Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, MONDAY, MARCH 13, 1939. LOCAL BODY LOANS

Poverty Bay Herald, Volume LXVI, Issue 19886, 13 March 1939, Page 4

Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, MONDAY, MARCH 13, 1939. LOCAL BODY LOANS

The announcement, that the New Plymouth Harbour Board has arranged to borrow £325,000 in Australia at 4J per cent is one of the most significant and important financial developments in recent years and is of particular interest to Gisborne at the present time. The policy of the Government has been that local bodies should not be authorised to pay a higher rate of interest than 3J per cent, although experience has proved that practically no money is available for investment at this rate. To meet the difficulty and avoid the suspension of urgent works, the Government itself has provided a certain amount of money and in other cases the borrowers have been authorised to. hypothecate debentures and raise funds from the trading banks at -U per cent. This is the first anomaly—that the man. who desires to invest his savings is debarred from receiving more than 3J per cent while the banks are permitted to obtain 4A per cent. Now there arises a still more serious one. Although the Government considers that per cent is sufficient for the New Zealand investor to receive, it compels the New Zealand ratepayers to pay a rate of 4;,' per cent to Australian investors. A third anomaly is that while the Government prates about stopping overseas borrowing it authorises an overseas loan without giving the people of New Zealand an opportunity to subscribe on equal terms.

The explanation of this curious position is that although the Minister of Finance realises that a rate of 3i per cent is not sufficient to attract the required funds and would willingly increase the rate, a large section of the Labour Party caucus has bitterly opposed him. This is one cause of the serious rift in the Government ranks, and while it continues the public is compelled to pay. Two years ago, local bodies could have borrowed ample funds on reasonably long terms for 4 per cent, and probably less, but the fixation of the arbitrary maximum rate of 3J per cent compelled them to secure temporary accommodation from the banks at 4J per cent. Even to-day money could probably be secured in New Zealand at 4 per cent, and certainly at 4J per cent, but the Government, to maintain the pretence that it is keeping internal interest rates down, still adheres to its 31 per cent limit and forces borrowers overseas. The effect of this absurd attitude is illustrated in the case of New Plymouth, where the Harbour Board will be compelled to remit £15,437 to Australia every year when it could have serviced the loan for £2OOO less had it been allowed to borrow in New Zealand at current rates. To this extent it is making a gift to Australian investors at the expense of its own ratepayers. Gisborne's interest in this position arises because in the next few months it will be compelled to make arrangements for a similar transaction. The Borough Council has a loan of approximately £160,000 maturing in London in March next, and towards the repayment of this amount it has accrued sinking funds of only about £40,000. The council has two alternatives, cither to refund the loan In London or else to repay it with a new loan raised in New Zealand or Australia. The New Plymouth experience was that the former course would have cost about 7i per cent, and there is no reason to expect that Gisborne would fare any better. This means that for all practical purposes refunding in London is ruled out. The alternative is to raise a loan in Australia, as New Plymouth has done, at a rate of 4!J per cent, and repay the old loan. To find £160,000 in London, however, will require £200,000 in New Zealand or Australian currency, and the £40,000 sinking fund which has been accumulated over a long period of years will be just sufficient to bridge the gap. In other words, after all these years, when much of the loan expenditure has lost its value, the indebtedness of the borough will remain the same and the annua! charges will be considerably increased, and this increase will entail a further increase in the already heavy rates.

The present loan bears interest at the rate of 4 per cent, to which has to be added another 1 per cent on account of exchange, and 1 per cent for the sinking fund, the total annual cost being nearly £9600 per annum. To replace the loan with an Australian one at 4-; per cent would mean an apparent saving of ', pev cent, but it is inconceivable that a renewal loan would be permitted, or made available by the lenders, without much more drastic sinking fund rcquhements. The best that could be hoped for would be a sinking fund of 2?, per cent, on which basis the annual loan charges, and rates, would be increased by about £2OOO per annum. Every J per cent increase in the sinking fund would increase the cost by £BOO a year. These figures assume that the money would be available at the same rate as has been secured by New Plymouth, but interest rales are lending to harden and it may be found that the council was unwise in failing to take action when its attention was previously directed to the matter. From a national point of view the position of local body borrowing is deplorable. Two or three years ago ample funds could have been secured

for terms of 25 or 30 years at rates of interest ranging from 33 to 4 per cent, but because the Government refused to relax its conditions local bodies throughout, the country were forced to secure temporary accommodation at higher rates and lost their opportunity of taking advantage of a period of cheap money. Now that money is scarce they will be compelled to pay higher rates and to remit overseas funds which could have been kept within the country.