Worth Richard: Securities (Local Authority Exemption) Amendment Bill — Second Reading 
Worth Richard: Securities (Local Authority Exemption) Amendment Bill — Second Reading 
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Dr RICHARD WORTH (National) 
: 
 The Securities (Local Authority Exemption) Amendment Bill was a very short bill when it was introduced and it is now only a little bit longer. It had two short clauses of substance. The first was to insert a definition of “local authority” and the second was to provide an exemption. Clause 5 exempts local authorities where they are issuers of debt securities from a number of provisions in the Securities Act. 
It is interesting to reflect in the wake of the collapse of the Blue Chip group and a number of disasters touching finance companies in New Zealand that this particular bill which will form part of the substantive Act the Securities Act is one of two pieces of legislation that give powers to two commissions the Securities Commission and the Commerce Commission to take action in respect of investments that sour. Those two commissions consider that they have sufficient statutory powers to undertake that task of investigation and remedial action. But we have not seen too much evidence of that to date. 
National supports this bill the Securities (Local Authority Exemption) Amendment Bill and rather than deal with its provisions I will just say something about local government financing in the context of today and about what this bill might mean for the future. This bill I believe is a pragmatic step that Parliament can take to assist local government in managing the current bulge of infrastructure development whilst maintaining local authority finances on a reasonable footing. 
It is a fact that local government has embarked on the most significant programme of capital works undertaken since the post-war boom in the development of the roading network. 
Hon Paul Swain 
: What a good Government. 
Dr RICHARD WORTH 
: I am talking about local government at the moment. 
Hon Paul Swain 
: Yes I know but it’s kind of helped by a good Government. 
Dr RICHARD WORTH 
: I say in response to Mr Swain’s comment that if we look at local authorities’ long-term plans we see that local authorities are undertaking approximately $30.8 billion in capital works in the 10 years to June 2016. Virtually all of this expenditure is to fund either network infrastructure—roads sewage disposal and water schemes—or community infrastructure which includes things like libraries sports grounds and stadia. That is more than double the level of capital expenditure in the period from 1995 to 2004. 
The other aspect that is quite interesting is that there is a significant degree of front-loading in the capital works programme such that about 50 percent of the funding needs will be required between now and 2009. The significant thing I would say about infrastructure assets is that they have long lives. Borrowing helps to spread the cost of this infrastructure over the life of the asset so that today’s ratepayers are not subsidising future ratepayers. 
There is a provision in the Local Government Act section 101(3) that places local government under a statutory obligation to consider this aspect of intergenerational equity. It is alongside other principles such as beneficiary pays exacerbater pays and the promotion of community well-being when making decisions on the funding of any particular activity. 
The recent report  
Independent Inquiry into Local Government Rates 
 noted all the points I have just made. It also made the point that local authorities should look more favourably on the use of debt. 
So we come to the period immediately prior to 1998 when the local government sector enjoyed an exemption from the requirements of the Securities Act. It was blessed with two privileges. The first related to the preparation of a prospectus and the second related to certifying the accuracy of the information in the prospectus by getting the signatures of every elected member. That changed in 1998 and the removal of those privileges—well we might call them privileges; they were certainly exemptions—placed significant economic and practical barriers in the way of any local authority that wanted to issue debt securities particularly the smaller local authorities. 
That barrier is very well illustrated by the fact that only one local authority was involved in debt raising under that new regime. That local authority was the Auckland City Council which issued debt securities to the public—$120 million in March 1999 and $68.2 million in February 2001. Very significant costs were involved with those debt issues. I understand that the direct cost to the council of those two issues was almost $700000 albeit that an amount of $190 million was to be raised. But even today experts in securities law as I understand it would say that the minimum cost to prepare a prospectus would be in the order of $100000 to $150000. That really makes the issue of debt securities economic for issues of $10 million or more but it also carries with it the consequence that only perhaps the largest 30 or 35 local authorities could be involved in that debt raising. 
Essentially the signature requirement made it impractical for local authorities to borrow because unlike corporate governance elected members of a local authority are under no obligation of collective responsibility. Thus they are under no obligation to sign any certificate. The consequence of that was that it was possible for an individual elected member who was opposed to a particular project to effectively exercise a right of veto over a project by refusing to sign the loan documentation. 
That is the history of all these issues and the basis of the removal of the exemption in 1998 was to promote a level playing field. But we should leave aside the fact that these entities were not really in competition with the private sector because in the past local authorities’ securities tended to be purchased by small-scale investors with quite conservative risk profiles or by people who were attracted by the altruistic notion of investing in the community. So what was the end result? The end result basically was that this flow of investment capital was choked off and that forced local authorities into dependence on financial institutions for borrowing. 
Of course one way of avoiding the limitations in the legislation was that those limitations could be circumvented by not having to provide a prospectus and by issuing debt to wholesale and what are called habitual investors. But that was a very limited market. I believe—as quite clearly the Commerce Committee believes the Government believes and National believes—that the New Zealand public are in need of a new source to secure debt securities in which to invest. 
Other members have noted the provisions of the legislation. I do not really want to deal with that issue. The proposition is a simple one. There is to be an exemption but it is an exemption framed around some additional disclosure requirements. I believe that we will see with this legislation an opportunity for investors to gain access to quality debt—high-quality debt. 
In the current period when the quality of debt products has come under closer scrutiny local authority paper is likely to be received extremely well by retail investors. It provides a much broader range of investment-grade credit which is a very important initiative in improving the overall quality of savings products available to New Zealand investors. 
National supports the Securities (Local Authority Exemption) Amendment Bill and would like to see its speedy passage.