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Date Published: 07/11/10

Bayelsa Bond: A Quantum Leap in Infrastructural Devt. By Richard Omagbemi

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Economic development, more than any single issue, is the battle line between two competing world views. What made traditional economies so radically different and so very fundamentally dangerous to Western economies were the traditional principles of prosperity of creation versus scarcity of resources, of sharing and distribution versus accumulation and greed, and of sustainability versus growth. Economies are supposed to serve human ends.. not the other way round. We forget at our peril that markets make a good servant and a bad master.

The Council of the Nigerian Stock Exchange (NSE), has approved the N50 billion bond to floated by the Bayelsa State government. President of the council of the NSE, Alhaji Aliko Dangote, who announced the approval to dealing members of the Exchange, called on them to support the state so that the government can realise its developmental objectives. Certainly, those who know the mechanics of bond financing and the laws  guiding bond issuance  will cast  no doubt as to whether the funds sourced from the bond would be judiciously used.

Governor of Bayelsa State, Chief. Timipre Sylva expressed confidence that the bond issue will be fully subscribed since it was fully underwritten by banks before it got the Exchange’s approval. The state is offering a total of 50,000,000 bond units at N1,00 per unit. The bond issue, which has a tenure of seven years is offered at a coupon rate of 13.75 per cent. The bond, according to Chief Timipre Sylva, will help the state reduce its exposure to banks, renegotiate its loan repayment pattern, interest rate, and build a gas turbine that is expected to give the state 24-hour power supply.

Earlier, the Governments of Delta, Edo, Ekiti, Yobe, Lagos, Akwa Ibom and Cross Rivers States have raised debt stocks ranging between N2billion and N15 billion since Year 2000 to provide long-term financing for some specific projects. Bonds are loan contracts which governments and private corporations issue to investors in order to raise long-term finance. Bonds are crucial in financing development because they have long maturity dates from when they are issued.

The approval of the N50 billion bond on July 1, 2010 is indeed a landmark achievement in three senses. Firstly, this is the first time the State has had access to bond financing. The first attempt was made during the Alamieyeseigha administration was not successful because of the absence of the basic pre-requisites to access the bond. At that time Bayelsa State had no audited account, and the proposed bond was not project-specific. Secondly, the N50 billion bond was made possible by the inexorable efforts of the technocrats in the Ministry of Finance  and Budget, who have put in place enduring framework for accessing not only bond financing but donor agency funding. Credit should also be given to those who served on the Bond Committee to produce the report that allayed the fears of Bayelsan. Again, It is a demonstration of the fact that the fiscal reform programme of the Timipre Sylva administration is working. Thirdly, from all intent and purpose, the bond will  accelerate infrastructural development  and open up the State for  industrialization.

Arguably, the projects covered under the bond are of immense economic importance. activities thus enhancing quality of life of our people. Among some of the massive infrastructure to be completed  projects include: the Judiciary Complex, the Kolo Creek Gas Turbine at Imiringi, the Musa Yar’Adua International Passenger /Cargo Airport, Tower Hotel and International Conference Centre, Okaka - all in the Yenagoa metropolis. Government has pledged its unswerving commitment to complete the  Glory Drive, East – West Igbogene Road, the Peace Park, Isaac Boro Square, Melford Okilo Memorial General Hospital and the Cottage Hospital, Opolo. Other projects that would require a huge capital outlay include the Ekoli Bridge, the Three Star Hotel, Five Star Hotel all at Swali the Yenagoa City Galleria, the Gloryland Castle and Government House. All these are viable projects that are capable of attracting Foreign Direct Investment (FDI) to the State. Bayelsa State needs FDI to diversify the economy and break the jinx of  over-dependence on crude oil.

The ongoing effort will help us consolidate and make out state tourist and investors’  heaven. This bond will help us build a road to brass, and the brass LNG worth about $17 billion. Given the strategic location of Bayelsa State especially the emerging hydrocarbon industry, the bond is a good investment outlet to portfolio managers particularly Pension Fund Managers (PFA) and other potential investors.

Bond markets are very sensitive to tax incentives. In countries with nascent bond markets, the formulation of the tax structure may not have given sufficient consideration to avoiding distortions in taxation of income from savings and various types of investment, including bond transactions. If bond transactions are subject to higher taxation relative to other financial transactions and instruments, it will naturally discourage bond market development both from the supply and the demand sides: companies would choose to finance their investments from sources other than bonds and investors would choose to invest in other forms of assets than bonds. Similarly, if the transaction taxes such as documentary and stamp duties are biased against bonds, bond financing will be discouraged.

Bonds, particularly if they are credit enhanced, may be sold to institutional investors and mutual funds, and sometimes individuals, through an underwriter or placement agent. Banks may buy bonds and hold them as loans, although the Bond financing is not subject to any form of taxation. Bond cannot be issued to finance undetermined projects or contingencies, or in an amount substantially in excess of that required for the project. This modus operandi provides adequate checks on the expenditure of bond financing.

In many East Asian countries, corporate governance problems arise mainly on account of weak protection of minority shareholder rights, lack of transparency, and inadequate market discipline for corporations, which often tend to be owner-managed. In many of these countries, minority shareholder value has traditionally been neglected. While this works against equity financing, it need not necessarily work against bond financing. However, what works against bond financing is that weak minority shareholder rights also create uncertainties as to whether or not bondholder rights will be upheld during disputes and bankruptcies.

The burden of managing the bond financing process rests squarely on the Ministry of Finance and Budget. It is the Ministry in conjunction with the investors that have the responsibility of driving the process. Gladly, the requisite legal framework has been put in place to manage bond financing. Also, the State has in place the Fiscal Responsibility law as well as the Public Procurement Law. These pieces of legislations seek to control expenditure within the scope of conventional budgetary discipline. Bond financing in the State will also eliminate the ‘business as usual scenario’ and entrench good corporate governance with in-built accountability mechanism. It will also encourage MDAs to optimize scarce resources in line with the on-going fiscal reforms spearheaded by government.

It is gratifying to observe that the wisdom of those who packaged the Report has yielded dividend. The merits of diversifying the revenue base of the State via the anticipated FDI cannot be quantified. In addition, it would rebuild confidence in Bayelsa State in terms  of managing resources as well as regaining the confidence of the International Community, especially the European Union, UNDP and other expatriates that are ready partner the State in the development of Agriculture,

The State Government shall strive towards maintaining its B+ Fischer rating in the medium term. The State Government shall strengthen the institutions and specific Government parastatals responsible for driving efficient public expenditure management. The allure of infrastructure bonds is even more compelling, and provides a ready market for the banks.  Bayelsa State expects that banks will be willing to buy the bonds meant to revolutionize infrastructure in Bayelsa State.

Bond issuance is a world-wide phenomenon – a practice that has been capitalized upon by many State governments in Nigeria, including the Federal Government for the purpose of developing the real sectors of the economy. The  seven years repayment period would give government ample opportunity to recoup. Certainly, this Bond with a moratorium of seven years cannot enslave any generation as earlier perceived by some analysts.  Rather, if prudentially used, the Bond has the potential of emancipating the youths by creating a united, secure and prosperous Bayelsa State where investment would thrive. The Bond will be used for the provision of economically viable projects especially in the area of infrastructure, which is barometer to measure the success of any administration.

The State should fast-track all Public-Private Partnership projects and intensify efforts to put in place tourism infrastructure to enhance investment in tourism. Countries like Malaysia and other Asian Tigers have resorted to bond financing to achieved significant progress in developing their physical infrastructure to meet the growing demands arising from rapid industrialization, population growth, urbanization. Financing through the issuance of bonds is well suited for large scale, long term projects that have well-defined cash flow streams. In Bayelsa State, there exists a well-structured financing schemes which can add value also increase the viability of debt financing. Most infrastructural projects are found to possess these favourable characteristics that enabled high bond ratings.

If the Coordinating Ministry is given ample opportunity to manage  the bond, it would facilitate private sector-led growth of the economy, relieve Government’s financial and administration burden, reduce Government’s presence in the economy and trim both the level and scope of public spending and to allow market forces to govern economic activities and improve efficiency and productivity in line with the developmental aspirations of the State.

The approval of the bond is a triumph of reason over fear and optimism over pessimism. The bond is an instrument of infrastructural development of the State and a reaffirmation of the fact that the Sylva administration is determined to develop the State. As the saying goes, smooth seas do not make for a skilful sailor, until the pain became unbearable, it is difficult to effect any meaningful change. Pain brings change and Bayelsa State since the 13 years of her existence has had a fair share of pains and crises. Crisis precedes progress.  It is against this background that investors are called upon to buy the bond for financing development in the State. If we get a government that reflects more of what the people want, and what the State is really we can turn  the economy around. This is what the Sylva administration and the array of technocrats in the Ministry of Finance and Budget are committed to achieving with the bond financing. 

Richard Omagbemi, wrote from Warri

 

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