Local Government Borrowing Bill — In Committee 
Local Government Borrowing Bill — In Committee 
[Volume:675;Page:21163] 
Local Government Borrowing Bill 
In Committee 
Part 1 New Zealand Local Government Funding Agency Limited 
PHIL TWYFORD (Labour) 
: 
 We do not have long for this debate this afternoon and that is a good thing because there is a lot of consensus about the Local Government Borrowing Bill. There was good discussion at the Local Government and Environment Committee. One of two minor items were debated but there was broad agreement if I am not wrong with the intent and the content of this bill. 
The purpose of the bill is pretty clear. It is the recognition that debt is a necessary tool for local government in this country. A significant amount of ratepayers’ funds are used for the cost of borrowing money particularly for capital items. The Local Government Funding Agency which this bill establishes will save a significant amount for the ratepayer. There is some question I think about whether the amount of $25 million will in fact eventuate given the fall in interest rates over recent times but I think it will probably still save a significant sum. The Auckland Council alone estimates that this bill will save it about $10 million a year and perhaps the Minister in the chair the Minister of Local Government might like to take a call and let us know what the latest estimates are. 
Part 1 makes a number of legislative adjustments that will give lenders confidence that the Local Government Funding Agency is an institution that they can rely on and will reduce compliance costs for the agency. The Local Government Funding Agency will be borrowing offshore. The bill changes the Local Government Act to exempt the Local Government Funding Agency from the prohibition on local authorities borrowing in foreign currency. The funding agency will also provide a vehicle that will be able to make retail offerings to the so-called mum and dad investors in New Zealand and that is another really positive benefit of this bill and this initiative. It will add to the efforts to deepen and strengthen New Zealand capital markets by giving mum and dad investors the opportunity to buy bonds and invest in New Zealand’s infrastructure. 
I congratulate the Minister of Local Government on this bill. We have supported this bill all the way along and we have supported the efforts to push it up the Order Paper to ensure that it would be progressed through all its stages and passed before the House rises for the general election. It is particularly important to note that the issue of debt raises different responses from parties across the political spectrum. Parties on the right tend to want to rise to the challenge of how we make the really significant investments that are needed in infrastructure by having recourse to privatisation and public-private partnerships. What we like about this mechanism is that it provides one alternative to those responses. It allows councils and ratepayers around New Zealand more of an opportunity to own their own future and it mobilises the savings of New Zealanders to invest in water treatment plants transport infrastructure and all the necessary capital items that local governments have to invest in. 
I will leave it there as an opening statement and I look forward to hearing from the Minister. 
STUART NASH (Labour) 
: 
 As Labour’s spokesperson on local government Phil Twyford mentioned we support the Local Government Borrowing Bill. Members heard something before that I thought I would never ever hear in this House. I thought I heard Phil Twyford praise Rodney Hide. I ask Mr Twyford whether I was right. 
Phil Twyford 
: It’s true. 
STUART NASH 
: Gee so it must be good. It must be good. We do support this bill. There are a number of reasons why I support this bill. It makes common sense and it is very pragmatic. In fact it was probably one of ours before it came into the House. But one of the main reasons I support this bill is that I think it provides one of those models that could take the place of State asset sales. This allows people to go out there and invest money without selling equity or it allows local authorities to raise money without having to sell off assets. This is particularly relevant for example to my colleague Brendon Burns who has brought up many times in the media—and I think even in this House in a number of speeches—the concern that he has about the Christchurch City Council selling its assets to fund infrastructural development redevelopment and construction. I have no doubt that Mr Burns will be talking about this matter when he takes a call in a couple of minutes. 
We are talking about Part 1. This part facilitates the operation of the funding agency. As a consequence of that and as a consequence I suppose of the unique nature of this legislation in clause 3(2) a number of things have had to be set up to allow this agency to work in a manner that optimises its mandate. For example paragraph (a) states that Part 1 “exempts the Funding Agency from certain regulatory or taxation criteria that would otherwise apply to it; and (b) applies certain regulatory or taxation criteria to the Funding Agency that would otherwise not apply to it;”. I suppose that that shows the unique nature of this bill and the fact that it is absolutely necessary. 
This agency will issue debt on behalf of all participating local authorities. If the cooperation and support from councils are sufficient the agency will be expected to achieve a credit rating scale specialisation that will yield significant saving for the participating local authorities. I suppose that in the end that will not only save the sale of these council-owned assets but also allow councils to better manage limited resources. Hopefully it may allow councils to drop their rates. I know for example that in the area I am from Napier the council has only about $4 million of debt but the Hastings District Council has about $60 million of debt which is expected to blow out to about $90 million of debt in 3 years. The cost to the ratepayer of financing that debt is extremely high and of course every dollar that is spent on financing debt is money that cannot be spent on improving council infrastructure building council assets and basically making sure that the city is running. But it also means that councils have to levy ratepayers a much higher amount in order to finance their debt. So that is the second reason why I think this is a very good bill. 
Although big is not always better if participating local authorities are brought together that allows economies of scale. This is one area where we can get those synergies that allow the benefits I have talked about. The operation of the funding agency will aid in the development of a liquid market in standardised local authority bonds. These will benefit retail and wholesale investors and be positive for the New Zealand capital markets. 
If there is one thing I have a concern about it is the lack of depth in our capital markets. I also say that the way to get that depth is not to sell our State assets but to sell these sorts of bonds. I suppose if people have a debt bond backed by a local authority that provides opportunity for those sorts of what we call ma and pa investors which I think is a misnomer actually. People who want to invest in the stock market or in our capital markets will be able to invest. I assume that the bond will be quite a low-risk bond and quite a low-returning bond but it will provide another option in the whole suite of options that are required to provide depth in our capital markets which is hugely important. I think that with the collapse of finance companies we are now seeing people becoming more and more risk-averse so this provides another option which is great. 
The bill provides the funding agency with certain legislative entitlements and exemptions that will allow it to be treated as if it were a local authority in terms of how it raises money— 
BRENDON BURNS (Labour—Christchurch Central) 
: 
 I join with my colleague Phil Twyford in acknowledging the role of the Minister of Local Government in bringing the Local Government Borrowing Bill to the House and through the House. This bill may be the last bill he brings to the House and I want to acknowledge that I think it is very sensible legislation. I acknowledge the good work he has done to bring it to this point. 
The bill is good sensible legislation because it embodies a collectivist approach. It uses what sometimes might be regarded as the collective power and might of a collection of local authorities—not the power and might of the State—to bring down the rates at which they borrow and to pass those lower rates on to their ratepayers in order to get more done for their ratepayer dollars. That is a good option for local authorities and when we consider some of the options and alternatives that are in the market place—and in Government policy at the moment such as asset sales—I think this is a very sensible measure indeed. 
My colleague Stuart Nash picked up on a point that I was going to raise and it is about one of the options that I think this bill might preclude—one hopes—but it is not clear. My city of Christchurch obviously faces enormous debt costs in respect of the earthquakes of the past year. A very fine plan for the rebuild has been released. It is a futuristic focused plan from the city council which has been put together by the city’s planners in just 3 months when normally a long-term plan like that would take some years. The estimate of the cost of the plan for the rebuild of the central business district alone for the city council is of the order of $2 billion. 
That is a curious figure in one respect because the Christchurch City Council also owns about $2 billion of assets. I applaud the council for its visionary plan and I say that we need instruments like this bill to allow the council to borrow. Christchurch ratepayers are already facing a rates rise this year of about 7.1 percent—7.1 percent—and about 1.5 percent of that is directly related to earthquake recovery costs. 
But there is another option that I fear which is that the city council will be forced to sell its assets by this Government. I would like to ask the Minister in the chair the Minister of Local Government whether he has been aware of any discussions in respect of that as this bill has been brought together. This bill embodies a sound principle around an entity like the Christchurch City Council being able to use the funding agency to borrow at competitive rates and to hold down the cost of rates increases for the good citizens of Christchurch as we try to fund our way through the enormous disaster that has befallen our city. As a matter of record in the 2011 report on the estimates of the finance Minister from the Finance and Expenditure Committee there is in fact a recognition of the sale of Christchurch City Council assets as an alternative to the measures that this good bill introduces; it is there on the books. 
As the report of the Finance and Expenditure Committee recorded “As the Canterbury Earthquake Recovery Act allows the sale of Christchurch City Council assets to fund the rebuilding of the city we asked the Minister of Finance whether he could guarantee that this would not happen. The Minister said that this was a matter for the city council to decide. He added that the Government would discuss cost-sharing with the city council but that it was important that the council have a stake in the process which included sharing the costs to ensure that value for money was achieved.” 
So there on the record of the Parliament is the fact that the Minister of Finance has acknowledged that there is capacity under the Canterbury Earthquake Recovery Authority legislation to require the sale of the city council’s assets in Christchurch. I ask the Minister whether he can confirm for us please whether that issue was discussed as this bill was brought together. This bill is a sound logical sensible pragmatic way to deal with the debts of Christchurch and other cities. Selling assets is a one-off sugar hit and it carries enormous long-term costs. 
Those assets in Christchurch have returned many hundreds of billions of dollars to our city. Orion—the power network—alone has provided a billion dollars in returns over the last 20 years. Even the Minister of Finance might acknowledge that that is a pretty formidable rate of return for any commercial organisation. The thought that my ratepayers and the citizens of Christchurch may face an option other than the one this good bill provides is a very very scary prospect. I would like the Minister in the chair to comment on that at some point through the Committee stage. 
Hon PETE HODGSON (Labour—Dunedin North) 
: 
 I think it is really good to be able to say something nice about the Government and in particular about the ACT Party. It is a rare event. I think this Local Government Borrowing Bill is a mighty fine idea and I would like to congratulate the Minister in the chair the Minister of Local Government on it. I welcome the speedy passage of the bill. The origin of it is something I know a little bit about because we have had trouble with our capital markets for a long time. They have never been particularly deep and we have had difficulties in many many areas especially in the private equity area. When I was Minister for Economic Development we established yet again a group to take a look at the issue of capital markets in New Zealand. One of its recommendations was this idea and I believe it actually made it—although I could have my history wrong—through to the National Government’s attention if you will by way of the Job Summit immediately after the change of Government. Whatever its origin and wherever it came from it is a really mighty fine idea. 
It is not a new idea. There is a bit of a health sector bank that exists. It does not go to the public to sell bonds it does not raise money from mum and pop investors but what it does do is keep the transaction costs for some financial activities of district health boards lower than they would otherwise be. Where district health boards have bridging finance issues or they are buying and selling land or they are dealing with Treaty settlements or whatever then having a bank for all district health boards is a hell of a lot cheaper than not. This idea which is not a bank so much as a fund—I understand the difference—is none the less of a similar ilk. I just think that the Government should be congratulated on progressing it. I could get sniffy about the delay. It really is quite a long time and quite a lot of savings will have been forgone as a result of that delay. But if the savings are worth $25 million and I understand that is the estimate then that is $25 million of impost that does not fall on ratepayers around the country and that has got to be a good thing. It is just straightforwardly a good idea and it is to be commended. 
Different local authorities behave differently. Some of them are well-to-do and some of them are not. For example Dunedin at the moment is characterised by an awful lot of local authority trading enterprise activity and by an awful lot of debt. Some of it was occasioned by the recent construction of the stadium. Indeed pushing out that debt to a 40-year horizon instead of a 20-year horizon is currently being debated by the good burghers of Dunedin. I do not think they will do it. I think the interest costs will be just too high. But this bill with this idea takes their problem and makes it a fractional bit less and it is really excellent. We just heard from Brendon Burns a member from a city that is in incredible stress in the form of Christchurch. We heard the member for Christchurch Central tell us about the difference it will make for his region and other regions. The next one up the line from Dunedin is Waitaki. Waitaki frankly does not have a level of indebtedness. It is really rather well-to-do albeit rather small. So the difference will vary around the country but none the less it is a great idea. 
It does occur to me that there is no particular reason why the idea should stop there. As I think through different parts of the economy I kind of find myself alighting on tertiary education as an area that may enjoy a similar arrangement. As it happens most universities do not have any debt. In fact the only one with a lot of debt is the Auckland University of Technology. But nearly every polytech does and I just think that we should look at the possibility of extending that facility into other parts of what one might call the broader public sector. I might be wrong and financial analysis is no strength of mine but I know having been the Minister for Tertiary Education that some tertiary education institutions do face considerable financial pressure with their indebtedness and of course the Tertiary Education Commission likes to maintain interest cover ratios and all sorts of things at certain levels. It would be the case I am sure that some mum and dad investors would be very open to the idea of responding to bonds issued in respect of the tertiary sector as well. 
The idea need not stop at local government but the next thing of course is to make sure that it can start at local government. That means the passage of the legislation and it then means the establishment of a fund. I do not know whether the Government will put any more money into it. I think $5 million has gone in—the Minister of Local Government will tell us. 
Hon Rodney Hide 
: It’s $5 million allocated. 
Hon PETE HODGSON 
: It is about to go in—OK. I do not know whether the Minister is of the mood; it is up to him but he might want to tell us whether he thinks that that is the right sum and if so why and whether he thinks the Government should be doing any more than that. There is a really good case for not doing so but then again if the fund is to be able to be administered it has to have some capital. I do not know whether the Minister is of the mood but I will resume my seat in the fond hope that the Minister will give us some idea of what he thinks the role of the Government will be in the case of this fund. I have no particular prejudices about it myself but it would be interesting to hear about his thinking. 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 To answer the member Pete Hodgson’s question the Government has set aside $5 million. It will have a shareholding stake in proportion to that $5 million. The money has not been put in yet other than $950000 as part of the costs of setting it up. The councils themselves have put in a substantial amount of money as a set-up. The councils will put in $20 million. 
IAIN LEES-GALLOWAY (Labour—Palmerston North) 
: 
 I will add to the positive comments of my colleagues about the Local Government Borrowing Bill particularly Part 1 which establishes the New Zealand Local Government Funding Agency Ltd. I suppose this is a type of third way approach. There is either public spending by councils themselves or of course the alternative approach which is to privatise assets or to go into public-private partnerships. This is an excellent idea. I believe it is a mighty fine idea as I think Pete Hodgson probably said at some point in his contribution. It not only ensures that councils can borrow for their own infrastructure that they ultimately will own themselves and that allows those councils to own their own future but it also gives New Zealanders an investment vehicle that is reasonably safe and helps to deepen our pool of capital available here in New Zealand. 
I suppose that is what brings me to ask a question of the Minister in the chair the Minister of Local Government about clause 7. I am happy to admit that I come to this debate very much as a layman when it comes to these matters. I suppose I am going to ask a question to which there will be a very clear and easy answer but I think it is a question that any New Zealander would ask about this legislation. Clause 7 states: “Part 5D of the Reserve Bank of New Zealand Act 1989 does not apply to the Funding Agency.” Part 5D of the Reserve Bank of New Zealand Act has a number of sections in it. Part 5D refers to deposit takers and specifically in section 157I the fact that deposit takers such as the funding agency that is being established under Part 1 of the bill must have a current credit rating. Section 157I states: “A deposit taker must have a current rating of its creditworthiness or if required by regulations made under section 157K the creditworthiness of the borrowing group of which the deposit taker is part that—(a) complies with the requirements prescribed by regulations made under section 157K; and (b) is given by an approved rating agency.” 
Putting to one side the fact that the credibility of ratings agencies is I suppose a bit iffy shall we say in the second decade of the 21st century I think what New Zealanders will want to know having put their money into finance companies—and some people have taken some serious losses there—is what certainty they have in investing in an agency like the New Zealand Local Government Funding Agency if it does not have a credit rating. Is there a mechanism by which the Government provides that certainty? Is there an alternative mechanism to a credit agency rating that gives people who want to invest in that funding agency some concept of the risk that is involved in investing in that agency and of how secure that agency is? I am quite certain that at this stage of the bill having been through the Local Government and Environment Committee there is an easy answer to this question. But I am very keen to hear what the answer is from the Minister because I think that what we are trying to do here is to provide not just a source of capital for local government but also a safe and secure investment vehicle that we might be able to encourage more New Zealanders to invest in. 
We know that we do not have a great savings track record in this country. We have a very heavy reliance on foreign capital and that is because we do not have deep capital pockets here in New Zealand. So anything that encourages people to save more and to invest more in New Zealand’s own infrastructure is I think a good thing. But I suspect that that might pose a barrier for people who want to directly invest their money by purchasing these bonds. If the funding agency does not have a credit agency rating against it then that might prove to be a barrier. We want to make sure that there are as few barriers as possible to encouraging people to invest in these bonds so that the money is available for local government. I know from feedback from my own city council— 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 Let me do my best to answer Mr Lees-Galloway’s questions. The first thing is that the New Zealand Local Government Funding Agency will succeed only if it does have a credit rating. As the member will see in the Local Government Borrowing Bill the issue with the credit rating is that the fund is guaranteed by all the local councils that together enter into it. It actually has a very very strong balance sheet in there as a consequence of that so people can have some considerable confidence. But one would not get away with not having a credit rating. 
The issue with the Reserve Bank exemption relates to the level of capital it needs to hold compared with a bank. Obviously because it has that guarantee of the balance sheet of the councils it can get away with a lower ratio compared with say a bank that is just dealing in normal loans. 
DAVID SHEARER (Labour—Mt Albert) 
: 
 I thank the Minister of Local Government for explaining that. It was actually one of the issues I was going to bring up in terms of the credit rating and how it will be properly established. I think as the Minister said with more than 80 local bodies investing into this the huge amount of infrastructure and obviously the rating potential that they have they are likely to attract an AAA rating which would bring down the cost of borrowing and be good for them as a whole. It is almost a virtuous circle in the sense of working in that particular way. 
I just wanted to reiterate some of the comments of my colleagues that the Labour Party will obviously be supporting this bill. I also want to praise the bill in terms of what it will actually be doing. Certainly in looking at the Auckland situation and the sort of infrastructure that we are looking at needing there to ensure that we move along in the way that we would like it to go we see it will need a source of funds that enables the Auckland Council to move in that direction. 
The New Zealand Local Government Funding Agency will be able to issue debt—and that is what Part 1 in particular speaks to—on behalf of all participating local authorities. If the cooperation and support of those councils is sufficient the funding agency would be expected to achieve as I said before a very high credit rating and therefore save—I think the estimate is at the moment certainly according to the regulatory impact statement—about $25 million. 
But that is only the beginning of the benefits of this type of scheme. There are other benefits not only to the councils but also to New Zealand as a whole as well. They stem from the ability of investors—ratepayers if you like—to invest in a bond market that will actually invest in people’s own future the future of the very communities in which people live. That is also to be commended. 
I will also reiterate a couple of things that the Minister touched on as well which is that the Government would take a minority stake and as I understand it would not be guaranteeing the viability of this organisation because in a sense it is actually guaranteed by the eight or more local councils that put money into it. But the Government will take a minority equity stake by putting $5 million of seed funding into the proposal. As the Minister said it is not yet there but we understand that it will be coming. 
It will also allow the ability for the Auckland Council to borrow in foreign currencies which comes more into Part 2. But it is an important point for the Auckland Council which as I said before is looking at an extraordinary amount of capital that needs to be raised to be able to meet the needs that are coming up. I speak to one particular need which is the inner-city transport link or the rail link that Auckland will need which seems to be getting at best lukewarm support from this Government—in fact “lukewarm” is probably a massive exaggeration if we listened to Steven Joyce in the House at question time today. 
These sorts of moves for the Auckland Council are extraordinarily important because Auckland grows at a rate of one Wellington City about every 8 years. I do not think that people quite understand that between now and 2030 Auckland will have grown by exactly an entire Wellington City and more and for that reason it needs to be able to access sufficient capital to enable that infrastructure to be built—particularly the transport infrastructure and particularly the transport infrastructure around rail and public transport because right now the roading network which has been funded largely by central Government is effectively complete. There is actually very little of the motorways— 
NICKY WAGNER (National) 
: 
 I move  
That the question be now put 
. 
STUART NASH (Labour) 
: 
 I will take a short call. I have some ever so slight concerns with regard to the funding agency being exempt from Part 5D of the Reserve Bank of New Zealand Act. My concerns are based on this: Part 5D of the Act sets out a whole lot of requirements that financial institutions must take into account: things like for example capital ratios credit ratings—which the Minister has talked about and the agency will have to have some sort of credit rating because no one will invest in it if it does not have a credit rating—liquidity ratios minimum capital requirements and limits on related party exposures. Maybe the limited party exposure provision is the reason why the agency is exempt. One of the major things that I think is important about Part 5(D) of the Reserve Bank of New Zealand Act is that it requires financial institutions to have a risk management strategy. I know that that is part of good financial management anyway and I am assuming that any sort of funding agency will have a risk management strategy in place but this part actually takes that off the table and does not make it a requirement. 
The other thing I would like to know—and obviously this agency is not Government-backed but backed by local authorities—is what the risk is of a local authority not being able to service that debt. How will it be passed on to the rest of the local authorities? I mentioned the Hastings District Council before. It has about $65 million worth of debt; I am not saying it has any liquidity problems at all. But what happens if one of these local authorities cannot meet its obligations? Does that mean that the rest of the local authorities will actually have to pick up that and carry that risk? When I read this bill I initially thought that this would be low risk but low return and that is fine. As Pete Hodgson talked about and as I mentioned before we need depth in our capital markets. But when I look at the bill I think that maybe the risk is not as low as I initially thought—firstly because of the exemption of Part 5D and secondly because some of these councils have quite a bit of debt. How will that be apportioned? How will that be allocated? 
Another thing I will talk about—Pete Hodgson mentioned this and I talked about it when I first spoke on this bill—is the ability of New Zealanders to invest through the bond market in infrastructure assets. Pete Hodgson talked about the university sector for example. I worked at the Auckland University of Technology as its director of strategic development. Pete Hodgson talked about this institution having quite a high debt level. When I was there we talked about how great it would be if we could actually issue bonds. We cannot do that under law. In fact no Government agencies can issue bonds under law at the moment but I think maybe that this bill is the start of this whole market being opened up and the depth it could possibly provide is fantastic. It is fantastic. I think Canterbury’s bond offer—the Westpac one—fell over did it not? Well having this sort of bill in place could provide so many more options for investors to invest in key infrastructure assets without their having to go to the sharemarket and without our having to sell our State-owned assets. This is a good idea but I would like the Minister just to comment on it in relation to the liability carried by that fund for those that default. This basically relates to clause 10 “Additional requirements to be specified in local authority’s financial strategy”. 
The other thing I was a little bit mystified about—members could correct me because I did not sit on the select committee; it is a pretty easy question—is clause 9 “Exemption from prohibitions and restrictions applying to council-controlled trading organisations”. Clause 9(1) states: “This section applies only if the Funding Agency is also a council-controlled trading organisation.” Does that mean there is a possibility that this funding agency will be a council-controlled funding agency or not? There is a little bit of confusion here. I read the bill and I think there will be only one funding agency. Is there a possibility that there will be another funding agency? Will there be two: one that manages Auckland bond issues and one that does the rest of the country’s bond issues? I am not too sure. Perhaps the Minister can just clarify that for me. Clause 9(2) states: “a local authority may give a guarantee an indemnity or a security in respect of the performance of any obligation by the Funding Agency.” I would have thought that this would not apply just to a council-controlled agency; I would have thought that if any council or local authority is raising money through a bond issue then it will have to provide some sort of security. Again I wonder whether this exemption from— 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 I will reply to Mr Nash’s questions. I want him to appreciate the underlying principle here of the exemption of the funding agency to Part 5D of the Reserve Bank of New Zealand Act 1989 which is that local councils are exempt from Part 5D. So if they are exempt from Part 5D it would be odd to put a collective vehicle of local councils together and make it subject to Part 5D because that would hobble the thing relative to their raising their own money. The whole point is to keep the regulatory regime the same as if the funding agency was a council because effectively that is what it is. 
In terms of a council defaulting of course that debt would then be carried by the other councils. That is implicit in the nature of what is being proposed. In fact it is that collectivity of the debt that actually gives the advantages being sought. The thing I would point out is that I do not think we have any experience of a local council ever defaulting. If we think about that for a minute—a council in New Zealand has never defaulted. If we wrap up a vehicle that represents them all the chances of the funding agency defaulting are unimaginable in the New Zealand setting of financial regulation and management. 
SUE KEDGLEY (Green) 
: 
 I will take up the issues that Stuart Nash was raising. It is absolutely true as the Minister of Local Government has clarified that all participating local councils will be required to guarantee each other’s debts. So if one council were to default all would have to pay. But I notice that the Government would not be liable. The Government may contribute I believe 5 percent for the first 10 years but the Government will not be liable; only the councils will be liable. The Minister has said we should not worry because it is extremely unlikely that councils will default. I agree that it is unlikely that councils would default. It is unlikely because they can always raise the rates to pay for increases in debt if they find themselves in that situation. 
However it is not unimaginable. We have had the situation in Canterbury which was unimaginable. We could have further situations. We could have one right here in Wellington. We could be in a situation where there are defaulting councils. What worries me is that I do not think most ratepayers are aware that their councils are signing up to this new funding agency. Although there is a requirement that councils inform the ratepayers through their financial statement the reality is that most ratepayers do not really look at the fine print of the financial statement. I would expect that a lot of ratepayers have no idea that this is going on and no idea of their joint liability through this new funding agency. 
Do not get me wrong; the Green Party is supporting the Local Government Borrowing Bill but we do have some qualms about it. The other one is that once there is cheaper borrowing which essentially this bill is all about the temptation will be to increase borrowing particularly when we are in a situation where councils do not want to put up the rates. We are in a very tight financial situation and it would be politically unacceptable for most councils to put up the rates in any substantial way. But we have a problem with some councils like the Auckland Council having to make substantial investments—in particular in public transport. Although the Government will pay 100 percent for roads and motorways it will pay only 50 percent for public transport so if a local council wants to develop public transport it has to invest 50 percent of the cost of any major public transport initiative. Substantial investment needs to be made and the temptation will be to do all of it through debt. 
There is an argument that if we come up with some major infrastructure—like say a new rail loop—we can spread the debt over generations. That is fine. But I fear that the temptation will be not to put up the rates because that will be politically unacceptable and the councillors will all be voted out of office but to just keep putting everything off and piling it up into this debt mechanism. In time we could end up with more and more council debt and a blowout of council debt. Down the road—say 10 years hence—we could find this funding agency with huge debts and we could find some councils defaulting. We could find ourselves in a situation where everyone will ask how it happened because no one told them that they had signed up to this entity and no one really consulted them. So we have some real concerns about that. 
We think there needs to be much greater awareness amongst ratepayers and much greater understanding of what we are getting into here of the joint liability and of the fact that if any participating authority defaults the debt will be shared. People need to be going into this with their eyes open. Let us hope this does not end up inadvertently triggering greater and greater amounts of council debt accumulating over the next 10 years because we have made debt cheaper through this mechanism. Thank you. 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 I think Sue Kedgley makes a very important point—and it becomes a general one for councils—that councils do enter into investments and take on debt largely without the awareness of ratepayers. They can actually delay the impost of the consequences of that investment or that debt for some years and we are now having to deal with some councils that are being forced to put up rates. It can actually also be just the cost of a running down of general infrastructure that gets pushed forward. I accept that point. 
What we have attempted to do there is that with the changes that we made to the Local Government Act we require councils from the next election onwards to put out a financial report in plain English. We are hoping that through that report local media and interested citizens can get a much greater sense of the true financial state of their council at the time when it is most valuable to them—that is the time that they are actually voting—and also of the challenges that that council confronts. I think if we had had that reporting procedure some years back we might not have got ourselves into some trouble with councils. 
It is also the case that if we lower the cost of the debt we might expect more of it. But bear in mind that there will be considerable discipline on the funding agency because it will be representing all the councils. It will not be just sitting there like an ATM handing out money for whatever particular project a council might come up with. It will actually look with scrutiny at the debt because it will be carried by all the councils together. In a way one of my worries as Minister observing it is that quite a small council that may not be very sophisticated—we quite like the small councils because they represent the community; we have nothing particularly against them—can easily find itself borrowing on some rather unfortunate investments that get pushed into the future. 
Interestingly in going off to the funding agency councils will actually have proper scrutiny because the people they are borrowing from are the other councils. In a funny way they will have a better understanding of and more information about the situation of local councils than might otherwise be the case. Sure a particular bank will lend to a council because it knows that the council can just put rates up into the future. So we may through this funding agency actually have a greater discipline particularly with the smaller councils that may not have that level of sophistication that a larger council would have. 
PHIL TWYFORD (Labour) 
: 
 I thank the Minister of Local Government for making that very interesting point about the extra discipline that will be brought to bear on smaller councils that seek to borrow funds through the new agency. One of the reasons that I think this bill is so worthy of support is that it is another way that small councils—particularly rural and provincial councils which have been really struggling with the demands of investing in their local infrastructure—can by tapping into the collective get the critical mass and the ability to make those investments. It is not unlike the approach to shared services that some councils have been successfully taking. It gives those smaller councils a pathway that avoids some of the difficulties associated with amalgamation. There is no doubt that a lot of those smaller rural councils are facing considerable pressure to amalgamate. As we know and as we have debated many times in this House bigger is not always better and there are real downsides in terms of representation—in terms of local voice and governance—particularly when smaller and dispersed communities are forced into bigger governance units. That I suppose is one of the big dilemmas in the local government sector today. The Local Government Borrowing Bill actually offers those councils one way out of that dilemma. 
I really appreciated the discussion earlier from Stuart Nash Iain Lees-Galloway and the Minister around clause 7 in Part 1 and the implications of Part 5D of the Reserve Bank of New Zealand Act not applying to the funding agency. I appreciated the Minister’s explanation of that. I suppose the underlying principle of this bill is that it is appropriate to treat the Local Government Funding Agency as if it were a local authority. That is the basis on which it is exempted from Part 5D. When Part 5D was put into the Reserve Bank of New Zealand Act originally local authorities were exempted from it. Clause 7 simply makes this bill consistent with that principle. 
I think it is worth noting the reasons why it is logical to treat the funding agency as if it were a local authority. There are a number of reasons and Local Government New Zealand summarised them quite nicely in its submission to the Local Government and Environment Committee. The agency’s function is to borrow money and lend that to local authorities. It is therefore merely a vehicle for local authorities to borrow collectively. The credit risk faced by lenders is of a similar nature to the credit risk that is faced by lenders to local authorities because the agency’s debtors will be local authorities themselves. The money that is being borrowed will be applied to exactly the same purposes as money borrowed directly by local authorities. To the extent that any funds are passed on to any entity that is not a local authority—that is in the form of dividends—that entity will be the Crown because the Crown is the only shareholder of the agency that is not a local authority. The Crown of course is also exempt from Part 5D of the Reserve Bank of New Zealand Act. 
The other related issue is the question of clause 9 which exempts the agency from prohibitions and restrictions that apply to council-controlled trading organisations. We heard at the select committee that it is arguable that the funding agency will fall within the definition of a council-controlled trading organisation under the Local Government Act 2002. If it does there are a couple of consequences. Firstly section 62 of the Local Government Act will apply to it which prohibits local authorities from guaranteeing the agency’s debt and secondly section 63 of the Local Government Act may prevent local authorities from lending subordinated debt to the funding agency. Clause 9 eliminates the risk that either— 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 I will respond to Mr Twyford’s comments. I think he is right just on the broader aspect. This is an example if you like of Parliament helping with the shared service. I think that when we look ahead if we do amalgamate or change jurisdiction we want to do it for governance reasons not for cost reasons. I think there is a bit of pressure coming on councils as we pile more functions on as times get tougher. People say: “Well let’s amalgamate.” but we are actually trying to amalgamate to save money rather than for the reason of good governance. 
The more that I have been involved in the sector the more it has become apparent to me that there are huge opportunities for shared services thereby dramatically reducing the costs for individual councils and indeed for improving their performance. We can have a whole lot of little councils trying to maintain a very sophisticated operation each on their own. Even if they have the money often trying to attract the necessary personnel is quite tough. There is certainly a greater enthusiasm in Local Government New Zealand and within councils to start talking about shared services. We need to think as a Parliament and as future Governments about what the role is and what the barriers are to facilitating those opportunities where councils agree that it is a smart thing to do. Hopefully that will be part of the review that we have set up with the Smarter Government Stronger Communities project. We can look at that because there is definitely a huge potential of which this bill is a part. 
SUE MORONEY (Labour) 
: 
 Thank you for the opportunity to take my first call on the Local Government Borrowing Bill. I want to speak to Part 1 which is the part that sets up the New Zealand Local Government Funding Agency and is of course the meaty part of the bill. 
I do want to profess that as I am not a member of the Local Government and Environment Committee I probably have more questions than answers in terms of this Local Government Funding Agency and what it can be used for. I say at the outset that it seems to me that the one thing that might help the funding agency would be the implementation of a capital gains tax. Why do I say that? Well it seems to me that if we were to level the playing field for how New Zealand investors choose to invest their money then perhaps they would look more kindly at this. Perhaps it would have lots of New Zealand investors who otherwise invest in property and the sorts of things where they can have basically tax-free profit at the moment. If we had a capital gains tax I think this would become more attractive to investors. Perhaps they would be looking more to investing in a vehicle such as this in order to improve local infrastructure or whatever it might be. That would be my opening comment. I think this bill could sit alongside a number of other policies that are being debated literally as we speak. 
But my questions are about the sorts of things that ratepayers and residents are debating all the time in their communities. At the moment in Hamilton and in the greater Waikato actually we have quite a debate occurring and I know that Iain Lees-Galloway will be very interested in this debate about funding a velodrome for the Waikato. This proposal has come through from Sport and Recreation New Zealand which is a Government-funded agency. Sport and Recreation New Zealand has a lump of money that it wants to put into the project and it has chosen Waikato as being the preferred option for this. 
Iain Lees-Galloway 
: Outrageous! 
SUE MORONEY 
: Iain Lees-Galloway is outraged because Palmerston North is of course another city that bid for exactly the same project. But here is the part that I know he will like: I am opposing the ratepayer funding of the velodrome project for the Waikato. I know that Iain Lees-Galloway will be very pleased that I am doing that and so are local ratepayers I might say. Although Sport and Recreation New Zealand and BikeNZ might think this is the ideal location for a velodrome it is the poor old ratepayers who will be asked to stump up for a velodrome that will cost $28.5 million. 
That might not seem like a great deal of money but currently in Hamilton the ratepayers are facing an 8 percent increase in their rates. They are not too keen to have more rates lumped on top of them as well. Also in Hamilton we have just recently experienced a $30 million contribution to hosting the V8 Supercars event. The cost was originally supposed to be $13 million but it has blown out to $30 million. So there are a number of reasons why ratepayers in Hamilton and the surrounding areas are asking some serious questions. They are asking “Well hang on haven’t we funded enough of people’s pet projects?”. If people have pet projects like a velodrome which let us face it will not be used by the vast proportion of the population—cycling in a velodrome is an elite sport—why should Hamilton ratepayers be funding them? Those are the questions that some local ratepayers are asking and I think they are really valid questions. 
In regard to this bill my questions are around that. Some people are asking why those bike enthusiasts who want to race around a velodrome and not just ride around streets a cycleway or anything else we might choose to invest in do not fund a velodrome if they really want it. They ask why they do not spend their money on it. The question I want to ask is whether this is a vehicle where that could happen. Could the group of people who want to see this go ahead actually put money into this funding agency and say that they want it to be used for a loan for a specific project? The question I really have is about some clarity as to whether that could happen. My guess is that the answer is probably no in terms of transparency accountability and those sorts of issues but I would like some clarity on that because as I say it is an issue that we are facing in the Waikato as we speak. If such a fund is used for a venture like the velodrome— 
JO GOODHEW (Junior Whip—National) 
: 
 I move  
That the question be now put 
. 
A party vote was called for on the question  
That the question be now put. 
Ayes 65 
New Zealand National 57; ACT New Zealand 4; Maori Party 3; United Future 1. 
Noes 51 
New Zealand Labour 42; Green Party 8; Progressive 1. 
Motion agreed to. 
Part 1 agreed to. 
Part 2 Amendment to Local Government (Auckland Council) Act 2009 
BRENDON BURNS (Labour—Christchurch Central) 
: 
 I thank the Minister for his ongoing response to the questions that members on this side of the Chamber have been putting. It is a good example to us of how Parliament should work and is from time to time known to work. I hope we can continue in that vein. This part of course is in respect of the provisions for the new Auckland Council to borrow in foreign currencies. We know that the Government has another set of proposals around asset sales. The proposition there is that mum and dad investors will be those who buy those assets. The question I want to put to the Minister is this: where is the capital likely to be coming from for the Auckland Council? If it is the case that it is able to borrow in foreign currency is Treasury advising the Minister and the Reserve Bank that that is where the Auckland Council is likely to be taking most of its borrowing from? If that is the case ipso facto it would suggest that that is the most likely market for other sources of investment. I think we know that at the moment the Chinese Government for one is contributing a fair amount of the Government’s debt profile and obviously in a situation where we are a debtor nation we have to be grateful for whatever sources we can rely on for capital. But I think New Zealanders would like some indication of where the Auckland Council is likely to be obtaining its capital from. 
The Minister indicated in the last part that the collective way in which the rest of the funding agency works provides some sort of inherent protection and I want to know how that relates to the Auckland Council in respect of any borrowing that it does offshore because although I think we know that local government in this country is very broad and soundly based it is not unknown for councils to get into trouble. I think of cities like Lille in Belgium which many years ago went bankrupt after high borrowing. Also we are now seeing cities in North America where the rating values have absolutely dropped as factories have moved offshore and the rating bases have dropped to maybe 10 or 20 percent of what their value had been perhaps a decade ago. It has caused enormous problems for some communities in North America. We are not in that prospect but in the spirit of cooperation we have been having members would like to know the likely debt profile that Auckland City will be entering into. Where is the capital likely to be coming from? 
I raise this concern too. While we are a debtor nation the best thing we can do is where possible create capital internally. Quite a lot of effort is going on at the moment to raise capital. I think of the University of Canterbury which has been in the market quite recently to try to raise funds for its institution. Obviously we have huge costs relating to the debts coming out of the Christchurch earthquakes. There will be a big demand upon capital. What will Auckland be competing against in terms of the provision of that capital? Obviously we have seen announcements from the Earthquake Commission in the last few weeks that effectively its coffers have run dry in respect of any further major natural disaster. That will be putting pressure upon debt programmes. 
It is a difficult time for us as a nation in respect of borrowing when we have those various pressures upon us. Auckland obviously has a huge infrastructure demand that needs to develop and grow. Hopefully a lot of the funding it will be raising under Part 2 will be put towards public transport programmes to assist Auckland to be a viable and sustainable city into the future rather than endless building of motorways with all of the climate change implications they bring. I would like the Minister to comment just briefly upon the likely source of capital that the Auckland Council will be likely to attract. Where is it going to be coming from? 
I guess the final comment I would make in respect of this is that every dollar that we borrow offshore—and we need to borrow many—carries with it an additional cost. Next week the Reserve Bank governor will announce his latest position on interest rates. The signals are that the market will hold but at some point interest rates will rise and every time we import capital and it repatriates back out that keeps our interest rates high and our dollar high. 
Hon RODNEY HIDE (Minister of Local Government) 
: 
 It would be inappropriate for me I say to Mr Burns to suggest what the debt profile could be should be or would be for a particular council or the Local Government Funding Agency. Let me just explain the Auckland situation. 
What we have done is to take four large councils and combine them with four other councils into one. The situation was that the New Zealand capital market could not actually fund the debt of that new council so the council needed to be in a position whether or not we had this funding agency to be able to go offshore. Secondly because it is such a large council if it could borrow offshore only through the funding agency the funding agency would be unduly exposed to one council. So we had to provide for both mechanisms. It was always the intention from day one once we had an understanding of the debt requirements of the new Auckland Council to allow it to borrow offshore. But we were very pleased that the council and then Mayor Len Brown committed to the funding agency because it actually helps the whole system to hold. That was one of the issues that we needed to address in setting up the funding agency—that it would have sufficient support. 
Let me acknowledge the new Auckland Council and indeed Mayor Len Brown for their commitment to Local Government New Zealand and to local government throughout New Zealand. They understand that although their council is very large and for so much could go out on its own it would be counter-productive for Auckland and counter-productive for New Zealand if it basically said to heck with the other councils and just did its own thing. The council has been very committed to being an active participant in for example Local Government New Zealand so that the smaller councils do not get left behind and indeed it has been committed to the funding agency. We certainly appreciate that as Aucklanders and as New Zealanders. 
PHIL TWYFORD (Labour) 
: 
 Again I appreciate those comments from the Minister of Local Government. The new Auckland Council with $28 billion of assets and a debt profile of about $3 billion or a little more perhaps obviously will have needs far and away in excess of any other local council. It makes sense that this bill the Local Government Borrowing Bill has the sort of flexibility structured in that will allow the Auckland Council to go offshore in its own right to borrow the funds it needs. 
I am interested to know—and I do not know whether the Minister knows this—what share of the borrowing by the Local Government Funding Agency is expected to end up with the Auckland Council. Presumably the Auckland Council will borrow some funds from the funding agency but also will be going offshore in its own right. I am interested to know what the proportions are likely to be. As Brendon Burns suggested Auckland will need some significant capital investment in the coming decade or so if it is going to reach the sort of aspirations that the country has for it and that Aucklanders have for it. 
The city rail link which has been hotly debated in this House in recent times will cost between $1.5 billion and $2 billion. There is a whole debate about how the city rail link should be funded and I think that mum and dad investors in Auckland would probably see it as well worth supporting and investing in. There are a number of other mechanisms—councils have the ability to raise money in various ways—but borrowing through the funding agency would be a pretty desirable way to contribute to the cost of that. It is a shame that Steven Joyce does not see the city rail link as worth investing in for Auckland’s future because I am sure most Aucklanders would see it as well worth investing in. 
I think it makes sense that the Auckland Council has the ability to go offshore in its own right. We heard at the Local Government and Environment Committee that because of the size of Auckland Council’s borrowing requirements and the undesirability of the funding agency lending so disproportionately to one council it makes sense for it to be able to borrow offshore. The Auckland Council told us—really assured us I suppose—that the borrowing would be undertaken on a fully hedged basis and that it has the capacity through its treasury unit to minimise the risk to the Auckland ratepayer. On this side of the House we are very comfortable with the provisions in Part 2. If the Minister is able to tell us anything about the likely share of Auckland Council’s lending—no all right then. 
STUART NASH (Labour) 
: 
 Mr Twyford and the Minister of Local Government have actually outlined some of the points I had but there are a couple of other points I would like to make in this Committee stage of the Local Government Borrowing Bill. I agree that Auckland is now so large that it needs to own its own future. It has to have the ability to go offshore because the depth of our capital markets is just not big enough for it. I understand that. I suppose the Auckland City treasury will have to determine itself how much money it wants to put into the rating agency versus how much it wants to borrow on the back of its own council. It would be interesting to know how much it would do that because again as the Minister alluded to I suppose the funding agency will be reasonably dependent upon the level of funding the Auckland Council can put into that and therefore the scale or the rating the funding agency will have in itself. 
There are two points I would like to make and two not really questions but reasonably significant points in my mind. The first one is the report to shareholders and stakeholders. The Auckland Council is responsible to well over 1 million people who pay the rates and who will service this debt. I think it is up to the Auckland Council to make absolutely sure that the ratepayers and the stakeholders know exactly what the Auckland Council is doing and what its policy is. Mr Twyford mentioned that the Auckland City treasury has said it will undertake a fully hedged strategy and I agree with that. But let me give members a couple of examples because I think that currency risk is now huge. This adds another risk on top of all the other risks that councils have to manage. I know for example and the Minister himself might remember that when the New Zealand dollar was about US70c at one stage—this was late last century—it plummeted. It went from about US65c down to about US50c in about 6 months. Carter Holt Harvey was I think New Zealand’s second or third-largest company at the time. Its treasury had a hedging strategy but it also played the currency markets to a certain extent. It lost literally millions and millions of dollars trying to bet on the New Zealand currency which it had no idea about. There were jokes going around about how to play the currency markets. One was that we ask 10 economists and we go with what the minority says. 
The bottom line I suppose what I am trying to say is that no one knows how to play the currency markets and win. It is a little bit like putting it on black at the casino: one wins sometimes; one does not win at other times. This is a risk. I think—and I would really like to know but I do not think that the Minister can tell me because it is an operational matter—that the Auckland Council must tell its ratepayers how it is going to manage. I remember that I went to a seminar once that was conducted by Deutsche Bank which was at the time—well it still is—one of the largest banks in the world. This seminar was for small to medium sized business owners. The advice from the head of Deutsche Bank at the time in terms of overseas trading in US dollars was that he would hedge 50 percent and then he would play the currency markets with the other 50 percent. I was astounded that a banker could give this advice to business people who relied on the margin of the deal being done. He was basically advising these people to play the currency markets and it was astounding that he would give that sort of advice. This is why we have to be very careful and we have to have a very good understanding of the strategy that the Auckland Council will take in terms of borrowing in foreign funds. I have no doubt that at some stage a smart banker will stand up at council and say that if it had not hedged at US83c as the dollar went down to US70c it would have made a whole lot of money. We are all very wise in hindsight when it comes to currency trading. Believe me we are very wise in hindsight but at the time if the strategy is not on the table and if it is not followed very very strictly then I tell members there will be accusations of mismanagement and there will be court cases. Of that I have no doubt whatsoever. 
Again let me give members two examples. I used to deal with two large New Zealand companies that imported. One hedged for the whole time. The other one did not because it took advice from—I will not name of the bank but one of New Zealand’s largest banks. This was when the dollar was at around US50c. The bank said not to hedge and not to worry as the dollar would be up to about US55c by Christmas. By Christmas the dollar was down to US45c and that company had lost about $2 million by just playing the currency markets. I suppose my point is that the council and anyone can take advice from a whole range of people who say they know how to play the currency markets—what they are about and the best strategy to make money with them—but no one knows and no one gets it right 100 percent of the time. 
JO GOODHEW (Junior Whip—National) 
: 
 I move  
That the question be now put 
. 
A party vote was called for on the question  
That the question be now put. 
Ayes 65 
New Zealand National 57; ACT New Zealand 4; Maori Party 3; United Future 1. 
Noes 50 
New Zealand Labour 42; Green Party 7; Progressive 1. 
Motion agreed to. 
Part 2 agreed to. 
Clauses 1 and 2 
PHIL TWYFORD (Labour) 
: 
 We had some debate at the Local Government and Environment Committee about the commencement clause and I will make a few comments about that. The Local Government Borrowing Bill as referred to the select committee provided in clause 2 for a deferred commencement. It provided for the bill to come into force on a day appointed by the Governor-General by Order in Council. We received a submission from the Regulations Review Committee chaired by Charles Chauvel that set out the committee’s general disapproval of deferred commencement dates. It reminded us that the general issue is that if we provide for legislation to come into force by Order in Council we are handing over a power to the executive to decide not only when but also whether that legislation should come into force. 
The submission cited the Legislation Advisory Committee guidelines about the risks of deferred commencement—namely that the will of Parliament could be frustrated by an executive that no longer supports the policies in the bill and that ultimately there was a risk that courts could be drawn into the legislative process if judicial review was invoked in an argument like that. There was a fair bit of discussion at the select committee about that and I am sure my colleagues on the Government benches would be happy to get up to take a call and flesh out the discussion about this. 
We ended up I think wanting to accommodate the concerns of the Regulations Review Committee but mindful that we wanted to get this legislation passed before the recess. We do not want to risk losing the momentum and the great work that had been done in the pre-establishment phase of the Local Government Funding Agency. So we have ended up under clause 2(1) saying that Part 1—which is really the meat and potatoes of the bill—will come into force “on the day after the Funding Agency is registered under the Companies Act 1993.” That is the compromise which we thought will go some way towards addressing the concerns raised by the Regulations Review Committee. The commencement is not an open-ended deferred commencement; it is tied to the fact that Part 1 will come into force on the day after the agency is registered under the Companies Act. There is a rider to that that if the agency is not established or registered under the Companies Act Part 1 will be repealed 12 months after the date on which it receives Royal assent. That is a compromise and one that goes some way towards meeting the concerns of the Regulations Review Committee. 
Part 2 on the other hand has no amendment proposed by the select committee. It will come into force on the day after the date on which it receives Royal assent. It treats the provisions relating to the Auckland Council’s ability to borrow on international markets quite separately and will come into force on the day after Royal assent is given. 
Clause 1 agreed to. 
Clause 2 agreed to. 
The Committee divided the bill into the Local Government Borrowing Bill and the Local Government (Auckland Council) Amendment Bill (No 2) pursuant to Supplementary Order Paper279. 
Bill reported without amendment. 
Report adopted.