Local government bond bank a step closer as select committee recommends bill creating it be passed

By Gareth Vaughan

The Local Government Funding Agency (LGFA) is a step closer after Parliament's local government and environment select committee reported the bill that would establish the so-called local government bond bank back to the House recommending it be passed with minimal changes.

The Local Government Borrowing Bill was co-sponsored by Finance Minister Bill English and Rodney Hide, the Minister of Local Government and former Act Party leader. The Bill will establish the LGFA which will be able to issue debt on behalf of all participating local authorities. The government also says the LGFA's establishment will aid the development of a liquid market in standardised local authority bonds, which would boost the local capital markets.

And the Bill will also change existing law to enable both the LGFA and the Auckland Council to borrow in currencies other than the New Zealand dollar. The new  "Super City" wants to be able to borrow money in foreign currencies as it seeks longer-term funding in a move it estimates will ultimately save about NZ$10 million a year. The LGFA and Auckland Council will hedge exposure to interest rate and foreign currency fluctuations. Local councils are currently only allowed to borrow in the New Zealand dollar.

The 11 member local government and environment select committee, chaired by National's West Coast-Tasman MP Chris Auchinvole, says it received and considered just six submissions on the Bill and heard four submissions.Submittors included the Auckland Council, Democrats for Social Credit, Federation of Maori Authorities, the Steering Group set up to represent the LGFA's nine establishment shareholder councils, and Local Government New Zealand. See the select committee's full report here  and the submissions here.

Central govt can lend to the LGFA

The LGFA will be a limited liability company with its shares held by central government and local authorities. At least 80% of the shares will be held by councils, making the LGFA a Council-Controlled Trading Organisation (CCTO). The government will be able to lend money to the LGFA if it's necessary to do so in the public interest, it's necessary to do so to meet an exceptional and temporary shortfall, and if the money is lent on commercial terms. However, the LGFA's debt won't be guaranteed by the Crown.

The main amendment to the Bill recommended by the select committee means that any guarantee, indemnity, security, loan or other financial accommodation given by a local authority in relation to the LGFA's obligations whilst it's a CCTO, would continue if it ceased to be a CCTO. This change will "provide certainty" for potential investors who might otherwise get the impression there's a risk of key transactions being overturned if the LGFA ceases to be a CCTO, the select committee says.

Council debt tipped to double in 5 years to more than NZ$11 billion

In its submission the Steering Group says current long-term council community plans indicate local authority debt will double over the next five years to more than NZ$11 billion. The plan is for the LGFA to issue bonds to both institutional, or professional, and "ma and pa" retail investors and on-lend the money raised to participating councils to help fund their infrastructure and other capital investment costs. The idea is to achieve savings through scale and through a strong credit rating at or near AAA.

Auckland Council, Christchurch City Council, Whangarei District Council, Western BOP, Tauranga City Council, Hamilton City Council, Wellington Regional Council, Wellington City Council, and Tasman District Council have approved the LGFA scheme meaning they're likely to be the establishment shareholders.

The Steering Group says currently pricing, length of funding term and other terms and conditions vary considerably across the local government sector and are "less than optimal" due to the limited debt sources available being the domestic banks, private placements, wholesale bonds to domestic institutional investors, and retail bonds to domestic retail investors. The  sector's fragmentation with 78 local authorities, many of whom lack scale, also doesn't help.

Furthermore "regulatory restrictions" mean local authorities are unable to access offshore - foreign currency - capital markets.

"The compliance process for local authority retail bond issuance is burdensome," the Steering Group says. "The large sector borrowing requirements and high credit quality/strong security position (for example a charge over rates) of local authorities creates the opportunity to address these issues and to rectify the situation. A centralised local authority debt vehicle has the capacity to generate significant benefits."

The LGFA will have tax exemptions, won't have to issue prospectuses and won't be subject to the Official Information Act. See more here.

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