Hide Rodney: Local Government Borrowing Bill — First Reading 
Hide Rodney: Local Government Borrowing Bill — First Reading 
[Volume:672;Page:18745] 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 I move  
That the Local Government Borrowing Bill be now read a first time. 
 At the appropriate time I intend to move that the bill be referred to the Local Government and Environment Committee with an instruction that the committee report finally to the House on or before 1 August 2011 and that the committee have authority to meet at any time while the House is sitting except during oral questions and during any evening on a day on which there has been a sitting of the House and on a Friday in a week in which there has been a sitting of the House despite Standing Orders 187 and 190(1)(b) and (c).  
This bill is to facilitate the establishment and operation of a new company the New Zealand Local Government Funding Agency. The funding agency will assist local authorities to borrow funds at lower interest rates than they can achieve now. The establishment of an agency of this type was recommended by the Capital Market Development Taskforce and was one of the proposals arising from the Government’s Job Summit. The proposal has been developed by local government and has widespread support amongst local authorities. Let me take just a minute to acknowledge the work of our president Lawrence Yule Eugene Bowen and the other members of Local Government New Zealand. 
The Government’s role in this proposal is to assist local government to achieve its objectives. In addition to introducing this bill the Government proposes to take a 20-percent shareholding in the funding agency. 
For the funding agency to succeed it must obtain a high credit rating. The bill contains provisions designed to assist that. Clause 7 extends the exemption local authorities have from Part 5D of the Reserve Bank of New Zealand Act 1989 to the funding agency. Part 5D deals with the regulation of deposit takers. Similarly clause 8 applies the Securities Act 1978 to the funding agency as if it were a local authority. Local authorities now have some exemptions from the Securities Act in relation to requirements for prospectuses. 
Clause 9 authorises local authorities to guarantee the obligations of the funding agency. This is critical to its credit rating as it gives investors in the funding agency the certainty that if the agency defaults they can recover their money from the local authorities to which it is lent. Clause 9 also permits local authorities to lend money to the funding agency on favourable terms. Local authorities borrowing money from the funding agency will be required to reinvest some of their borrowing with the agency which will hold those funds in short-term investments. This will ensure that the agency has a high degree of liquidity at all times. 
Clause 10 requires participating local authorities to include in their financial strategy their policy on guaranteeing the obligations of the funding agency and on guaranteeing the obligations of other local authorities to the funding agency. The structure requires participating local authorities to guarantee each other’s debt to the funding agency. This clause requires local authorities that give such guarantees to be clear to their communities about the obligations that they are accepting. 
The funding agency may borrow in foreign currencies then convert that currency to New Zealand dollars before lending to local authorities. To maintain a high credit rating lenders to the borrowing agency need to be confident that they are not burying any exchange rate risks. Clause 11 achieves that by permitting local authority guarantees to be denominated in foreign currencies. 
Clause 12 contains technical provisions designed to ensure that transactions of the funding agency and commitments by local authorities to the funding agency can be enforced. Again these provisions assist in promoting the creditworthiness of the funding agency. 
Clause 14 exempts the funding agency from income tax and exempts any dividend income local authorities receive from the funding agency from income tax. As it stands local authorities are not taxed on financial transactions they undertake and this provision maintains that status for transactions undertaken on their behalf by the funding agency. 
Clause 15 provides authority for the Minister of Finance to lend money to the funding agency without further appropriation if it is necessary or expedient in the public interest and necessary to meet an exceptional and temporary liquidity shortfall affecting the funding agency. This authority expires after 10 years. Again the purpose of this provision is to give investors confidence in the creditworthiness of the funding agency for their investments. However clause 16 makes explicit that the Crown does not guarantee the debt of the funding agency just as the Crown does not guarantee the debt of any local authority. Clause 16 requires a statement to be included in all relevant documentation that the Crown does not guarantee the funding agency’s debts or arrangements. 
Clause 18 exempts the Auckland Council from the prohibition in the Local Government Act 2002 on local authorities borrowing in foreign currencies. To maintain a high credit rating the funding agency will have to spread its lending amongst a range of local authorities. Having a concentration of lending in any particular local authority would jeopardise its credit rating. Therefore the funding agency will not be able to meet all of the Auckland Council’s borrowing needs. Without an exemption the Auckland Council would end up with more limited access to foreign currency borrowing than other local authorities. All other local authorities will be able to fully access foreign currency markets through the funding agency but the funding agency will not be able to achieve this for the Auckland Council. The bill therefore proposes a specific exemption for the Auckland Council to borrow in foreign currencies. Clearly the Auckland Council is of a size to engage the necessary skills to manage the risks of borrowing in foreign currencies. 
It is encouraging to see local authorities taking a lead in this matter and the Government is happy to assist in that process. Just as Government agencies are focusing on delivering more for less local authorities also need to find ways of lowering their costs and this is one such way. Thank you.