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Tuesday
Mar062012

6. Borrowing Hazard

One of the great rationales that emerged early in this Council's term was the assertion that it was 'under-borrowed' and that the limit should be adjusted upwards from the self imposed limit that applied at the time of 100% of total revenue ($80m. approx.) against both internal and external borrowing - total $80m.

The new formula of 150% of rates revenue ($60m. approx) based on external borowing alone permits borrowing up to $120m. - a $40m. increase were it to be fully utilised.  

Remember that internal borrowing against reserves is fully utilised at all times - some $51m for 2012/13, but estimated to go as high as $85m in 2021/22 - the reason for the substantial increase being the depreciation on the Eastern plants of between $25m. and $41m. in the outlier years - cash reserves contributions on the unused portion of the plants are postponed for at least the next three years to allow some catch-up, but this will probably be extended due to the almost zilch growth. 

This upper limit increase was substantially argued at the time by Cr McLean, and the remainder went along with it. Although there are sounds arguments for an increase, the level that is proposed is both dangerous and tempting in a Council that has demonstrated less than average financial acuity, even though the interest limit is set as a 'stopper' at 15% of rate revenue.

The accompanying graph appears to assume 7% interest through the 10 year period, and borrowing well within the limit, but I for one am immensely concerned at the substantial risk thus incured, and the under-lying temptation for this or future councils to take the borrowing limit as an invitation to set about major 'pet', or even well foundered projects in a profligate manner.

The groundwork has now been laid - and this potential needs to be kept under constant surveillance, particularly if the forecast begins to blow out over the next three years.  Everyone has grown complacent in regard to the interest rates, and this Council would be well advised to secure its five plus year funding before entering into any further major commitments. This target has not been met for some time, and that is a concern as noises begin to emege from the Reserve Bank Governor regarding the long anticipated increase in the OCR.

 

 

 

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