Accounting for Infrastructure Service Delivery by Government: Generational Issues

Abstract

Infrastructure service provision by government creates huge distributional issues about service availability and performance over time and the relative funding burdens borne by successive generations of consumers across time. But providing financial disclosure on these issues through inter‐generational accounting pre‐supposes that accounting measurement is both generationally neutral (temporal neutrality) and does not legitimate any particular pattern of distribution. At the very least, accounting measurements of service provision costs should possess the attribute of distributional fairness. They should not bias the inter‐generational allocation of cost or funding burdens. We argue that the forced application of inappropriate commercial accounting concepts of asset valuation, depreciation and capital maintenance does produce significant generational bias. More flexibility is required to produce the necessary accounting measurement attributes for financial disclosure on whether government has discharged its continuing accountability for inter‐generational equity in burden sharing. We discuss three conceptual issues and illustrate the need for flexibility by proposing an alternative ‘flow of obligations’ approach which does not require reference to valuations of community service resources or arbitrary cost allocations under depreciation.

Intergenerational Equity: Treatment of Infrastructure in New Zealand Local Government Financial Planning

“…This implies future service potential, with the expectation of costs being shared equitably across generations of users. McCrae and Aiken (, p. 276) claim that, as infrastructure assets incorporate the potential for service provision into the future, maintenance and renewal should occur ‘so they are passed on to future generations of users in a comparable form to [an] inheritance’.…”

“…However, for intergenerational equity one needs to look beyond just financial repayments and consider whole‐of‐life expenditure. McCrae and Aiken () suggest a ‘flow of funds’ approach, which focuses on the cost and obligations incurred in current service provision, including the cost of borrowings, with these funds flows being amortized over the period of greatest use.…”

“…Accounting provides the basis for decision making and financial planning. However, there are questions as to whether government accounting can ‘measure the costs of infrastructure service provision in a generationally unbiased way’ (McCrae and Aiken, , p.266). We argue that, as foreseen by Pallot (), accounting standards and generally accepted accounting practices (GAAP) have a propensity to hinder accounting that considers intergenerational equity.…”

“…The provision of infrastructure, particularly roads, was considered to be the key driver of expenditure (Rates Inquiry, ). McCrae and Aiken (, p. 269) assert that:

the sheer size of the funding requirements, the social impacts and the political significance associated with infrastructure projects, is sufficient to ensure that inter‐generational funding and tax burden issues are a fundamental issue for financial disclosure.

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Financial Reporting Dilemmas for the Maltese Local Government

“…It has been claimed that the application of accrual accounting in the public sector leads to measurements that are not reliable, fair and neutral (McCrae & Aiken, 2000). Accrual accounting has been criticised because it enables organizations to defer liabilities and burden future taxpayers with these costs (Hoque & Moll, 2001).…”