Date Published: 02/01/10

The N50 Billion Bond: A Needless Controversy By Richard Omagbemi

The world is not new to financial crisis. All over the world, financial crises are a product of the leaders opponents reach consensus in advance on the definition of issues. So it was during the Great Economic Depression in the 1930’s, the Asian Financial Crisis of 1997 and very recently, the  global economic melt down. During such crises, financialisation and liberalization of capital flows has integrated developing countries more closely into world capital markets since the early 1990s. The flows of Foreign Direct Investment was sustained during and after the Asian crisis of 1997-8, but the overall character of capital flows has become significantly different in the 2000s. Developing countries have been obliged to hoard international means of payments as a result of participating in international capital transactions.

While there has been an increase in private capital flows to all the major developing country regions, in general, private capital flows remain concentrated in just a few countries. In 2005, about 70 per cent of bond financing and syndicated lending went to ten countries. Similarly, only three countries - China, India and South Africa-accounted for nearly two-thirds of all portfolio capital flows. There has been some increase in bank lending to poor countries, especially from oil surplus countries benefiting from the recent increase in world oil prices and from low-income countries located geographically close to major investors. However, this still remains not only a minuscule fraction of the total of such flows, but far below the requirements in these countries. 

In fact, the definition of the alternatives is the supreme instrument of power such that the antagonists can hardly agree on what the issues are because power is involved in the definition of who gets what. In developing nations politics is not all about struggle for power for its sake. In those progressive nations,  politics is more about development, arising from the leader’s ability to evolve and articulate a clear-cut development agenda.

The global capital markets have never been so active, especially for flows related to developing countries. The past year witnessed a massive and broad-based increase in capital flows to developing countries, which reached a net level of $491 billion. This included increases in all the major forms of capital flows: bank lending, issues of long-term bonds of developing countries, foreign direct investment.  
The recent increase in private capital flows has also been fairly widespread in regional terms, with all of the major regions showing some increase.

One of the instruments for funding available to developing states is the bond market. Bond markets in general and corporate bond markets in particular have, therefore, developed rapidly in countries where the macroeconomic environments have been more stable and predictable. Meanwhile, in countries where the macroeconomic environment has been relatively volatile, the corporate bond market has had to rely heavily on government support in one form or another. In Korea, this has taken the form of state banks issuing bonds with government guarantees and relending to corporations. In China, the government had to resort to, initially, mandatory quota allocation and, subsequently, to heavy subsidies in order to create a demand for bonds issued by the state-owned enterprises. In the Philippines, among other things, the volatile macroeconomic environment led to the adoption of corporate bond financing of capital intensive projects.

Initiatives to develop bond markets in East Asia has focused on sustaining a stable macroeconomic environment with low inflation and stable interest rates, developing a healthy government bond market that would serve as a benchmark for the corporate bond market and completing the post-crisis agenda of banking sector restructuring. In addition bond market aims at improving corporate governance, strengthening the regulatory framework for bond market and rationalizing tax treatment of bonds. In Africa, there has been a push for broadening investor base and promoting the growth of the bond market as catalyst for accelerated economic growth. It is therefore not out of order for State in Nigeria to go to the bond market for financing physical infrastructural projects to attract investors.

Now, our knowledge of the bond market  and its workings in the economic development can better be appreciated. Bonds are fixed or floating rate debt securities, including debentures, bills, notes, certificates of deposits, and asset backed securities  and debt securities collateralized by pools of mortgage receivables. All tiers of Government: federal, state and Local Governments take bonds to provide either industrialization or infrastructure needed for development. In fact, after the Asian Financial Crisis in 1997, most nations even among the Asia Tigers use bond as a veritable instrument for development engineering. There is indeed nothing mysterious about a State Government taking a bond for the development of the 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.  

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.

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.

It is therefore surprising that some faceless Bayelsans are mounting a campaign on the bond financing would be mismanaged by the State alleging that previous loans were handled shoddily.  Such critics have failed to understand that in the heat of intense militant activities, the State’s receipt from the Federation Account dwindled drastically. This was amidst very astronomically high security votes before the amnesty era. One will not fail to point out that other States such as Abia, Imo, Lagos, Rivers State among other are resorting to bond financing. So what is the hullaballoo about the N50 billion bond financing of Bayelsa State now that the State enjoys a conducive atmosphere to provide sustainable investment in the State? Why is the bond issue subjected to unnecessary politicking? Is bond financing an aberration of the fiscal responsibility law?

What is more, the bond the State seeks for is clearly tied to visible and systematically selected projects based on need assessment. These projects when executed would tremendously improve economic activities and enhance the quality of life of our people. It has already been clarified that part of the bond would be used to clean out current exposures in the commercial banks with high interest rates and this will save the State about N11 Billion. In my opinion, liberating the State from the stranglehold of its current debt service burden is one huge leap to open-up boundless opportunities for economic growth. Again, 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 in a fragile ecology such as that of Bayelsa State. 

The Timipre Sylva administration has expressed its sincere intentions of completing some of the projects initiated by his predecessor as well as the ones initiated by his administration. 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. These are concrete projects that will be implemented in the 2010 fiscal year. 

Through the instrumentality of the bond, government has pledged its unswerving commitment to the completion of 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. Also to be included in this arrangement is the Galleria, the Gloryland Castle and Government House. Ostensibly, that the completion of the aforementioned projects will not only accelerate the pace of development but also attract Foreign Direct Investment (FDI) to the State. Besides, employment generation would be given a boost while capacity building would be accorded premium . Bayelsa State is in dire need of FDI to diversify its economic base especially in real sectors such as industries, tourism, and other non-oil sectors of the economy.  

Already, the House of Assembly has put in place an enabling legislative framework for the judicious use of public funds. The Fiscal Responsibility bill has been passed into law. In the same vein, the Public Procurement Law has been passed. The overarching aim of these laws is to control expenditure within the purview of conventional budgetary discipline. With this law in place, monies can only be expended realistically in line with stipulated accounting conventions and due process. It is one of the major pillars of good governance when its nexus with transparency is appreciated.

In post-crisis Asia, the development of domestic bond markets is increasingly seen as one of the key requirements to strengthen the financial sectors of East Asian countries and to reduce their vulnerabilities to future financial crises. There is a great diversity in terms of the level of bond market development across East Asian countries. Judged by several indicators of bond market development, Hong Kong, China and Singapore are ahead of other countries. This is followed by a second tier consisting of Korea; Malaysia; and Taipei, China and a third tier consisting of PRC, Philippines, and Thailand. Indonesia’s bond market is perhaps the most nascent among East Asian bond markets. Going forward, the list of requirements for the development of robust domestic bond markets in East Asia appears lengthy and formidable.

In Nigeria, there are people whose fundamental moral belief is that we all live in the same empirical and rationally comprehensible world and that morality is the adoption of universal and openly defensible rules of conduct. But experience has shown that those who rush around ladling out moral judgements soon arrogate to themselves an alarming and repellent sense of their own moral infallibility. This is the situation in Bayelsa State where even people with very poor records of public performance mount the podium of morality to give tutorials on good governance.  

Good governance can only thrive when there is transparent and accountable leadership with the support of the people. At this historic moment, Bayelsa people need to emphasize those factors that would forge unity among all segments of the people rather than those factors centrifugal bearing. However, the administration should see the entrenchment of fiscal discipline as an article of faith so that Bayelsans would be convinced by their conscience to support any initiative capable of accelerating the development of the State. The development of Bayelsa State can only be accelerated with Public-Private partnership and the bond option is one of such efforts. Governance is not driven by angels, but by human mortals who have their foibles. The N50 bond is not only desirable for investment to Bayelsa State; It is necessary for increased capital flows into the State for accelerated development. Bayelsans should be forward looking and should not continue to look at the past before they are turned into a pillar of salt.