• Wednesday, June 12, 2024
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States’ chances of tapping capital market funds dim on low IGR

Nigerian states

As Nigerian states battle tough financial conditions and search ways of expanding their sources of funds, they also face even more hurdles of tapping capital market resources due to current stringent requirements, BusinessDay finds.

The Federal Government would prefer that the states go to the capital market to source funds and stop crowding out the private sector, but many of them appear constrained due to their abysmally low Internally Generated Revenues (IGR), a key requirement to access the market, going by Securities and Exchange Commission (SEC) rules.

SEC’s consolidated rules which guide borrowing by Federal, States, Local Governments, Government Agencies and Supra nationals do not allow states to access more than a particular percentage of their IGR from the capital market.

Rule 566 of that guideline provides that, “The internally generated revenue (IGR) of the issuer shall not be less than 60% of its total revenue for the preceding year. The rule also provides that, “In addition to the issuer’s internally generated revenue (IGR), the issuer shall provide a third party guarantee from a bank, insurance company, supranational institutions, international financial institutions or any other, acceptable to the Commission, to cover payment of the principal and interest in the event of default.

The guideline is to guarantee that the states would be liquid enough to repay as and when due and that the monies can be deducted at source from their monthly allocations from the Federation Account.

Thirty-five states’ IGR, excluding Ebonyi state totaled N682.7 billion in 2015 as against N696.8 billion in 2014, according to National Bureau of Statistics (NBS) figures.

BusinessDay finds that apart from Lagos state which had the highest IGR at N268.224 billion, no other other state generated up to N100bn in 2015. While Rivers state, the second highest in IGR, pulled in N82.101 billion, states like Yobe and Zamfara generated mere N2.251 billion and N2.741 billion respectively.

Available data suggest that with this rule, most of the states cannot at their present income levels meet the requirements for accessing funds from the capital market or bargain for substantial amounts.

“States are not constrained to raise funds from the capital market. They are only challenged to access the capital market because their revenue profile is low. The law says they can’t access more than 50 percent of their IGR form the Capital market,” said Oscar Onyema, CEO, Nigerian Stock Exchange (NSE).

Unfortunately, states face tough times, having seen their incomes drop to considerably lows levels, following plummeting oil revenues which shrank monthly allocations from the Federation Account pool in Abuja, the capital.

In May 2016, they were only able to receive a cumulated sum of N57.22bn from the Federation Account, indicating that each of the 36 states got averagely meager N1.6 billion, as against thrice this amount  which they possibly received about the same time in 2014.

The Federal Government, in a desperate effort to help the states, has provided a N90bn budget support loan which they can only access on meeting some 22 tough conditions that would eventually help improve transparency and accountability at the sub nationals.

Finance minister, Kemi Adeosun on Monday, disclosed that no state has met those conditions, contrary to earlier reports that five states had been qualified to begin to access the money.

Sola David Borha, CEO, Stanbic IBTC Bank believes that states would be able to raise long term funds if they work hard but adds that they must have the vision and capacity to look inwards.

“They must actually work out ways of harnessing those potentials,” Borha noted, at a recent meeting.

According to figures from the Federal Account Allocations Commission (FAAC), just a few states like Lagos, Rivers and Delta, which receive much more federal allocations than the other states and also generate substantial IGR can be said to qualify to raise reasonable funds from the capital market.

The Federal Government wants to encourage states to access funds from the capital markets for bankable projects through issuance of fast-track Municipal bond guidelines to support smaller issuances and shorter tenures, as minister Adeosun has indicated in recent times.

Aliyu Wadada, former chairman, House Committee on Capital Market, sees continued bailout of states as not sustainable and is concerned about their level of recklessness. He condemned the situation in which some governors play politics with serious issues like bonds. “An example is when a governor goes to issue, say five year bonds just before his tenure elapses and one begins to wonder.

“There are areas you don’t play politics with,” he warned, insisting that “there is no state that is not viable but the issues is the commitment of the leadership.’

Last year, the federal government spent billions of naira in a bailout programme that enabled most of them clear salary arrears, though some of the monies were reportedly diverted to other ventures.

Analysts think that states, most of which now face looming bankruptcy seem to be in a precarious situation, apart from the fact that they have reached their end point in terms of borrowing, most of their people also seem to be overtaxed.

Elizabeth Uwaifo, Partner at the UK based Radix Legal and Consulting, says the solution is for them to increase revenues internally. “If the states can increase their domestic market, they can attract other investors,” she submits.

Femi Gbajabiamila, majorityl leader of Nigeria’s House of Representatives, does not just want institutional rules amended to help the sub nationals, but strongly believes that the constitution must be reworked in a way that it improves the structure of government and gives true autonomy to states.

“We need to work on the present structure of government,” he said adding, “When you give more powers to states, you free their ability to raise more funds. We need more independent states, there is no other way to get around it.’