STATE ADVANCES.

Dominion, Volume 6, Issue 1572, 16 October 1912, Page 5

STATE ADVANCES.

» ' 1 PARLIAMENTARY INQUIRY. , INSTALMENT LOANS1 OPINION OF THE SOLICITOR- 1 GENERAL. BOARD'S PRACTICE DECLARED ILLEGAL. The Public Accounts Committee of the Houso of Representatives-yesterday con- 1 tinued its inquiry into tho administra-, fcion of tho State Guaranteed Advances Department, under past Governments. Jtr, J. B. Hine presided. Also- present were tho Hon. Jas. Allen, Sir J. Ward, Jlessrs. G. V. Pearcc, J. Craigie, A. ;JI. Jlyers, E. P. Lee, J. A. Hanan, and Dr. A. K. Newman. . : The Hon. Jas. Allen continued his examination of Mr. ,J. W. Poynton,. Secretary to'the Treasury. The witness put in a number of returns asked for by the committee at the previous sitting. Following arc details:— . ' Amount granted since February, 1910, to September 30, 1912, .to local bodies under tho Local Bodies Loans Act, 1908, and its amendment, 1910: — From From 1/2/10 1/2/11 '•> to to 1/2/11. 30/9/12.. £ £ County, ■ councils 31,751 • 9,385 Borough councils ... 45,235 3.700 Road boards 12,288 2,556 Town beards 500 — River boards — — Drainage boards ..; 8,535 C 75 Water supply boards — — Harbour hoards — — 93,307 16,316 . Average amount paid over per year from 'February, 1910, to September 30, 1912, under the New Zealand State Guaranteed Advances Act, 1909: — ' Average per year. J2 . Borough Councils 319,036, : County, councils 164,422 ~ Read "boards . ..' .59,332 Town boards '. 29,694 Drainage boards 18,60+ River boards 932 Harbour boards - 18,300 , Water supply boards Nil Average amount per year granted from 1537 to 1910 by the Government to local bodies:— •C County Councils 53,142 Borough Councils 29,281 lioad Boards . 24,027 Town Boards 755 River Boards 3,084 Drainage Boards ; 3,281 Water Supply Boards 810 Harbour Boards .....' Nil .£114,990 Average amount per yeaT granted during .1908 .and 1909 .undo/ the Local Bodies" Loans Act, 1008:— ■ \ 1907-8. 1908-9. £ £ County Councils 38,273 50,848 Borough Councils 14,861 , 27,092 Road Boards , 7,372 10,514 Town Boards ....' 1,000 850 River Boards 2,500 2,500 Drainage Boards 4,200 4,262 Water Supply Boards ... N.il. Nil. Harbour'.Boards Nil. ■ : Nil.- •' ■ 68,209 96,066 Another return supplied the following 'particulars:—Loans..finally approved but ;no portion paid over, at 3ft per cont., .£13,-. 105. Loans finally approved, but 110 par-' tion paid over, at- 3J per cent., 173. Balance of amounts finally approved and Bartly paid over at 3J per cent., .£514,210. alance of amounts finally approved and partly paid over, at 3} par cent., .£18,910. What'th'e State: Loses: ", In regard \to the amount lost by the State under the various local Bodies' Loans Acts, witness presented tlio following return -.—Amount of inscribed debt (i.e., of moneys lent to local bodies): At 41 per cGnt., .£1,161,329; amount at 4 per cent., ,£101,443; amount at 3$ per, cent., -£1,720,235. On' each <£100 lent at 4\ per cent., the. local body, will pay 41 per "cent, for twenty-si* years, when its" liability ceases, both as to payment of principal and interest. The State meanwhile pays 3i per cent. 011 the moneys, and at tho end of the twenty-six years must continue to pay interest and ultimately tho principal top. As tho local body will for twenty-six years pay 1 per "cent, more than the interest paid by the State,; this must be allowed in calculating the loss. £1 per annum invested for twenty-six years at 3J per cent, compound interest will amount to .£4l 6s. 4Jd. Therefore the loss to the State, apart from tho interest to be paid after the twenty-six years, will be 011 each ;£100:—.£100, (.£4l 6s. 4Jd.). •£SB-13s. 7Jd.. and on X 1,101,329, .£681,550. On the .£104,413, lent at 4 per cent, for thirty-two years, the local body pays for thirty-two years 4 per cent, per annum, when its liability for principal and interest ceases. The loss to the State on each .£IOO will be lessened by the amount of 10s. per cent, invested " each year for thirty-two years, 10s. being the difference between 3} per cent., the interest paid by the State for the moneys borrowed bv it, and 4 per cent, received by the local body. This, accumulated as before stated, will amount to .£2B lis. 4Jd. for each .£IOO. Therefore the loss on tho .£104,443 will be:—<£lo4443 (£29,940), £74,503. . . . "As the interest," added witness, ' paid by tho local bodies on tho ,£1,720,-' 235, lent at, 3J per cent, for forty-ono years; is only the same as that paid by the State for the moneys lent to them, nothing can bo allowed for excess interest as in the other cases, and the loss to tho State wtl! be the whole sum so lent. Tho total losses on this basis will be-.— £ On .£1,161,329, at 41 p.c. 681,330 On .£104,443, at 4 p.c 74,503 'Op .21,720,235, at 3} p.c 1,720,235 ' V ■ .£2,476,283 But money was not always lent at present rates. The first loans were for twenty-six years only, and the rate was 5 per cent. In 1899 the terms were made twenty-six, thirty-two, and forty-one years, at the option of the local body borrowing, and the rate ■}}, 4, and ,'H per cent. ,In 1900 the rate of interest on the old twenty-six years' loans was reduced from ;5 per cent, to 45 per cent. In 1903 rates were raised to' 5 per cent., i) per cent., and,4 per' cent, for twenty-six, thirty-two, and forty-one years. In 1907 rates .were reduced to' 4J per cent., 4 per cent.,' and 3$ per cent., as at present. It is difficult to say how much was lent at these varying rates, and for how long. Until the: figures are obtained the exact loss cannot be given, but the reduction in loss through this increased ' interest would not be more than, say, .£176,000. This Svould make, the loss £2,300,000 at least. .- The, Rate of. Interest. The Hon. Jas, Allen asked whether ho had not understood Jlr. Poynton to ;sny that the Post Ofiice had agreed to supply money for loans provisionally granted at 3J por cent. Jlr. Poynton said that there had been some" confusion regarding the terms "provisionally approved" and "finally approved." He produced a filo with minutes sayiug that it would, show- the exact arrangement, and wc,nt on to state that when tho Post Office was proposing to lend' to local bodies instead of to tho Advances. Department, it was considered that it \vould not be wise, in view of tho demands made by local bodies, to let. tho money ee. . The question cropped up in October last. He wrote to the then Minister for Finance on October 31, 1011, recommending that, the rato of interest on future Post Office loans should be 33 per cent., subject to an amount necessary to enable leans then granted to be supplied at 3J per cent. • He'also rc-commehdcd that.: loan applications for .£SOOO or less, should have preference. Witness al.--o prod need a minute, by Jlr. Robertson, Secretary to the Post Office, doted November 8. 1911. staling that, the existing late of interest was t;o low, and that if future loans bore interest at o'i or 4 per cent, the position would he, fully met.

Mr. Povnton (juotcil further from the Departmental files showing that an arrangement was eventually made that future lorns from 'he P:ft Office to the Treasury should bear, interest nt. the rate -f ai tier cent,, ljut that a sufficient-

amount should lie obtained from tlio Post Office at 3} per cent, to satisfy loans already granted by. the Advances Department .iit 31 per cent. Mr. Allen: Did you lead the Post Office to _ understand that loans provisionally approved would have to bo found at H.V pe'r cent.? , Mr. .PoynlouThe. Post Ofiice does not understand .the difference between provisionally . approved" anil finally granted." '• „ „ j.> Mr; Allen: Does, finally approved mean "granted"? j. Mr. Poyiiton: Technically it does not, but there is a moral obligation to grant loans finally approved. Jlr. Allen: Is the Post Office committed to find money at 'i\ |wr cent. I'ot provisionally approved loans? Mr* Povnton: Yes. Mr. Allen: Does the Post Office understand that?

Mr. roynton: I should think so: Mr. Alien produced a, file relating to n Tc Awamuiu loan application, asking at what, rato the loan was provisionally approved. 'Mr. Povnton: At 3J per cent. Mr. Allen asked at what rato the loan was finally-approved. Mr. Poynton :3J per cent. Jlr. Allen: Is that tho same as the pro. visionol-approv.il? , Mr. Poynton: Thero is some second loan overlapping here. There was a fresh application. It was found that a loan of .£20,000 was insufficient and the town clerk asked that a. loan of .£30,000 should be granted. Mr. Allen: Was.the provisional approval of this loan a moral commitment? .. Air. Povnton said that if they had gone to any expense . there would have been a moral commitment. ;

' A Mistake of lhe Department. Mention of 3J per cent, in connection with this loan in a form dated' September, 1912, witness stated, 'was a mistake. Tho fresh' application : from Te Awamutu for .£30,000 }vas refused.. Tho loan of £20,000 was golie on with, and a mistake had arissn as to the rate. It was a mistake by tho Department. A clerk in filling up tho form had made tho Tate 3J per cent, instead of 3.V per cent. Jlr. Allen: If it is a moral obligation to find money for loans provisionally approved at 3i per cent., will that increase the amount to be found ut 31 per cont. ? Jlr. Poynton: AH those applied for at 34 per cent, have been. finally granted, lapsed, or. paid over! . Jlr. Allen: All'of them?— Yes. To some further questions, Jlr. Poynton replied that he had asked a clerk to inoludo loans provisionally-approved in ai return before the committee. There were no such loans. A i Post. Office Protest. At the request of the Jlinister, Jfr. Poynton read a letter from Jlr. Eobertson (Secretary to the Post Office), dated February 15, 1912,- in which he stated that it had recently been decided that the rate- of interest on future Post Office loans to the Treasury should be 3J per cent. The Treasury had recently renewed debentures to the amount of ,£194,200 at 35- per cent. Ho contended that this was a breach, of the arrangement that future loans should he granted at 3j per cent. Jlr. Poynton read, also, his letter to the Minister-fop finance on. this subject, in which lie stated .that, in making tho arrangement, the Treasury was consider? ing only future loans. He recommended, however,', that 3} per cent, should be granted'on future renewals., Jlr. Poynton next stated that Mr. Myers, Mr. Robertson, .and himself, had discussed. the. position regarding local body loans already granted at 3V per,, cent. It was- decided that authority: should bo given by..an amendment to tho Act to make up the difference between 33 and 3} per cent., on these loans, ; ;out of the solidated.Fund.Jlr. Allen: Do you.think it a fair thing to ask the Consolidated "Fund to find (he loss, on loans granted to largo, boroughs at 31 per. cent? •. '' Jtr. Povnton said that the large boroughs were pretty sharp in getting loans. Jlr. Allen: Do you think it a right thing to suggest to the Jlinister that the lo;s on loans to large boroughs should bo mado up oiit of the Consolidated Fund. Mr, Poyiiton said that tlio loss would ibe very slight..' '. Mr. Allen: When .1 came into office did I find a large amount of loans finallyapproved nt per cent, for which no money had been . provided ?—"Yes." Jlr. Allen: No provision had been made to obtain the money at per cent, except from tlio Post Office?—'"No." Jfr. Allen: What assurance had you from' the' Post Office that.thev would Withe .money at 3} per cent?—" These letters and minutes" (produced). Jlr. Allen: Their assurance was that they would find tlio money if the state of tho funds permitted. Do you think it was a- wise policy to commit the country to loans at U per cent, for two or three years ahead? | ... A Choice of Evils. Mr.'Poyntonreplied that it was a choice of evils. The Jlinister had pursued a similar policy in regard to Lands for Settlement. v Jlr, Allen: This is an officer of my Department, making a charge against me and I am going to have it settled. Have T plenty of authorities for money for land for settlement—heaps of it? Mr. Poynton: Yes. He added in repai'd to the Minister's previous question that- it was a question of policy whether money should be;, kept, waiting investment or invested ahead. To further questions Mr, Poynton replied that some county councils had been Tcfused loans since. October 1911. Jlr. Allen: And these large boroughs camo in and got their loans? Mr. Poynton: They were more alert than the others. Jlr. Allen: Did you consider it good policy to commit 113 for two or three years ahead at 3| -per cent? Mr. Poynton: I don't know whether it was good or bad policy. We could not keep the money" waiting for two or three years uninvested. Jlr. Allen: Did you think it a trood thing.on behalf of- the Dominion of New Zealand? Mr. Poynton: I don't know that we ever' considered the question. Jlr. Allen: Did you consider the legality of it ?—Yes. \Did you get an opinion?— No. I Are you sure it is legal?— Yes. Jtr. Allen-. I had the opinion of the Solicitor-General. He added that on assuming office he found himself in considerable difficulties ■ owing to the heavy responsibilities- by which lie found himself faced. He therefore obtained tho opinion of- the Solicitor-General on tho position, jrr. Allen then put in a filo containing a letter fTom himself to the Attorney-General. (the Hon. A. L. Herdman) and the letter from the SolicitorGeneral to which he had referred. Following is the first-montioned letter:—

]!)()!), that the rulo of inlrrosl charged In a local body shall bo (lie sune as ilio rate at which the money was raised by tlio Govoi-iiineiil. This implies (hat every loan is made out of iiionov already actually raised, ami thut: (lie rale nf interest must bo (lie same as the rate paid by tlio Government. Tho regulations anil the practice of the board should be altered so its to 'conform to lliis -requirement. Except where (tie loan is.to be granted immediately out of moneys already in the hands of tho board, the rate of interest should not be fixed in I tie contract made with tho local authority. Tho contract should be so worded that tho l'ato of interest is determined from timo to time at tho date of tho issue of tho debentures by tho local authority on tho receipt of tho loan, or cach successive instalment of it. The only difficulty involved in this would bo that tho local authority would not know accurately and definitely tho precise rate of interest which it would bo called upon to pay. The risk of an increase in the rate would l>e upon tho local authority, instead of as now upon tho Government. This, howovcr, is not an alteration to which tho local authorities could take any reasonnblo objection. It may be advisable, liowover, to make somo legislative provision by which the amount of a special rate mado by a local authority to meet tho charges of a loan may bo increased from timo to timo without the necessity of further reference to tho ratepayers. This, I think, is the only legislative alteration that would be needed to introduoo this cliango of practioe. Tho regulations, however, will require redrafting. to somo extent. "Although, as I have indicated, the practice of the board in this respect has been illegal, I am of opinion that the contracts already mado by tho board aro valid and enforceable by tho local authorities. These authorities are not bound to inquire into the state of the board's accounts, and are not responsible in law for tlio act of the board in agreeing to lend money which lias not yet been raised, or at a rate less than that at which it was raised. These are matters within the knowledge of the board alone, and no disregard by. the board of the provisions of tho Act would deprive a local authority of the right to enforce one of theso contracts. "I may add that it might facilitate the operations of tho board in this respect if provision was made in the Act that in caso the full amount authorised to be raised in any one year tras not so raised, the residue might be raised in the succeeding year, in addition to tho full amount authorised for that year. This would render it unnecessary for tho board. to raise moneys until they wevo actually wanted. • "Signed) JOHN 7 fi ALMOND, "Solicitor-General." The letter was referred to the Hon. Mr, Allen by the Hon. A. L. llerdman. Mr. I'ovnton: It is rather late for the Crown Law Office to rai?e -that point now, seeing that they have issued regulations' which allow a loan over four years. I Mr. Allen: Suppose we can't get money I from the Post Office at !U per cent., what ] then ? ,' ■ . Mr. Poynton: Get it elsewhere. Mr. Allen: If wo can't get it elsewhere? Mr. Povnton: Have to pay more. Mr. Alien: And lose more? Sir Joseph Ward: lie said "pay more." Mr. Poynton: Wo should lose more. i Tho Hon. James Alien terminated his examination at this point. A number of questions were put to tho 'vitnsss by Messrs.'Pearce, Craigie, ami Lee. • A Timaru. Loan. Mr. Craigie mentioned the loans granted to Timaru, and elicited the information that Timaru put in an application for a large loan on January 14, J'JIO, before tiie Advances Act camo into lorce. The application was made by the then Mayor of Timaru (James Craigie). -Air. Craigie: Tho Mayor of Timaru is very energetic. (Laughter.) . Mr. Myers: Is that the same Craigie who;is in Parliament now? Mr. Craigie: This is a serious question, lie asked Mr. Poynton whether Timaru, by being in the field early and taking up a loan of ,£'60,000, had rcuuccd the lots of the Department. Mr. Poynton: Yes. Sir. Craigio said that a loan of .4128,000 was applied for, but that part of it was "turned down." Mr. Allen: What was turned down? Mr. Craigie: Tho .renewal of a loan of .£OO,OOO, in London, for waterworks. That was turned down. Mr. Allen: I should think it was! Shortly More 12.30 p.m. the committee deliberated privately, lor about ten minutes, and then adjourned until 10.30 a.m. to-day, v -Mr. J. B. Hine moved in the House yesterday that the Public Accounts Committee should !>o given ten days additional in which to complete its inquiry. This was agreed to.