N100 Billion Oyo State Prosperity Bond – Your Questions Answered

On July 21, 2020, the Oyo State Government announced that the Executive Council had approved the issuance of a government-backed N100 Billion private company bond to fund key priority projects in the state. Concerned citizens of Oyo State contacted the Oyo State Government Feedback service with questions about the terms of the bond. We forwarded these questions to the Honourable Commissioner for Finance, Mr Akinola Ojo (@iamakinolaojo) and these are his responses below.

• Why is the Oyo State Government opting for bonds instead of taking loans from the banks?

To be clear, Oyo State is NOT issuing a bond. The information in the press about the state issuing a N100 billion bond is NOT correct. The Oyo State Government is NOT issuing any bond.

That said, the state has embarked on some strategic projects aimed at facilitating a speedy development of the state, boost our local economy, provide supporting infrastructure for the creation of jobs, open the state to international commerce and direct investments to Oyo State, better the lives of the great people of Oyo State with quality health care and other social infrastructure investments.

From the initial estimates, these projects together will cost about N100billion. Given the scope of what we want to do, this sum is not surprising, especially since the benefits will be long standing, yielding trillions of Naira to Oyo State in decades to come.

However, in view of the state of the national economy and global trends, the administration of His Excellency, Governor Seyi Makinde is looking at creative ways to implement these lofty goals, especially with a view to effective implementation and funding. In view of this, the state plans to work with competent private sector partners through Public-Private-Partnership (PPP). Advanced work has been put into this since our administration came into office.

The plan is for these projects to be implemented on a PPP basis i.e. private sector investors will partner with the state in executing these projects. The private sector partners will raise their capital and invest in the various projects, upon receipt of requisite approvals and guarantees from the state, in line with national and international best practices.

From our initial market sounding, we have received feedback from competent prospective partners who are prepared to engage, raise and deploy their own capital in implementing these projects, subject to receiving relevant comfort and commitments from the state, which may include guarantees on the projects. The state has only expressed its intention to support its private sector partners in this way, especially with a view to enabling them raise required capital for the projects.

Anyone who understands the way government finance works will understand that this – Public Private Partnership – is the only way forward for governments in their quest to delivering developmental initiatives.

In an environment where there is paucity of funds for governments, dwindling oil prices and falling government revenue, private capital is what must be encouraged to partner with government, in a sustainable and forward looking way.

Even if the state were to decide to implement these projects directly and not through the more efficient PPP model, taking loans from the banks may NOT be the optimum funding option now. The borrowing rates from the banks will be higher than what the state can get through bonds. Bonds are long term financing option and our banks are more short to medium term.

• Have the bonds been issued?

As mentioned earlier, Oyo State is NOT issuing any bond. The only Oyo State bonds in issue are the ones issued by the previous administration, which our administration has actually been servicing.

• Does this mean that the Oyo State Government has collected N100 Billion sitting in an account somewhere? How does this work?

Oyo State, under our administration, has not collected a kobo from any bond issue and we do not have any plans as yet to issue a bond. However, as I mentioned earlier, we have only committed to providing any support required by our Private Sector Partners (PSP) in their implementation of our strategic projects.

• You referred to the bond as a private bond. Could you please explain what that means?

Basically, a private bond is one issued by a private entity such as companies and corporations. The Government of Oyo State is not a private company. It is a public institution that seeks to advance the betterment of the lot of the great people of Oyo State. You therefore can now see the contradiction saying that Oyo State will issue a Private Bond, when Oyo State is not a private company.

• Can you give us a breakdown of how the N100 billion Oyo Prosperity Bond will be used?

The plans of this administration span the development of infrastructure, both tangible and social infrastructure – roads and rail for improved transportation, healthcare, education and various initiatives that will bring jobs to the youth of the state and overall prosperity to our people.

The specific projects that have been represented in on-going discussions include: development of an economic hub around the rail corridor to tap into the economic benefits of the new rail system passing through the state. This is a significant investment that includes the establishment of an inland/dry port, an industrial park and enterprise hubs.

We also plan to execute the construction of the Circular Road in Ibadan with a view to enhancing the efficiency of transportation systems and effectiveness of municipal integration in the city. This road will facilitate the connectivity of Oyo State to neighbouring states and enhance trade and commerce with those states and, will be essential to the overall effectiveness of the Dry Port and industrial hub being done.

We have presently embarked on the construction of the Moniya-Iseyin and the private bond intends to finance the construction of the 50km Iseyin-Ogbomoso road to improve the socio-economic benefits in that region, linking our agricultural hubs to the state capital, which is the commercial centre.

We plan to conduct a comprehensive upgrade/reconstruction of three hospitals across the three (3) senatorial districts – Oyo South, Oyo Central and Oyo North – of the state into healthcare centres of excellence, returning the state to its old glory when we had Adeoyo, Oluyoro and UCH which had the best providing care services for Nigerians across all walks of life..

The Ibadan airport will also be upgraded through a partnership with the Federal Government, via the Federal Airports Authority of Nigeria (FAAN). In view of this upgrade, we have identified significant opportunity in further developing the economic centres in and around the airport into a modern aerotropolis that will further facilitate an economic integration of the state.

• Do you have clarity on how these projects will pay for themselves?

The major projects are revenue generating projects. This is why they are fit for the PPP model. Take for instance, the dry port or the industrial park or the economic activities in the proposed aerotropolis, the significant boost in economic activities will generate revenue and cashflow for respective projects.

At the end of the day, the projects will have contributed to the accelerated development of the state without being a burden on the treasury of the state in the long term.

• Who can subscribe to this bond and how can they access it?

Again, the state is NOT issuing a bond. If the state were to issue a bond, then the professionals who would have packaged the issue will administer it via approved channels to qualified investors. The same protocols apply to a private bond.

• Some of the projects are Federal Government projects. Judging from the FG’s recent disclosure that they won’t be paying states that take on their projects, what if the FG refuses to give back what Oyo State spends?

Majority of the projects which the state is working on will be projects of Oyo State. However, these projects may leverage on some initiatives of the Federal Government. When we need to cross that bridge, we will engage with relevant agencies of the Federal Government to discuss impact, overlap points, roles and responsibilities for all parties.

That said, we do not intend to fund any Federal Government project, and neither do we expect them to fund ours. If, however, we find areas of beneficial overlaps, we will engage accordingly and we expect that beneficial collaborations will not be unreasonably withheld. After all, it is all for the good of Nigerians.

• What is the tenure of the bond?

Oyo State is NOT issuing a bond. However, based on initial discussions with our PSP, bonds of this nature typically have a tenure of ten (10) to twenty (20) years. Nothing is cast in stone and nothing has been agreed, the actual terms of the bond will be agreed in the best interest of the people and then made publicly available in line with the transparent nature of this administration.

• Since you may not be in office when the bond matures, how do you ensure that you do not create an unsustainable debt burden for subsequent administrations?

Let me be clear, Oyo State is NOT issuing a bond. However, the terms of our Public-Private-Partnership are structured to ensure Oyo State develops and implements strategic projects of long-term benefits, but with minimal burden on the state in the short to medium-term which reduces to near zero in the long-term.

It is important to also state that based on our initial discussions, a sinking fund will be set up to repay the loan which we envisage will be done quarterly. I make bold to say that a lot of intentional thought has gone into ensuring that posterity is kind to us because of the decisions we are making today.

Unlike previous administrations that took on loans without vivid execution of the intended projects/use, our approach to the implementation of our projects is with a view to the long-term for the benefit of every citizen of Oyo State.

• There have been constant comparisons between the loans taken by the previous administration led by the late Senator Abiola Ajimobi and the present administration. Could you please tell us how much the previous administration borrowed in total?

When we came on board in May 2019, we met a debt burden in the region of N130bn for both domestic and foreign debt.

• You mentioned that the previous administration also raised a bond. How much was it for and what was the tenure of the bond?

What we know is that the previous administration looked to raise N55bn from the capital market, but were only able to raise about N4.8bn. The coupon rate was 16.5% and one-off fees was 5.5%. I can tell you that we are still having to repay the bond as we speak. From feeling the pulse of the market, what we do know is that the one-off fees for the proposed Oyo prosperity bond will be significantly lower than the 5.5% of the previous administration and also, the interest rates would also not be as high, about 250 – 450 basis points lower which is between 12% and 14% but again this will subject to and also be in line with market realities at the point of issuance.

• What does it mean in actual terms liability wise for the government to back the private bond? Does this then go on the state’s profile as a debt?

All it means is that the repayments are guaranteed by the state from the stream of income from the projects to be financed. It doesn’t go on the state’s profile as a debt because it’s a private company raising the bond which is only backed by the state.

ADDENDUM: As at August 10, 2020, total debt accrued to the Governor Seyi Makinde administration is N40.1 Billion broken down as follows: Repurposed Loan collected by the previous administration N7.6 Billion; Infrastructure Loan (July 2019) N10 Billion; Infrastructure Loan (May 2020) N22.5 Billion. Out of the N40.1 Billion loan, only 10.2 Billion has so far been utilised for projects.