KEY POINTS:
With significant regulatory hurdles soon to be eliminated, local government bodies will increasingly look to retail investors to help fund $30 billion in infrastructure expenditure over the next 10 years.
Last week legislation was introduced to Parliament that, if passed, will re-establish a key exemption from Securities Act
rules for local authorities wishing to raise funds by issuing debt securities to the investing public.
The move is expected to allow councils to ease the burden on ratepayers and give capital markets a welcome boost.
Commerce Minister Lianne Dalziel said the bill would reduce the cost to councils of producing a prospectus. More importantly, it will alter the signature and liabilities provisions of the act which, because of a lack of political consensus among councillors, has been a big factor in choking off debt issues by local authorities.
"The principle of collective responsibility under which company directors tend to operate does not exist within local government where elected members are not liable for decisions or actions they don't support," Dalziel said.
Since 1998, when the exemption was removed, the Auckland City Council has been the only local authority to issue debt.
"A prospectus can cost $35,000," said Local Government New Zealand chief executive Eugene Bowen.
"But the major thing is that all councillors are not bound by the same loyalties, so it's a practical impossibility to expect all of them to sign a prospectus."
Bowen said the independent rating inquiry had highlighted the fact that ratepayers are in effect having to fund infrastructure that will deliver benefits over 50, 60 or even 100 years.
Dalziel said councils' enhanced ability to raise funds via debt, "will take some of the pressure off rates by allowing the cost of infrastructure assets, which are essentially long-term investments, to be spread across the life of the asset".
Despite a "political nervousness about community perceptions of debt", Bowen said there was now a consensus among local government officials and regulators "that debt is okay".
Long-term business plans which councils are now obliged to produce suggest they will need to fund $30 billion of capital expenditure over the next 10 years.
"That's likely to be as big as any other investment proposition. From that point of view, particularly given the rather sparse pickings for investors in New Zealand at the moment, it could be quite an attractive additional investment opportunity."
With the necessary exemption to the Securities Act in place, at least some of the new councils elected this year are likely to take advantage of the improved opportunity.
"I think one or two of them will pursue that quite vigorously. The first driver of uptake won't be size, it will be philosophy, so there will be a range of size of councils that will be attracted by the opportunity."
The reintroduction of the exemption was great news for the New Zealand Exchange, which operates the NZDX debt market, said NZX head of markets Geoff Brown. Before 1998, local authority debt had been listed and traded in "reasonable amounts" but the removal of the exemption had been "a huge constraint at a time when a lot of these organisations are looking at having to raise capital".
Brown expected new council debt issues to "add depth and a range of choices for retail investors on the NZDX market".
"But the other thing is these organisations have very, very good credit. With the council's ability to charge rates, their debt is always going to be good paper to own. My expectation would be they would get an investment grade credit rating.
"Like we've seen with the Rabobank issue, I expect in the current environment local authority debt is exactly the sort of fixed interest instrument that the investing public should have a very healthy appetite for."
FUNDING MECHANISM
* New legislation will make it easier for local government to raise funds from the public via debt instruments.
* The changes are timely, with councils planning to spend about $30 billion on infrastructure over the next 10 years.
* The alternative funding mechanism could ease the burden on ratepayers, provide new opportunities for investors and stimulate the listed debt market.
