Local Government Borrowing Bill

Hon RODNEY HIDE (Minister of Local Government) Link to this

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 now achieve. Local Government New Zealand has estimated that the funding agency will save local government in the order of $25 million a 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, with 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 that 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 the authority to lend money to the agency in exceptional circumstances. This authority expires after 10 years.

Part 2 authorises the 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, the Auckland Council will need to continue some borrowing outside the agency. Part 2 will effectively give the 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 the Auckland Council confirmed its intention to fully hedge its foreign currency exposure in order to avoid any additional risk to ratepayers. It is intended that Part 1 and Part 2 will be divided into separate bills at the Committee of the whole House stage.

The Local Government and Environment Committee has 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 council-controlled trading organisation. This will make it clear to potential investors that key transactions, including guarantees, cannot be overturned if the funding agency ceases to be a council-controlled trading organisation.

I especially thank the Local Government and Environment Committee for its excellent work on this bill. I thank each of the members and the outstanding chair, Mr Chris Auchinvole, who has done an outstanding job in his chairmanship. I commend this bill to the House.

PHIL TWYFORD (Labour) Link to this

Labour members are happy to stand today in the House and support the Local Government Borrowing Bill. We supported the bill at its first reading, and there was a lot of consensus at the Local Government and Environment Committee that this was a useful, positive bill that should be supported.

The idea, I think, first raised its head from the Capital Market Development Taskforce, and Phil Goff spoke out strongly at the Local Government New Zealand conference last year, calling for progress on the concept of a local government bond bank. I am pleased to say that I think there is a high degree of consensus across political parties and across the local government sector that this bill, and its promise of coordination, efficiencies, and cost savings by local councils, is well worth supporting.

I note that the figure of $25 million has been cited throughout the debate on this bill. I think it came from the work that Local Government New Zealand has done. I note that in “BusinessDay” back in April, Hugo Ellis, a partner in Cameron Partners, was quoted as saying thar the possible savings from the establishment of the agency were based on council borrowing rates from September, which had fallen by up to 35 basis points since then. So he casts doubt on whether the $25 million figure is credible, but in the same article he notes that one of the reasons that the cost of local government borrowing has fallen is in fact in anticipation of the bond bank being set up. So this is a remarkably efficient bill, which saves—who knows—possibly millions of dollars in local government borrowing costs before the legislation has even passed its second reading in the House.

I want to talk about the broader question of local government debt. We heard much in early 2010 from the Minister of Local Government about the ballooning levels of local government debt. There was talk of a crisis in local government, with local councils being unable to meet the costs of infrastructure, ballooning levels of local government funding, and debt getting out of control. This talk was bandied around as some kind of justification for the Minister’s agenda of rate capping, of trying to roll back the scope of local government through his core services agenda, and of opening up municipal water services to what we regard as an effective privatisation, through 35-year public-private partnerships. The last of those three items was, in fact, implemented in the Local Government Amendment Act that was passed at the end of last year.

Interestingly, the Auditor-General’s report on the trends and financial information in long-term council community plans offers some really interesting reading about the state of local government debt. This is the most rigorous, most authoritative data that we have at hand—coming from the Auditor-General’s office—on this issue. It came out in August 2010, and I will just quote one or two passages from the Auditor-General’s report. The long-term plans, which go from 2009 out to 2019, were analysed and clearly showed an increasing use of debt, a trend that was evident in local government from about 2004. The debt was forecast to reach its highest level over the 10-year period in 2015, peaking at $11.2 billion. Although the total debt is clearly significant in dollar terms, the Auditor-General notes that the amounts are “not so large”—those are the Auditor-General’s words—“when considered in the context of local authorities’ overall balance sheets, and annual revenues and expenses.” The debt as a percentage of total assets over the 10-year period was forecast to move from 7.4 percent in 2009-10, to peak at 9.5 percent as a percentage of total assets, then fall again to a little over 8 percent by 2018.

That is not the kind of picture that was painted by the Minister of Local Government and his followers in early 2010, when they sought to paint a picture of escalating debt getting out of control in some kind of financial apocalypse in local government. The cost of borrowing is significant, whichever way we slice it, for local government. According to the Auditor-General, $6.7 billion will be spent—that is the cost of capital for local government investment in capital items—in the decade 2009 to 2019. That reflects a more than 100 percent increase in the annual interest expense, compared with the financial year 2008.

The general picture is that debt is increasing. It is not increasing to levels that are unsustainable; it will peak, then fall away again towards the end of the decade. But whichever way we slice it, we are talking about large amounts of money that are a cost to ratepayers—$6.7 billion during the decade we are talking about, 2009 to 2019. The Auditor-General’s final verdict was: “We do not consider that this level of interest expense is high or poses a likely risk of compromising the prudence with which local authorities are managing community assets.” So debt is increasing, but it is well within the normal standards of financial prudence that are expected from local government.

Needless to say, it did not really matter that the Minister’s fantasy of ballooning, out-of-control debt and the need to rein in these irresponsible councils—that story—collapsed, because by then the Minister had been reined in by his own Cabinet colleagues, who had told him that they did not want to see any more of the extreme agenda he was promoting through 2010.

Labour supports this bill. We support the establishment of the Local Government Funding Agency, because it is consistent with the fundamental Labour principle of owning our own future. This bill will make it easier for councils to offer retail bonds to mum and dad investors, which will allow them a secure option for investing their money, and for investing in the vital infrastructure needed in communities throughout New Zealand, whether that is water supply, transport infrastructure, or new buildings—you name it. This is an opportunity for New Zealanders to make sound and secure investments in the future of their country.

But I contrast this with the approach that National is putting before the people of New Zealand in this election campaign. It is putting up on the auction block our most profitable and our most well-run State assets. National is putting up those organisations on the auction block, and will be selling off 49 percent of them in a way that, contrary to the blithe reassurances we have heard from the finance Minister, will inevitably end up with a substantial amount—if not all—of those shares in foreign hands. That is irresponsible, it is wrong, and I am sure the people of New Zealand will reject that policy resoundingly.

Privatisation is very much on the agenda of this National Government and its allies, and we have to wonder whether that will come back to bite New Zealanders if National is re-elected for another term. Will National force the city of Christchurch to sell its assets in order to fund the reconstruction of that city? That is a question that National MPs should answer in this debate. I call on Christchurch members in particular to stand and take a call in this debate. Will this Government force the city of Auckland to sell its shares in the Ports of Auckland in order to fund the rail infrastructure that is so desperately needed in Auckland?

LOUISE UPSTON (National—Taupō) Link to this

I am pleased to be able to stand and speak in the second reading of the Local Government Borrowing Bill. It is great to see that the bill is being supported by the Labour Opposition, because, clearly, it is about reducing costs for local government. The member before me spoke about the fact that perhaps the level of debt owed by local government entities was not at the rate we had spoken about previously. But Treasury’s projections still are that local government borrowing will jump by two-thirds over a 5-year period, and will reach about $10 billion. There would not be a week that goes by without my having a constituent in one of my electorate offices concerned about increases in their rates, and, probably more important, their ability to constrain rates increases. That is really what the Minister of Local Government has had as one of the clear focuses in his work.

The Local Government Borrowing Bill has two parts. The first, of course, is the creation and operation of the New Zealand Local Government Funding Agency and its ability to issue local government bonds to New Zealand and also to overseas investors, who will then be able to re-lend to local authorities for capital and infrastructure projects. The second part of the bill concerns the ability for the Auckland Council to borrow in foreign currencies. As we heard from the Minister, there were not many submissions in the select committee process—only six, of which five were strongly in support, with just a few comments about how we could possibly tweak the bill in order to improve it.

This is a common-sense bill. It is solving a very real problem—a very real problem that affects district councils differently up and down the country. Some councils have incredibly high gearing; others have low. Some councils manage their capital investment requirements in different ways. In effect, this legislation will level out some of those differences up and down the country and will provide the ability for local councils to borrow at realistic rates and get some real economies of scale in relation to their interest costs.

We know that strong and good local government is vital for each of our communities, be they small or large. The success of local government is vital to our economy and also to the protection of our environment, but the reality is that we cannot be in a situation where rates continue to rise and debts taken on by local government are at unsustainable levels. The speaker before me talked about the fact that local governments are starting to change their behaviour. Some of the projects they have put forward in their long-term plans are different. I think part of that is that they are responding to a signal from this National Government and from the Minister of Local Government that there is an expectation that local governments should be more mindful of how they are spending ratepayers’ money. They are clearly more mindful of the economic conditions we are in right now. Just as every household is tightening its belt, and just as central government is tightening its belt, local government entities are doing so, as well. They are responding to the circumstances we live in, as well as to the signal from this particular legislation, and it is great to see that they have taken that on board.

This bill is very simple—it is about reducing costs. We could argue around the edges, but we are talking about anticipated savings of potentially $25 million in interest costs for local councils. That is a massive saving, and a reduction in the burden on our ratepayers. There is also a reduction in duplication. If we think of our different district councils, we know that some are very small in size; others, like the Auckland Council, are large. But this legislation will reduce the burden on them in terms of their having to deal with the sometimes very complex issue of borrowing for and financing their debts. This does not mean that local councils have to borrow through this funding agency. They still have other funding options available to them. But the bill will provide them with a choice. As the Minister said in his opening comments, there will be a strong move by many of the councils to get their funding through the Local Government Funding Agency.

The other side is that the legislation also provides an opportunity for mum and dad investors. If National is successful in being re-elected after 26 November, there will be other investment opportunities for people; there will be a whole suite they can choose from. If I look locally at the Taupō electorate, I know there is a significant list of projects that need to be completed within the three different district councils, all of which need funding. Some needs are significant, and I spoke about water and waste-water projects in the bill’s first reading. I know, having spoken to the councillors in the Taupō electorate, just how grateful they are that central government is extending a significant hand of assistance to them in a very real and practical way, which assists them in reducing their costs. That is why I am very pleased to support the Local Government Borrowing Bill in the second reading, and I will be pleased to see it through to fruition.

Hon RUTH DYSON (Labour—Port Hills) Link to this

It gives me a lot of pleasure to speak in support of the Local Government Borrowing Bill. It is quite a rare opportunity to support something that has been introduced by the Minister of Local Government, the Hon Rodney Hide, as an ACT member of Parliament. That is not generally Labour’s position on such matters, but this bill is worthy of support. The bill certainly went through the Local Government and Environment Committee very smoothly, as well. I commend the select committee for the way it considered this bill, and I also acknowledge and thank the officials. There were not a lot of contentious issues under debate during the process, but the select committee nevertheless gave the bill a decent and rigorous amount of consideration. The officials—as usual, actually—paid a lot of attention to the issues as they were raised by both submitters and members of the committee.

This bill had its background under the previous Labour-led Government in 2007, when an inquiry was instigated into local government rates, and particularly the funding mechanisms that were available to local authorities. The recommendation that really triggered this bill was that “local government look favourably on making more use of debt to finance long-term assets. This should include the issuance of bonds (including infrastructure bonds) on the capital market, not just shorter-term borrowing from commercial banks.”

As the member who just resumed her seat, Louise Upston, noted, there are a variety of ways in which capital can be raised. The member was nearly salivating by the time she finished her speech, as she talked about the hocking-off of New Zealand’s strategic assets that National is planning, should it win the election at the end of November. National is proposing to sell off assets to, as it says, Kiwi mums and dads—except that Kiwi mums and dads already own those assets. We already own our lakes, our dams, and the power companies that National wants to sell back to us. It makes no sense at all. The Minister of Finance was obviously trapped not just at his own National Party conference by his own delegates but also in the House today. He has spun the story that Kiwi mums and dads will be at the front of the queue to buy those assets, which they already own, and that there will be some magical protection against all these assets being hocked off to foreign owners.

But that is not true. There is no mechanism at all, either intended or in existence, that will stop our dams, our lakes, and our power companies being sold to foreign owners. If National thinks that is OK then that is what it should be campaigning on, instead of this spin, which is rapidly becoming undone. If we had a choice between what this bill proposes and hocking off the family silver, as National wants to do, we would certainly go for this. Likewise, this is not only better than privatisation but also much better than the public-private partnerships that the National-ACT Government is so keen to promote.

I mentioned earlier the Local Government Rates Inquiry and that the concept of a local government bond bank was also proposed by the Capital Market Development Taskforce. Again, that was set up by the previous Labour-led Government in 2008 and reported back to the current Government towards the end of 2009. The Government then said it supported that recommendation, but all it has done is put in a minuscule amount of money, a mere $5 million, to establish that fund. That was in the Budget of last year, and there has been no other progression since then.

This is good legislation. It is nice occasionally to have such unanimity, but even better, I guess, is the fact that all of us in this Parliament know that through this process and by supporting this legislation there is the potential for the ratepayers of New Zealand to save about $25 million in interest. That has to be good. As a Cantabrian I know that we will have a lot of very good use for any additional funding we can save out of our council budget. On that note, I remind the Minister of Local Government that he has already abolished one of our councils in Canterbury. The Canterbury Regional Council was abolished in a disgraceful way by the current Government. I put on record the fact that we do not want the Christchurch City Council to be abolished as the next move, as part of the setting up of some super-city. We are keen on keeping all three of our councils: the Waimakariri District Council, the Selwyn District Council, and the Christchurch City Council.

Labour is very keen on full democracy being restored to Canterbury and our regional council being re-established as well. Everyone else in the country had a vote for their regional council, except us in Canterbury. We have done our penance for whatever sin the Minister thought had been committed by Environment Canterbury. We would like our full democracy restored. In the meantime, I will be pleased to watch the progress of this bill.

SUE KEDGLEY (Green) Link to this

The Green Party too will be supporting the Local Government Borrowing Bill, but with a couple of misgivings. We agree with other speakers that it makes sense to set up the New Zealand Local Government Funding Agency, which would enable it to become a large-scale borrower on behalf of local councils, to borrow and to raise finance. Hopefully, through amalgamating the borrowing the agency would get good credit rating terms and thereby lower interest rates, and there would be savings. The projected savings do depend, as the Minister of Local Government said, on getting good credit ratings. The projected savings are from a Treasury regulatory impact statement, and they are just that: they are projected, in terms of reduced costs of capital. I wonder whether the Minister of Local Government could stop speaking right here; it is a little bit distracting.

RAHUI KATENE (Māori Party—Te Tai Tonga) Link to this

Tēnā koe. The circumstances around irresponsible borrowing and lending have been at the heart of the financial crisis of the past 3 years. In many respects, therefore, we could look at the Local Government Borrowing Bill as an extension of the borrow, borrow, borrow mentality that has had disastrous consequences at the central and local government levels, at the community level, and at the family level. But we cannot ignore the very serious debt issues facing our local government, which this bill attempts to address.

I am really pleased to be able to speak to this bill as the Māori Party member of the Local Government and Environment Committee. As the Māori Party member on that committee, I am really keen to ensure that I do as much as I can to assist the committee to tackle an extremely significant issue for local government—that is, to dramatically improve representative democracy as provided for in the provisions of the Local Government Act 2002, in particular Māori representation.

The provisions are really specific in terms of providing opportunities for Māori to contribute to and participate in the local authority decision-making process. There is the opportunity for fostering the development of Māori capacity and the requirement to provide relevant information to Māori in order to best uphold the commitment to democratic representation, yet representation of Māori elected on to councils is at best between 5 and 7 percent, despite Māori being 17 percent of the population. Of course, as we all know, the Māori population is increasing, and at a faster rate than the European population. So there is no question that we have a long way to go in improving the effectiveness of local government for Māori. We must pull out all the stops to enhance Māori participation in local government, to implement and monitor accountability mechanisms to ensure effective Māori participation, and, of course, to be engaged in the true realisation of the power-sharing envisaged in Te Tiriti o Waitangi.

In order to meet these needs, we accept that local councils need to allocate priority to Māori representation. Yet as we already know, local authorities are facing many competing priorities. It is a situation that this bill attempts to address. The forecast borrowing needs of local authorities are large. Total borrowings could reach $10 billion within 5 years from a current level of around $6 billion. The purpose of the bill then, as others have said before me, is common sense. It is, very simply, to make borrowing cheaper for local councils. This simple aim would be achieved by establishing the New Zealand Local Government Funding Agency Ltd to act as a type of umbrella organisation for the purposes of borrowing money for local councils. The theory is that multiple councils issuing their debt collectively will lower the cost of borrowing, and we have to applaud that purpose. Economies of scale will mean that the agency is more creditworthy than individual councils and will therefore borrow money at a lower interest rate. We would hope, therefore, that the benefits of this approach will be realised by all and, more to the point, will enable a more comprehensive and enduring attempt to create representative democracy.

The Māori Party places huge priority on listening to the people, so we were particularly interested in the submission from the Society of Local Government Managers. We must pull out all the stops to enhance Māori participation in local government. In order to meet all of these needs, we accept that local government councils need to allocate priority to making sure that as well as Māori representation, there actually is the facility to make borrowing cheaper. That can only benefit ratepayers, that can only benefit local authorities, and that can only benefit taxpayers, as well. So we are supportive of this bill. Kia ora.

NICKY WAGNER (National) Link to this

I rise to support the Local Government Borrowing Bill at its second reading. This bill is all about better, cheaper, more cost-effective borrowing for local councils. It is a way for local government to coordinate its borrowing to obtain economies of scale and cheaper interest rates. By collaborating and working together, councils will have a better chance of affording the capital they need in the coming years to fulfil the expectations of their ratepayers. At the moment the market for local authority debt is fragmented, with over 80 issuers and several hundred mainly small issues of debt. Coordination will improve the overall market for local authorities and make it more efficient for both issuers and investors, and generally improve the New Zealand capital market.

Council borrowing has a very low credit risk, and ratepayers should gain the benefits of supporting financially sound institutions. In the past, because councils have been unable to coordinate their borrowing effectively they have not taken advantage of these opportunities. The bill will facilitate the establishment of the New Zealand Local Government Funding Agency, which will issue debt on behalf of all participating local authorities and will have the same regulatory environment as the participating local authorities. That will allow local authorities to combine resources and purchasing power and to achieve economies of scale that will provide cheaper borrowing than ever before. The agency is expected to yield significant savings for the local authorities involved. In fact, the forecast stated that they would indicate a 50 to 70 basis point reduction, which would cut the interest bill of local authorities by up to $25 million a year. That is something ratepayers would be very pleased to see. In reality, the $25 million might be an overestimate now, because local government interest rates have already dropped significantly—partly in anticipation of this new authority—so this bill is already being effective.

Cheaper finance will mean that communities can spend more on essential infrastructure and other priorities and less on servicing debt. It could also mean there will be less pressure for rates increases. The Local Government Funding Agency will also provide a deeper and more liquid market in standardised local authority bonds, which will be good for both wholesale and retail investors. At least nine of the larger local authorities have already committed to working together to support the agency, and they represent about 54 percent of the rateable income of New Zealand local government. That statistic is from 2009. But a much bigger group—more than 35 councils—is also interested in being involved.

The costs to ratepayers have been escalating for years, but through this initiative, which I believe came out of the Prime Minister’s Job Summit, we have found a better, cheaper, and more effective way for local government to manage its borrowing. It is about time that councils took advantage of their low credit risk and that they do so for the benefits of their ratepayers. I commend this bill to the House.

BRENDON BURNS (Labour—Christchurch Central) Link to this

As earlier speakers have indicated, Labour is supporting the Local Government Borrowing Bill because it makes absolute sense. It is a mechanism to allow the local government authorities of this nation to use their collective power and might to borrow at more sensible rates. That collective approach is something that Labour often endorses as a way to go. This bill predates the Prime Minister’s Job Summit. It goes back to the Capital Market Development Taskforce, which the last Labour Government set up in 2008. The task force reported to the new Government at the end of 2009 and proposed the idea of a local government bond bank. This bill has evolved from that. At the heart of the bill in its gestation was a view that Auckland would most especially need a borrowing mechanism such as this and, indeed, the bill includes a particular reference to Auckland being able to borrow offshore.

But since this bill began its journey through the officials and into the House, we have had the Christchurch earthquakes. My city of Christchurch is facing considerable extra ratings demand upon it as it works through the process of paying for its share of the costs of recovery. In question time in the House today we heard reference from, I think, Russel Norman about the fact that ratepayers in Christchurch this financial year are seeing an additional 1.75 percent on top of the earlier expected rate that they will pay this year as Christchurch residents pay their share towards the cost of recovery. Every dollar that the Christchurch City Council is able to borrow at a lower rate means another dollar paid off the debt bill that our city must meet as its share of contributions to the cost of the earthquakes and the recovery that is needed. Of course, we would much prefer that that was the approach taken, and that the council in Christchurch and councils across the country take the opportunity of what this legislation envisages and use it collectively to borrow, to press down the interest rates, and to save their ratepayers, cities, towns, and local authority entities considerable amounts of money.

We always have a concern around what the alternatives might be. Obviously, one of the things in our mind at this point is that this is a much better mechanism to allow councils to borrow and to use their collective might to borrow at lower rates—it is certainly a much more preferable option—than privatising assets or part-privatising assets. We know that that is certainly on the Government’s agenda. It is stated as being part of the Government’s agenda in respect of the assets that the Crown holds in Air New Zealand and Solid Energy. Of course, there are other assets in the wider public domain, and there are prospects for such alternatives to borrowing sensibly, repaying debts over a longer time period, and using this bill to hold down the interest rates that councils and, therefore, ratepayers would face.

In my city of Christchurch we have seen a very solid stream of revenue to the ratepayer base of Christchurch from a number of council-owned companies, particularly Orion, which will be known to many members of this House. Orion did a sterling job through the crises of September last year and February this year and through the 13 June earthquake as well. Orion has just released its annual report. Members will have been sent a copy fairly recently. I note that despite the hellish year that Orion has been through, the report says it has still managed to produce a net overall profit of $28.4 million and fully imputed dividends back to its shareholders—namely, Christchurch City Council as the most notable shareholder—of $37.5 million.

Again, with members opposite from Canterbury present, I raise the concerns that are emerging in Canterbury—and it was referred to in question time in the House today—about the option that the Government may be considering for Christchurch as an alternative to borrowing as provided for by this bill. Sensible borrowing at lower rates is a good mechanism that uses long-term strategies and uses dividend streams from assets such as Orion. The Government may be putting the option to the Christchurch City Council, in most forceful terms, of selling off assets like Orion. I think members opposite from Canterbury need to comment on that issue. I again raise that question in front of them, as I have at every opportunity in the House over the last few months.

It is an important issue for the ratepayers of Christchurch to know whether the Government is leaning on the Christchurch City Council and saying to the council that it should sell off those assets or part-sell off those assets like Orion, the port company, the airport company, the Enable broadband network, and the Red Bus company. Those assets are collectively worth around $2.2 billion. If this Government has a philosophy that it is appropriate to sell down assets to reduce debt, I ask whether the Government is leaning on the Christchurch City Council to effectively force it to sell down assets instead of taking up much more sensible options, as envisaged in this bill, to hold on to assets, to use them to leverage and raise capital by way of debt, and to use the good effects of this bill to hold down the interest rates that the councils and, therefore, the ratepayers would pay. That is a much sounder strategy—a much sounder strategy—than the short-term option of realising assets, selling them off, taking the payments, and reducing debt but carrying the long-term costs.

Going back to the Orion example, I note that the latest dividend of around $37.5 million takes Orion’s payments back to its shareholders—notably Christchurch City Council and the people of Christchurch—over the last 20 years to $1 billion of dividends and other payments. One has to ask what sort of madness would inspire any Government to consider selling off assets that return that kind of return to the ratepayers of Christchurch. Again, I say that we have members opposite from Canterbury in the House today and I ask them to comment on that issue.

The reason Labour is supportive of this bill is that it is absolutely just plain common sense, to borrow a phrase that a member opposite has been known to use. It provides a mechanism for local authorities to collectively raise capital at the best possible rate. I need to note that local authorities are facing some extra costs as a result of some Government policy changes. For instance, at Christmas last year—in fact, on 23 December; I had predicted that the Minister of Health would choose that date—the Minister announced the capping of the funding scheme that Labour had put in place to allow small communities within local authorities across New Zealand to access some assistance with improving drinking water. That fund has now been capped at $10 million a year. There is still about $80 million in the fund. It was actually fully funded by the Labour Government—$150 million was put into the pot. About $80 million is still in the pot, and the Minister has chosen to cap it. In a situation where one in five New Zealanders is still drinking water that is either not safe or not being tested to assure people that it is safe, that is exactly the sort of funding that assists small communities to make their water potable and able to be drunk safely.

One wonders if behind this bill, in some respects, the Government has chosen to squeeze back the funding that is available to small communities and their local authorities, then gear them up so they can take out loans to pay for some of this. There is nothing wrong with support from the taxpayer, especially where the funds are there, to assist those small communities. Many of them will continue—even under this bill, which provides those slightly lower interest costs—to not be able to afford to improve their drinking water unless they are given some assistance, as was provided and envisaged by the last Labour Government. Those funds are still there, but are now constrained to $10 million a year.

I also note that in just the last few weeks we have seen the last payment under the Sanitary Works Subsidy Scheme, which the last Labour Government also introduced. So we are seeing two funding schemes disappear. We are seeing this sensible mechanism about lower local government borrowing costs, which is commendable, but the background to it includes the loss of two schemes that I think have assisted many small communities to upgrade their very basic and most essential services, which are also worth supporting. In the meantime, this bill proceeds through the House. Labour supports this bill.

NIKKI KAYE (National—Auckland Central) Link to this

I am very pleased to speak on the Local Government Borrowing Bill. It is good to speak on legislation that has so much support across the Parliament. I acknowledge the members of the Local Government and Environment Committee, and particularly the chair, Chris Auchinvole, who has done an outstanding job of chairing the committee’s consideration of this legislation.

The purpose of this bill is to improve financial management within local government. When we look around the world and at what is happening, we see that it is really important that this Parliament recognises that we are passing a bill that is designed to improve the management of ratepayers’ funds across New Zealand. Obviously the major purpose of this bill is to set up a new agency that will enable collective borrowing across local government in New Zealand. I think Ms Louise Upston raised the point that there are different borrowing needs right across the country, and the Minister of Local Government mentioned that 35 local authorities have signed up to this bill. So it is good to see that it has a lot of support.

We need also to acknowledge why at this time it is so important. We know that there are many people on fixed incomes, and rates rises really hurt some of those people. So I think it is really important that this Parliament, as I say, takes a moment to acknowledge that we are doing everything we can to ensure either that we are freeing up greater funds for services in local government, or that we are enabling local authorities to not have to spend so much on borrowing so that we actually reduce the chance of rates rises. I think it is significant that over $25 million is projected to be saved under this legislation. We also need to acknowledge that this idea came from the Job Summit and that it is voluntary. Local authorities can choose to borrow independently, or they can choose to use this legislation.

I really want to touch on the Auckland Council situation. As members know, in this House throughout this term we engaged in a major reform of local government within Auckland. I think it is very important to acknowledge that we now have a wonderful situation in Auckland where we have one mayor and one council. The council is proceeding to make some pretty big changes across our city, across public transport, and right within the spatial plan. It is very important that the legislation we are passing today will give it much more flexibility in terms of its borrowing needs, given that it now has $30 billion in assets and is dealing with billions of dollars in rates. It is also important to acknowledge that significant changes were made at the select committee, particularly around council-controlled trading organisations. We had to ensure that there was some financial certainty around council-controlled trading organisations that may be disestablished, to ensure that investors have certainty that transactions will be conducted.

As I have said before, I am very pleased to support a bill that has so much support across the Parliament, that is focused on ensuring that we save ratepayers money, that gives councils greater flexibility in terms of financial management, and, very important, that gives the Auckland Council the ability to better manage its finances, given that it is such a large organisation. It will enable Aucklanders to free up potentially $10 million—which is the figure I think I have seen—which could be spent on local government services or on ensuring that we keep rates down. I commend this bill to the House.

DAVID SHEARER (Labour—Mt Albert) Link to this

It is my pleasure to speak on the Local Government Borrowing Bill. As we have indicated, we are supporting this bill. We believe that it is a good move and a good means by which capital can be raised for important infrastructure projects that are offered by local communities. It is very cost-effective. It is looking to save local authorities about $25 million a year, which is a big saving and one of the big reasons why we support it.

As one of my colleagues said, an additional reason we are supporting it is that it means that we do not have to flog off assets in order to buy other assets. We can actually do this through people investing in their own infrastructure within New Zealand at the local level in order to get the infrastructure that they require.

Just to give some background to this particular legislation, the idea of the local government bond bank was floated at the Job Summit about 2 years ago—2 quite long years ago—and it is only now coming back to Parliament. I believe that the Government has really dragged its feet on moving this bill through, despite the fact that, particularly in the Auckland region that I know best, we need it urgently.

The concept of a local government bond bank was also proposed by the Capital Market Development Taskforce back in 2008 under the Labour Government—again, we signalled that we were in favour of it way back then—and reported to the National Government in 2009. So on the one hand it came up through the Job Summit, and on the other hand it was actually a formal recommendation from the Capital Market Development Taskforce. Both of these ideas came to the same conclusion of a very cost-effective way of raising money for infrastructure, yet it has taken until now for it to go through. The Government set aside $5 million in an establishment fund in Budget 2010, but here we are nearly 18 months later in 2011 and we are only now going through the bill’s second reading.

The funding agency, as I said, is a win-win both for local government and for New Zealanders—Kiwis—looking for new and safer ways to invest. We have certainly had a calamity within the investment market, particularly with the finance companies falling over. People are still wary about the stock market. The property market at the moment is up and down. People are looking for more secure, safe ways to invest their money. I also believe that they feel quite strongly and, perhaps, patriotically that they would like to invest their money in their own communities through this sort of mechanism.

We hear so much from the other side about mum and dad investors when National members are talking about flogging off our key electricity assets, Air New Zealand, and things like that. But we know that their shares will end up going offshore, as they have done in every single case where this has happened before. But in this sort of case, mum and dad investors know that their investment is good for the community and will help Kiwis retain ownership, not lose it to an Australian or a US corporation that will simply send the proceeds offshore. They will control those assets—

CHRIS AUCHINVOLE (National—West Coast - Tasman) Link to this

It is a pleasure and a privilege to be the last speaker during this second reading of the Local Government Borrowing Bill. The bill is to facilitate the establishment and operation of a new company: the New Zealand Local Government Funding Agency. It has been a pleasure to see this bill come through our Local Government and Environment Committee. It was one of those occasions when, basically, we were all in agreement that it was a good idea—not only a good idea but also that it had true purpose, true meaning, and was significant legislation.

I remember during the early stages, because as has been evidenced by the way people have spoken we were pretty much in accord on this issue, there was very much a bipartisan discussion about the whole thing. I did, none the less, feel obliged to ask the officials why, if it was such a good idea now, we had not done it before. The answer to that question really was given by Local Government New Zealand, which is a very, very strong supporter of this particular bill. It said that in the past, without the pressures of the difficult economic times we have been having, money was reasonably easy to facilitate for local councils and the interest rates were always competitive, because they were such blue-chip financial institutions. But without that, with the difficult times we have had, with banks being more careful whom they lend to, with councils being more cautious about borrowing, this has certainly become a timely operation and it is a good thing to be doing.

Local Government New Zealand has estimated that the funding agency will save local government in the order of $25 million each year. At the Local Government and Environment Committee we are quite familiar with the level of debt that various councils are engaged in and we are kept up to date with that. So if we can make savings and easier facilitation of money, the operation of the agency will also strengthen New Zealand’s capital markets by providing a new high-quality investment option, and that will be a good thing too. Unsurprisingly, the bill has a very high level of support throughout the local government sector. We are advised that 35 local authorities have indicated they intend to participate as shareholders in the funding agency, and a further 14 have indicated they will participate in this scheme as guaranteeing borrowers. There is strong support for the proposal and there is very little opposition to it.

If I may, I will take just a moment to reflect on the response to local government requirements that the current Minister of Local Government has shown throughout his tenure of that portfolio. The Hon Mr Hide has repeatedly come out with legislation that is tailor-made to suit the requirements of local government. It goes from the very large effort in Auckland down to this sort of consideration, which is really for smaller councils’ maximum advantage.

This bill is most worthwhile legislation. It gives the Minister of Finance authority to lend money to the agency in exceptional circumstance, but it specifically states that the Crown does not guarantee the obligations of the funding agency. As I say, I am pleased to be the last person speaking on this particular reading of the bill. The recommended amendments we brought through the select committee will be most worthwhile if they are incorporated into it. I think that of the six submissions we had, five were in support and there were very few recommendations for change. It has been very tidy legislation. I am deeply grateful to the committee members who assisted in the passage of the bill, and to the officials who provided us with the assistance we required. Thank you.

Hon STEVE CHADWICK (Labour) Link to this

I will take only a short call, mainly because the ACT members sat here, in humility, and did not take their call. Mr Hide will be surprised to hear me say that Labour is fully behind the Local Government Borrowing Bill. This is a much better bill than National’s position of a borrow-and-hope bill, because this bill will have concrete and tangible benefits for the local government sector. I congratulate Minister Hide. When I think about his rate-capping legislation, I realise he always had concerns about expenditure at the local authority level.

But I want to put it on the record that the establishment of the Local Government Funding Agency is not actually a new idea. I remember that when the previous Prime Minister met with mayors of the country and chairs of regional councils, this sort of mechanism was discussed by Labour—