Governor Gboyega Oyetola of Osun State would be engaging the capital market community on areas of support to finance projects and invest in the state tomorrow, November 07, 2019.
The governor would also be honoured by the management of the Nigerian Stock Exchange (NSE) with its Closing Gong Ceremony, in commemoration of the event.
A bond is a debt investment that an investor like NSE loans to an entity (corporate or governmental body) for a defined period of time (long-term), at a variable or fixed interest rate. The purpose of such funds is to finance capital projects in order to bridge the revenue shortfalls of the states.
What it means
Usually, when state governments’ top officials visit the NSE, the purpose of such visit is likely to feel the pulse of stockbrokers and other stakeholders on whether it is safe for the state to raise a new bond from the bourse or to brief them on how it spent the fund raised earlier. In the case of Osun State, there are greater chances that the state would soon raise fund through bond in the bourse.
Is this a good move at this time?
There are concerns that the financials/liquidity level of the state may not agree with the move of the top officials of the state, which allegedly has been struggling to pay salaries of its workers.
[READ MORE: Access Bank lists N30 billion bonds on NSE]
Data obtained from the National Bureau of Statistics by Nairametrics disclosed that while the state’s internally generated revenue (IGR) stood at N10.20 billion as at the end of first half of 2019, its total external debt and total domestic debt stood at $99.08 million and N148.10 billion by the end of 2018.
Another question which the capital market stakeholders would likely ask Governor Oyetola is whether the N30 billion raised about 10 years ago has been judiciously used. Hopefully, the Governor would answer the question “without mincing words.”
Like Governor Oyetola, Governor Kayode Fayemi visited the bourse last August, telling stakeholders and whoever that cared to listen that the land of honour had judiciously used and refunded the fund raised via bond in 2014.
While speaking at the Facts Behind the State Economy at the NSE, Fayemi disclosed that the state had cleared all its outstanding bonds listed on the NSE.
Though the governor didn’t disclose whether the state would raise fund via bond, his body language did when he was asked the question.
He responded, “We deemed it necessary to visit the stock exchange to inform the market about the level of development and the projects we intend to embark upon. We are also excited with the development in the stock exchange for providing and sustaining the channel of providing long term funds for development.”
[READ MORE: How Diaspora Bonds Work and Benefits]
The Controversial N567 billion bond raised by 14 states
Findings disclosed to Nairametics that about N700 billion was raised by 14 states of the Federation through bonds issued by the Stock Exchange about 10 years ago and part of the funds cannot be properly accounted for as many of the capital projects, for which they were originally meant, are not completed and some are abandoned.
Details of the bonds
The past administrations in Lagos, Kogi, Niger, Osun, Nassarawa, Rivers, Delta, Kwara, Akwa Ibom, Abia, Enugu, Ebonyi and Imo, raised the bonds at different times, except for Ekiti, whose governor returned to office in 2018.
This has also led to a situation where the projects for which the bonds were originally taken, have been abandoned because the governors’ successors, who are mostly from the opposition parties or have different views, have become incapacitated to carry on with such projects.
Within a space of eight years, Osun State has raised N30 billion; Lagos, N277 billion; Delta, N50 billion; Edo, N25 billion; Kwara, N17 billion; Gombe, N20 billion; Niger, N15 billion, Plateau, N28.2 billion, and Kaduna, N8.5 billion.
Others are Benue, N13 billion; Ebonyi, N16.5 billion; Ondo, N27 billion; Ekiti, N25 billion and Bayelsa, N50 billion, among others.
Investigations also disclosed that eight of the states, which floated their bond programmes at the NSE, raised over N600 billion from the emerging bourse to fund specific capital projects.
The eight states are Ekiti, Lagos, Kogi, Niger, Osun, Nassarawa, Rivers and Delta.
The amount raised and expected to be refunded with interest by most of the states does not, however, reflect the revenue-generating capacity of the states.
There are allegations that part of the funds had allegedly been diverted to other areas of interest to the ex-governors, including political activities and other frivolities.
Some of the states were set to raise bonds from the market, in spite of the fact that some of their governors had less than a year to complete their tenures.
This development has, however, generated concern among political and economic watchers. Their fear is that if a state, whose governor has less than two years in office, raises money from the bond market, there is hardly any assurance that a chunk of the fund would not be diverted.
[READ FURTHER: Central Banks move to aggregate investments in green bonds]
In line with the arguments of the observers, critics also believe that the said funds were not judiciously used for their intended purposes.
Some of them, who are aides of the administrations across the states that took over from the ex-governors, alleged that the funds were diverted by the former governors for other uses such as financing electoral campaigns, which some of them eventually lost to the opposition.
In Ekiti State, Governor Fayemi had promised to use a chunk of the N25 billion bond raised in 2014 to construct a new governor’s office and government house, a civic centre, a 10,000-seater state pavilion and rehabilitation of the Ilawe-Igbaraodo– Iboji road, among others.
However, his successor (former Governor Ayodele Fayose) refuted the governor’s claims.
The Media aide to Fayose, Lere Olayinka, disclosed that the projects were abandoned by Fayemi some months to the 2014 governorship election in the state.
He alleged, “The projects were abandoned and Fayemi and his men didn’t leave any money behind to complete them. N1.2 billion is being deducted monthly from the state’s allocation to service debts that he took in the course of his four years. That is responsible for the inability of Fayose’s administration to pay salaries.”
The governor’s aide further alleged that the rehabilitation of the Ilawe-Igbaraodo-Ibuji Road, which was awarded for rehabilitation by former governor Segun Oni’s administration at N200 million, was raised to N894.6 million by the administration.
In Delta State, out of the N50 billion raised by former governor Emmanuel Uduaghan in the bond market, the total actual proceed received by the state was N46.60 billion, indicating that about N3.40 billion was paid to regulatory agencies and parties to the bond.
But a top source in the state’s ministry of finance, who preferred anonymity due to the sensitivity of the issue, disclosed that N41.44 billion, instead of N46.6 billion, was reported to have been spent from the bond proceeds on the planned projects.
“The balance of N5.16 billion was missing from the bond proceeds. The report of the Hand-over Committee revealed that only a little over N1 billion was left in the bond account. The balance of the fund has not been accounted for by the officials of the Ibori-led administration,” he disclosed.
Why Treasury Bills at 2% is actually a good thing
While the current prevailing rate of 2% might not be good news for investors, the low rates could be better for the Nigerian economy.
Latest stop rates from the Nigerian Treasury Bill auction held last week revealed some of the lowest rates for the nation’s T-Bills market in recent times. The 91-day bills had stop rates of 1% and the 182-day bills was also 1%. For the full year, the 364-day bills had an equally low rate of 2%. This is actually a good thing, as investors will become more creative, amongst other benefits.
If you were a frequent Treasury bills investor in the pre-COVID-19 era, you will most likely agree that one of the favorite markets for risk-averse investors, has taken a major dip over the past year. In 2019, the rate was as high as 13.029% – enough to give you a fighting chance with the equally high rate of inflation, as opposed to a savings account offering around 4%.
However, while the current prevailing rate of 2% might not be good news for investors; theoretically, the low rates could be better for the Nigerian economy.
Double digits risk-free rates impede development
At the very basic level, having a risk-free investment that yields a guaranteed interest rate of about 15%, means that investors can put in their funds and fold their hands. Therefore, the option of making less risky investments become less alluring, as the lower rates can easily be mitigated by the relative safety of the principal (and return!) – something many businesses cannot boast of today.
Put simply, why should business owners risk employing people and possibly make losses, when they can invest in Treasury bills? After all, they too are exposed to the same inflation rate.
Unsurprisingly, this has contributed its own fair share in impeding the growth of the nation. Think about the percentage of the income of Nigerian financial institutions like banks that are from Treasury Bills. Conservatively, Nigerian PFA’s also have a significant percentage of their funds in Treasury bills – doing little and gaining little. It is always about the “cheapest to deliver.”
No society can effectively spur development with only safe investments, as it comes with its own benefits like creating more jobs, building the stock market, and ultimately strengthening the industries in the country.
‘Model’ economies have really low risk-free interest rates
Some of the largest economies like the US, Japan, and Germany are known to have some of the lowest rates for risk-free assets. Whilst their rates cannot also be isolated from their equally low borrowing costs, the facts are crystal clear.
From a demand and supply standpoint, at 15%, it means that what the government is willing to pay to get capital is high. This makes it even more expensive for the government to fund infrastructural development.
From a private sector standpoint, it is by taking risks that angel investors emerge, companies get seed funding, and further development is enhanced. Without this development, very few jobs will be created. Interestingly, most of the countries with the highest amount of venture capitalist investments have some of the lowest rates for risk-free assets.
How investments should be done
There is an old investment strategy known as “Carry Trade.” The way it works is simple – you borrow at a low-interest rate, convert the borrowed amount into another currency, and invest in assets that provide higher rates of return in that currency. If Treasury Bills offer such high rates, “foreign investments” of this nature will not aid in the overall development of the economy. As long as the exchange rate is stable, investors get to make a killing with no value-added. This is just one of the many lapses of investing in high risk-free assets.
With the rates low, people can now invest the way investment should be done. Investors will now be forced to be creative. Consequently, this will birth even further infrastructural developments. For example, with this rate sustained, mortgage-backed securities and other forms of infrastructural funding can now take place.
Though, it is not without its own limitations, keeping the free money low is always a better option.
#ENDSARS Protests: Why this is different
The #ENDSARS is not just a protest about rogue police officers, it is larger than that and this is why.
In June 2019, the Hong Kong Government revealed plans to implement a controversial law that allows the extradition of Hong Kong citizens to mainland China.
As the government dithered, pockets of protests broke out, which triggered clashes with Policemen that most protesters viewed as excessive. Within days, protesters went from a few thousands to over 2 million, the largest in the history of Hong Kong.
By the time the government decided to pull back the bill; the protesters, many of them young, were already demanding for more than just a withdrawal of the bill. They wanted the police investigated and prosecuted for using excessive force, amnesty for protesters, and a right to vote for all.
The protests lasted for about 6 months only to be dissipated by social distancing requirements, due to the COVID-19 pandemic. Before then, protesters had grounded the economy, which drove the Hong Kong economy into a recession and $3 billion in stimulus.
Nigeria is experiencing its own version of protests similar to that of Hong Kong, except that it does not have any money to inject as stimulus. The latest protests were triggered by anger over the alleged violent killings and extortion by the controversial anti-robbery unit of the police, known as SARS or FSARS.
For years, young Nigerians, mostly via social media, have called for the unit to be disbanded and rogue elements in the force brought to justice. Despite repeated promises by the government, they have failed to heed to their demands, triggering a new wave of protests that has now spread across the country.
From demanding an end to SARS, prosecution of rogue police officers, and reforms; Protesters are more emboldened, threatening to continue if all their demands are not met. The government is scrambling to contain a situation that is escalating and could dangerously metamorphose into violent clashes with authorities, leading to loss of lives and destruction of properties.
There is also fear that this week’s protest could be sustained for more days, if not weeks. You only need to look at the economy of the Nigerian Youth to understand why this is such a critical moment.
According to data from the National Bureau of Statistics, Youth unemployment is at an all-time high of 34.9%, making up 64.3% of total unemployed Nigerians. University students have also been at home for months, due to the 7 months ASUU strike.
Their parents are also facing tougher economic conditions with inflation rate galloping past 13%, after multiple devaluations and the removal of fuel subsidy. It was just a matter of time for them to find a rallying point to vent their frustration.
There is still a window for the government to de–escalate tensions, and it is not just by accepting the terms of protesters on paper and making bogus pronouncements. Nigerian youths want concrete actions and it starts by making immediate changes in the leadership of the Police – the rogue unit in particular. Officers suspected of murdering innocent Nigerians need to be made to face justice.
The government also needs to urgently resolve its dispute with the Academic Staff Union of Universities (ASUU) on the Integrated Payroll and Personnel Information System (IPPIS). Students and young Nigerians also need to be offered grants and palliatives to help them cushion the effects of an economic crunch that is in no way their making.
Proceeds from the Nigerian Youth Investment Funds should be disbursed immediately to those who have applied. The government also needs to introduce student loan schemes for millions of Nigerian youths, who can’t afford to pay for quality university education.
The National Assembly also needs to introduce laws that protect young Nigerians from police brutality, status profiling and wrongful arrest. Investments in mega tech hubs across the country, establishment of recreation zones in major cities must be carried out by State Governments, to keep them engaged in activities that can better their lives.
No investor, local or foreign will put money in any country where its youths are in a long-drawn protest with the government. As the economic cost of the protests for the last few days continues to mount, the negative effects could be more dire than a deeper recession.
#ENDSARS does not just represent a protest against rogue Police officers; it is a symptom of the poor state of the economy, which for months has only gotten worse. Fortunately, the agitation can still be managed but time is running out.
Thrive Agric: “Where is my money?”
AgriTech firms make promises of mouth-watering returns, but what they do not reveal loud enough is just how risky the investment is.
Fund a farmer, make a profit! Thus, says Thrive Agric, a popular AgriTech company that crowdsources funds from investors in exchange for a profit. The business model appears simple and easy for any basic investor to understand.
When you invest through them, they pool your funds along with other investors and then invest the collective sums in farms across the country. When the farmers harvest, they sell the farm produce at a profit, receive the cash, and split among investors who contributed to the pool. The company keeps a commission for itself. It all makes business sense, except for one thorny challenge – It is highly risky.
Explore Data on the Nairametrics Research Website
Last week, a Twitter user posted a tweet demanding a refund of his investment in Thrive Agric – almost a million naira. The company lamented that they could not pay him, because they had experienced losses due to the COVID-19 pandemic. The investor was taking none of the excuses, resulting in a name and shame on twitter that has since gone viral.
AgriTech Investments as they have come to be known has gained popularity as a viable investment option for Nigerians, who are still afraid of investing in the stock market. The largely unregulated sector leverages technology, an easy and relatable business model, and the promise of a mouth-watering return to yield-hungry investors. What they however do not reveal loud enough is just how risky the investment is.
Farming in a country like Nigeria is a highly risky venture that relies on a value chain that is fragmented, full of middlemen, and largely inefficient. Nigeria’s average yield per hectare is one of the lowest in the world, largely due to lack of farming inputs such as fertilizer, irrigation, and insecurity.
AgriTech firms like Thrive Agric face these risks when they pool money from investors and pass on to farmers. Though part of their role in the investment scheme includes monitoring how the funds are utilized by farmers, they have no control over several risk factors such as the impact of COVID-19, which they alluded to as the challenges for not being able to pay investors.
Perhaps, if they disclose the inherent risks in the business, investors will be better informed and size up their risk against the returns. A cursory look at the company’s website reveals there is nowhere that it is mentioned that there is a risk of not getting all or part of your money when you invest. It probably would ruin the pitch if they did.
This is why when you visit their website and that of their competitors like Farmcrowdy (who pioneered this business) what you see are testimonials of just how well the investments are doing. You could argue that they had not defaulted in any of their previous rounds, so there was no need to say otherwise.
However, alerting investors about the inherent risks in a crowdsource investment scheme is not only responsible but a matter of best practice and compliance. The Security and Exchange Commission (SEC), noted this in its draft Exposure on Proposed News Rules guiding crowdfunding. Section 9a (iv) states that the crowdfunding company is expected to share a general risk warning on participating in funding through the company’s platform.
It also requires in Section 14 that they must publish on their website that “Investing through an online portal is risky and Issuers raising funds through the portal include new or rapidly growing ventures,” and that “Investment in the businesses hosted on the portal is very speculative and carries high risks; Investors may lose their entire investment and must be in a position to bear this risk without undue hardship.” This proposed compliance requirement is not been done by most AgriTech firms.
If this had been published on its website and duly communicated to its potential investors, we may have avoided the embarrassing and reputation damaging question that any fund manager wants to avoid – “Where is my money?”, especially if they don’t have it.