Local Government Borrowing Bill

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.

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.

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.

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.

I move, That the question be now put.