PUBLIC AND PRIVATE LOANS

Evening Post, Volume CXXIII, Issue 51, 2 March 1937, Page 8

PUBLIC AND PRIVATE LOANS

The time was coming, said the Prime Minister at Oamaru last week, when local bodies requiring capital moneys for necessary works approved' by the proper authorities would have to be assisted by the Government. This may mean much or little. Many years ago a system of State advances to local authorities was instituted and we assume that it still operates. But many of the larger local bodies have continued to deal direct with the investing public and investing institutions. Possibly some of the smaller bodies are now having'difficulty in borrowing at the rates approved by the Government; but why? There is ample money available for sound enterprises at reasonable rates. Is it not possible, then, that investors consider the rates insufficiently attractive having regard to the return available from investment in other directions? At one time local body securities were generally regarded as offering the margin of security which entitled the borrower to obtain the money at a lower interest rate. This still holds good with all the larger local bodies and most of the smaller. But investors cannot quite forget that they were compelled to accept a reduction of interest on the ground that the debt burden was oppressive. The debts were incurred voluntarily, there was no speculative element such as in "vendor mortgages," yet the bondholders were compelled to face a sacrifice.

- In these circumstances the debtor who accepted the sacrifice must expect that future borrowing will be affected. Local government loans will be taken up according to their security value in comparison with other investments. The Government may fix the value at a certain rate and the investing public may not respond. The conclusion to be drawn is that investors are not as convinced as the Government is that the works are productive arid that the return is commensurate with that obtainable from private investment. If the Government then intervenes to assure that the money is available it must act either by putting its own guarantee behind the local body or by some form of compulsion on the investor. In either case, there is a considerable risk that money may be diverted from productive private use to less productive public works. It may be said that, if the works are approved by the Loans Board, the Treasury,: the Minister of Finance, and, in some cases, by the ratepayers, they are worth while. . But it is not the function of these authorities, to judge between private calls on investment money and public demands. The public flotation of a loan is a good test for this purpose. It checks the tendency of public bodies to rush the loan market in prosperous tinies. If their loan proposals have the full support of the community it should always be possible to ' secure subscription of the loan locally, provided the terms are in keeping with the terms offered for private enterprise capital. If the public loan cannot compete on these terms it is a prima facie indication that the public enterprise is not so much wanted by the people.