7. Council Investment Capability
Currently the investment capability of a Council is determined by considering both internal and external lending ability.
7.1 Internal capability
Under the requirements of the Local Government Act 1974, each Council has to have a funding policy that governs the level of borrowings that a Council is able to make. The funding policy imposes quantitative restrictions generally based on the underlying value of Council assets or ability to rate.
Where a Council wishes to borrow in excess of the treasury policy, a Council must pass a resolution.
The Local Government Act provides high-level guidance on the content of what should be included within a funding policy, however, each individual Council sets their own quantitative funding restrictions. Each Council therefore has a different basis for determining the level of funding available for investment into economic development or Council initiatives.
Following are some examples of the quantitative restrictions applied by a sample of Councils:
- Debt servicing costs as a % of revenues – This ranged from 8% to 15%
- Term debt as a % of total assets – This ranged from 3.5% to 12%
- Total debt not to exceed a stated % of income – This ranged from 20% to 60%
Each Council also had their own unique measures that could not be compared with other measures.
A lack of uniformity in funding and investment policies has potential to significantly impact on a Councils ability to fund a water enhancement development. A scheme that is located in a region with conservative Council policies is less likely to access Council support than a scheme that is located where Council policy towards investment is more aggressive. This is an element of chance that must be addressed by Government (Central or local) to ensure that schemes with the best potential to maximise value receive the support, rather than having this based on a random geographic location.
One opportunity to overcome the internal constraint of meeting funding policy requirements would be to allow Councils to exclude certain investment borrowings (i.e. water enhancement projects) from the funding policy on the basis that the funding is for a specific purpose and that there is a designated revenue stream (also excluded from the funding policy) to meet the funding requirements. (Effectively off balance sheet structuring and financing) For this to be acceptable to Council, the revenue stream would need to be secure or guaranteed through the use of a targeted rate to ensure that general rate payers were protected against any credit risk.
A key driver of investment capability of a Council is the size of the rating base. Small rural Councils will find it difficult to raise large volumes of funding for such significant projects. To overcome this issue rural Councils may consider partnering with the main centre Councils with much larger rating capacity. Urban Councils may be attracted to a water enhancement scheme in the region given the downstream benefits that can flow to ratepayers and businesses within the city district. An example of this is the proposed Central Plains scheme, where the irrigation district is located within the Selwyn District Council, but Christchurch City Council have been providing financial support on the basis that the scheme will also benefit businesses within the city region, will increase port revenues and bring additional population to the main centre.
7.2 External capability
In addition to the above, any financial institution lending to Council for the purposes of funding water enhancement development will undertake their own assessment of Councils capability to lend.
It is our experience that the internal lending capability will be more conservative than the external assessment, therefore, this is not an additional constraint to those outlined above in section 7.1.
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