By Gareth Vaughan
The Local Government Borrowing Bill, which will establish the Local Government Funding Agency (LGFA) which aims to reduce local council's borrowing costs and allow the Auckland Council to borrow in foreign currencies, is set to be passed into law tonight.
Overseen by ACT Party MP and Minister of Local Government Rodney Hide, the Bill's third reading in Parliament is set for today and is expected to be passed before the House rises tonight, a spokesperson for Hide told interest.co.nz.
Hide says the LGFA will issue local government bonds to investors and on-lend the funds raised to participating local authorities to help meet their funding needs. This pooled approach will help local authorities borrow money at lower interest rates than they currently can, says Hide, noting industry body Local Government New Zealand estimates the LGFA will save councils about NZ$25 million annually through scale and by obtaining a strong credit rating at or near AAA.
In a submission on the Bill a Steering Group set up to represent the LGFA's nine establishment shareholder councils, says current long-term council plans suggest local authority debt will double over the next five years to more than NZ$11 billion.
Representing 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, the Steering Group says local authorities’ debt funding options are currently limited to the domestic banks, private placements and wholesale bond issues to domestic institutional investors and, to a lesser extent, retail bond issues to domestic retail investors.
'Borrowing restrictions need to be lifted'
The Steering Group notes the local government sector is fragmented with 78 local authorities and that, on their own, a significant number of these lack scale. However, the 10 biggest ones account for 68% of total sector borrowings with average borrowings of NZ$470 million and the remaining 68 have average debt of NZ$33 million. Existing regulatory restrictions such as local authorities not being allowed to tap overseas foreign currency capital markets, a "burdensome" compliance process for local authority retail bond issuance, and the sector's big borrowing needs and strong security position through a charge over rates, creates the opportunity to address these issues and to "rectify" the situation.
Hide says 35 local councils plan to participate as shareholders in the LGFA with another 14 planning to participate in the scheme as guaranteeing borrowers. However, his spokesperson declined to name them citing ongoing negotiations between the Department of Internal Affairs and various councils over the LGFA's establishment.
Meanwhile, Hide - reiterating what the government's Capital Market Development Taskforce said in 2009 - says the LGFA will strengthen New Zealand’s capital markets by establishing a new high-quality investment option.
Hide notes the Bill specifically states that the government doesn't guarantee the obligations of the LGFA but it does give Minister of Finance Bill English the authority to lend money to it in "exceptional circumstances" with this authority expiring after a decade.
The Bill will also enable the Auckland "super city" Council to be able to borrow money in foreign currencies, something local councils are currently prohibited by law from doing. The Auckland Council says borrowing money in currencies other than the New Zealand dollar will ultimately save it about NZ$10 million a year and says it'll hedge its exposure to interest rate and foreign currency fluctuations. See more on the Auckland Council's plans here.
Other local authorities will be able to borrow through foreign currency markets indirectly through the LGFA.
Parliament's Local Government and Environment Committee unanimously recommended the Bill be passed in July, recommending just minor technical changes. See more on this here.
The LGFA will be a council-controlled trading organisation (CCTO), meaning local authorities can guarantee the obligations of the LGFA, or lend money to it on favourable terms. Any transaction it enters into would continue, even if the LGFA's ownership structure changed and it ceased to be a CCTO, Hide says, giving potential investors comfort that key transactions such as guarantees, won't be overturned if it ceases to be a CCTO.
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