Cheaper borrowing for local authorities

05:23, May 26 2009

The Government is about to ask for expressions of interest in setting up a bond bank to raise cash for local councils.

The bond bank, an idea copied from overseas, would be a financial agency that could raise finance for the 85 local authorities by issuing bonds. It would bypass the banks and retail investors and tap straight into overseas institutional lenders, thereby bringing down councils' cost of borrowing.

The Sunday Star-Times understands the project is being carried out by a steering committee headed by Paul Dyer, the former investment chief of the NZ Super Fund and now an economic adviser to Finance Minister Bill English.

The proposal would ask private organisations wishing to run a bond bank to suggest the structure they would operate, and there are likely to be competing versions put forward.

The desire to set up a bond bank comes from the very pressing need of local authorities to spend big bucks on infrastructure while keeping a cap on rates.

Local authority projections for infrastructure spending over the next 10 years total some $33 billion. It's a huge sum and, given the unpopularity of rates increases, could require as much as $20b in new borrowing.

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Total council borrowing is currently about $4b.

One likely respondent to the proposal will be Tim Sole, chief executive of Civic Assurance, a council-owned finance business that once issued bonds for local authorities.

Sole said the problem for local authorities was not raising money, but paying too much for it. Given their low-risk nature based on their ability to raise rates from local populations, councils should be paying less.

Sole gave the example of the recent Auckland City Council bond issue at 200 basis points above the bank swap rates, despite it being safer than any of the banks.

"Paying 1% too much is $200 million a year based on debt of $20b," he said.

Local authorities would like to see the government provide a guarantee for the first $5b of bonds issued by Civic Assurance's bond bank.

Without that, it would be hard to get the ear of big overseas investors, Sole said, adding that local government would happily pay for the guarantee just as the banks and finance companies are, even though they knew they would never need it.

A local government-owned bond bank would achieve more than a privately owned one, Sole said.

"We wouldn't be aiming to make a profit as there is no point in profiting from our shareholders.

"There are savings for local government of hundreds of millions of dollars from pooled debt raising. A private sector solution might capture only 70% of this."

A combined bid from Cameron Partners and Asia-Pacific Risk Management is also expected, though is likely to be differently structured.

Roger Kerr of Asia-Pacific Risk Management, consultants to 28 local councils on financing arrangements, said an alternative form of government guarantee might be for the state to provide a limited amount of "uncalled capital" as an equity slice for the bond bank, thereby limiting its exposure. Similarly, the government through the Debt Management Office could provide liquidity for the bonds, which would in all likelihood be listed on the NZX.

Sunday Star Times