Securities (Local Authority Exemption) Amendment Bill

GORDON COPELAND (Independent) Link to this

I will take just a brief call on the Securities (Local Authority Exemption) Amendment Bill, and I begin by congratulating Dr Richard Worth. He set out a very eloquent and very complete analysis of the bill and its importance. It is actually a very important bill. As Dr Worth said, it is a very short bill but its ramifications are quite dramatic.

Before I go on to speak on the bill, I think I should respond to the contribution of the Hon Paul Swain, who correctly pointed out that the problem we are fixing probably has its roots in the time of the National Government of 1996 to 1999. I say to the Minister that it is now 2008, and if Government members protest too loudly about their great vision of getting things fixed in their country, then I say to them that it has taken a great deal of time. It has taken far too long to fix this problem. I just want to bring a bit of balance to that political issue.

I want to make a slightly different link, as well. At the time this bill was being considered by the Commerce Committee we were also talking about housing affordability. I wonder whether the very, very large development levies would have been levied on new homeowners by local councils in this country if this bill had been enacted much earlier. As Dr Richard Worth has said, we have actually, unintentionally, I believe, shut off the ability of mum and dad ratepayers to invest in stock issued by their own local council.

I remember the days when, for example, the Nelson City Council or the Lower Hutt City Council could go to its own ratepayers, tell them there was a bond issue coming up, and ask whether they would like to buy some stock. Many households of every portfolio, large and small, always had a fair proportion of their investment in local body stock. Bringing that to an end was a tremendous mistake, with ramifications not just for the funding of local authorities.

I will refer back to the development levies just to make this point. The development levy is actually a levy on the new homebuyer, and it therefore makes housing affordability worse. It makes housing less affordable. The right way, in my view, to fund new infrastructure such as sewerage works and roading works is—as Dr Richard Worth has pointed out, and Mark Blumsky has also mentioned it in this connection—through long-term intergenerational debt, so that it is repaid over a 30 or 40-year period. That is the traditional way it has been done in New Zealand, and removing that opportunity really was a great mistake. I agree with the comments that have been made that removing that opportunity has also forced a lot of mum and dad shareholding, ratepaying investors to get into junk bonds with finance companies like Blue Chip, with very, very sad consequences.

I look forward to the passage of this bill. I wholeheartedly endorse it, and I hope we will see a return to the good old days when ratepayers—mum and dad investors—had the opportunity to put some of their money into their own local council bonds. That really is intergenerational finance in another sense, is it not? Those people who are older and better off and who have some spare cash are actually funding—physically and necessarily funding—the infrastructure that is coming on board for the next generation of homeowners and the next generation of citizens. That is the way things should be.

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

I will take just a brief call in the Committee stage of the Securities (Local Authority Exemption) Amendment Bill to thank members for their contributions to the debate. I understand that my colleague the Hon Paul Swain made reference to the time frame for the repeal of the previous exemption that existed in the securities legislation for local authorities. I think that to say it has taken a long time to put it back ignores another reality, which is that I do not think that when the Government of the day actually removed the exemption it believed that the consequences would be as significant as they were. In fact, it really was not until this Government set up a Central / Local Government Forum that was able to talk about the issues facing local government that we realised that this issue was one that had been of concern to local government.

So the issue was able to be brought to the table, and the Prime Minister undertook, as soon as it was brought to her attention, to take it to the relevant Minister, who was me as the Minister of Commerce. We set about bringing about this legislative change quite quickly once we had got it on to the legislative timetable. In fact, we announced this change last year, and here we are on 1 April seeing the bill through virtually its final stage. There is only one more stage to go this week. The bill will be passed by the end of the week, and I know that many local authorities are looking forward to this legislative change.

I appreciate the Commerce Committee’s work as well, because this bill does not reinstate exactly what existed before. I think it would be a mistake for people to think that we have not modernised the framework so that it is now more in line with what one would expect in this environment.

I have made the point in more than one of the contributions I have made on this bill that it is very timely to have quality debt products available for those whom I would describe as not being sophisticated investors. We have seen people who believed they were investing in a secure product, sometimes because it involved land—for some reason, people think that buying an apartment off the plans is somehow a secure investment—without having the proper checks and balances in place. This bill puts a good product back on the market, which enables those investors to feel some confidence in that regard.

That being said, local authorities will not be able to give guarantees unless the product is Government guaranteed, so those particular issues need to be addressed as well. Unless the product is guaranteed under the Public Finance Act, local authorities will not be able to say that it is, but it certainly is a lot more secure than some of the investments we have seen people investing their hard-earned money in.

Hon PAUL SWAIN (Labour—Rimutaka) Link to this

When I last rose in this Chamber I began a speech in the Committee stage of the Securities (Local Authority Exemption) Amendment Bill. I looked up and saw that the gallery was packed and I thought that it was in anticipation of my rendition of a speech about local authorities being able to issue debt. After I sat down I realised that it was nothing to do with me; it was to do with our colleague Su’a William Sio, who was making his maiden speech—and a fine speech it was, too. I have now had to lower my sights again and say that although I am sure the securities issue was interesting for the people in the gallery, it is an important issue for local authorities.

Before the dinner break we heard a little bit of history from the National list member Richard Worth.

Hon DARREN HUGHES (Deputy Leader of the House) Link to this

I had not intended to take a call, but I am happy to indulge the member for Rimutaka, the Hon Paul Swain, who has raised some very interesting issues before the Committee regarding the Securities (Local Authority Exemption) Amendment Bill. What I would say to the member is that this bill is driven entirely by a desire to remove a lot of the administrative inefficiencies that have previously applied to local government under the securities legislation.

SUE MORONEY (Labour) Link to this

I appreciate having the opportunity to contribute to the Committee stage of the Securities (Local Authority Exemption) Amendment Bill, which the Committee has agreed to have a wide-ranging debate on, rather than to debate it part by part or clause by clause. This bill is easy to debate in a wide-ranging way, because it is a big picture bill. This Labour-led Government is committed to strengthening the way in which councils may operate and serve their constituencies. It looks as though the Commerce Committee received very fine submissions from Local Government New Zealand and from some of the larger local authorities, and they urged the House to support this approach. The bill will reduce compliance costs for local authorities and will give them greater ability to fund long-term investments, such as infrastructure.

Under this Labour-led Government we have seen significant improvements in the funding of infrastructure, and certainly my own area in the Waikato is a very fine example. Work has started on many of the roading projects and that will make a big difference to economic development in the region. Additional Government funds have also come from the Joint Officials Group process. We see the effects of Government funding accelerating that infrastructure development and all that it means for the economic development of our region. The region is absolutely booming.

A similar disclosure exemption used to exist for local authorities, but it was repealed in 1996—by the previous National Government, I believe. That was done in order to subject local authorities to a thing called a level playing field, where they would compete with private companies. In those days the market was the best tool that National could think of in Government. It was not our Government, of course; I want to be very clear that this did not happen under a Labour-led Government, but under the previous National Government. Its mantra was “the level playing field” and “the market is the only thing that determines what shall go on in this country”. National sat on its hands and let the market run rampant over everything, basically, in the 1990s.

However, the exemption does not take into account the differences in legal frameworks between companies and local authorities. This bill seeks to redress the fundamental mistake that was made by the National Government in 1996 when it did not recognise the fundamental differences in the legal frameworks between private companies and of local authorities. This Labour-led Government understands that the current provisions of the legislation impose unnecessary compliance costs on local authorities and prevent local authorities from raising capital in an effective manner.

The bill amends the Securities Act 1978 to exempt local authorities from the full disclosure requirements of that Act when issuing debt securities. It does that because the level of disclosure required from local councils under the original Act was burdening them with unnecessary compliance costs. Local Government New Zealand clearly outlined that issue in its submission to the select committee. The original Act required all councillors to sign off on a prospectus, essentially requiring the unanimous agreement of a council to a project or to issue debt to fund the project. That does not happen with any other council decision, I would say. This legislation was getting in the way of the normal democratic procedures that take place on pretty much every other decision that a council might make on behalf of its constituencies, because in this case the legislation required a unanimous decision. So the changes, which are intended to allow an exemption from these provisions, will reduce compliance costs by easing the process for local authorities to offer securities to the public.

This bill will provide a valuable source of alternative funding for infrastructure assets. It will also provide investors with options to expand their investment portfolios. That is a positive move for the investment market.

Without further ado, I am very happy to stand and contribute to this debate in the Committee stage. I was not on the select committee, but I feel certain that it would have given due consideration to the very fine submissions that came in on the bill. It is good to see the wide-ranging level of support in the Committee for this positive move, because this bill recognises that the whole mantra around the “level playing field” was nonsense and that there are differences between private companies and local authorities. Finally, this bill has come forward to put things right.

Hon DAVID PARKER (Minister of State Services) Link to this

The reason that we have the Securities Act is to protect the interests of investors so that investors have adequate information upon which to judge risk. That is relevant because, obviously, if one is facing a higher risk, then one ought to seek a higher rate of return, and in many cases if one fully appreciates the nature of the risk when making an investment, then one may decline to make it. We can see the importance of appropriate Securities Act disclosure very clearly in the current environment, where there have been finance company collapses, and where the information disclosure that is required to be given to people who are thinking of investing in finance companies is absolutely essential for them to be able to assess risk properly.

This bill recognises that there are some entities for which the additional information disclosures are not necessary because of their size. An obvious example is the Crown. The Crown issues Government stock and other securities, and because the Crown is probably just about the best debtor that one can have, given the tax base of the Crown, the assets of the Crown, the ability to levy taxes, and the reputation that the Crown has for meeting its debt, the Crown is obviously seen as a very good bet by investors.

The next tier down, in terms of institutional size and the ability to repay moneys loaned to it, is local government. Most local government entities are very large and they at times have the need to borrow money. It is necessary that they have a practical set of rules under the Securities Act that they have to deal with.

Until now, local authorities have been faced with the same set of rules as have applied to private company borrowers, and those private company borrowers have had to meet the full rigours of Securities Act disclosure, including information statements, full prospectus, and the related company accounts. This has meant that borrowing by local authorities has become more administratively expensive for those local authorities. As a consequence, rather than issuing local government stock directly to people who were wanting to invest money in local government stock, much in the way in which they have traditionally invested in Government stock, local authorities have not availed themselves of the issuances of debt securities through the Securities Act route because it has been a bit complicated.

There are good reasons why councils ought to, at times, borrow money. Many infrastructural projects have a lifetime measured in many, many decades. For example, once in 50 years it might be necessary to upgrade sewerage infrastructure or stormwater infrastructure—or to build a new motorway, as the Minister in the chair, the Hon Darren Hughes, has mentioned. The assets that are built have a useful economic life that could be five decades and it would be inappropriate to put the full cost of that particular project on to the ratepayers who happen to be ratepayers in the year that these things are built. It is appropriate to spread the cost of those expensive infrastructure assets over a number of years, and the way in which a council often does that is by borrowing the capital sum required for the project and repaying it over a long period of years, often decades, in order to achieve some matching of the cost against the ratepayers who benefit from that investment. Of course, borrowing enables local authorities to do just that.

So the purpose of this legislation is to recognise the reality that it is appropriate at times for local authorities to borrow money through the issuing of local government stock, as used to happen, recognising that in this instance local authorities are more akin to the Government than they are to private enterprise, and to reflect that in the Securities Act settings that apply to them. That is what this bill achieves, and I recommend it to the Committee.

Dr RICHARD WORTH (National) Link to this

We are being treated to an unusual event tonight, and the unusual event tonight is that the Labour-led Government is in disarray and panic. We have heard a series of speakers on the Government side saying nothing of consequence at all, and saying it with an apparent sincerity, which I do not accept, and with an apparent earnestness, which I do not accept. That makes us wonder what in fact is happening behind the scenes in this Government.

We know that the Order Paper is very short. We know that this is a short bill; it has five clauses. We know that the points have been thoroughly canvassed, yet a string of speakers, two of whom are Ministers, have spent a substantial amount of the Committee’s time talking about aspects of the bill. So let me talk about an aspect of the bill that has not been spoken of at any great length. It concerns an issue that Mr Copeland and I both raised in the earlier contributions we made, and it is this issue of junk bonds against the type of debt security offered by local government. I made the point, and he has followed up on it, that local government securities, at a previous time, were popular securities, well removed from the junk bond class.

We have a situation in New Zealand at the moment with Blue Chip. With these finance companies, there are, for many investors, huge tensions, huge difficulties, and huge losses. I would just express the hope, in that context, that the Commerce Commission and the Securities Commission, which are well resourced, take the steps that are appropriate to be taken in pursuing those who have been responsible for setting up these schemes or their implementation. What is the relevance of that to this bill? It is a very easy linkage. What this bill will offer, when enacted, is a security pathway that will be attractive to, I guess, what one might call mum and dad investors. So I invite you, Mr Chairperson, to close down this debate so we are not treated to more of these games of vexatious play that the Government, for some unknown reason, has embarked upon.

DAVE HEREORA (Labour) Link to this

I take the opportunity to have a short call on the Securities (Local Authority Exemption) Amendment Bill. I just want to remind the previous speaker that, simply, the intention surrounding this bill is to lower compliance costs. At the end of the day, that is exactly what the bill is designed to do. The Government is committed to strengthening the way in which councils may operate and serve their constituencies. The bill will reduce compliance costs for local authorities, as well as allow them greater ability to fund long-term investments such as infrastructure.

As a member of the Commerce Committee, I think it is important to talk about some of the submitters who came to us and some of the comments they raised. Submissions were received from the Auckland City Council, the Auckland Regional Council, Local Government New Zealand, the New Zealand Society of Local Government Managers, and the Property Council. These submitters raised about five main issues with us. One in particular was the criminal liability aspect. Submitters said that councillors should be exempted from criminal liability, because they are similar to a Minister of the Crown who is not criminally liable in such circumstances. I suppose that the committee in raising that issue gave some serious consideration to submitters’ concerns surrounding that.

The other issue was the proposed requirement that only two councillors sign an investment statement, and the fact that that may lower investment confidence. That, again, was designed to lower compliance costs. In respect of indemnities in insurance, submitters said that local authorities should be exempt from sections 61 and 61B of the Securities Act. In respect of trustees, submitters said that local authorities should be exempt from the requirement to appoint a trust of the debt security, as is the case for the Crown, the Reserve Bank, the National Provident Fund, and the Housing New Zealand Corporation.

I thought it was important to highlight some of the issues those submitters had raised with the committee, and to reiterate that the level of disclosure required for local councils under the original Act was burdening them with unnecessary compliance costs. The original Act also required all councillors to sign off on a prospectus that essentially required unanimous agreement in council for a project or for issuing debt to fund a project. Again, I just reiterate that the whole intention of this bill, and the commitment from this Government, is to lower compliance costs. Kia ora.

GORDON COPELAND (Independent) Link to this

I want to take just a brief call on the Securities (Local Authority Exemption) Amendment Bill. I simply say that if the Government speakers—and we have now had quite an array of them—are determined to run a filibuster on a bill that has the unanimous support of the House, then I would like to sow the thought in their minds that it might be appropriate to move that the House rises early so that we can all get on with something else. I do not think it is necessary for us to sit here and have repetitious speeches covering the ground that has already been covered adequately by Dr Richard Worth and others.