Where are the infrastructure bonds?
I really respect China’s verve, even though a lot of their people, now moving to different parts of the world more than ever like conquering locusts, need to be coached on how to be less brash (as I had to do on the streets of Chinatown, New York recently). Many of those who travel here […]
I really respect China’s verve, even though a lot of their people, now moving to different parts of the world more than ever like conquering locusts, need to be coached on how to be less brash (as I had to do on the streets of Chinatown, New York recently). Many of those who travel here and oppress our people are actually ‘bush men’ in their own country. That said, I am learning Chinese/Mandarin presently because I believe that country will continue to wield considerable global influence. So I hereby reproduce the treatise on ‘Infrastructure Bonds’:
The stock market in Nigeria is comatose. And the reason it is in its present state has everything to do with our collective exuberance and in particular the role of the banks in overheating that sub-sector of the financial system. We all fell for the gimmicks then; the ‘wrap-around’ newspaper adverts, the promises of 600% – 800% returns in one year and so on. Banks, being what they are, have shifted gear in recent times, to the same bond markets that they would rather not touch a few years ago.
All we’ve been hearing is how banks intend to issue ‘corporate bonds’. As at last count the cumulative volume of what is planned for the market by a few banks, was nudging N1.4Trillion. By the time a few more banks are cleared by the CBN, one can be sure that the bond market will also suffer from a deluge of ‘new initiatives’, as every bank intends to issue corporate bonds. Indeed one cannot blame banks for acting in this manner – they say it’s strictly about self interest and profit maximisation, but the banks should now be wiser to balance their quest for profits with some social responsibility.
The issue is that the current initiatives of the banks seem quite opaque. What are these ‘corporate bonds’ meant for? Are banks just seeking funds for ‘working capital’ finance, meaning they just need funds that will give them all the free hand to spend as they like? Will the proceeds be used to finance the profligate ‘high-maintenance’ habits and fantastic salaries of our bankers? Are we talking about more money for financing importation of refined crude and dollar-denominated real estate? If this happens, the rate of default on the bonds will be high as mismatches will surely occur on a number of occasions, and we would have messed up yet another segment of the financial sector.
That is why I would humbly suggest to the banks to look into the area of infrastructure finance, and to ensure that the bonds being issued are directed in that area. In the first place the fact that ‘bonds’ will be the fad for some time to come, is a good development as we will gradually extricate the average Nigerian (and our banks) from the get-rich-quick syndrome. One could not get more than 15% or at best 17% returns on bond investment in a year. Gone are the days where we would expect to earn 100% on an investment in just 3 months (a rip-off tactic anyhow).
We could also expect to see a gradual reduction in interest rate levels (from the current all-in of about 30% to somewhere around 15% for bank lending), and even the fact that people are now thinking in the teens will help manage down inflation rates. It is only logical that this happens as we cannot keep operating an economy where nobody cares.
The allure of infrastructure bonds provides a ready market for the banks. Nigeria’s biggest problem today is the absence of infrastructure. People currently spend ten hours travelling over 100 kilometres in parts of Nigeria. NEPA’s failure is still a refrain in our mouths. The people will be glad if banks are coming out with bonds meant to change their lives by revolutionising infrastructure in Nigeria.
The other alternative open to banks is to finance Small and Medium Scale Enterprises and also manufacturing concerns. But at present, the infrastructure challenge will erode at least 30% of funds allocated in that direction, as companies try to provide their own electricity and water boreholes. That itself is the beginning of loan default. So why not finance the base infrastructure on which enterprise would build? If done on a PPP basis, infrastructure transactions can also be very profitable to the banks. Indeed bond issuances by state governments especially are still subject to massive inefficiencies, wastages and embezzlements, but when handled by private entities we get more results – a case in point is MMA2 Airport in Lagos.
Private banks are now allowed to issue infrastructure bonds in most jurisdictions, based on proper analysis by the regulators. Since Nigeria’s infrastructure problem is arguably the worst in the world, this should be our main focus. We cannot afford to use hard-earned savings of the people, their pension funds and what not, to finance opaque ‘corporate bonds’ that is subject to whims and caprices.