Daily Independent (Lagos)
Kingsley Ighomwenghian
30 June 2009
Lagos — The Ogun State Government recently signified its intention to access the capital market through the floatation of a two-tranched sub-national debt instrument to raise a total of N50 billion. The bond, according to Governor Gbenga Daniel, will enable the state take more advantage of its location as a gateway state to Lagos, Nigeria's financial capital city, benefiting from spill over effects of more companies relocating to the state, unable to find space in the former federal capital city.
The first tranche of the bond issue (N28 billion), the Governor said, is to be ploughed into projects that will better position the state as an investment destination. Such investment, according to reports will engender a quantum leap in the state's internally generated revenue pool.
The bond, he noted, is part of a master plan fashioned by the government to positively redefine the state's future with such projects as the "Gateway International Airport with associated rail systems, Stadium Development Projects, Gateway Holdings Limited Head Office Complex, two ultra-modern, multi-storey complexes for Ogun Property Investment corporation, Abeokuta, OK Free Trade Zone and Olokola Liquefied Natural Gas Project (OKLNGUDeep Sea Port Free Trade Zone; and construction of major roads (including dualisation of Abiola Way/Adatan Road, Abeokuta."
Others in the pipeline are the "Otta Road Network; Ifo to Kajola FTZ dualisation, the Imodi/lmosan/llisan/ago-lwoye road, and the Igbogila/Sawonjo/lgan okoto Road); Construction of Hostels for 5 Tertiary Institutions in Ogun State; Construction of 19 roads under the rural Road Development Initiative (Legacy Roads); Construction of various Water Schemes and Health Centers; Development of the Abeokuta City Center; Acquisition of Customized Independent high Capacity, Low Speed generators (Mini-Power Stations), and Industrial Parks".
The projects, he continued, "have been selected because they have the potential to dramatically transform the economy of Ogun State through massive employment generation, development of key infrastructure and ultimately Consolidate Ogun as a critical transportation hubs and nerve centre of economic activities. This would have a dramatic positive effect on the economy of the State and its inhabitants."
He added that "in its usual practice, the Ogun State Government has ensured it follows the due process in the lead up to the bond issuance programme. First, the bond process is deeply rooted in law since the programme has been established pursuant to the Ogun State Development and Savings Bonds Law, 1980 and the resolutions passed by the Ogun State Executive Council on April 29, 2009. Indeed, in the 2009 appropriation bill which has been passed into law by the Ogun State House of Assembly and assented to by the Governor, the funding gap and the issuance of the first series of the bond was expressly stated."
The Ogun State bond issuance programme he believes will give Ogun State advantages such as access to relatively cheaper source of long-term funds, raising of funds from a wider source of capital, greater flexibility in financing and repayment structure, better planning, management and forecasting, since there is a structure repayment pattern, a hedge against future interest rate fluctuation, inflation and other vagaries of the macro-economy".
The Problem
The problem now is that although the government, following the resolution of the State Executive Council, has notified the legislative arm in writing, there is a growing disagreement over the timing of the bond issue, which is being sought less than two years into the end of the current government's tenure in office.
Despite the tacit approval of the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) for the government's bid, the lingering loggerheads between the state executive and legislative arm may set the bond issue back.
Reason: The law requires the State Government to produce an Irrevocable Standing Payment Order (ISPO) through the due process, including its passage by the state assembly, without which the bid would be considered dead on arrival. With the ISPO, the government permits the Federal Government to deduct regular sums from its the state's statutory allocation into an escrow account from which the bond would be liquidated at maturity.
One of the major issues that have been raised about the plan by the Ogun State Government is that it could plunge the state into a mire of massive debts, due to the lack of knowledge, according to one analyst, of how bond issuance works, a situation, he said can be unhealthy. This, he said, makes it necessary for government agencies to "create awareness through sustained sensitization programmes on the benefits of this funding option."
Sometimes, many have blamed the problem on a combination of ignorance, mean-spiritedness and utter bad faith, even among the elites on how a bond and its repayments actually works may cost a people their future.
Imo State's Head Start
For now, the Imo State made a head start on Sunday when it held the completion board meeting, sign-posting the beginning of its bid to raise N18 billion by way of bond to finance critical infrastructure to develop socio-economic infrastructure across the state.
According to a statement on Monday, proceeds of the bond will be used to rehabilitate the State's water schemes, as well as the rehabilitation and construction of critical roads in the state. Proceeds of the offer would also be used to finance the State Government's equity investment in Imo Wonder Lake and Conference Centre Oguta.
The issue, which is priced at 15.5 per cent fixed rate is part of the N40 billion medium term note programme at N1.00 per unit payable in full on application is scheduled to mature in 2016.
Unlike the Ogun State bond, the Imo State House of Assembly has before now conducted a public hearing on the issue, before giving its blessing, convinced that the move is for the state.
"It's incumbent on us to grow the economy that will provide jobs for our children", he said, adding that raising funds through the bond issue is the most disciplined way to develop a state, since it is subject to scrutiny by market's regulators particularly the Securities & Exchange Commission (SEC) and the NSE.
"Dr. Nnamdi Azikwe took bonds to build the University of Nigeria, Nsuka", he continued, stressing that bond issuance is the cheapest and most transparent way to raise funds for infrastructural development.
The bond is to be tradeable on the NSe, following an application for listing, just as it is 100 per cent underwritten, even as an innovation was added, with plans for the issue to only open for one day.
Reasons For Bonds
Analysts believe that bonds are necessary, since it enables States to put critical infrastructure in place, rather than awaiting the monthly statutory allocations to function properly.
Noted one analyst in a recent newspaper piece: "Bond markets are windows of opportunities for growth and provide a major shift away from overdependence on the statutory allocations. By the way, the fall in oil prices has seen a dwindling in these allocations. What this means for the overall state of development if timely advantage is not taken of the available funding option is anyone's guess."
Governor Ikedi Ohakim of Imo State agrees, just as he explained recently that: "development cannot come to the people using statutory funds and that contrary to the belief by many that have continued to criticize accessing the capital market for funds, it is not in anyway plunging the future administrations and generations into debt, since the repayment mode is spelt out at the beginning, aside from this the proceeds will be expended in verifiable projects for the benefit of the populace".
He blamed the current problems leading to Nigeria's underdevelopment to the discovery of crude oil in commercial quantity. His words: "Oil money has killed us in this country. Every state relies on allocation from Abuja. No state can attain full development by relying on allocation from the Federal purse".
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