KEY POINTS:
The recent rash of finance company collapses is enough to make any nervous investor consider putting their money under the mattress.
Except of course there's no return.
But there is another old-fashioned place to put your money that may come back in vogue, thanks to a little-noticed amendment working its way through Parliament.
The Securities (Local Authority Exemption) Amendment Bill, when passed, will make it much easier for local authorities to borrow at retail level (rather than from banks or other commercial lenders).
Which means small investors will be able to invest in their local councils and councils will be able to use those funds to pay for new roads or sewage systems or any of the other many pressing infrastructure projects needed around the country.
The bill is still before a select committee, where only five submissions have been filed and all are supportive.
The idea harks back to the old harbour board and hospital board loans which were killed off in the 1990s by securities regulation zealots.
But the Government should be congratulated for trying to breathe life into the corpse.
The select committee heard that local authorities are likely to need to borrow more than $30 billion by 2016. (The ARC alone estimates it needs to raise between $600 million and $800 million within the next six years.)
Not much of that would be so short term as to be repaid in that time. That's a lot of money. To put $30 billion into perspective, the value of the market capitalisation of the NZSX on a good day is less than $70 billion.
Raising this money from the local community has two obvious advantages.
First, it gives ratepayers a greater, tangible stake in the projects being built in their communities.
Instead of complaining about their local councils loading up debt, investor-ratepayers stand to get a personal return on that debt plus the certainty that the availability of funding means the project will be completed.
Secondly, the debt can be spread over a longer time.
Banks will lend large chunks of money to local authorities and their prudential ratios encourage this; but the loans are not for long periods of time, so the pay-back period is squeezed and more pressure is necessarily applied to ratepayers.
Spreading the cost of a project across generations makes better sense. If a road or sewage system is going to last for 40 years, why not have the users pay it off over its whole working life? Of course, this doesn't lock in every small investor for a 40-year term. Instead, local authority stock is listed and traded like shares.
The NZSX is excited at the prospect. Investors should be too.
Naturally there are questions like how secure is this and what kind of return will we see?
Retail investors will be comparing the rates of return offered by the major banks and the local authorities. The NZX reckons local authority stock will carry a better rate for the investor than Government stock, and should be cheaper for the local authority than borrowing from the bank. NZX puts that at 10-15 basis points, or a saving of $30 million-$46 million for local authorities and their ratepayers.
As for security, the loan will be backed by a council's ability to strike a rate to cover the liability. But it's worth remembering that no New Zealand local authority has defaulted on a loan since the turbulent 1920s. In all likelihood small investors are probably not going to factor in the risk of a major default by either a major bank or a local authority.
Allowing councils access to intergenerational funding through raising debt is a useful and timely variation of the much talked about (and little realised) public-private partnership idea. Passing this bill should be a priority when Parliament resumes at the end of summer.
Then ratepayers and residents, whether or not they intend to be lenders to local authorities, should be asking elected councillors when they are going to spread the burden of new infrastructure funding from the ratepayers of today to the generations who will benefit from it.
* David Cochrane and John Sproat are partners in the national law firm Chapman Tripp. The views expressed are their own and not necessarily those of the firm or its clients, especially those in the finance sector.
