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Friday
May302014

Internal Borrowing - My Comments!

Quite apart from the confusing explanation provided by Steve, he again fails to answer the essential questions surrounding the rationale for failing to recognise 'Internal" borrowing against reserves within the Council accounts – specifically to help pay for the Eastern Seaboard waste-water plants that in the end cost grossly in excess of their original budgets.

Steve and I have diametrically opposed points of view on the treatment of these reserves, and the role that they play in regard to ‘Internal Borrowing.’ This is not an isolated or academic argument - accounting experts even on the Council contradict themselves repeatedly in endeavouring to explain why, or why not borrowing against these reserves should be regarded as part of the overall borrowing of the organisation.

It is an accounting dilemma that even the International Accounting Standards to which all councils are meant to adhere appear unable to resolve. Either way, it is not as simple as Steve portrays it when he states - “It would be misleading to portray that we owed an external party $73million ($49m external + $24m ‘internal) when we do not.” Clearly, there is no argument about the $49m owed to banks, but even the balance of $24m he refers to is itself misleading.

Steve explained to the meeting of Council on 21 May that the Councils Reserves of $53.5m comprise, Special (Power Company Shares) $32.7, Depreciation $7.6m, LAGC $1.2m, and Retained Earnings $12m. If it is as he has stated on several occasions in the past - fully borrowed, is  it $24m, or $53.5m, or somewhere in between? I believe it is more like $40m as represented by the Special and Depreciation Reserves, but as it is not identified in the accounts, who would know?

Our Council has for years refused to incorporate ‘Internal ‘ borrowing as part of its overall borrowing in its Annual Accounts. It just sits there in the background, and now our Council wishes to change the name so that ratepayers are not panicked when they see how our total borrowing compares with other councils. Keep ‘Internal’ out of the equation and all looks well. Our Council is by no means alone in exploiting this anomaly, but few engage in it to the same extent.

It needs to be kept in mind that councils are not ‘commercial’ business’s where treatment of reserves are mandated by the same IAS (International Accounting Standards). Councils are ‘public’ entities that are still supposed to operate on the principle of ‘full’ disclosure. Paradoxically, although councils were at the outset required to adhere precisely to the IAS’s this requirement was later modified. In the case of TCDC, the OAG allowed depreciation on the waste-water schemes to be reduced to the actual percentage of each scheme being used. The argument was that TCDC’s Eastern Seaboard waste-water plants were grossly over-built, and the decision allowed TCDC to substantially reduce its depreciation commitment, contrary to the IAS requirements. 

The proceeds of the Power Co. Shares belong to every ratepayer, not just those on the Eastern Seaboard who benefitted through waste-water schemes. Therefore, the use of the Thames Pool example by Mr Baker is a total ‘red herring,’ that obfuscates the real issue - the reserves were never used for the Thames Pool.  

I maintain that internal borrowing should be treated in exactly the same way as ‘External’ borrowing, with the funds repaid over time in order to restore the fund to its full potential for future use for other infrastructure projects benefiting all ratepayers, current and future. This will not be achieved by simply carrying the debt indefinately as an ‘interest only’ liability – keep in mind that it cannot be further borrowed until it is repaid, either partly or in full - a fairly simple concept I would suggest. 

To avoid this approach disadvantages all future ratepayers, while enabling current councillors to distort rates for their own electoral advantage - now made even more evident by the expressed intention to use false nomenclature in order to avoid frightening the ratepayer horses. Incidentally, if the funds have not been ‘borrowed’ what is the rationale for continuing to pay interest internally in order to subsidise the UAGC as Steve espouses?

I believe the time has come for this non-disclosure to cease, and for our Council to front up with a truly open balance sheet that recognises debt for what it is - not as some ‘off-balance sheet’ subterfuge to confuse and potentially deceive rate-payers, just because the Auditor General is too slack to pick them up on it. And secondly, that steps are put in place to repay the borrowing over time in exactly the same manner required for bank ('External') borrowing. This would of course require appropriate budget revisions.


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