Amid revenue surge, Lagos sets to acquire more debt

As Assembly Approves N250b Loan
With the swearing in of the commissioners and special advisers by Lagos State Governor, Mr. Babajide Sanwo-Olu, governance in the state ought to get more energetic. This also implies that the different socio-economic sectors of the state would be feeling the push and pull of government, which is likely to lead to the execution of a number of projects.

Over the years, the tradition is for government to finance its projects, especially capital projects, through Internally Generated Revenue (IGR), federal allocation or loans. And Lagos State government had used all of these instruments to finance its projects.

So, it was not out of place when Governor Sanwo-Olu wrote to the Lagos State House of Assembly seeking a fresh N250bn loan, which was approved recently by the House of Assembly. Shielding more light about the loan, the governor, during the presentation of the 2020 budget to the Assembly, said the N250billion loan would be deployed to address critical infrastructure needs, including the following: Public School Infrastructure Rehabilitation Program, which will transform 300 public schools across the State; Road Infrastructure Projects: Lagos – Badagry Expressway; Agege – Pen Cinema Overhead Bridge; Agric – Isawo Road; Bola Ahmed Tinubu; Ikoyi-Victoria Island CBD reconstruction projects – Igbogbo Road, and our Zero Tolerance for Potholes program; Rail/Civil infrastructure works; Construction and completion of Mother and Child Centres (MCCs) in Badagry, Epe and Ojo; Desilting of major drain systems across the State; and construction of new ones; Provision of Security and Emergency Equipment.

While citizens are yearning for better infrastructure and amenities, government at the different levels is complaining of declining revenue. Despite complaints of inadequate funds, Lagos State is having increased internally generated revenue almost on a yearly basis. In fact, for about two decades now, Lagos’ IGR has experienced a yearly increase, except in 2000, 2010 and 2015, when shortfalls were recorded.

Lagos IGR has sprouted from miserly N14.6bn in 1999 to N382bn in 2018 and that of 2019 is likely to surpass the 2018 figure, because the National Bureau of Statistics (NBC) revealed that from January to June 2019, Lagos IGR already stood at N205bn, which is higher than what was generated within same period last year. Equally, the federal allocation to Lagos has also moved from N48.62bn in 2007 to N89.69bn in 2017.

Just as the IGR and revenue base of the state is growing, so also is its population. The state’s population is said to be about nine million in 2006, but now said to be over 20million. And this has impacted on facilities and infrastructure. Meaning, there is so much to do around infrastructure.

Immediate past Governor, Mr. Akinwunmi Ambode, while engaging members of the Organised Private Sector in 2018, disclosed that the state would require a sum of $50 billion in the next five years to bridge the state’s infrastructure gap.

According to him, about $20 billion would be required for the construction of roads alone and $16.5 billion for providing 24-hour stable power supply under the Lagos State Power Reforms Law, 2018. He also said the state would require $9.3 billion for transportation; $5 billion for information and communication technology; $3 billion for water development and $2.7 billion for waste management and other environmental challenges over the period of five years.

In spite of the glaring financing gap for infrastructure, it has been suggested that the state must still continue with its developmental agenda, if it hopes to transform into a true mega city and remain competitive alongside other global cities.

Though Lagos State has huge IGR, it has also borrowed heavily to finance its projects. It has the highest debt profile among the country’s 36 states and Federal Capital Territory (FCT), domestic and external debts. Some analysts are wondering why the state has such a huge debt stock, despite its massive IGR. The argument by the state and its managers over the years has always been that the state has the capacity to pay whatever loan it takes.

The International Monetary Fund (IMF) in April 2019 said Nigeria’s Debt-to-GDP ratio, though good is risky and cannot be guaranteed going forward. Debt-GDP ratio compares the size of a country’s debt to its economy with a view to determining the sustainability of the debt profile, as well as the vulnerability of the economy to creditors and repayment obligations. The ratio, which stood at 21.1 per cent early 2017 was projected to reach 25 per cent at full year 2018. But the IMF indicated that the range is already risky and cannot be guaranteed. It also harped on the quality use of the funds borrowed, saying that the channeling of the fund to productive sectors is necessary to achieve significant impact on the economy.

The authorised agency that provides statistics about government debt in Nigeria is the Debt Management Office (DMO). The DMO was established by the Federal Government to centrally coordinate the management of Nigeria’s debt, which was previously managed in uncoordinated and inefficient manner by several establishments.

A check was conducted on DMO’s website to track Lagos debt from when Nigeria returned to democracy in 1999 and Bola Tinubu was elected governor of the state. The state’s debt profile could only be traced backward to December 31, 2006 for external loan and December 31, 2011 for domestic debt.

Nigeria’s debt, including those of the 36 states and Federal Capital Territory (FCT) as at December 31 2018 was $25.27bn external and N16.63trn domestic. A breakdown of the foreign debt revealed that $11.01bn of the debt was multilateral; $344.63m was bilateral (AFD), $2.75bn bilateral from the Exim Bank of China, JICA, India and KFW. Also, $11.17bn was commercial, that is Eurobonds and Diaspora Bonds.

Lagos has the highest external debt among the thirty-six states and the FCT, accounting for 5.64 per cent. Of the country’s N16.63 trn domestic debt, Lagos state accounted for 3.19 per cent of the domestic debt.

Looking back, Lagos had a $190.43m foreign debt as at December 31, 2006. This was towards the tail end of Tinubu’s tenure, and he was the governor between 1999 and 2007. He handed over to Mr. Babatunde Raji Fashola in 2007. And by the end of 2007, the state’s debt profile grew to $243.28m. Fashola completed his first term in mid 2011 and by December 31, 2011, the state’s debt rose to $491.85m. About five months to the end of Fashola’s second term in office, December 31, 2014, the state’s debt was $1.169bn, while seven months after he left office, December 31, 2015; the debt stock had increased to $1.208bn.

On Lagos State domestic debt, DMO only has record from December 31, 2011 and the state’s domestic debt at the end of 2011 was put at N157.54bn. This was about seven months into Fashola’s second term in office. Five months to the end of his second term in office, the state’s local debt was N268.06bn, while seven months after he left office, December 31, 2015, the state domestic debt reduced to N218.54bn.

Mr. Akinwunmi Ambode succeeded Fashola in 2015. Ambode left office in May 2019 and about a year before when he left office, June 30, 2018; the state’s external debt grew to $1.45bn, while the domestic debt got increased to N542.23bn at December 31, 2018. This, therefore, meant that within the four-year reign of Ambode, the state’s external debt went up by $244m, while domestic debt grew by N334bn.

Speaking on the state’s debt profile, and specifically on the new loan being sought by Sanwo-Olu; an economist, Professor Olanrewaju Olaniyan of the University of Ibadan, said the first thing to ask is what does the state want to use the loan for. To him, that is the most important thing as there is nothing wrong in taking a loan. He, nonetheless, maintained that there is everything wrong in using a loan for consumption purposes or for embezzlement.

“But if they get a loan to build an asset and you have done some feasibility studies, which showed that over time, the loan is going to earn more income that will enable the state pay back and also have some excess, then such loan is right.

“If I know what the loan is to be used for or what the ones taken earlier had been used for, then one will be able to discuss meaningfully.”

Debt Repayment
In 1998, Lagos State spent about N400m to service its debt. But from 1998 to 2018; the state has spent about N280bn to service its debt and about N30bn to service debt last year.

On debt servicing, Olaniyan said if Lagos State spent about N30bn to service its debt yearly, and grew its IGR to over N300bn annually over the years, doing a back of the envelope analysis, it is not too much to spend about N30billion to service its loan yearly.

“What is essential in any loan; personal, corporate or government, is to use the loan for productive purposes that will regenerate the loan and be able to pay back,” Olaniyan said.

To Mr. Ayo Teriba, an economist, the first thing to consider is the expected income. “If a state has high expectation of income, which is not materialising today, but going to materialise tomorrow, it can borrow against the expected income. And the higher the expected income, the higher the leverage it can contract.

“But if you have low income, lets say you are in retirement, there is another strength you can leverage on to raise liquidity. You have retired, but you had a very rewarding working life, the income has stopped, but in the cause of your working life, you have acquired assets; land and buildings, you can leverage these assets to borrow.”

Teriba maintained that: “Even if your income is zero, just like Nigeria’s income is very low, because of the collapse of oil price, if you are assets rich, you can borrow. Therefore, you should marry the debt either to the income you are expected to make or assets that you have.”

He further said that as long as the value of the asset is above the value of the debt, such a state or person is solvent, the net-worth is positive.

“This is the reason the most indebted countries in the world today in terms of the size of their debt are Japan and USA, yet nobody is raising any issue about their debt, because the value of their assets exceed the value of their debt, so they remain solvent.

For this reasons, he said Lagos State debt should be looked at either with reference to its income or assets. He said as long as the value of the assets exceed the value of the debt, the state is solvent, it is just merely illiquid and if it is illiquid, it can borrow, as it will not have liquidity problem. “When the net-worth is positive, that is what matters for debt sustainability.”

On what projects the state should borrow to finance, he preferred capital projects, whether income generating or not.

“If the capital projects are chosen carefully, even if not income generating, but could create income streams. For example, the Ikoyi-Lekki link bridge, even though it is tolled, because the private partners that built it needed to recover their money. But if Lagos had borrowed to build it and did not toll it, the impact of that link bridge to houses within five kilometres radius is that, the value of the houses would appreciate and Lagos State can generate more tax revenue from the enhanced value of the land and buildings around that corridor.”

He also said the same scenario plays out with the Lekki Expressway, whether or not it is tolled. He stated that the Lekki Expressway has enhanced the value of land and buildings along that axis, becoming more attractive for people to come live there and do business, all of them paying taxes on the land and buildings.

“So, even if the road does not generate revenue, Lagos State will generate multiple revenues. When you borrow to do capital projects, you are using it to unlock liquidity. When you fix the traffic bottlenecks, it makes room for people to make money more quickly and Lagos State too generates revenue more quickly.

“If you hear that Lagos IGR has been increasing, the key is the infrastructure interventions across the state.”

The Chairman, Centre for Anti-corruption and Open Leadership (CACOL), Mr. Debo Adeniran said there won’t be issues with borrowing, if the proceeds are used judiciously.

“In the days of former Lagos Governor, Babatunde Raji Fashola, Lagos that had the highest income and revenue also had the highest debt internally and externally.

“And the jobs, for which those loans were taken, were seen more in the news media than on the ground. And we brought that to the fore, but the politicians that are gearing him on were not interested in it.

“What I am saying in essence is that, there is no problem in borrowing, but we must see the reason for which the governor is borrowing and how the loan would be applied.”

“We did not see it in the days of Fashola and we do not believe that the present governor has any reason yet to borrow and is yet to show any reason why he should go borrowing. This is because the state IGR has not been applied in a way Lagosians will say that performance is satisfactory.”

He said the governor has not shown why he needs additional money. “He should first and foremost tell us what he met in the treasury, how he has applied it and tell us how he is going to implement the budget and why he would need additional loan. There are several projects that had been paid for that he had stopped according to sources. Why did he stop them, he should explain to us.”

Adeniran maintained that until Lagosians are brought into confidence, he should not be allowed to acquire more debt on behalf of Lagosians.