Securities (Local Authority Exemption) Amendment Bill

I move, That the Securities (Local Authority Exemption) Amendment Bill be now read a second time. This bill provides for the inclusion of a local authorities’ exemption in section 5 of the Securities Act 1978. The exemption allows local authorities to meet reduced disclosure requirements when offering debt securities to the public. Although they will still have to produce an investment statement containing certain product and provider information, they will be exempt from producing a full prospectus signed by all councillors of the local authority, as they have had to do for a number of years.

The disclosure requirement under the Local Government Act is, in many cases, a double-up of disclosure requirements under the Securities Act. This places unnecessary compliance costs on local authorities. The bill intends to reduce these costs without greatly affecting the benefits that disclosure provides to investors. The exemption means that in order to ensure investors receive full, accurate, and timely disclosure information, more reliance will be placed on the information disclosure requirements under the Local Government Act. This reliance caused some concern for the Commerce Committee. Members felt that although initial disclosure information was addressed by the exemption, the provision of ongoing and continuous disclosure was not. As a consequence, clause 5 inserts an additional subsection (3B) in section 5(1) of the principal Act to address those concerns.

This subsection deals with a local authority making information available to the public about its financial position. It requires that a local authority offering a debt security must provide financial statements to potential investors on request and free of charge. Also, its investment statement must refer to its most recent audited annual financial statements, and to interim financial statements where the date of allotment of the debt securities is more that 9 months after the last balance date.

The subsection also requires that a local authority must include in its investment statement that the debt securities being offered are not guaranteed by the Crown unless, of course, they are being guaranteed under the Public Finance Act 1989. This would normally appear in the prospectus, but without a prospectus it must go in the investment statement.

Access to this information allows investors to make informed decisions on the potential risks and returns of their investment choices. I am confident that this additional change will alleviate any concerns about the disclosure requirements of the Local Government Act, and will also address the Green Party’s desire to see more detail in the investment statement and for other documents to be clearly identified.

The addition of subsections (3C) and (3D) in section 5(1) are technical requirements supporting the subsection (3B) amendment. Together, these amendments should reassure the National Party that the bill does not create different standards of reporting for issuers of securities to the public, depending on the model of the governing body. What they do is ensure that there is no reduction in the financial reporting stringency required of local authorities, compared with companies.

Further, this bill is strongly supported by the conclusions in David Shand’s report, which is an independent inquiry into local government rates published around the time of the first reading of this bill. One of the key recommendations made in the report is that in order to spread costs over generations, councils should make greater use of borrowing for long-term capital projects, specifically its dates. The report states: “There are very good reasons for local authorities to make greater use of debt to finance long-life investments. Doing so may advance the date at which the infrastructure can be provided and spreads the capital cost more equitably across the generations that benefit from that service. Moreover, central and local authorities are generally low risk debtors, so they enjoy low interest rates in debt markets.”

Interestingly, the comment made by Sir Basil Morrison, president of Local Government New Zealand, that “… the ability to once again issue debt securities will save councils millions of dollars in interest costs.”, was reinforced by submissions during the select committee process. These highlighted that by providing another avenue for accessing capital, the bill will lead to more competitive pricing for local authorities’ debt and consequently create more accurate pricing in the market for debt products.

Another area of concern for the committee was the issue of criminal liability. Some submitters considered that elected members of local authorities should be exempt from criminal liability for breaches of the Securities Act, as Ministers of the Crown are. However, this was rejected by the committee, as councillors and Ministers of the Crown have different obligations regarding accountability. In comparison to local authorities, the Crown has to fulfil significantly more reporting and accountability requirements, and faces many more checks and balances. It is my firm belief that retaining the burden of liability will further ensure the robustness and transparency of the process undertaken by local authorities when issuing debt securities to the public.

I welcome the availability of local authorities’ debt securities on the retail market. It will provide a valuable source of alternative funding for infrastructure assets. It will also provide investors with options to expand their investment portfolios, which is a positive move for the investment market. I am confident that this bill, including the changes made to provide for the availability of current financial information, will achieve the objectives of the disclosure regime of the Securities Act, as well as those of the Local Government Act.

Finally, I would like to thank members of the Commerce Committee for their work on considering this bill. They did a very good job. I would also like to acknowledge the contributions of those who provided submissions on the bill. I commend the bill to the House.

The National Party supported the first reading of the Securities (Local Authority Exemption) Amendment Bill and it will continue to support the bill’s passage through the House. As the Minister said, the bill provides local authorities with an exemption from the full disclosure requirements of the Securities Act when issuing debt securities to the public because of their extensive closure requirements, supposedly, under the Local Government Act 2002.

I cannot help but smile when I think about the work that is being done around the Financial Advisers Bill and the financial disclosures regime, as well as the non-bank deposit taking prudential supervision legislation, as it seems that we are relaxing some of the matters relating to the issuing of securities in this particular legislation. Having said that, the Commerce Committee made sure, following the hearing of submissions, that in a number of sections investors had access to adequate information, including financial accounts and interim financial accounts.

It is always a bit of a balancing act when making it easier for local authorities and, for that matter, other entities to issue debt securities to the public or to raise funds, whilst at the same time ensuring that the protection of investors means that disclosure requirements provide them with sufficient information to ensure that they are not left in the dark when it comes to some of the finer detail. If this bill proceeds through its remaining stages, it will be the case that local authorities will need only to produce an investment statement with the signature of two councillors, rather than the more onerous requirement to produce a prospectus signed by all councillors.

We need to take a bit of a step back and think about what we have been trying to do as a Parliament in other legislation that has come before us over recent weeks, and about whether the test for consumer protection and disclosure is still met in a bill such as this. There is probably no doubt in the minds of those who sat on the Commerce Committee that heard submissions on this bill that local government legislation, alongside this business of making adequate information available by way of financial accounts, meets that test, but it is important that across sectors we do not have one test for local government authorities and another entirely different test for those other houses, if you like, that are seeking to issue debt securities to the public.

We want to enable local government to get on with the business of accepting investment and issuing debt securities. We certainly do not want to stand in the way of sensible legislation that would allow only two councillors to authorise such a statement.

Sitting suspended from 6 p.m. to 7.30 p.m.

Madam Assistant Speaker, I believe this is the first time I have made a contribution in the House since you have been in the Speaker’s Chair as opposed to your being in the Chair during the Committee of the whole House, so I take this opportunity to congratulate you on your appointment to the role of Assistant Speaker. I look forward to working under your supervision for the remainder of your period in Parliament. I know from having observed you for some time and having been a co-presenter to the first-year politics class at Victoria University for some years that you will bring good humour to the role as well as a firm hand.

Can we return to the Securities (Local Authority Exemption) Amendment Bill. Before the dinner break I was talking to the House about the issue of consistency. The Hon Paul Swain was good enough to say to me during the dinner break—and he will correct me if I am misquoting him—that there were some considerations as to whether the local government legislation in and of itself provides sufficient protection for disclosure and information being made available to investors, and whether the new legislation in respect of amending the Reserve Bank of New Zealand Act, which is designed to create a prudential supervisors role for non-bank deposit takers, will have any effect on local government’s ability to issue debt securities to the public.

With the fall of a number of investment companies in recent months we have seen a determination by Parliament—and I use the term “Parliament” deliberately—to legislate to try to protect investors with a tightened disclosure and accountability regime, and National has been supportive of those moves. As I was saying before the dinner break, it is a bit ironic that this legislation is designed to make it easier for local government to raise funds by way of issuing debt securities to the public in an environment where we are doing quite the opposite to private enterprise. It may well be that local government bodies and councils themselves, by their statutory existence, create a higher level of certainty and less risk in respect of the issuing of those debt securities to the public. But the select committee was determined that, although some of those arrangements to do with disclosure and the issuing of prospectuses were to be relaxed, there was no chance that investors would not receive sufficient information to make informed decisions.

The select committee, under the guidance and leadership of Gerry Brownlee and the Hon Paul Swain, is to be congratulated on picking up on that particular point to make sure that we balance this delicate equation of the two elements. One of those elements makes it easier for local government to do business. In other words, if a local authority is raising funds by way of issuing debt securities to the public, then it does not have to have every councillor signing the offer documentation, which means that the transaction would become, quite frankly, a very difficult transaction to enter into if one councillor decides that he or she will not play ball. This bill now provides that only two councillors have to sign. We have to balance that element against the element of making sure that individual investors are protected.

The select committee—under quite a hurried timetable, it has to be said—worked its way through this bill with some diligence and made some amendments to the process that I think have improved this bill significantly. We will watch and wait to see what effect the amendments to the Reserve Bank of New Zealand Act in respect of prudential supervision may or may not have on the securities offered. I think that the Hon Paul Swain made a very fair point, and it will be interesting to determine whether those questions can be answered with any veracity in the Committee of the whole House.

Yes, Madam Assistant Speaker, I agree with the previous speaker, Simon Power, that it is right to congratulate my old bench mate on attaining that high office, and I wish you well as you sail towards the sunset—like my very good self.

💬 Hon Ruth Dyson: To the next stage of her career.

Yes; she is on the way to the next stage of her career.

Before I get into the Securities (Local Authority Exemption) Amendment Bill, I say that Simon Power made an interesting point in asking what the relationship is between this bill and the Reserve Bank of New Zealand Amendment Bill, which is being considered by the Finance and Expenditure Committee. The honest answer to that question is that I personally am not sure. That legislation is designed to bring in some prudential oversight of the Reserve Bank over the non-banking sector. One of the issues being looked at there is the definition of what is called a “deposit taker” and whether a local authority that is issuing debt securities for infrastructure projects, for example, would come within that definition. This was not discussed this morning at the Finance and Expenditure Committee, but I will take it up at that select committee to see whether there is a relationship between these two issues because I think it will be important to get that relationship, if it is at all possible.

The point of this bill—and I congratulate the Minister of Commerce, Lianne Dalziel, on bringing this bill forward—is an attempt to make it easier for local government authorities to be able to raise funds for infrastructure projects, in particular, and to finance them through issuing debt securities, rather than having to pay for them up front through rates. I think that this is a good thing to do. The argument was that the regime they were under, under the Securities Act, meant that the compliance costs were high, and as a result most councils found it greatly difficult—and, some argued, prohibitive—to do this. What we are doing is exempting local government authorities from the full disclosure regime of the Securities Act, particularly around the prospectus.

Under this legislation there will be no need for a full prospectus signed by all councillors. Simon Power correctly made the point that if we had to get all councillors to sign off on a prospectus looking to raise debt for an infrastructure project, then all it would need is for one councillor to say no and the project falls over. This point was made by submitters. What happens now is that councils are required to put out what is called a financial statement, which is required to be signed by two councillors. Obviously if only two councillors were held to be liable, then no one would sign it, so all councillors are liable for what is called the accuracy of that statement. We had some discussion at the select committee as to whether a councillor could vote against the financial statement if he or she did not agree with it, but, provided there were two councillors to sign the financial statement, the councillors were still essentially liable. Therefore, it is incumbent on all councillors to try to make sure that they understand the issue and that they attest to the accuracy of that statement, so the issue of liability still holds.

There was the question of whether, like Ministers of the Crown, councillors should be not liable, and there was some discussion about that. I think that the submissions from Local Government New Zealand raised that matter. The select committee said no in the end. The roles and responsibilities of Ministers are different from those of councillors, particularly around accountability, and there are a lot more checks and balances in the central government sector. Treasury is all over this stuff like a rash, the departments are audited by the Auditor-General, and all those things are hidden in behind there. We felt that was not an appropriate comparison.

However, we were still concerned about making sure that there was sufficient disclosure to ensure that people who were investing in these things had some surety, so we introduced some other measures. When the local authority issues these things it will be required to refer to the most recent audited annual financial statements in the investment statement that it distributes when issuing debt security. There is a document for people to look at that refers to the last annual statement. They can refer to interim financial statements in the investment statement where the date of allotment of debt security is more than 9 months from the last balance date. That makes sense as well. A local authority would provide financial statements to investors and potential investors on request and free of charge—as there was an issue about whether people would be charged for this—and it would state in the investment statement that the debt securities being offered are not guaranteed by the Crown.

Some people will think: “I will put my money in here because the Crown is backing it.”, because people often do not understand the difference between central government and local government, certainly in my own area. When there are potholes they come and see me, and I blame the mayor, and when it is something to do with central government, he blames me. A lot of people do not understand the difference between the two, or where the boundaries are, so it was important to say that debt securities issued by a particular council are not guaranteed by the Crown unless they are covered by the Public Finance Act 1989.

The Commerce Committee has done a good job on this legislation, under the chairmanship of Gerry Brownlee. Once this legislation is enacted, it will be interesting to see whether the issue is taken up, and whether some infrastructure projects that are not able to be funded at the moment for a whole pile of reasons are, in fact, funded. The relationship between this particular legislation and the Reserve Bank of New Zealand Amendment Bill is of interest to me, and I will be taking up that matter at the Finance and Expenditure Committee.

This bill is good legislation. It is in the best interests of councils. It should encourage investment, which is a good thing, and I recommend that it proceed further through its remaining stages in the House.

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.

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.

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 $700,000, 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 $100,000 to $150,000. 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.

I would like to compliment the member who has just resumed his seat, Dr Worth. He at least has the honesty to suggest where the Securities (Local Authority Exemption) Amendment Bill emanated from—the Shand inquiry, which was an inquiry into local body funding, and alternative funding, that came about as a New Zealand First initiative. That is putting it politely.

We were put under huge pressure, as the member well knows, to support the rather naive Rodney Hide bill that the National Party wanted to support at that particular time.

💬 Hon Tau Henare: Be nice for a change.

I am being nice. It was a rather naive attempt to cap rates. New Zealand First thought the issue through and demanded, in a very tough manner, that there be a formal inquiry into rate funding. It is known as the David Shand inquiry—it was named after the chairman—and it recommended quite strongly that local bodies, local councils, get more involved in debt funding. That is a view that New Zealand First has had for some time when it comes to infrastructure. In recent years we have progressed a little bit in the way in which we fund roads, from when if we had the money we invested it in roads, and, if we did not have any more money, we stopped until the next year when we got a little bit more money. That just does not make sense in the modern world.

New Zealand First has always supported the idea of Governments and local councils debt funding on a reasonable, responsible basis, certainly when it comes to the cost of infrastructure, and the like. We are very pleased that the Shand inquiry supported that contention. Infrastructure is not only for today’s ratepayers; it is for tomorrow’s. It is only right, proper, fair, and equitable that infrastructure is funded in such a way that the users contribute to it. Debt funding is the way to go. As Dr Worth said, this could open the door for some high-quality debt, which investors can participate in, and, all going well, there will be a nice little nest egg for people in the longer term.

💬 Dr Richard Worth: Better than Blue Chip, perhaps.

I knew that the member would say that. I am conscious of whom he is sitting next to right now. Yes, it will be darn sight better nest egg than Blue Chip was, I would suggest.

In essence this bill relaxes the rules, and allows two councillors—and the Hon Paul Swain touched on this—to sign the prospectus. Currently, every councillor has to sign it. That is a case of living in the dark ages, because it means that one councillor who wants to be awkward, bloody-minded, or who for some reason wants to stall the development, can do so.

💬 Hon Tau Henare: Steady on, man!

There is one talking right now whom I could think of, if he were a councillor—but I am sure he would not. This could stop a whole project going ahead, or even more than that. This bill improves the situation considerably.

As the Hon Paul Swain said, every councillor will be liable—otherwise nobody would sign the prospectus—but it allows progress to be undertaken. Of course, there are some rules and safeguards. It is only right and proper that there are safeguards. I have to compliment the Commerce Committee, which, I might add New Zealand First was not on, on proposing to amend section 5 of the Act by inserting subsections (3B), (3C), and (3D), basically in order to put in safeguards when it comes to having accounts up to date and investors seeing the most current financial position. New Zealand First concurs with that, and we compliment the select committee on inserting those provisions. Obviously, there have to be safeguards. If we have investors we need proper safeguards. We do not want anything to be set up that in any way resembles a fly-by-night type of operation.

New Zealand First is pleased with this bill. We know that it had its beginning out of the Shand inquiry, and we are grateful to the Government for taking on board the recommendation made by that inquiry team. We will support the passage of this bill through the House.

I take just a short call to say that the Green Party will support the second reading of the Securities (Local Authority Exemption) Amendment Bill.

Bill read a second time.