Local body 'bond bank' may help fund councils

Wednesday 8th July 2009

The government is studying the potential to create an entity that would raise debt funding for local authorities, helping them access the cheapest possible borrowing as they prepare for an estimated $30 billion of infrastructure spending over the next decade.

The scope of spending on roading and other infrastructure projects is set to surge in the next 10 years. Local authorities currently have about $4.5 billion of debt outstanding, of which $3 billion is in the capital markets, according to Asia-Pacific Risk Management, which is advising on the study along with Cameron Partners.

“Councils face a big spike in costs over the next decade to provide adequate sewerage, water and roads,” Finance Minister Bill English said. “We are sympathetic to any arrangement that can lower the cost of local authority borrowing.”

Local authority debt is typically fragmented with only a handful of the biggest city councils having credit ratings, including New Plymouth on AAA and Christchurch on AA+. The new Auckland super-city will also have a credit rating to raise funds in its own right.

That fragmentation adds to the cost of borrowing for councils, which end up paying a premium for smaller issues of debt, to compensate investors for a lack of liquidity. That’s an issue that has been exacerbated during the global credit squeeze.

English said a joint government and Local Government New Zealand steering group will get the results of the study in about a month. The proposal for a bond bank that could reduce local authority borrowing costs was one of the proposals tom come out of Prime Minister John Key’s Jobs Summit and was also a recommendation of the Financial Markets Development Task Force.

Businesswire.co.nz

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