Several attempts to establish a collective borrowing vehicle for the local government sector in New Zealand were made in the 1980s and 1990s. These attempts ultimately failed, due in part to a lack of strong and unified support from local authorities.
At the Jobs Summit in 2009, another proposal for a local government debt vehicle was put forward. On this occasion, the Global Financial Crisis (GFC) ensured that stronger support for the proposal was forthcoming.
“The GFC focused everyone, including the local authorities, on the capital markets – pricing and security of access in particular.” Hugo Ellis, Borrowing Together for Better Balance Sheets, INFINZ Journal, May 2012.
The “infrastructure deficit” in New Zealand was another factor supporting LGFA’s development. It was clearly recognised by both central and local government that infrastructure spending would need to increase significantly over the next decade to maintain New Zealand’s international competitiveness. To balance this cost between current and future generations, it was inevitable that local government borrowing was set to rise considerably. Having a more efficient funding vehicle on hand would minimise the cost of this additional borrowing.
A group of nine councils strongly supported LGFA’s development, and formed a steering group with Local Government New Zealand to turn the concept into reality. Key advisors, Cameron Partners and Asia Pacific Risk Management, were appointed to work on a range of structural issues.
In May 2011, an Establishment Board chaired by Craig Stobo was formed to negotiate with key stakeholders and provide day-to-day guidance to the advisors. Over two years of work by the steering group and Establishment Board (funded by the nine councils and central government), resulted in a proposed structure for LGFA that shared some features with peer local government funding agencies in Scandinavia, but with a uniquely kiwi element.
For example, LGFA’s capital structure includes Borrower Notes (debt securities that can be converted to equity under specific circumstances) and investors in LGFA are supported by a joint and several guarantee from participating local authorities and an initial $500 million liquidity facility from NZDMO. Furthermore, start-up operating expenses were minimised via an outsourced services agreement with NZDMO.
Overall, the robustness of LGFA’s structure is best measured by it's credit ratings. In September 2011, Standard and Poor’s and Fitch both assigned LGFA a preliminary domestic currency credit rating of AA+; the same rating they assign to the New Zealand government.
During the same month, the Local Government Borrowing Act 2011 received royal assent.
From the Jobs Summit in February 2009, almost three years of dedicated work by a large cast of committed stakeholders culminated in the incorporation of LGFA on 1 December 2011.
LGFA Establishment Board
- Craig Stobo, Chairman
- Paul Anderson, Christchurch City Council
- Eugene Bowen, Local Government New Zealand
- Mark Butcher, Auckland Council
- Matthew Walker, Hamilton City Council
Advisors to the Board
- Hugo Ellis, Cameron Partners
- Stuart Henderson, Asia Pacific Risk Management
The LGFA Establishment Board and their advisors won the 2011 KangaNews Achievement Award for their contribution to the development of capital markets in New Zealand
Source: Cameron Partners