From: National Business Review, 2 May 2003 p55
Consumers stung in ‘sector neutrality’ sham
By Sue Newberry and Alan Robb
New Zealand will adopt international financial reporting standards from 2005.
Developed by the International Accounting Standards Board (IASB), they specifically
apply to profit-oriented operations. They are not designed for not-for-profit
activities in either the private sector or public sector.
New Zealand’s Accounting Standards Review Board (ASRB) intends to adapt the
international standards by adding “requirements specific to public sector
entities (and all not-for-profit private sector entities)”. It claims
this will result in “sector neutral” standards.
“Sector neutral” is a misleading term that came into prominence with the
privatisation agendas of Roger Douglas and Ruth Richardson. Papers
obtained under the Official Information Act show that sector neutrality is
a sham that seems designed to covertly advance the privatisation agenda.
When it became apparent in 1990-93 that the government’s pursuit of privatisation
would be political suicide, some advocates adopted a more subtle approach.
For example, key Treasury advisers proposed that the government could still
achieve its strategy by focusing on the financial numbers. The Treasury
would apply “increasingly sophisticated analysis and argument” in support.
Some business lobbyists argued for compulsory competitive tendering as had
been done in the UK but this generated strong public opposition.
The Treasury advice was that work started on developing the fine details
of the public sector financial management system would make compulsory competitive
tendering unnecessary. Ministers would only need to focus on the numbers
and buy from the lowest-cost provider.
Biases were then built into the accounting rules of the public-sector financial
management system to inflate reported costs. This was termed competitive
neutrality, but in fact it tipped the purchasing decision in favour of private
providers who appear more efficient, if efficiency is regarded as having
the lowest cost. No triple bottom line considerations here.
Other business-sector representatives sought incentives for private-sector
investment, including investment in infrastructure. Yet tax incentives seemed
to be ruled out but not so other incentives that would force consumers to
pay more for services. These related to the accounting policies about
the amount at which infrastructure assets should be reported in financial
reports, and the appropriate accounting treatment for their management.
The Treasury favoured optimised deprival value for assets and mandatory depreciation.
The Audit Office and the Society of Local Government Managers argued against
this. They preferred recognition of the actual costs to maintain infrastructural
The difference in accounting treatment is highly relevant to setting charges
for the use of infrastructure assets. The Treasury preferences echoed
techniques promoted internationally by privatisation advocates to “bid up”
asset values and user charges to make privatisation more attractive.
The accounting profession then entered the fray, announcing in 1992 that
its accounting standard for fixed assets (SSAP28) should be revised to apply
to infrastructure assets and conform with valuation standards. Meantime,
an Institute of Valuers revision apparently introduced optimised deprival
Before the 1993 general election, the Treasury, previously opposed to the
idea that financial reporting standards should be given legislative force
for business sector financial reporting, reversed its position.
The Financial Reporting Bill had had its second reading in the House when
the Treasury proposed that its application should be extended to the public
sector. A late amendment to that effect was slipped in by supplementary
order just before the third reading. The ASRB and its “sector neutral”
approach to New Zealand’s financial reporting standards became established
without any chance for public input.
Approved by the ASRB in 2001, FRS3: Accounting for Property Plant and Equipment
is convoluted and controversial. It devotes considerable attention
to infrastructure assets. Depreciated replacement cost, the definition of
which is little different from optimised deprival value, is mandatory for
Depreciation must be written off whether or not assets are falling in value.
The long run average cost of renewal method of accounting for infrastructure
assets is banned even though it makes commonsense and avoids the need for
expensive recurring revaluations.
FRS3 seems designed to hide an unpopular political agenda or giving it the
façade of theoretical soundness. If that is the intent, it fails.
From a theoretical perspective, it is nonsensical.
FRS3’s requirements are not sector neutral. They favour investment
in infrastructure assets, while rules within the public sector financial
management system are designed to prevent it. As a result , private
sector investment is favoured.
The accounting valuations help rationalise high and increasing charges on
consumers, leaving them vulnerable to opportunistic behaviour by operators
of essential infrastructure services. In short, “sector neutrality”
is a sham that creates a system biased against consumers.
Sue Newberry and Alan Robb are senior lecturers in accountancy at the
University of Canterbury, New Zealand.