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States in Season of External Loans

23 Dec 2012

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Minister of Finance, Ngozi Okonjo Iweala

To augment their shares of revenue from the federation account, a number of states have indicated their interest in accessing the World Bank and other multilateral bodies for external loans, while others are looking at the prospect of raising bonds for long term projects in their domains. Is there any cause for alarm for these exposures? Festus Akanbi asks

The attention of members of the economic and business community was last week drawn to the misgivings being expressed over the increasing appetite of a number of state governments for financial assistance from multilateral institutions.

As a result of paucity of internally generated revenues, which in most cases are grossly inadequate to meet the increasing responsibilities of the states, a number of measures are being put in place to attract funding especially for long term development projects.
A random analysis of some of the facilities being sought for by some states of the federation showed that most of the external loans and bond issuance are tied to one project or the other.

Some of the states in this category include Ondo, which is seeking a loan of $77.9 million. Out of this, $50 million is for health programmes and another $27.9 million for youth employment. Enugu wants $148 million. It earmarks $50 million loan for watershed management project, $40 million for youth empowerment, and $40 million for energy project. In the same vein, Niger is asking for $78 million for what it tags rural mobility. Irrigation, it says, will take $14 million, while FADAMA will take $32 million. Anambra is asking for $75 million for erosion and flood control. The Lagos State Government got the $600m facility from the World Bank with the understanding that the loan would be made available in three tranches of $200m in three years.
Oyo State is planning to spead the $56.24million African Development Bank loan on urban water supply and sanitation development project in Ibadan.

Senate Committee Raises Alarm
However, the Senate Committee on Local and Foreign Debts had expressed concern over requests by state governments to secure foreign loans totaling over $3.059 billion. Chairman of the committee, Ehigie Uzamere who raised the alarm at a recent meeting with some of the affected states’ finance commissioners in Abuja. Uzamere warned state governments against obtaining loans that would mortgage the future of Nigerian children.
The states are seeking the National Assembly’s approval for a $3.059 billion loan, out of the $7.9 billion foreign loan approved by the senate last week.

Economists Differ
However, economists who were drawn into the debate over the recourse to external loans by some state government said it will be wrong to condemn the affected states for looking outward for financial assistance as long as the loans are targeted at productive ventures.
Head of Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, in a chat with THISDAY said the implications of foreign loans by states are the same as for the Federal Government.

According to him, “The states would be able to borrow at more competitive rates (usually single digits) compared to the over 14% domestic rates. However, the loans are usually guaranteed by the Federal Government and the foreign exchange and balance of payment risks cannot be ignored.”

“H e however, pointed out that, the serious implication of the loans repayment brings to bear the problem of judicious use of debts.  “The projects for which the loans are obtained should be economic in nature or at least, have direct impacts on improving the economic activities of the states so as to generate tax revenue that will aid its repayment. The use of debt for consumption or social activities that do not bear any direct impact in economic activities is not acceptable.”

Ademola argued that “Nigeria can only benefit if government could promote a budget investment policy that mandates the application of borrowed funds into investment in economic activities that have the capacity to repay the loans without any unnecessary burden on the future generation.”

Emphasis should be on Productive Ventures
On whether it is bad for states to go for external financing, Ademola said that foreign loans are not bad, explaining that “It is the discipline to apply the funds to productive use that is the challenge. It is therefore required that debts (especially foreign) should only be applied to productive use. However, from multilateral institutions there are various type of financing that are available. There are aids, grants and loans that can be accessed by states to finance projects depending on the requirements and the type of projects. For social projects which are directed towards poverty alleviation, education and gender equality, states can access funds that can be packaged as grants or aids to achieve the objectives of the projects. In this regard, as long the states meet the requirements of the multilateral institution, there are no significant financial implications for the country/state except for reputation issues. But if the project is economic and the state requires loans, the process has to be followed including obtaining the necessary approval from the federal government. As long as all the requirements are met, the process completed and the governance structure to ensure that the funds would be spent for the intended purposes, it is not bad for states to access multilateral institutions for funds to finance projects.” 

Ademola had attributed the increase in domestic debts to shortfall in revenue and the controversial oil subsidy expenditure.

Oyo Targets Capital Projects
In Oyo State, it is a combination of a facility from African Development Bank  (ADB) and bond issuance. Justifying the financing options being adopted, the state government said the N50 billion bonds being sought from the capital market was meant to execute some development projects that would change the face of the state.

The state Commissioner for Finance, Mr. Zachaeus Adelabu listed the capital projects to be executed with the bond to include the urban mass transit scheme of the government; development of agricultural silos of 10,000MT in each of the three senatorial districts and construction of ultra-modern markets.

Others, he said, included the building of agricultural processing plants in each senatorial district of the state; construction of Ibadan Circular Road; construction of a five-star hotel, canning/agro-processing factory, housing estate, as well as construction of logistics centres/industrial parks across the state.

The commissioner also explained that the $56.24 million African Development Bank (ADB) loan is meant to fund the Urban Water Supply and Sanitation Improvement Project in Ibadan, with the state paying its own counterpart funding.

He noted that all previous interventions in the water sector in Ibadan had always been limited to the rehabilitation or expansion of water treatment facilities without corresponding attention to the reticulation system.

Adelabu said the bond had been approved by the Securities Exchange Commission (SEC) after verifying the specific projects, all of which he said would be self-financing, adding that it had also been guaranteed by the Federal Government.

He explained that in the long run, the bond option would be cheaper for the state government than commercial loans granted by financial institutions, and better suited to fund projects with long-term impacts and benefits when compared to short-term funds.

``The regulatory requirements for bond financing will force the state to utilise the proceeds for developmental/commercial projects specifically identified during the bond issue planning phase and strengthen our resolve for improved transparency and accountability,’’ the commissioner said.

Adelabu further explained that the bond would be in two tranches, with the first tranch of N30 billion to be finalised this year and the second in 2013.”

On the controversy raised by critics of the administration over the external financing options, Adelabu said ``There is really nothing strange about a state taking bond, as long as it is not a mismatch of portfolio in which case short term loans are taken to finance long term projects. In our own case in Oyo State, we won’t do that. The bond we are taking is meant for developmental projects,’’ he said.

Explaining the ADB loan, Adelabu  said the chaotic water situation in the state capital inherited by the current government necessitated the partnership with the continental financial institution. ``As a result, most of the pipelines which were laid more than 50 years ago are now seriously leaking, thus resulting into unaccounted-for water in the city of Ibadan which stands at about 50 per cent. This is apart from the fact that the existing pipeline covers less than 50 per cent of the city.

``The project, therefore, seeks to improve access to water supply by increasing the percentage of safe water supply from the current 25 per cent to 80 per cent by 2017 through the extension of the distribution network to new areas of Ibadan city and the replacement of old and unserviceable pipes in the existing network,’’ the commissioner stated.

Tags: Business, Nigeria, Featured, External Loans

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