Bail-out fund: States debt profile has mortgaged their future - Ogunleye.

Story by Edward Jaleyemi/edwardjaleyemi.blogspot.com.ng

Mr Kola Ogunleye, is an architect, and a chartered accountant of repute. He is also an economic policy analyst and commentator. His wealth of experience spanned both the public and private sector of the economy. He spoke to a select group of newsmen in Abeokuta, the Ogun State capital, expressing concern about the debt profile of South-West states, which he blamed on financial recklessness of the governors. He also criticized the Federal Government for not raising questions on why many of the states incurred huge debts before providing soft landing which he said has put the future generation in bondage. Excerpts:

By Adeleke Adeseri, South West Regional Editor

Your opinion about the bond arrangement by the Federal Government to give reprieve to many states groaning under the yoke of debts?

I believe that Federal Government had been misled into taking some of the steps in respect of the state debts.

The FG should have been more painstaking in looking  at each state and ascertain why and how they got into that financial mess.

There is a blanket provision for them now without scrutinising how they came about such debts, most of them are saying they cannot pay salaries. What happened to their prior allocations?

For example Ogun State is not in that category, the governor kept on saying he can pay salaries, why is he availing himself of this long term loan.

The mistake made by the Federal Government was that, it did not look at the uniqueness of each state and the financial profile of these states, FG just said any loan owed to commercial banks, to me it is as if the Central Bank of Nigeria and DMO are trying to save the commercial banks from an imminent crisis.

Kola Ogunleye

It is no longer about the state, it is about our banking system that faces collapse. If you look at the quantum sum of money states owe these banks they cannot pay.

Why did they take decision to help those who did not help themselves through wrong decisions.

Banks ought to take decision strictly based on financial data and sound economic analysis because there are Standing Payment Order (SPO) that these states have signed that any money coming from the federation account certain amount should be deducted.

What the government has done was to truncate that agreement, and that is wrong. In a federation, the FG has no sole power to take over the state debts without consent of the states and national assemblies because it is part of the budget.

The moment you are tinkering with the budget you must go back to the Assembly and take authority that you wanted to transfer these debts to the FG.

Transfer of debts

The fact that the governors met and agreed on a soft landing for themselves does not mean the National and State Assemblies should not play their constitutional duties in this arrangement. And everything must be put on the table and not to be shrouded in secrecy. Publish the debts they owe banks and on what projects. There must be due process and that has not been done. We are looking at the bond that is condemning generation yet unborn to bondage.

You are from Ogun state. What can you say about Ogun’s N55billion debt being converted to Federal Government bond?

I think the situation on ground now is that the N55billion that is being bandied around and presented at the National Economic Council meeting is a very wrong and inaccurate

description of the debt profile of the state. Those are debts that the state owed commercial banks in the country which the Central Bank and the Debt Management Office (DMO) have decided to package as Federal Government of Nigeria bond. Another 19billion owed workers in respect of illegal and unauthorized and un-remmited deductions have also been slated to benefit from another intervention fund.

So N55billion does not completely describe the debt profile of the state, there are all sorts of debts, other loans from commercial banks are there, there are debts in respect of pension and gratuities, deductions made from staff salaries that are neither remitted to the appropriate organs are there, there are also unfunded contingent liabilities in respect of on going projects in the state and the best way to really look at that is to look at the kind of project profile we see in Ogun State that are not completed. We have schools that started three years ago that are not completed, we have roads that were started four years ago that were not completed and these are the projects that are supposedly inside the budget of various years.

Don’t you think that with the commercial loans converted to bond, the state will have enough fund to complete the on going projects?

No, let me put it in a proper perspective, you approached a bank to pick a loan of N2billion for a project and the cost of the project itself is about N10billion. That N2billion is incurring interest and interest is being paid on it and the interest has constituted itself to become an albatross on your neck, you cannot move forward, you therefore look for a way to convert that short term facility, because it is like an over draft, not a proper loan perse, with astronomical interest rates that is compounded each time the overdraft is rolled over and this is not supposed to be so, it is supposed to be serviced regularly but because you are not able to service it adequately it has accumulated. If it is so much today, it comes to nil by the end of the month, but once you could not do this, you now look for a succour at the federal level.

Now your N2billion is now being converted to a long term loan, to give you a leg room, do you know you still need another N8b to complete that project? Where will that money come from. The price of oil is falling, Naira exchange rate is falling, everything is on a downward spiral, where will you now get funds to complete the project itself?

Ogun State once put its IGR at over N6billion per month.

The question you just raised bothers on debt sustainability and economic viability of the projects. Ordinarily, most of the projects that have been embarked upon could be described as Urban Renewal Projects that should stimulate the economy of the state a la Keynesian Economics.

I do not want to go into polemics of urban renewal but suffice to say, what we have in Ogun State today is that the projects have not stimulated economic activity in the state as unemployment remained very high and the multiplier effects envisaged are yet to materialise.

Government has  embarked on road expansion projects in major cities and these projects are not targeted at economic zones. When you want to spend this kind of money we have spent on road construction in Abeokuta, you need to tell us what is the size of economic improvement that can happen to the ordinary man’s life there. What is the volume of traffic in the city? How does the average citizen whose house or shop is demolished is restored economically and socially?