5th August the Productivity Commission released their report on Harnessing Data and Digital Technology