Vanguard (Lagos)

27 June 2007

Nigeria: Universities Should Use Capital Market Option for Sourcing Funds - NSE DG

interview

Lagos — Director General, Nigerian Stock Exchange (NSE), Dr. (Mrs) Ndi Okereke Onyiuke in an interview with Vanguard during the public lecture she delivered at University of Nigeria Nsuka recently titled " Inadequacies of traditional ways of funding our University System via Government subventions" stated the need to deviate from grant-based to revenue-based funding. She focused attention on alternative/additional ways of funding the university system especially the capital market option.

She enlightened the university community on the methodology of raising funds from the capital market via equity and project-tied bonds etc, as well as collaborating with the organized private sector for commercially viable projects within the university system.

Despite the level of increase in government funding, universities in Nigeria continue to be under funded. Why?

The answer is not far fetched, we all know that facilities are either inadequate or are completely run down. Operating expenditure continue to increase. Generally, most institutions are faced with an increasing problem of meeting, among other things, all of their recurrent and capital requirements, and especially to improve the salary levels for their academic and non-academic staff.

The current crisis in university funding demands a paradigm shift. It is clear that the financing of university education remains a critical and vexing question. It is costly and must be paid for. But who must pay? Recent reforms have sought to alleviate the financial burden of the state by involving other stakeholders such as the private sector as well as encouraging higher institutions to diversify their funding sources. Suggested ways of improving the financial position include raising fees, increasing Government subvention and increasing income from non-Government sources.

University autonomy requires that government confines itself to the determination of its fiscal contribution and leaving the other decisions i.e., overall budget, input prices and output prices to the decision-making organs of the institutions.

In the face of increasing resource constraints, entrepreneurial activities are becoming significant part of the universities' response to the need to develop new sources of finance. However, success has been limited in the Nigerian experience as current commercial operations contribute an insignificant percentage of total income of universities over the years.

What are the implications for diversification of funding source by universities under the autonomy system?

Given the dwindling resources coming to universities, there is a need to move away from sole -dependence on subventions and grants and to ensure that available resources are being- used in the most effective and productive manner. It is generally acknowledged that the rate of expenditure of f funds is faster that the rate at which the funds are generated . Active investment management is part of the functions of finance manager in ant organisation..

In line with this role, the universities need competent hands as treasurers or investment managers to actively invest surplus funds in money aid capital market instruments such as bank deposits, Treasury Bills, Government Bonds, Shares of quoted companies and such other securities as may be allowed from time to time for the purpose.

Such people would have the business skills to receive the funds and handle them in such a way that they would not all be used at once, but that they would provide a constant stream of revenue for advancing the work of the institution. Currently most institutions are financed by the subventions and grants going directly into capital projects and recurrent expenditures without any form of investment management. This subvention/grant-based system of financing requires the universities constantly to make appeals for new subventions/grants and donations and limiting their activities to the responses to each appeal.

Specifically what other avenues of generating funds can universities implement to enable them run efficiently like their counterparts in other parts of the world?

In most advanced countries, student contributions occupy a prominent place in the funding of universities. The fundamental reasons are the "beneficiary should pay principle" and the fact that free university education is fiscally unaffordable. In some universities abroad, students form part of the university staff with some of them working in the libraries, canteens or farms in order to support themselves. Here, in Nigeria our students stay in the pipeline for 4 -6 yrs and are totally economically dependent on their parents and the system whereas their counterparts abroad work and support themselves at school.

We are all aware of the exploits of Nigerian athletes in foreign universities and in our Nigerian Universities who achieved great honours in athletics while at the same time supporting themselves through school. There is need for universities to have flexible programs to enable students "LEARN AND EARN' i.e. to work and support themselves as this will reduce restiveness, help parents and channel their youthful energies to productive ends.

As a strategy for expanding the funding net, our universities must make themselves attractive to foreign students and academia. It is a known fact that foreign students pay more than local students and usually pay in foreign currency. However, in order to attract this category of students, the universities must meet certain minimum standards some of which are presently lacking.

The search for alternative sources of funding must involve universities reaching out to industry who are the end-users of products (graduates). The corporate sector could be expected to part finance academic programmes on the basis of a benefit principle which sees it as reaping part of the social returns to investment in university education.

This thinking formed the background for the recent introduction of Education Tax Fund in a bid to increase funding available to educational institutions. Thus, in addition to the normal corporate tax rate of 30per cent , companies are required to pay an additional tax of 2%.

It is important to warn here that to the extent that public contributions are financed by higher levels of taxation, the economy runs the risks of disincentive effects on labour supply, brain drain and disincentive effects on capital investment. Higher levels of taxation also tend to be regressive. A major disincentive to this expectation is the reality that because the output of universities is a resource pool accessible to all enterprises, irrespective of financial contribution, any employer may benefit from the production of graduates without directly incurring any of the costs.

Thus, enterprises -- would be disinclined to make a contribution because labour mobility may cause them to lose their investment in the training of graduates unless the mobility can be constrained by contractual arrangements. On the part of the institutions themselves, a major hindrance to attracting industry support is the very little involvement in research and development collaboration with industry. Some of the reasons adduced to this state of affairs include the reluctance of academics to value profit-seeking behaviour highly, ignorance of business decision-making systems and business practices, problems of reconciling the conflict between an academic mission of knowledge production, knowledge dissemination and education with a business mission of profits based on exclusive property rights, and the limited funding allocated to research in the budgets of most universities.

The universities should serve as incubators -- some kind of "silicon valleys" where industry problems are resolved through research and innovation. Contemporary issues begging for attention include the bird flu epidemic, HIV/Aids, witch-weed which hinders agricultural output etc.

Some people have argued that the absence of sufficient commercial considerations constitutes a major inhibition to the flow of financial resources to public universities. Universities should encourage wealthy individuals and corporate entities to establish trust funds vested in a university institution for the benefit of student and universities. This option is to be preferred to the current practice of bestowing honorary degrees to people in return for large one-off donations. Such trust funds should be supported by a trust deed.

In what way can universities identify and structure income generating opportunities?

An important step towards turning the foregoing opportunities into profitable ventures is to commission a consulting team which will identify the business opportunities available and to package them into bankable commercial projects.

This will entail conducting appropriate feasibility and viability studies and producing business plans which will form the basis for seeking funding either from banks or private investors. These ventures, must of course, be legally established in line with the Companies and Allied Matters Act of 1990 as Special Purpose Vehicles (SPVs).

An independent management team for each of the business ventures is a critical success factor. The challenges of managing a private venture in a purely academic environment demand that professional managers with experience in business and financial matters be recruited with commensurate private sector remuneration and incentive structures established for corporate governance purposes.

What number of options are available for financing capital projects in Nigerian universities ?

Nigerian universities are advised to use the long term instruments in the capital market to finance their long term projects. Using short term instruments for longtime projects is not acceptable

Debt capital is externally generated funds for financing short, medium or long-term operations of company.

There are different types of loans and all are tenor matched, repayable on given dates and earn fixed rates of interest. They include overdrafts, loans (secured/unsecured, mortgage loans) and debentures. Overdrafts are the commonest forms of loans and are accessible to all enterprises including the sole traders and the simple partnerships. Interest is paid on the amount by which the account is overdrawn.

Debt capital can also be arranged in form of Project Financing which is essentially the structuring of a debt issue with repayment tied solely to the cash flow streams generated from the project and without recourse to the company's general corporate cash flow.

The success of project financing depends on if the project is a viable and profitable investment on its own.

A word of caution on debt financing is in order here. Fund raising in the form of debt, requires careful consideration. A fixed rate of interest may superficially be attractive since it assists in planning and project costing. However, a company may find itself in serious jeopardy on account of its debts during times of rising interest rate as its cashflow may not be able to service the debts. Even when the rate is fixed and -- interest rate falls, lenders impose penalties for early repayment.

While a company's obligation on ordinary share capital is regular dividends if and when the company makes profit, loan capital must be serviced by regular interest payments and repaid according to agreement, whether or not the company makes profit it must pay interest on its debts.

Relying on overdrafts for financing long-term assets can be a very expensive exercise and it can lead to the collapse of a company. In spite of the present favourable interest rate regime, the general volatility of short-term interest rates should discourage excessive reliance on bank overdrafts, which are an inappropriate means of financing a company's financial requirements.

Clearly, the creation of debt is a substantive danger to a university's financial position especially in prolonged situations of rapidly rising production costs in response to enrolment expansion and education quality change when dwindling resources constraints limit the expected financial contributions of governments.

There is nothing intrinsically wrong with debt creation if it is part of a coherent financial plan which contains clear and reliable income generating arrangements for debt service and amortization. of this Scheme include Juli Plc and Rokana Industries Plc.

I wish to recommend equity funding to Nigerian universities. By equity funding, the universities will offer shares to the investing pubic for subscription.

Equity funding for the viable projects could be obtained from two principal methods, namely through Private Placement of shares to selected investors and through listing on the Nigerian Stock Exchange.

How can the individual academic and non-academic staff as well as students take advantage of the opportunities in the Stock Market to enhance their personal financial welfare?

One basic factor about human nature is that it never changes. A very basic element of that nature is a hunger for security -- law and order, job security, retirement security, decent and affordable health care and financial security. For a variety of reasons, people are beginning to feel that the organization especially governments, designed to provide their basic security no longer can be relied on.

By necessity, not by preference, people are becoming more involved in creating their own security by taking ,active interest in personal financial planning, savings and investments and by developing multiple streams of income.

Investing in stocks and shares has long been recognized as one of the best means of beating inflation and securing one's financial future. In Nigeria, the stock market is booming as a result of improved awareness of the opportunities in the stock market, improved operating results by some quoted companies, available large float especially in the banking sector, the influx of pension funds and low interest rates on deposits in the money market.

Therefore, individual academic and non academic staff as well as students should invest in capital market to meet their future need, Let us consider a practical case of an investor who had a choice to put his money in a saving account or investing it in the stock market. If he had put =N=500 into a savings account 24 years ago, collecting 3 percent interest compounded quarterly (that is, leaving the interest in your account to earn more interest), his bank balance would now be about =N= 1,000. But his =N= 1,000 would now buy even less than your =N=500 would have bought 24 years ago. So he would not even have held his own. Could he have done better? Yes. He might have invested in shares of good companies. Suppose he had bought 100 shares of Nigerian Breweries at =N2.00 per share in 1976.

The foregoing clearly illustrates that an investor who bought 100 units of Nigerian Breweries shares in 1976 would by 2006 have a total holding of 39,997 shares of the company as a result of growth through bonus shares issued by the company over the period. At the market price of =N=39.80 as at June 1, 2007, this investment would be worth =N=1,591,098 as against the initial investment of N=200. Note that this valuation excludes all the dividends received over the period.

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