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To concession is more responsible than to borrow $29.9bn -By Henry Boyo

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Henry Boyo
Henry Boyo

Henry Boyo

 

President Muhammadu Buhari’s request, dated October 25, 2016, for legislative approval, to disburse the sum of $29.9bn, between 2016 and 2019, from an anticipated external loan package, was the first notice of government’s intent to commit to, arguably, the largest borrowing in Nigeria’s fiscal history.

Media reports suggest that the funds will be deployed to improve agriculture and redress severe infrastructural deficit in selected parts of the country. So far, the criteria for project choice and location are not yet known and there are already concerns that the project spread appears inequitably lopsided. However, the Debt Management Office, particularly, and some media partners, have extolled the reportedly very low interest rate, below two per cent, and the seemingly generous tenure of up to 15 years, for the huge loans.

It may seem a no brainer if government eagerly embraces the reported concessionary terms of our creditor “godfathers”, particularly with the present acute shortfall in projected revenue and the heavy burden of funding N2.2tn 2016 budget deficit. Inexplicably, however, critical supplementary details on the loan package were not made available to the Senate as indicated in the President’s letter. Consequently, the Senate has rejected the Executive request for now. There is clearly a need for a comprehensive repayment plan, with pre-project and feasibility studies, cash flow statements and environmental impact analysis for each project, to accompany the President’s request when it’s resubmitted to the Senate for consideration. It is standard practice that creditors will professionally evaluate the viability of a repayment plan for each project before they part with their money, and it will therefore be irresponsible for the Senate to approve any loan request, whatsoever, without such due process.

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Nevertheless, with a fiscal landscape, in which about 40 per cent of annual revenue is already applied to debt service alone, (i.e. exclusive of capital repayment, as matured debts are simply, frequently rolled over), Lawmakers should ignore predatory suggestions that our economy is relatively under-borrowed, just because total debt still remains below five per cent of the critical debt to GDP benchmark of 19 per cent!

Invariably, Nigeria’s present debt burden will rise beyond $90bn when compounded with the $29.9bn loan currently sought. Additionally, if the foreign loan package excludes the widely reported offer of billions of dollars’ China loans and the trillions of naira which will also be borrowed from the domestic market to fund future budget deficits, then of course, well over 50 per cent of our actual annual revenue will be required just to service our debts, while the balance income will be predominantly, as usual, consumed by recurrent expenditure, with little left over for infrastructure remediation. Unfortunately, serial defaults in payment of service charges, as was the case before the 2006 debt exit, will invariably instigate overbearing foreign creditors to exercise their rights and insist on more socially oppressive economic reforms to guarantee their investments.

Furthermore, the Senate should not also be deceived by the allegedly low cost of borrowing below two per cent, reportedly, attached to the proposed loans. It is intuitively evident that if in the next five years, naira rate continues its freefall, well beyond N500=$1 to say N5,000=$1, as is the case in Ghana, the economy will certainly be in deep trouble, because, in spite of the optically low interest rate, we may then require 10 times more naira to service such dollar denominated loans annually. Thus, we will, effectively pay over 20 per cent in naira value annually, on these seemingly “concessionary” foreign loans!

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Besides, when completed, projects funded with the $29.96bn loans would invariably become public utilities. These prospects should be worrisome to us all, as our track record in the management of public utilities has always been riddled with corruption and deliberate negligence while some projects have become moribund even before completion, while other sporadically sustainable operations have ultimately ended in dismal failure.

It has unfortunately become an endemic custom that procedures for loan acquisition and project implementation in the public service have generally become vehicles for providing “jobs for the boys”. For example, relations of a certain minister were alleged to have pocketed millions of dollars on the 2006 debt deal. Ultimately, a vastly bloated national loan burden and dwindling revenue may instigate loud suggestions to sell our diminishing national assets as a way out of our economic predicament! Regrettably, nevertheless, enthusiastic promoters of asset liquidation and the present $29.9bn financial escapade may not be around to witness or endure the social oppression they “inadvertently” bequeathed to future generations.

Conversely, however, loanable domestic funds for investment in infrastructure and real sector will remain grossly inadequate so long as government borrowing continues to account for over half of all bank advances and the CBN’s monopoly and regular auction of dollars against the naira persists. Furthermore, industrially supportive single digit interest rates will remain elusive if the CBN readily sustains the oppressively high interest it pays to reduce the lending capacity and inclination of banks to finance infrastructure or indeed the wider productive private sector.

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In addition, Nigerians should stop being deluded that the present infrastructural decay can be significantly remediated from paltry annual capital budgets below $2bn, when in fact the needs of the power sector alone probably exceeds $200bn!

The preceding narrative does not deny the urgent need to begin to remediate our infrastructural decay. However, the foreign loan of $29.9bn is probably not the best option. There are good reasons, particularly with the significant revenue shortfall, to separately package identified infrastructure enhancing projects, with fiscal incentives and tax holidays, where necessary, to make them attractive for foreign direct investment. We have deepened our national experience in project concessioning in recent times, and should have acquired the capacity to create a comprehensive template that is acceptable to all parties, so that earlier pitfalls are avoided. Indeed, despite the abiding challenges, the telecoms sector and Murtala Mohammed domestic Airport Terminal 2 remain visible icons of sustainable concessioning, which can be successfully replicated, with sensible modifications.

A vibrant and transparent concessionary template would rapidly transform our landscape without a kobo spent from the public treasury, while government will rake in considerable income from concession fees, even before project commencement. For example, we recall the billions of dollars paid by telecoms companies to obtain operational licences. Government’s role is to provide a relatively secure environment for concessionaires to operate, while also benefitting from steady tax revenue from the operations of project sponsors, their employees, and the value chains they invariably create.

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Nonetheless, the Terms of Reference for such concessions should include the engagement of a “reasonable” percentage of local staff in various levels of their operations. A government monitoring team should be established to diligently ensure that the Terms of Reference are always strictly adhered to. The concession “monitoring” team would similarly guard against asset stripping especially as the tenure of each concession draws to a close. However, credible performance by a project operator should be a recommendation for the extension of the concession, if so desired, after relevant discussions between the government and the concessionaire. Furthermore, concessionaires should have the assurance of “cast iron guarantees” that unless there are reasonable unforeseen circumstances or fundamental infractions of the original terms which both parties endorsed, each concession will be allowed to run its full tenor.

Arguably, a robust and transparent concession policy should reduce those opportunities that facilitate corruption in the handling of public projects and also reduce wastage and leakages from the public treasury. Notably, government will, in place of oppressive debt payments, conversely, earn new streams of incomes from the operations of the concessionaires, even when government did not directly invest a kobo in their enterprise!

 

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