Saturday, April 13, 2024

Looser local govt debt rules part of infrastructure drive

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The Local Government Funding Agency plans to loosen the limits on how much debt larger councils can take on relative to their income, giving them more headroom to help fund a national infrastructure programme.
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The proposals would let 30 councils with an A credit rating or higher take on net debt equivalent to 300% of their total income in the June 2021 and 2022 financial years, up from 250% currently. It would then taper off at a rate of five percentage points each year to 280% by 2026.

The extra headroom is needed to overcome a shortfall in forecast funding estimated at between $355 million and $1.5 billion in the June 2021 year, with councils unable to raise rates as much as expected and as fee and investment income declines, LGFA said in presentation slides published on the NZX.

LGFA said councils are re-evaluating their capital spending programmes, and expect to spend 73 of their budgeted capital expenditure in the year ending June 30.

That’s against the backdrop of the government wanting ‘shovel-ready’ projects to help the construction industry get back to normal. That’s on top of the $12b upgrade programme and the Provincial Growth Fund investments.

LGFA said the looser covenant will help ease the short-term impacts of the covid-19 crisis on revenue and the structural issues facing councils to deliver necessary infrastructure. It would also provide flexibility for councils to co-invest with central government in future infrastructure programmes.

Civil Contractors New Zealand chief executive Peter Silcock said local government is an important part of getting the construction sector up and running again by providing a pipeline of projects that can come to market.

“The uncertainty of local government income is quite big – it’s not just a problem about rates, it’s also about other income that they’ve got,” he said.

Financing and funding infrastructure has been a bone of contention for councils, whose calls for a wider set of tools to raise revenue have largely fallen on deaf ears.

Last month, the Local Government New Zealand’s review of a Productivity Commission inquiry into local government funding and financing agreed with the report’s analysis, but not its recommendation that targeted central government transfers were the way to go.

The LGFA said the 30 A-rated-or-better councils had borrowed $10.42b at the end of June last year and could borrow a further $11.36b before hitting the previous debt ceiling.


However, if their income fell by 10%, that headroom would fall to $9.18b.

Loosening the covenant to 280% on an ongoing basis would give those councils scope to borrow another $2.35b, largely keeping that capacity intact.


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