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 assets.

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 value.

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 specialised assets.  

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.