Securities (Local Authority Exemption) Amendment Bill

There is nothing too difficult about this bill, but it does have significant implications for local authorities. I say “nothing too difficult”, because it comprises only five clauses. The two most significant points about the bill are that it is to insert a definition of “local authority” and then provide for an exemption in respect of local authority debt-raising.

Some of us who are a little bit older will remember those days when a number of local authorities in New Zealand issued local government stock, and the Auckland City Council was certainly to the fore in that. That day will come again with the passage of this change to the Securities Act—legislation that National supports. At a time when the Blue Chip group has collapsed and the fortunes of finance companies in New Zealand generally continue to tumble in quite a disastrous way for small investors, local authority paper is likely to be well received by retail investors.

Local government faces a real challenge at the moment in managing the current bulge of infrastructure development whilst maintaining local authority finances on a reasonable footing. Local government has embarked on the most significant programme of capital works undertaken since the postwar boom in the development of the roading network. 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, water schemes—or community infrastructure, which includes things like libraries, sports grounds, and stadia. That is actually more than double the level of capital expenditure in the period from 1995 to 2004.

It is also significant that there is a significant degree of front-loading in the capital works programme and that about 50 percent of the funding needs will be required between now and 2009. Infrastructure assets have long lives, and 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.

💬 Mark Blumsky: Intergenerational.

As Mr Blumsky has just this moment said to me, it is about intergenerational equity.

In 1998 changes were made to the law that made it very difficult for councils to issue debt securities, and only the Auckland City Council issued debt securities to the public after that. It issued $120 million in March 1999 and $68.2 million in February 2001. The hope is that that will now change and that an opportunity has been given to investors to access quality debt.

I will talk for a moment on the benefits of this legislation. There are really three. The first is local authority access to capital. The second is investors’ access to quality debt. The third, perhaps more generally, are some market-wide benefits that will flow. When the Local Government Amendment Act (No 3) was passed in 1996, there was a failure to recognise the practical implications of accessing public money. Effectively, that change made it too onerous for local authorities to access public money for two reasons.

The CHAIRPERSON (H V Ross Robertson): This debate is on the title clause.

💬 Hon Lianne Dalziel: I raise a point of order, Mr Chairperson. I would like to help clarify the situation. If we were having one wide-ranging debate across this very small bill of five clauses, then obviously that would be the way to accommodate what the member is doing. Otherwise, I take a point of order and say that the member is outside the scope of the clause 1 debate. I guess I am very much in the Committee’s hands, as is the Chair, but I would be happy to seek the leave of the Committee that we take a single wide-ranging debate to cover the whole of the bill and have it put as one question.

I am happy to accommodate the comments the Minister has made.

The CHAIRPERSON (H V Ross Robertson): The Committee is the master of its own destiny. The Minister has sought that we have one wide-ranging debate. Is there any objection to that course of action being taken? There is no objection.

As I was saying before the Minister made her comment, there are really three issues of significance in the context of this bill and its title. I was making a comment with reference to the passage of the Local Government Act and the consequences of that legislation. The Act increased issuance costs with the requirements to produce a prospectus. But more significantly it created a really insurmountable hurdle, as all the councillors were required to sign a prospectus. If there were a councillor who had been elected perhaps on the basis of reducing council borrowing, he or she would find it very difficult to sign the prospectus for the raising of additional debt. That is why all local authorities opted to issue debt on the wholesale market with just one public issuance of local authority debt.

Now the reinstatement of the exemption will provide a much more feasible business case for local authorities to access public money. That is particularly relevant with these infrastructure plans that I have already referred to. Generally, the market provides a premium of around 10 to 15 basis points for retailable debt. If we apply that to the estimated borrowing of $30.8 billion, it equates to a saving of approximately $30 million to $46 million to local authorities.

The second point is that there will be investor access to quality debt by removing the particular requirements that have existed to date. That will provide retail investors with access to high-quality debt instruments. That is particularly important at the moment, when finance companies have come under such critical and close scrutiny. Providing a broader range of investment-grade credit is an important initiative in improving the overall quality of products for New Zealand investors.

The final thing I will talk about for a moment is the market-wide benefits. If local authority debt is available to retail investors, it will create more accurate pricing of junk bonds and other high-yielding debt products. Having local authority debt available for the investing public continues to broaden the range of debt products available for retail investors. With more quality debt products in the market, retail investors will be able to easily compare their investment options and price them accordingly. It is for those reasons—and, in particular, in the context of infrastructure demands that are placed on local authorities providing services to the community—that National supports this legislation.

This is one of those seemingly strange occasions when everybody in the Committee supports the Securities (Local Authority Exemption) Amendment Bill, so we will talk it out endlessly, probably down to closure. Many of the reasons for that relate to the importance of the legislation, but I suppose also it is to give us a little time to organise ourselves for the maiden speech from our colleague Su’a William Sio, which is coming up next. I think my job is to try to provide a little light entertainment—

💬 Dr Richard Worth: Warm-up.

—to warm up the crowd, I think it is called; and significant the crowd is, and it is lovely to see them all—before the maiden speech and the pearls of wisdom from our new colleague who is coming in very shortly. I am looking forward to hearing them. I am sure they will be far superior to the pearls of wisdom that people are about to hear from me.

I will make a couple of comments about what the previous speaker, Dr Richard Worth, said. We both agree that this is important legislation in order to be able to encourage investment within the local authority scene. He talked about local government stock. I remember the days when we had hospital bonds and local government bonds. They were a good way for people to invest in local authorities. He actually mentioned two dates that I thought were quite significant: 1996 and 1998. He said that unfortunately the Government at the time—I think that is what he said—did not take into account the full consequences of the legislation that came into force in those years, which meant that in the end it made it much more difficult for local authorities to access investment.

The member forgot to say—and it is important for me to remind him of this—that it was a National Government that did that. The member nods; he is saying yes. I do not want to labour the point, because I think—

💬 Hon Member: He made a mistake.

It was just a little mistake. But I think that in one moment in time one can see that a National Government created difficulties for local government investment, and a far-reaching, long-sighted, Labour-led Government is enabling local authorities to get into investment strategies once again. I could talk a lot about the vision of the two parties—probably outside the scope of the bill—but I will not, because I thought the member gave a good speech and it would be churlish for me to remind people of the differences between short and long-term vision. It would not be appropriate to do that when we are debating a bill that we all agree with.

As the member said, the legislation is about creating investment opportunities. And he is right to say it will apply mainly to things like transport infrastructure, where there are long-term investments. Lots of investment funds are looking for good investment opportunities. We have seen all the difficulties that happen with some of the short-term Blue Chip - type arrangements. So here are good opportunities for people to make investments in local authorities.

💬 Hon Dr Michael Cullen: Red chippy, not blue chippy.

Blue chippy, not Blue Chip, the Minister of Finance said. That is not one of his better interjections.

💬 Hon Dr Michael Cullen: I said “red chippy”.

Oh, I see—“Red chippy, not blue chippy.” That is not one of his better interjections. If I keep talking a bit, maybe he can think of something a little funnier to say. It is very, very difficult to make a speech such as this without humorous interjections, so I hope that the member will interject in a more humorous tone in a minute.

The member over there, Richard Worth, was right when he said this bill is about investment in local authorities. Members might ask what the bill does. It lowers the compliance cost for local authorities to issue debt securities. That is a good thing, and it will help local authorities as they try to move forwards. In particular, the problem is that they now have front-loading infrastructure projects at a time when investment funds are looking for more long-term advantages. The bill helps to lower compliance costs by releasing some of the obligations and requirements of the Securities Act, and that is important. A couple of important things it does are to ensure that two local authority - elected people may sign off a financial statement, not the full council, but that they are all still liable for the accuracy of the statement.

Progress reported.

Report adopted.