PETERSIDE ECONOMIC REVIEW

Chamberlain S. Peterside, Ph.DSunday, August 28, 2011
[email protected]
Rivers State Commissioner For Finance

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STILL ON THE PROPOSED RIVERS STATE BOND OFFERING ...THE FACTS BEHIND THE STRATEGY

...For Starters

n the surface the decision to issue bonds by the Rivers State Government might come across as an ill-conceived idea or wrong step that could put generations in bondage. But far from it, the move was well thought out and actually arrived at after a long process of analysis by the Executive Governor, Rt. Hon. Rotimi Chibuike Amaechi. With the Governors legendary averseness to accumulating debt, one might wonder why bonds and why now? The facts on which this momentous decision was premised can be substantiated by economic rationale.


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Not many will argue against progressive and forward-looking economic policies that are designed to achieve long-term development. Little do we realise that capital investments are truly a function of the quantum of funds at your disposal at every point in time. The level of investments in infrastructure witnessed in Rivers State over the last four years has been unprecedented and must be sustained to not only stem the prolonged socio-economic decline but stimulate future qualitative growth. Recent statistics on economic growth in Nigeria clearly demonstrates that concerted investments in infrastructure in the telecom sector have remarkably impacted the pace of the country's development. Whereas Nigeria posted marginal growth rate in the 1990s and early 2000s, since the advent of Global System for Mobile communications (GSM), growth rates has edged up and remained sustained at 5 to 7.5 percent and even higher for the non-oil sector.

Assuming separate data was recorded for Rivers State, it might have shown that growth here is higher than the national average especially since the 2007-2009 periods. This is partly a result of peace and tranquillity in the post-amnesty era, but more importantly thanks to aggressive infrastructure investments. To sustain this momentum and achieve double-digit growth in the 2011-2015 period based on policy projections of the current administration the following key steps are critical:

  1. Set in motion crucial institution-building processes like reforming and modernising the Public Accounting System (PAS), including disclosure standards, debt management, peg operating expenditure to 15-20 percent of budget and deepen public procurement and due process regulations.

  2. Drive the volume of Internally Generated Revenue (IGR) as a ratio of total revenue to at least 50-70 percent, which at current prices could be about N120-N180 billion annually over the next year and beyond.

  3. Complete on-going capital projects and initiate major transformative infrastructure investments that can be executed in phases.

  4. Define a holistic long-term development plan that can help diversify the economic framework from overreliance on oil and gas industry.

All these require financial resources and long-term money for that matter; hence the need to approach the capital market. But to allay concerns of the ability to repay given the enormous economic dividends of long-term financing, we must consider relevant facts.

...Why Bond Makes Economic Sense
To better understand the reasoning behind the strategy and why issuing bonds makes economic sense for Rivers State, consider the following empirical data:

Our total revenue for 2011 was N230 billion, while total current debt-load is less than N45billon or about 1.5 percent of GDP. Going by that baseline projection - total revenue over the next 4 years all things being equal could be at least N920 billion to over a Trillion Naira at the best case scenario (earned over time). Our projected debt-service payment for the first N100 billion tranche of bond issued for a 5-year tenure with coupon rate of 12-13 percent will be N1,9 billion monthly. That can be managed very comfortably by the State. Recurrent expenditure as ratio of total budget is 21 percent with the bulk of expenditure focused on capital expenditure (over 70 percent).

Long-term capital investment has a gestational period, but ultimately that�s what drives growth. IGR was N2.5 billion monthly in 2007 but N4-N6 billion today (or over N60 billion annually). To achieve the 50 percent target, we need to revamp the Board of Internal Revenue and realise at least N10-N12 billion monthly; or N120-N140 billion annually based on 2010 budget revenue benchmark. Nigeria is currently growing at the average of 7.5 percent with non-oil exports growing at 8.5-9%.

Evidence on business activities in a vibrant economy like Rivers State clearly shows resurgence at rate above the national average stemming from the relative peace since 2009, compared to 2005-2007. Investments in power (generation) where the State has more than enough capacity to light up 24 hours a day at over 540 megawatts but can't be distributed, therefore the focus now is on distribution. Diversifying the economy will be impossible unless we assemble the building blocks - infrastructure, reactivate idle state enterprises, revive agricultural output, link up remote and riverine communities (Opobo Unity Road. Trans Kalahari Road, Okrika Ring Road amongst others, thereby creating new semi-urban areas.

To keep the oil capital city humming you need robust and modern infrastructure in Port Harcourt, hence the M-10, ring road and monorail. You also need to shift the population from the dense areas to new spaces with modem facilities - hence Greater Port Harcourt City master plan. How can all this be financed? You be the judge. With regular power robust infrastructure, strengthened accounting and taxation system, we could easily post double digit growth consistently from 2012 and beyond. With a consistent 10-12 percent economic growth rate, Rivers State can strive to reduce poverty in the rural areas and the cities, create new job opportunities, deliver improved healthcare and educate our kids better than the last 20 years. That's what needs to be done to build a 21st century State that will blaze the growth trajectory in Nigeria.

...Benchmark Bond issue
Against this background, the core essence of the proposed bond is not merely to fill perceived financing gap, but also to kick start a process and culture of long-term financial planning in Rivers State, as well as open new funding window to the capital market for the state and possibly Local Governments/Muncipalities and Agencies (like Greater Port Harcourt City Authority or Rivers State Housing Authority) that might desire long-term financing for specific large capital projects in future.

Aside from the obvious advantages of obtaining funds from the capital market at a fixed rate, bonds by its nature offer the impetus for institutionalization of fiscal transparency in spending while enhancing due process in procurement process and execution of capital projects. Regulatory practices demand that bond issuers clearly define the use of proceeds for projects, whereas reporting requirements mandates you to disclose the progress of work on those projects.

This is unlike any other funding source like bank loan for instance that in our environment are mostly short-term in nature and doesn�t necessary confer any accounting obligations on the borrower except that you service your debt as at when due. Moreso, the proposed Rivers State bond will ultimately act as a benchmark, through which other potential bond issues (by local governments/ municipalities or agencies for specific purpose like housing, rural infrastructure) can be measured in not-too distant future. Already there are urban and semi-urban level governments and municipalities with potential industrial and commercial base that would benefit from this practice if their financial systems can be standardized and strengthened like Port Harcourt City Council, Obio/Akpor, Bonny or Ahoada Local Governments.

With the gradual lengthening of domestic bond yield-curve, where over 6 states have successfully issued bonds in just the last 2-3 years for tenures ranging from 5-7 years, longer tenure bonds of 10, 15 or even 20 years could soon become a standard practice rather than an anomaly. The imperative or long-term financial and economic benefits for Rivers State bond cannot be over emphasised. All that is required to make the best use of an evolving debt-capital market is for us to put certain elements in place; including a debt management and bond laws, (which are currently in process) then possibly enact a legislation that will mandate successive administrations to strictly comply with loan covenants and follow through to complete capital projects in which public funds have been deployed. This can save future generations the scourge of perennial wastage and rampant abandoned projects that we have withnessed in this country over the list three decades.

Chamberlain is Rivers State Commissioner For Finance

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