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According to the figures from the
Nigerian Stock Exchange, 12 states, from 1999 to date, have raised
about N374.6 billion from the bond market. This is apart from over N2.6
trillion which the Debt Management Office (DMO), on behalf of the
Federal Government, has raised from the same market. All these reflect
the huge sums many state governments borrowed from commercial banks at
great cost to the states’ treasury.

When Edo State, under Lucky Igbinedion,
blazed the trail in 2000 to successfully raise N1 billion, it opened
the gates for other states to rush to the market, which provided an
alternative and cheaper window to augment their receipts from the
federation account. Delta State soon followed in the same 2000 with N5
billion in two tranches, then Yobe (2001), and Ekiti (2002) States,
with N2.5 billion and N4 billion respectively. In 2002, Lagos floated
the largest sub national debt issue at the time with N15 billion for
various projects in two tranches.

The success of these issues attracted
others and soon Cross River (2003), Akwa Ibom (2004), and Kebbi (2006)
followed with N4 billion, N6 billion, and N3.5 billion respectively.
Imo, Bayelsa, Kaduna, and Ebonyi are currently in the market to raise
N18 billion, N50 billion, N8.5 billion and N20 billion.

Debt Management Act

However, the plausible question to ask
at this point is, where has all the money gone? The desire to restore
modesty to the manner in which states and federal government bonds were
raised prompted the government of President Olusegun Obasanjo to pass
the Debt Management Office Establishment Act 2003.

Thereafter, the president invoked
section 24 of the DMO Act, which demands that states must obtain the
permission of the minister of finance before issuing bonds. The point
was to ensure fiscal discipline in the manner states funds are raised
and appropriated. To get the minister’s consent, states were required
to submit three years financial report and the approval of the state
house of assembly. The consent of the minister of finance would
translate into the signing of an Irrevocable Standing Payment Order
(ISPO), which allows the interest and principal payable on the bond to
be deducted at source from the federation account.

Lanre Oloyi, spokesperson of the
Securities and Exchange Commission (SEC), said state governments that
raise funds from the bond market are expected to deploy the proceeds
for that which they stated it would be used for.

“There have not been any issues about funds misappropriation,” he said.

“The market is rule based and due
process must be followed and complied with. If there are instance of
states not acting responsibly, they would have been so advised,” Mr.
Oloyi said.

SEC is responsible

According to him, SEC has the
responsibility to ensure that states use the funds judiciously, adding
that the commission conducts monitoring exercise and on-the-spot
assessment.

“If there are issues, we advise the
state accordingly, without necessarily having to make it public. The
fact that we have not made such findings public does not mean that SEC
is sleeping. We are always alive to our responsibility,” he said.

The commission, after a similar concern
raised some years back, actually cleared some states of wrong
application of bond proceeds. According to SEC, under the former
director general, Suleiman Ndanusa, Edo, Ekiti, and Yobe States did not
misapply the proceeds from the bonds which they raised from the capital
market then. This clearance came at a time when Charles Soludo, who was
then the chief economic adviser to President Obasanjo, took a position
that states should not be encouraged to raise funds from the capital
market because such funds were not properly utilised.

However, out of the four states which
were evaluated, the report only blamed the Edo State government for
lack of co-ordination and adequate supervision of the projects. It said
that lack of co-ordination by the Edo State government stemmed from the
involvement of many agencies and ministries in the execution of the
identified projects.

Up till now, the Iyekogba Housing
Estate in Benin City, for which the funds were raised, is yet to be
completed, and the occupants have moved in without the basic amenities
which were promised as at the time the funds were being raised. Delta
and Lagos State governments, which raised N5 billion and N25 billion
respectively, were not mentioned in the SEC report.

Not much monitoring

However, a securities dealer who spoke
off record said SEC may not have done much in monitoring how states
deploy such funds. He said even though the commission is supposed to
guide against irresponsible bond issuance, some states still go ahead
to raise funds just to offset recurrent expenses.

“Only a certain percentage of their
annual revenue are supposed to be raised as bond in order to keep it at
a responsible level. But what we find is that many states are trooping
to the bond market.”

He said the latest effort by Ogun State
and the attendant political crisis that it has generated is good enough
reason for people to begin to ask how much of these funds are put to
judicious use.

“SEC and CBN (Central Bank of Nigeria)
have come up with rules to contain irresponsible bond issuance. The
guidelines under which state bonds can be considered as liquid assets
is one of them. State bonds already have a problem of illiquidity at
the secondary market, as it is difficult to sell,” he said.

Victor Ogiemwonyi, managing director of
Partnership Investment Limited, said the important thing is for
investors to get returns on their investment. “It would really be
difficult to monitor how states utilise the money unless an on-the-spot
assessment is carried out on the projects they have said it would be
used for.”

The CBN in July released guidelines for
states wishing to float bonds, among which must be a law enacted by its
House of Assembly, specifying that a Sinking Fund, fully funded from
the consolidated revenue fund account of the issuer, is in place.

According to the guideline, states
must, “put in place a Fiscal Responsibility Law with adequate
provisions for debt management and ensure that proceeds from the issued
bonds are specifically disbursed to the projects they are meant for,
with the execution monitored by the Securities and Exchange Commission
(SEC).”

The guideline also stipulated that that there should also be a
credit rating at inception and throughout the tenor of the bonds. The
credit rating would be determined by a rating agency registered or
recognised by SEC.</