Local Government Borrowing Bill - Second Reading Speech

Mr Speaker, I move that the Local Government Borrowing Bill be now read a second time.

This Bill is to facilitate the establishment and operation of a new company, the New Zealand Local Government Funding Agency.  The Funding Agency will issue local government bonds to investors and on-lend the funds raised to participating local authorities to meet their funding needs.  This pooled approach will assist local authorities to borrow funds at lower interest rates than they can currently achieve. 

Local Government New Zealand has estimated that the Funding Agency will save local government in the order of $25 million each year.  The operation of the Agency will also strengthen New Zealand’s capital markets by providing a new high-quality investment option.

Unsurprisingly, the Bill has a high level of support across the local government sector.  I have been advised that 35 local authorities have indicated that they intend to participate as shareholders in the Funding Agency, and a further 14 have indicated that they will participate in the scheme as guaranteeing borrowers.  There is strong support for the proposal and very little opposition to it.

The Local Government and Environment Committee received only six submissions on the Bill; five supporting it and one opposing it. 

Part 1 of the Bill removes a number of regulatory impediments to the operation of the Funding Agency.  Many provisions are designed to ensure the Agency obtains a high credit rating, which will be crucial to the success of the Agency. 

The Bill specifically states that the Crown does not guarantee the obligations of the Funding Agency.  However, it gives the Minister of Finance authority to lend money to the Agency in exceptional circumstances.  This authority expires after 10 years. 

Part 2 of the Bill authorises Auckland Council to borrow in foreign currencies.  This overrides the provision in the Local Government Act 2002 that prohibits local authorities from borrowing in foreign currencies.

To maintain a high credit rating, the Funding Agency will not be able to lend disproportionately to one council.  Therefore, because of its significant borrowing requirements, Auckland Council will need to continue some borrowing outside the Agency.

Part 2 of the Bill will effectively give Auckland Council the same access to foreign currency markets as other councils will have indirectly through the Funding Agency.  In its submission on the Bill, Auckland Council confirmed its intention to fully hedge its foreign currency exposure to avoid any additional risk to ratepayers.

It is intended that Parts 1 and 2 of the Bill will be divided into separate bills at the Committee of the whole House stage.

The Local Government and Environment Committee have unanimously recommended that the Bill be passed, with technical amendments to two clauses.

The first amendment is to clause 2 – the commencement clause.  The Regulations Review Committee raised an issue with the current open-ended commencement for Part 1.  The Select Committee has proposed an alternative that would provide a specified commencement date for Part 1, while still allowing sufficient time for the Funding Agency to be incorporated before Part 1 comes into force.

The second amendment is to clause 9.  This clause overrides sections 62 and 63 of the Local Government Act 2002 to provide that, while the Funding Agency is a council-controlled trading organisation – a CCTO, local authorities can guarantee the obligations of the Agency, or lend money to the Agency on favourable terms. 

The recommended amendment clarifies that any transaction entered into under clause 9 would continue - even if the Agency ceased to be a CCTO.  This will make it clear to potential investors that key transactions, including guarantees, cannot be overturned if the Funding Agency ceases to be a CCTO.

I want to thank the Local Government and Environment Committee for its excellent work on this Bill.  I commend this Bill to the House.

ENDS