Deconstructing the Debt Profile of Ogun State as at May 2011

Politics
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Wednesday, August 27, 2014 9.49AM / Kehinde Sogunle

 

BACKGROUND
We would not have bothered to respond to the constant misinformation and insinuations of the current administration in Ogun State about the financial management and the debt profile assumed on their inception into governance but for the consistent misinformation and contradictions being peddled to etch in the mindset of unsuspecting citizenry the wrong perceptions aimed at scoring cheap political points and festering continuous politicking of the serious business of governance.


We think that, as fellow professionals with about 18 months learning period in the saddle, the ecstasy and euphoria of unexpected elections victory will have given way for a more reflective appreciation of the realities and a deeper understanding of the delicate balancing responsibility of financial management of a domain with sufficient political sophistication yet with limited financial resources for the challenging social and economic expectations of the citizenry.


Before and since the inception into office of the Amosun administration in Ogun State, issues have been raised about the nature and amount of debt and loans inherited from the predecessor administration of Otunba Gbenga Daniel. At the state of the state address given by the State Governor, in June 29, 2011, Senator Amosun stated that: “I have come to the conclusion that Ogun State is the most indebted state in the country, officially the debt the last administration, claimed to have left behind is N50 billion, but the real value of the debt could even be more. Professionals who are well trained in this regard are working on this. People compare Ogun State with Lagos and Rivers State: they easily forget that the revenues from these other states can easily pay off whatever debt we owe”.


At the town hall meeting, organised by the Ministry of Budget and Planning, The Governor mentioned that the size of the debt inherited is N87billion.


This cue has also been followed by some key functionaries of the government, for examples, On 5th September 2012, The State Commissioner for finance Mrs. Kemi Adeosun, stated this at a press briefing in Abeokuta while presenting the state audited financial statements of year 2011. According to her, the administration of Governor Ibikunle Amosun has started paying the inherited debt of 87 billion Naira and left with about 62 billion Naira to be paid. “We are aggressively paying off the inherited debt and very soon the debt will go down to a reasonable level


Recently, Barrister Taiwo Adeoluwa, the Secretary to the State Government, while receiving members of the state Council of Hausa Communities in Abeokuta said “We met a state that salaries and subventions were owed. We met a state where pensions were owed for 32 months. Before they left, minimum wage was not paid. We inherited empty treasury. Even by their own admission, they said they left N50bn debt but we later discovered that the state was indebted to the tune of about N97bn.” He said further, “Our capital expenditure is more than our recurrent expenditure. I can confirm to you that we have not borrowed a dime to pay salaries since we came. Since we came, we have not owed anybody any salary and we will not owe. We get about N2.5bn from Abuja every month and we pay about N6.1bn as salaries.”


Often times, this is often indicated as a major factor that the administration had to contend with and affecting their performance. This political gimmick is being used to hoodwink and attract the sympathy and support of the unsuspecting public riding on pedestrian perception of the complex nature of Public Financial Management, Debt Management and its inherent challenges.


Some of these statements made reflect a paradigm and mindset that confuses and confounds the public about the essentials for governance. The issues in the mind of the discerning individual arising from the statements being made would include:
1. What exactly is the debt profile inherited by the current administration?
2. Was there truly an empty treasury?
3. How does a state or government finance its activities?
4. Is deficit financing inimical to social and economic development?
5. What are the criteria for assessing and accessing the required structure of funding for government activities?

It needs to be stressed that Public Financial Management should not be taken to pedestrian levels and used as excuses for every possible challenge that a government faces. It has been identified that the management of public finance is about the management of public resources to achieve public results, as these resources are not usually sufficient everywhere in the world to meet the results to achieve. Deficit Financing or Debt thus becomes an imperative. The challenge is to effectively manage the Debts.

Sina Kawonise, the Former Commissioner for Information in Ogun State, has aptly described this debt sensationalism tendency in an article in the Daily Compass of May 2, 2012 in the following words… as “at every opportunity he had to speak publicly, he criticised the immediate past administration for leaving behind what he called huge debts. And the figure he put to the inherited debt depended on his mood and the type of audience he addressed. In some instance, he puts the figure at N105 billion. On another occasion, it was N95 billion, during another event, the figure came down to N87 billion. On one significant day, he said the whole of the last debt figure was stolen by the immediate past Governor and members of his cabinet

 

THE DEBT PROFILE (AS AT MAY 29TH, 2011)

The Compendium of Financial Statements for the eight year administration of the State for the period till 31st March 2011 compiled by the civil service officials indicated that the Total Debt Outstanding was N49.2 billion. This consists of:

 

LOANS:
Internal Loans (Cash loans from Banks) 13,978,617,955.78
External Loans (Foreign loans from multilateral agencies) 12,474,642,761.35
TOTAL A 26,453,260,717.13

 

CONTINGENT LIABILITIES:
Contractors' Arrears 3,449,412,141.81
Pension and Gratuity 7,637,963,900.12
Others (Subvention, Bulk Release, Counterpart funds, PHCN etc) 5,665,764,931.25
ISPO 3,602,423,669.83
Salaries (Gen.31, Leave Bonus, Deductions etc) 2,423,771,803.53
TOTAL B 22,779,336,446.54

 

GRAND TOTAL A+B 49,232,597,163.67

 

It is important to note that the Administration will be the first in the history of our country to present its financial statements for eight years in office to its successor. Further to this is the fact that Governor Gbenga Daniel did not see the final report until the final printed copy was handed to him for presentation to his successor in office. These financial statements were duly handed over to the new administration as part of the handing over notes.


CONFLICTING DECLARATIONS OF DEBT PROFILE
The current government has indicated many figures through its officials depending on the audience or circumstance. Whether it is N87 billion, or N97 billion or N105 billion and have not in any situation given the public a corresponding breakdown of the various figures being thrown around as the inherited debt profile of the state in the vein of what was contained in the compendium. This precludes any interested party the opportunity for any independent analysis and conclusions. This information asymmetry can conveniently lead to the assumption that the figures are being unnecessarily bandied about for political mischief.


It is also necessary to point out that whilst every effort is created to emphasise the debt situation, no corresponding effort is made to mention or acknowledge the assets created during the tenure or the revenues that had been yielded by the investment or the economic development efforts of the past administration. This was an administration that more than doubled its work force and refuse to retrench its staff in 8 years. Ogun State that we have today is far more developed economically, with a lot of infrastructural development on the ground than what was met in 2003. There is no gainsaying the fact that Ogun State witnessed tremendous physical, social and economic progress during the tenure of Otunba Gbenga Daniel, and exercised a lot of prudence in spending and was very efficient in managing the state’s resources while at the helms of affairs.


Rather than concentrating efforts on building on these achievements, the focus, gleaning from the activities and attention in the past 18 months since inception, has been on disregarding viable projects, reversals, policy somersaults and efforts at downplaying achievements and results and shifting blames. What is the essence of continuity in government?  How should African states waste resources and efforts based on political differences? The development of the state and the welfare of the people should be given priority and attention once elections and politics are over. Governance should be for everybody. If we all take a cue from the last Presidential elections in the United States of America, President Obama in his acceptance speech said that he will work with Candidate Mitt Romney for the continued progress of their country. The standards of democracy and politics should be lifted by the professionals playing in it.


OUR POSITION ON THE DEBT PROFILE COMPARED TO OTHER STATES
Contrary to the impression created by Senator Amosun, Lagos State in the last 5years has accessed approximately N290 billion from the bond market, Rivers floated a bond of N250billion while Bayelsa has done the same to the tune of N50 billion. Osun state did N30billion refinancing loan from a first generation bank. Kano has a debt of N108 billion, etc, etc. Against this background, a recent development indicates that “the Federal Economic Council, the Nation’s economic managers, declared that growing concerns and criticisms of the country’s huge domestic and foreign debts were not well-grounded. The Council, which is made up of the 36 state governors and top officials of the Federal Government, asserted that the total debt stock accounted for only 17 per cent of Nigeria’s Gross Domestic Product (GDP) and that this marginal level of indebtedness was healthy for the economy”.

 

In the same vein, the Federal Government, through the Debt Management Office (DMO), said “the country’s debt profile which currently stand at about $45 billion, out of which external debt stood at $6 billion and domestic debt, $39.6 billion. This, the Director-General of DMO, Dr Abraham Nwankwo, claimed was in order, saying that Nigeria’s debt gross domestic product (GDP) ratio was 18.65 per cent, as against global ratio of 40 per cent”


WHY SENSATIONALISE DEBT?
It is important to note that the issue of Debts is not new to Ogun State nor any state government whatsoever in Nigeria. And indeed, the Daniel Administration inherited debts in the region of N36 billion at inception in 2003, which consists External Multilateral Loans and Arrears of Salaries, Arrears of Pensions/Arrears of various increases in Pensions and other Gratuities (current and retired civil servants are witnesses to this). Rather than turning this into a convenient political swan song, the proactive measures taken to meet the challenge was to renegotiate the debt repayments from N180 million to N90 million with the Federal Ministry of Finance. Further a scheduled process of meeting the arrears of salaries, arrears of pensions/arrears of various increases in Pensions and gratuities was put in place. The debt relief and forgiveness programme of the federal government also assisted in significantly clearing the outstanding external loans balance.


Rather than sensationalising loans which include multilaterals loans, which are often competed for among states on the basis of demonstrable needs and the technical capacity to cope with the rigorous project management capacity for the projects, It is to the credit of the Professionals in the Daniel administration that the resumption of the Urban Water Scheme in Abeokuta and other towns and the Health Systems Development Project (HSDP) among others were secured through this rigorous process. To count this, which are often on long term concessionary rates, as part of the “huge loans“ inherited by the new government makes mockery and belies the development focus of the administration.


The circumstances leading to the contingent liabilities made up of the arrears of entitlements and expenditure are well known to discerning minds. A combination of a challenging financial and economic environment, global recession, the crash of the capital market and low oil proceeds with the pressures and internal conflicts in the Peoples Democratic Party in the state created a set of reinforcing circumstances that culminated with the state (and even most governments) at that time were practically living from hand to mouth. This phenomenon is now reversing with its concomitant flow benefits. Even at that, we made concerted efforts to attract alternative funding which are now crystallising to the benefit of the state. To attribute that to any financial wizardry is akin to claiming credit for a rain or flood of which the clouds are already gathered!

  
WAS THE TREASURY EMPTY?

Another convenient statement usually made to disparage the past administration is to assert that the treasury was met empty; this is very far from the truth. As it is for any going concern, there would be liabilities and of course there would be assets, as a matter of fact liabilities are generated in order create assets. This is also clearly different from the cash available or readily available for disbursements to meet exigencies. For an entity like a state, that is entitled, given the current federal arrangements, to allocations on a monthly basis, states could not be talking of bankruptcy. Many treasury enhancement measures were taken by the Federal Government to ensure that any new government commences on a good footing. Some of the ones we are privy to that applied to the state during the transition include but are not limited to the following:

1.    The allocation for April 2011 was delayed and paid to Amosun administration, so it could not be utilised by the outgoing government so much so that the statutory severance allowance for outgoing political appointees could not be paid and has not been paid to date, 18 months down the line.

2.    The allocation for May 2011 was paid in June 2011 to the Amosun administration.

3.    There is a budget adjustment usually paid to states for the difference between the budget revenue and the actual revenue from oil proceeds. The ones accruing to states for the first half of the year 2011 was paid to the Amosun administration in July 2011.

4.    The exchange difference between the benchmark price of oil and the actual price are paid as budget differentials and paid to states. The one for states was for the first half was paid to Amosun administration.

5.    The states proportion of the instalments of the repayments of N450 billion due from NNPC was commenced from August 2011 and paid to Amosun administration. These are matters that the previous administration contributed immensely to for Ogun State’s rights through the national economic council and the federal account allocation committee.

The payments that accrued to the state beyond the normal allocations in the first 6 months of the Amosun administration will be an additional income of about N25 billion. It would just be cheap and vain glory to claim that salaries were paid or arrears were cleared when there were concomitant inflows that would have been utilised to pay them if they had been paid to a previous administration. We however still accept the fact that government is a continuum, and that the payments were made to citizens and workers of Ogun State that we all came to serve. This is not rocket science. It is unfair to shift the burden and claim the glory at the altar of politics.


Besides the above normal inflows, there are other extraordinary flows that have been proposed, processed and pursued up to disbursement stage by the Daniel administration that are or could be available to the Amosun government. The details of all this were included in the handing over notes to the incoming government. This includes but is not limited to the following:
1. the Refunds from the Federal Ministry of Works for Federal Government Projects undertaken by the state
2. the State access to the Universal Basic Education Fund
3. Access to the National Housing Fund for Housing Development in the State
4. The State Agricultural Support Fund
5. the Ecological Fund
6. Receipts from Olokola Licences
7. Outstanding Balances in Foreign Domiciliary Accounts opened for proceeds from the Ikenne Dairy Farm Concession
8. The Balance of the Debt Relief Fund Allocation in Foreign Currency used as Collateral for the Cash Liabilities to the Banks

Funds accruable to this efforts are in the region of N15 billion. When this is added to the initial N25 billion mentioned, the N40 billion in the coffers is sufficient to put the state in a safe financial status. Of course, the multilaterals loans not for repayments immediately will provide additional cushion.

The current consistent maintenance of oil price at above the benchmark of $75 per barrel to an average of about $105 per barrel has no doubt also improved the financial flows from the federation account to every state including Ogun state. An extract from the Federal Allocations to the state culled from the Federal Ministry of Finance, website shows an average allocation of N3.5 billion per month. (see Table below). Yet our SSG, to present a dire situation to the state to the unsuspecting leaders of the Hausa communities said “We get about N2.5bn from Abuja every month and we pay about N6.1bn as salaries” We need to ask him, how does the State fund the shortfalls and take care of other expenditure including capital expenditure, from internally generated revenue and or loans.

 

CONCLUDING REMARKS
Despite the dire situation being presented, The Ogun State people are also wondering about the source of funding for the N500 million per kilometre road between Sokori and Ita Eko, the first overhead bridge in Abeokuta, the proposed air-conditioned pedestrian bridge and mega schools being awarded and the various urban renewal schemes which are estimated to cost N100 billion, of which compensations of about N10billion are being claimed to be payable to displaced people. Some measure of creative financing is definitely being adopted and this cannot be more than creating financial exposures in whatever guise. We sincerely hope that sufficient justice will be done to address this in detail in the forthcoming budget presentation.


Apparently smarting away from his famed condemnation of the attempted Bond Issuance of the previous administration based on the Governor Amosun’s famed “Bond of Bondage” statements, we note that the current administration has woken up to the reality of recognising that a measure of leverage, financial accommodation, debt or loan is necessary to support social and economic development. Whether overdrafts or treasury notes, for the short term, promissory notes or standing payment orders or contractor financing, for the medium term, or bonds, for the long term. Borrowed funds for development necessarily have a cost, create obligations and coalesce into a balance at the end of a reporting period. This is what is referred to as a debt profile. And such would have to be consummated based on the best judgement of the executive team at that time and the prevailing regulatory and compliance environment. At the inception of the Daniel administration, the resolution of the executive council is sufficient for overdrafts and short term loans, and this was acceptable to the financial institutions.


At present, improved democratic experience and reforms through fiscal responsibility and debt management regulations has made an enabling act important. The Daniel administration set the building blocks and foundations for these to happen through the initiation of the fiscal responsibility act, the public procurement act, the setting up, capacity building of the debt management unit and the conduct of the domestic debt reconstruction exercise. This is being consummated by the current administration to support the current financial exposures. This is what continuity means in government. But to distance, sensationalise and bash previous administrations, particularly to audiences that may not be discerning enough, whilst threading on this same financial management path, is akin to hitting below the belt and cheap politicking!


It is worthy of mention that the last administration was one of the few states that invited the Debt Management Office to conduct a Domestic Debt Reconstruction exercise in 2010.

 

This is with the objective of ascertaining the desirability of the level of financial exposures incurred by the state and the sustainability of the debts. The DMO template was continued and used as the basis for the collation of the figures contained in the compendium of Financial Statements at 2011 towards handover. At the end of the exercise, The DMO gave the following conclusion: “With the application of the Country Policy and Institutional Assessment (CPIA) 250% Debt stock to Revenue threshold, the review of Ogun States’ Total Public Debt is shows that the December 31st 2009 as well as the projected December 31st 2010 Total Public Debt Stock to Total Revenue ratio of 42.48% would be within acceptable thresholds. The same applies for the State’s debt service ratios

 

Furthermore, the following specific ratios were considered
“6.3.1 TOTAL DEBT STOCK
TOTOTAL REVENUE
Ogun State Total debt stock
to Total Revenue attained its peak of 53.03% in 2009. Between 2007 and 2008, the total debt stock to total revenue ratios were 19.70% and 39.09% respectively. A significant decrease to 42.48% in 2010 is projected and a further decrease to 29.53% is also projected in 2011. Using the CPIA index of 250% total debt stock to total revenue, the State’s ratios are within acceptable limits throughout the periods of this review.

6.3.2 TOTAL DEBT SERVICETOTOTAL REVENUE
The ratios for Total Debt Service to Total Revenue are also as presented in Table 5. Total Debt Service to Revenue ratios were 9.34%; 11.66%; 30.78%, 10.44% and 10.51% for the years 2007 – 2011 respectively. These ratios are also within the CPIA 30% threshold for total debt service to total revenue.

6.3.3 TOTAL DEBT STOCKTOTOTAL REVENUE (SEC REQUIREMENT)
The ratios for Total Debt Stock
to Total Revenue in relation to the requirements for the Securities and Exchange Commission (SEC) are also shown in Table 5 above. The ratios ranged between minus 30.30% to 7.52% for the years 2007; 2008, 2010 and 2011. It should be noted that the projected 2010 year end stock when computed alongside the envisaged N26bn Bond generates a 45.36% projected total debt stock to total revenue (Sec requirement) ratio which would be approaching SEC’s 50% margin.”

 

We expect the State to continue in this tradition to foster the continued utilisation of data and analysis instead of expressing value laden, normative statements which only serve sensational and exploitative purposes rather than the seriousness governance deserves. As a minimum, current and subsequent exposure situations should be analysed on this basis for comparisons, efficiency and effectiveness purposes. This would be of continuing benefit to the government, the investing public, stakeholders and discerning people.

To continue the spirit of accountability and transparency, and indication of the progress being made, we expect that at regular intervals, reports to enlightened audiences and appropriate publications should be made about the situation of the financial management of the state which in this respect should include and not limited to

·         The breakdown of the inherited claim of “N87 billion” debt;

·         The Repayments or adjustments that have been made thus far;

·         The breakdown of current facilities or exposures being added, whether through treasury notes, promissory notes, contractor financing and the like and the purpose of such facilities; and

·         The balance of the debt profile of the state

The minimum we owe our common patrimony is a measure of respect, responsibility and candor and a common commitment to the development of our state, and the upliftment of our people, irrespective of political affiliations. To do less is to sacrifice the opportunity that our people have given us to lead for self propagation and adulations. We cannot shrink ourselves to greatness! Our people are quite sophisticated and enlightened to know better!

 

 

Kehinde Sogunle, B.Sc.(Hons), FCA                                   Kayode Sunmola, MBA, FCA

Former Commissioner for Finance, Ogun State             Former Director General, Bureau of Management & Budget, Ogun State

 

Kindly Download PDF of Outstanding Payments on all Road Projects in Ogun State

 

Kehinde Sogunle, B.Sc.(Hons), FCA is the former Commissioner for Finance, Ogun State. He can be reached vide Ksogunle@gmail.com

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