Labour clarifies the loan

Labour’s Mike Smith (General Secretary) has very sensibly disclosed full details of the $100,000 loan from Owen Glenn, according to NZPA.

He said the loan was given in December 2006 and repaid in December 2007.

“At the time that the loan was made we established a market rate for the foregone interest on the loan with Owen Glenn’s accountant, in order that it could be declared to the party’s auditors in the return of donations for 2007,” he said.

“This return is due to be made to the Electoral Commission in April 2008 and is made under the provisions of the Electoral Act 1993.”

Excellent – that is exactly what they are required to do. In fact I would praise Mr Smith for establishing a market rate for the loan at the time.

He said the foregone interest was calculated to be about $8000, which had been declared to auditors.

Hmmn, let me see if I can work out the rate of interest to get to that. Yes I can. If the interest compounds daily then a 7.7% interest rate would come to $8,003 of interest. That is around the average secured rate.

Craig Foss does make the point that if the loan was unsecured (not against property) then one can argue a fair market rate would be 20%. I presume the party’s auditors are happy with the rate used – they are the ones who decide effectively. And to some degree it is not that important now as the loan is now public knowledge. At the 7.7% rate though, the donation fo the interest would not have reached the disclosure level unless Glenn had made any other donations in 2007.

Mr Smith said Mr Williams had made a mistake when he said last week Mr Glenn had not made any donations to the party since the last election.

Again kudos to Mr Smith for putting the record straight. Williams did stuff up – both legally, but also morally. Regardless of the exact wording of the Act, if reporters are asking if someone has donated, in the context of the Govt honouring them, then it is being too cute by half to be effectively saying “No, because you didn’t ask me about interest free loans”.

Now Mike Smith has shown he is a smart guy, who understands the law. Sadly our Minister of Justice does not. In Parliament yesterday:

Hon Bill English: So what action does the Minister expect would be taken by the Electoral Commission or the police when the president of a major party says: “We don’t declare these sort of donations, but we get lots of them.”, and will she be ensuring that the credibility of the Act is reinforced by some show of enforcement of its provisions?

Hon ANNETTE KING: A show of enforcement will be made either by the Chief Electoral Officer or the Electoral Commission, or the police if that is necessary—it is not for me to say that. But what I will say to the member is that up until the end of last year the provisions relating to donations were part of the 1993 Act. That member yesterday asked in this House whether I was aware that the Electoral Finance Act made it quite clear that interest-free loans would be counted as a donation. There is no mention in the 1993 Act of such a thing.

Now let us look at what the 1993 Act does say:

214F Interpretation
In sections 214G to 214J,—
party donation, in relation to a party registered under Part 4,—
(a) means a donation (whether of money or of the equivalent of money or of goods or services or of a combination of those things) …
(b) includes, where goods or services are provided to the party under a contract at 90% or less of their reasonable market value, the amount of the difference between the contractual price of the goods or services and the reasonable market value of those goods or services

Now certainly the EFA is more explicit but there can no real argument that the 1993 EA doesn’t also cover interest free loans.  Mike Smith certainly believes it does.  Providing a loan is a service. The interest on the loan is the cost of that service.  Calculating the reasonable market value of a loan is probably the easiest service in NZ to price, and there can be no one who passed third form maths who argues that a 0% cost is not less than 90% of the market cost.