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  • ‘AMCON’s assets can’t pay its debts’

    ‘AMCON’s assets can’t pay its debts’

    The Asset Management Corporation of Nigeria (AMCON) that was established to provide succour for ailing  companies has fallen a victim of its very purpose for existence. Its debts have overtaken its assets, says the Managing Director, Ahmed Kuru, in this interview with Group Business Editor SIMEON EBULU.. 

    What is the worth of AMCON’s assets?

    You know valuation is a moving target. Our asset if you value them today, are generally worth less than N2 trillion. Let me explain to you what has happened because sometimes we need to give  clarity to what is happening. You know when AMCON was established, we purchased non-performing loans from the banks. The non performing loans that we purchased were worth N3.3 trillion and we paid N1.7 trillion for the loans. Then, we had what we call, financial accommodation. Financial accommodation is the money that AMCON paid to bring the net asset, value of some of the challenged financial institutions to zero, for that we paid N2.2 trillion. The N1.7 trillion that we paid for the assets of N3.3 trillion are part of our assets, different kinds of assets, while the N2.2 trillion is not backed by any asset.

    So, the assumption is that with the passage of time, the value of the assets will grow because already there is a discount from N1.7 – N3.3. So it is assumed also that the value of assets will grow and then it will now cushion the effect of the N2.2 trillion, because the whole money that was raised was real money,  it was debt that was used to pay for the assets. So it was assumed that the valuation and the value of assets will go up over a period of time whether it is five or six years.

    So there is that assumption that the value will go up and we’ll be able to take care of the N2.2 trillion financial accommodation. But you see the economy in the last five-six years didn’t respond quickly despite what must have been said about the largest economy in Africa, and all that. The economy that we know didn’t grow that fast and the operation of AMCON is heavily dependent on the state of the economy, because it is the constituent of what we do have as the business, and the business depends on what happens in the economy.

    So if the economy doesn’t respond, the operation of AMCON is also challenged both in terms of the economy, valuation and also in terms of resolution.

    With what you have enumerated, how comfortable are you relative to the inception of this organisation.

    We should always look at things in the right perspective. AMCON was set up primarily to bring financial stability as a result of the global economic crisis and I think by and large, that has been achieved. If AMCON hadn’t been set up, may be nothing less than N10 billion would  have  been lost and not less than N9 trillion in form of assets. We would have lost almost N4 trillion in form of deposits, people would have lost their employments and by implication, it would have also weakened some of the other financial institutions.

    So we are now going into the second phase. The first phase was to provide that financial stability and provide liquidity to some of these banks so that they would be able to lend and then jumpstart the economy, and you can see since that time, the economy, the banking industry has been able to stabilise. You know we came out of the financial crises successfully. At least Nigeria is a success story when you look at it globally and the response to the financial crises.

    Now we are in the second phase and the second phase is how AMCON will now meets its obligation, how does AMCON now redeem its fund because we’ve addressed the financial situation. Now it’s how do we meet our obligation.!  So they are totally slightly different scenarios.

    I would need a clarification here on your last point. The assets at a time had been written off as bad loans until AMCON came and acquired them. Who reactivated the issue of interests on them, the banks, or?

    No, no you see AMCON, the structure of AMCON is that we are not going to use taxpayers’ money, which means we are going to borrow, so any funds you borrow have interests, somebody must carry that interest, and it’s as simple as that.

    Do you think it’s right because the way you explained it, for five years some of the loans they’ve stopped charging interests. If AMCON is coming  to pay the debt and you are using another debt to pay for debt with interest, will those businesses not collapse entirely?

    Yes, you see like I told you, there were certain assumptions, part of the assumptions is that the underlining assets will continue to appreciate, AMCON would have the cause on a worst case scenario to sell those assets. So it is believed that it will compensate for the growth in terms of interest addition on the facility so the template is that even with the incremental interest charges going on, the incremental increase in terms of the valuation of the assets will be more than the incremental in terms of the interest.

    So that means AMCON is actually designed to sell those assets then?

    Basically yes.

    And not to allow the owners to go back to them?

    No, that was not… If it was to allow the owners to go back, that should have been done at the bank level, but you see AMCON has primary responsibility to see how to help the business first. I have this business, what can I do to help it come back. What structure do I need to put in place, if I give them support will they come back? So the first call on AMCON, is any facility, any transaction, any account that they want to talk about, once they bring the account on the table, the first thing that goes through their mind is how can I help this business first. It is when they look at the businesses, because some of the businesses, some of the facilities they’ve locked them up for more than 10-15 years.  So the idea is that if from all analysis we may not be able, or we could not bring back those businesses, then we have to put the cost with asset on sale because I do, or we do believe that any business, if it has the right capital and right skill and management, corporate governance, it will come back, because it’s not rocket science, people are doing them because there are times you do have problems with corporate governance, you have problem of indiscipline, you have problem with diversion, you have problem with lifestyle and all those situations contributed. And also the economic situation didn’t help matters much but all those other side consideration also affected the viability of some those businesses.

    So, how many of such businesses have you sold in the last six years?

    Let me tell you how we operate. See, there is what they call collateral audit, I mean collateral assets and there is what they call proprietary assets. Collateral assets are very difficult to deal with. Now before you can sell any business, first of all you must have the legal charge, that the business now belongs to you because quite a lot of the businesses that you see do not belong to AMCON because they are collateral assets, but they are assets that are supporting their credit.

    You’ve gone to your bank, they have given you a house and they gave you money now you haven’t paid and they’ve decided to transfer the facility to AMCON. Now AMCON must go through the legal process to convert those assets before they can sell it. So generally, we have not sold our proprietary assets in terms of percentage -less than 20 per cent. Quite a lot of things are happening now. If you want to sell today, you are definitely going to sell far  below market because you are holding an asset for N100 million, today the valuation is N60 million.

    Now you have two options, either you sell it N60 million and you take a hit of N40 million, or you have to explain to Nigerians where the gap is coming from or you hold on to those assets and continue to work together with government on the economy  so that when the economy picks up, then you can dispose.

    Let me give an example. This house today (AMCON Lagos office), maybe you want value. This house may be they’ll tell you it’s around N1billion. Ask the same valuer to sell the house for you, he’ll come and tell you he can’t get more than N600 million because the market is bad now, there is no cash because there is a very wide gap which we all know between actual valuation of assets and real market situation which is driving or being driven by liquidity and current economic situation. So in this kind of situation, what you normally do is to hold on to the assets and wait until such a time that the economy improves and you can get better value for them,  because if you dispose them today, you won’t get the value that you need to compensate for the money that you have paid to the financial institutions.

    Would you then say that the banks, given what you said about discipline, lifestyle, poor corporate governance, would you say the banks were rather reckless for want of a better word, in their approval processes.

    No. You see, credit approval process is a very difficult situation. Sometimes you can comment with benefit of hindsight, but I can tell you in the credit situation, you look at so many issues which will guide your approval process. Now there is not any template anywhere in the world where if you say if I do A, B, C and D it will be performing to the end because there are so many other factors, external factors that come into play like what happened in 2007 – 2008, the situation at that time, things moved swiftly against for example all the guys that are playing in the oil and gas industry.

    Now maybe at the time that the credit officer approved that credit, there were certain assumptions the industry will grow at five per cent, or it will grow at 10 per cent or it will grow at 20 per cent, A will happen, B will happen. Suddenly he woke up and there is a global economic crisis, automatically the credit will go bad. Look at what happened in power and what is still happening in the power sector. There was an assumption, there was a reform and based on that assumption, you know there was a divestment, government sold some of those assets and because of the economic situation and certain miscalculations which may not necessarily mean recklessness. They are now is deep problem, because of wrong assumption, because of certain things that have happened that haven’t been anticipated. Nobody anticipated that for example that crude would sell for $30 or $35 per barrel. Now if somebody is doing credit two-years ago and he is running his cash flow, he will assume that  crude is selling at $100 per barrel today, worst case scenario it’ll do $90. So on the basis of $90 this is my cash flow and this is how they’re going to pay me. Now it is selling for $40 automatically it has thrown off that credit. So it’s a combination of so many things. I don’t, and I would not believe that we can say it’s their recklessness.

    Of course there are certain cases that you’ll do better but like I said, credit will continue to remain a subjective process. But it’s not as simple as 2+2 is 6, its in the mind of the analysts, the same credit if you give it to Mr. A and you give it to Mr. B and he’ll analyze it differently from what this is, his skills, his experience, his composure, his temperament all come to play when you are told to have credits and you are analysing your risks and what you believe are your mitigate.

    I want to know if you are caught in any quagmire between selling to make money and minimise the pressure on you from the rising interest, or the accumulating debts of your corporation right now. I’m talking with respect to what you said you know the assets were valued at a particular rate now they have dropped you are holding some money on which interest is being charged. So between these two extremes what are you going to do?

    It’s a very difficult balance, I can tell you and its difficult, balancing situation because you know you are dealing with public trust and also you are dealing with an environment that assumes that everybody is guilty until proven otherwise and in that kind of situation and in a political environment like ours, you have to be extremely careful how you deal with some of your assets. If you are holding an asset worth, based on the valuation of the assets, N100 million in your books and because of the current economic situation it has gone down to N40 million and in your own estimation if you hold on to this asset a little longer the economy picks up and you get a better returns on what it is today, it will be a political suicide for you to sell it today because when the story is going to be told, nobody will remember what the current situation is today, they will only tell you that there was an asset of N100 million and they sold it N40 million, its as simple as that.

    And they call you and tell you to start explaining to the extent that you may not be able to explain because maybe at that time, the same asset will be worth, may by N120 million, meanwhile you sold it N40 million which was the earning rate at that time you know. So public trust is something that is a very easy thing to do, but it’s also very complicated particularly in an environment that we see what is happening.

    So we are always caught in between these two very extreme difficult situations, so what we try to do is, we look at what is in the national interest. You know I have a principle when I look at these things generally speaking, the first thing that comes to my mind, everything in my life I ask, will this sit very well with my God, between me and the contract I have with God, can I explain it when I wake up in heaven because I know I’m going to heaven when I wake up in heaven, will I be able to explain my action! Is it godly that’s principle number one. Number two and most fundamental, is it in the national interest, I also ask myself that question. Then Number three, I say okay, does it follow the rule of law! in that order because public trust is something that goes beyond your service period when you’re dealing with assets.

    Now rich people don’t like to pay debts, poor people also don’t like to pay debts but for poor the man, it’s understandable because he doesn’t have the money but today lend money to your neighbor and come back in the evening, he’ll start telling you that his mother in-law that came in yesterday and this and that and by the end of the month, when I receive my salary he is going to pay you. By the end of the month, go to his house and knock, the first thing he’ll tell you is why did you come here, is it because you gave me money last month that is why you’re knocking my door early in the morning? It become an issue  because people generally don’t want to pay debt.

    And Nigerians?

    And Nigerians specifically, rich Nigerians very specifically (laughs) you know somebody has taken —— because they’ve allowed the debt to accumulate so much, that it is becoming a challenge for them, N30 billion, N40 billion, N50 billion, N100 billion. So, what do they do! it’s to rush to the court and continue to get all manner of injunctions against AMCON. You move this side, they block you, move that side, they block you and because we’re operating under the rule of law, we have to see it through, otherwise I can tell you, our recovery rate would have been much faster because out of 14,000 —figures that I have in my books, less than 10 per cent of that accounts for more than 70 per cent of my debts, less than 10 per cent. So even if I can get 40 per cent of that 10 per cent, that means I can be able to recover more than 50 per cent of my debts. So it’s a complicated issue, let me tell you the truth, even today if I sell all my assets, I would not be able to pay my debts because my debt is around N5.2 trillion and you asked me a question at the beginning and I said the valuation by 2006 is less than N2 trillion, so there is a gap.

    You know we are in an environment right now where government is interested in recovering all monies. Are you comfortable; are you able to withstand the pressures from official quarters insisting that the debts must be recovered now because the debtors are known?

    Based on the recession you know that the government is in need of money.

    For us in AMCON our job is not complicated, we must recover our money. What is a bit complicated is the state of the economy because there must be a balance between efforts to recover the money and ability to pay. The government is very serious about this recovery business, we are very serious and we are determined. The only challenge that we do have now has to do with the legal process.

    Now let me tell you what they’ve done (overseas) which is different from ours. At the beginning, ab initio, all the assets that are being sold to the asset management companies are given to the asset management companies; they adjusted the law and the constitution to reflect that any distressed asset, that they are taken away from the financial institutions to the asset management companies, you are transferring it with ownership. So, what it tells you is that if any of the original owners of the business want to deal with those assets, they come to you to acquire the assets back from you. Our own is different.

    In our own, they transfer the assets in the same type right that the banks were having. If it’s a legal mortgage, you have to go through the process to dispose the property, if its equitable mortgage, you have to go through the court to get an order of the court to dispose, if it’s a company or whatever it is, you have to appoint receiver.

    The court must give you that order, and because of the ability of our people to hide behind the legal process, they rush to the court and get an injunction. Meanwhile the asset has been transferred to you, it’s your asset, then they go to the court and  get an injunction that you cannot touch the asset. Now that process can take you up to the Supreme Court, that process can take you up to 10 years. While in other climes it’s not so, from day one the assets belong to you. Look they can’t go anywhere, it’s your asset. You’ve taken N10 million from the bank, you are not able to pay so we have given the assets and we are taking N10 million from AMCON and the law protects that the asset belongs to that asset management company.

    So, you don’t have any challenge, so from day one, I can decide to sell all the assets because they’re my assets.  But there is a difference in our case . For me to sell, I have to go through a process and because of our legal process, sometimes that process can take years. They know it and I know it, they know they are just buying time and for them that time is important for them because they’ll continue to live their lifestyles, they’ll continue to fly their private jets, they’ll continue to live in their mansions, they’ll continue to just spend and waste money on the streets and pretend that they’re what they’re not and to them, that is more important than meeting their obligations.

    Despite the fact that you said the legal process is a challenge, the impression out there is that AMCON is out to kill businesses!

    AMCON cannot be and will never be an agency to kill businesses,  because if you kill business, how do you recover your money. It is only a  propaganda because you can’t, if you want value in something, if you destroy that thing, you’re destroying that value. But what people want is for you to continue to live with the lies that at the end of a tunnel that seems endless, that there’ll be light and this is an organisation that has a sunset period,  and like I said, its common sense if in the last five  years despite all the money that we put inside, I’ve not seen any change in behavior, or any performance indications coming from you. So what is the recourse? The recourse is very simple and it is covered by the AMCON Act.

    You have to forfeit the asset over to AMCON. Now the issue is that whatever asset I take from you, I have to sell it to somebody for value to get my money because if I kill it, I can’t get my money. So, if you have a business and you say the business is not doing well, you cannot pay me and I say okay, give me the business so I can sell that to somebody who is interested and will bring new money and he’ll bring management and he’ll run the business and take the risk and he’ll pay me my money. To my mind, we are even helping the economy because some of the guys are holding the business and the business is not doing well, and they are not doing anything and also they are not paying AMCON. So from all sides, we are losing. So, up till now we are telling people that and if you say look at our mantra, what is our mantra? Please come and talk to us. And the whole idea about AMCON is that we help you to revive your business, but where it is very clear it is not possible, you have to forfeit the assets to us because the assets belong to AMCON and AMCON cannot take an asset and kill that asset because it is from that asset that we’ll be able get money and pay up our debts. So it’s a partnership whichever way, we have to work very hard for those businesses to continue to survive. I can tell you its just propaganda.

    If you say your business is doing well, because for you to kill something, something must be doing well, so come and talk to us. Nobody can put N10 or N5 billion today on the table, but come and talk to us, so that we have a structure. We want to have a structure but this money you have to pay. Either you pay in cash or you pay in asset because that is loan, it has nothing to do with AMCON. If you are not able to pay in cash then you have to pay in asset, you have to because the business that you are holding belongs to AMCON. Now most of these people that are making these allegations are people that have refused to come and pay, their facilities are in excess of N50 billion, N60 billion, N70 billion they are not paying one dime and they are pretending they have business and then they are not coming to AMCON.

    What is the percentage of those who are unwilling to pay?

    Well quite a lot of those big guys, and I’m sure you have been reading about them because people have allowed things to accumulate more than 50 billion, 60 billion even 70 billion and some of them are coming out with some frivolous kind of requests. Your debt is 90 billion, you say you want to pay  N40 billion, that AMCON should write off N50 billion so that your  business will grow. Now that N50 billion where is it coming from. It doesn’t help Ahmed if you pay N2 billion out of N90 billion because the balance of the N82 billion is not coming into my pocket but this is public trust. Your book value  is 90 billion. You say because your business is like this and you can only pay N40 billion and even this N40 billion you want to pay it in three years, or four years. So what happens to the N40 billion?  I mean your lifestyle does not even support your request.

    Are there  some exceptions, some companies you can really hold up to say these ones have performed according to the law and they are doing well?

    You know, there are some of them, the (Name withheld)  is a very good case, they are doing very well, they have accepted the situation and AMCON has intervened and they are doing very well, we are very happy with them. You know what we are trying to do in AMCON is not to join issues with people on the pages of newspapers because that is what they want to drag us into.

    You keep talking about  some of the debtors fighting back, and then you talked about the rigours of our court processes. Are you saying that the court have rendered AMCON more or less a toothless bull dog?

    No, the courts are doing their work, they work on the basis of the facts presented to them. Once you go to them and seek for some reliefs, they’ll look at it and if they believe that if you need to have that relief, they’ll give you because everybody has’t right of hearing and that right of hearing causes time causes some delay but it’s legal. I want to carry your assets, you know that asset belongs to me then you rush to the court and ask for injunction because you have some other rights that you want to claim, court must hear you. Legally, they must hear you. But that to me causes delay but they must hear you but that is also legal. So nobody has rendered anybody toothless only that they take advantage, its just a question of taking advantage of the process , otherwise the courts are doing their work the way they are supposed to do.

    Are you in favour of special courts?

    You see even if you have special court, let me tell you, the special court can only be an enactment of the National Assembly – which is secondary to the constitution. The constitution only recognises fundamental right to seek relief in court, isn’t it?

    Even if you have special court, it will only accelerate it which is good, they’ll accelerate the process you know but that’ll not stop you from doing what you want to do  regarding y our fundamental right because that is why you are protected by the constitution.

  • ‘How banks hide bad debts’

    ‘How banks hide bad debts’

    Local and foreign investors rely on the integrity of financial statements to make decisions. To the Financial Reporting Council of Nigeria (FRC), only a financial statement that meets the International Financial Reporting Standards (IFRS) will inspire them to invest in a company.  FRC’s Chief Executive Officer Jim Obazee said this and more in an interview with SIMEON EBULU and COLLINS NWEZE during his visit to The Nation.

    How has Financial Reporting Council streamlined financial reporting by companies?

    The FRC was established by the FRC Act 6, of 2011. Prior to this, there was the Nigerian Accounting Standards Board (NASB). The NASB in itself had some histories. Prior to the indigenisation, there were different companies, coming from different countries into Nigeria. And when they come, the rules that govern who they report their income and expense; assets and liabilities, were provided for by the standards issued by their home countries.

    So, you have companies from the United Kingdom (UK) reporting UK’s standards, and those from the United States, reporting based on US standards.

    We had a lot of mix ups. You can actually report fair results following those standards, but when you report, people who are interested in investing in your company, may be relying on very faulting foundation if both were given the same rules.

    How?

    For instance, a very smart managing director that is making loses will likely want to adjust the figures. Don’t forget that in some companies, the Managing Director’s emoluments are tied to percentage of the profit of the company. So, such MD is not interested in losses. So, he could gather smart guys in the office and say, gentlemen, our numbers are not looking right, what can we do? So, they are no longer discussing the business concept, they are discussing earnings management.

    It is actually fraudulent financing reporting. So, he would say, gentlemen give me some ideas, we cannot show our shareholders this result. He is not telling them the major problem which is the fact that he is not happy because he cannot get good salary. So, somebody needs to create the opportunity for him.

    Then a young man, would raise up his hands and say, you know the car we bought for N100,000 and the policy of this organisation is that the estimated useful life of the car is for four years. So, every year, we write off 25 per cent against profit. So, we write off 25 per cent of N100,000 which is N25,000. So, let’s change the policy to say the car will last for 10 years.

    So, if we are going to rely on 10 years, instead of writing N25,000 this year, we should write off N10,000. By adopting that structure, the company beefs up its profit by N15,000. This will now change the bottom line to look very healthy, even when there is no value underlining the result.

    What does that mean for investors?

    The investors will rely on the result to their own detriment. But don’t forget that the N15,000 brought into the profits, the Managing Director is entitled to a percentage of it. It was at that point that organisations in Nigeria decided to establish a new standards reporting setting body.

    So, eight organisations led  by the Central Bank of Nigeria, Securities and Exchange Commission, Institute of Chartered Accountants of Nigeria, among others, came together and formed the NASB on September 9, 1982. They were churning out standards which lacked legal backing. The institutions were simply persuading companies to comply. Prior to that time, there were the Companies and Allied Matters Act, 1990.

    The promoters of NASB went to those putting together the CAMA, brought in Section 335 sub-section 1 of CAMA Decree 1990, which stipulates that financial statements prepared in Nigeria, must comply from time to time, with the statement of accounting standards issued by the NASB to be constituted by the Minister of Trade and Industry.

    So, they got legal backing by which the minister would constitute the board. The Minister of Trade and Industry constituted the NASB to become a parastatal of the Federal Government of Nigeria, reporting to the Minister of Trade and Industry in 1992.

    How was FRC formed?

    It was under the former President Olusegun Obasanjo that there were all forms of attempts to form the FRC, but it did not see the light of the day. When I was appointed the CEO of NASB, I made the formation of FRC my priority. Before then, the World Bank came and promised to assist Nigeria, provided there is a Financial Reporting Council, where you can have an all embracing structure.

    Firstly, I was the chairman of a committee on the adoption of IFRS in Nigeria and we needed to deal with the law. Before the 2005 banking consolidation, I said that only seven banks were healthy. My view came after I analysed the results of the banks and discovered that there was a problem. I needed to deal with what I saw then, which was institutional weaknesses.

    Tell us about those institutional weaknesses?

    Many of the banks had started opening up insurance companies to hide their bad loans. If a bank is owed N1 billion and the customer is not able to pay, the CBN would check the bank’s account and ask if it has been fully provided for. The bank would be asked to take the bad loan off its assets and profit and that would constitute a big problem on its balance sheets.

    What the banks did was to set up  insurance companies and, for instance, factor the N1 billion to the insurance company, and subsequently claim that the insurance company had bought the N1 billion bad debt. The insurance company buys the bad loan at N900 million, with the understanding that when it recovers the debt, it will make N100 million gain. So, the N900 million will now be quoted in the bank’s books, so that when the CBN comes for checks, the bank will be applauded as doing very well.

    The CBN is inspecting banks, not insurance companies, while the National Insurance Commission that inspects the insurance companies, do not check the books of the banks. You see, when I said banks should not own insurance companies, you can now understand why.

    What impact has the FRC Act had on companies’ reporting formats?

    The establishment of the FRC Act has brought sanity to companies’ reporting of their financial statements, and made it difficult for them to manipulate their earnings, as all accounts are now reported using the International Financial Reporting Standards (IFRS). With the new reporting format, the practice where companies that are supposed to make losses, manipulate the result to post huge profits, would be difficult. Prior to the coming of the FRC Act, regulatory agencies, including the CBN, never took financial reporting seriously. No Nigerian demanded for the CBN account, let alone analysing what is inside. Because if you pick the financial statement of the CBN, and you have eagle eyes, you will raise several questions that they will beg you not to ask the questions. The law empowered FRC on some broad areas. First, financial reporting generally, which includes valuation of standards, auditing accounting standard both private and public, and then actuarial standard. It also empowered us to develop and co-ordinate corporate governance. Hitherto, there was no law governing the corporate governance in Nigeria. Now, it is only in the FRC Act that you see corporate governance. The FRC Act also says we are responsible for Corporate Governance Code in both public and private sector. Finally, FRC Act gave us power to check audit quality.

    What’s the impact so far?

    The FRC is committed to making Nigeria corporate reporting investment friendly. The FRC Act and its implementation is providing protection for investors. That is why you are seeing a lot of the fight. The judges themselves, when people started taking us to court, did not understand the type of organistion we are. Overtime, when they started understanding what we are doing, they started to embrace and know that we are bringing sanity.

    Does the National Assembly need to legislate on the National Code of Corporate Governance?

    It is not something you can legislate upon. It is a Code of Corporate Governance. It is like legislating on integrity.  We want to know, what are the roles of people that are entrusted with the direction, control and supervision of an entity? That is what Corporate Governance is all about. It is not an issue meant for the National Assembly. The Code of Corporate Governance for the public sector is talking about boards. All the boards of Ministries, Departments and Agencies of government, are already captured within the enabling laws of these institutions.

    Since they are already captured, it means you cannot bring a code that can override that law. Instead, it has to go to the Federal Executive Council through the Minister of Trade and Investment, so that a guideline, saying that the structure and composition of the board should defer to that of the national code. That is what we want to do. The reason is not far-fetched. Firstly, the code is talking about international best practices, and  reviewing the laws will take a lot of time.

    Tell us about the Code of Corporate Governance for Not-For-Profit organisations?

    The code of corporate governance for Not-For-Profit organisations has received very heated debates. Not-for-profit people are saying they are not ready yet. The reason is that the code will require them to be accountable. They must have financial statements before having a corporate structure. They are not happy with the committee structure because we are insisting there must be three committees.

    What about the extended audit report that FRC is canvassing?

    Very soon, we shall be inviting six big firms to a meeting. We want to talk to them on extended audit report. It will focus on key audit matters. The audit report will look at observations. We need to protect stakeholders, protect minorities and also grow the market.

    We have three major challenges. We have board concentration. All your board members are all friends. This leads to group thinking, where everybody thinks alike, nobody thinks at all. So, in board concentration, there is no healthy debate. We are campaigning that after one has served as Managing Director of a company for 10 years, such person should not immediately transmute as the Chairman. There should be a cooling off period. Immediately you transmute as the Chairman, you will become Managing Director one, the new Managing Director will become Managing Director two.

    We also have what we call ownership concentration. In the Nigeria capital market, we have just 20 per cent free float. We also have audit concentration. The four big firms are the ones auditing the companies.

    Are you having challenges with shareholders’ associations?

    Shareholders associations are also challenging us, saying we have brought out a rule, saying for you to be a Chairman of audit committee, you must be a professional accountant. Our reason for that remains that audit committee members should understand accounting.

    In our registration, we said one cannot sign a financial statement as a Chief Financial Officer unless the person is a member of the ICAN or the Association of National Accountants of Nigeria (ANAN). The moment foreign investors know that the companies are being policed; they will come and invest in our country. The first direction in fighting corruption is to ensure there are financial statements. Tell all government agencies to prepare their accounts, you will see there is a problem. Government agencies should have accounts.

    Are you still receiving 2015 financial accounts from banks?

    Yes, but Section 8 of the FRC Act says that public entities are to file their financial statements with the FRC not more than 60 days after approval by the board. So, they still have a two-month window. They are submitting their accounts and we are receiving them. But if the accounts are qualified, you cannot announce that account until we have looked at them. These are the things people worry about, saying – why is the FRC policing us. You need to be policed. The moment foreign investors know that the companies are being policed, they will come and invest in our country.

  • NNPC’s cash call debts hit $7b

    NNPC’s cash call debts hit $7b

    Nigerian National Petroleum Corporation’s  (NNPC’s ) debt overhang in cash calls to  multinational and indigenous oil companies it operates Joint Venture (JV) project with, has reached about $7billion, it was learnt at the weekend.

    Cash calls is the counterpart funding the NNPC pays yearly for the 60 per cent equity shareholding it owns in various oil and gas fields operated by International Oil Companies (IOCs) and indigenous oil firms (independents).

    The Corporation has over the years been battling to clear the cash call arrears, which have been revolving around $5 billion. The Federal Government is determined to settle the arrears to the operators of the various JVs  the Minister of State for Petroleum Resources and NNPC Group Managing Director, Dr Ibe Kachikwu, has said.

    However, it is feared that the prevailing low oil price regime, which has reduced the nation’s revenue from oil, may prevent the government from accomplishing  its desire to settle the $7billion  debt .

    It was learnt that as at January this year, NNPC owed the IOCs cash call arrears of $5.5 billion, while their  indigenous counterparts are being owed $1.1 billion, and an estimated $400 million that would have accrued between January and now.

    The Federal Government said it is considering the adoption of zero funding model for the JV operations from next year to halt the growth of the cash call arrears but there are still concerns about the model.

    The zero JV funding seeks to empower the operators not to wait for the NNPC counterpart funding before going on with operations and projects implementation. Therefore, the operators will source funds and go ahead with projects’ implementations, while the NNPC’s bureaucratic processes of approval including endorsement by the National Assembly continue. The operators of the JVs will deduct costs at the end and remit what is due to NNPC at the end of the deal.

    An industry source told The Nation that the zero funding model being contemplated by the state-run oil firm will cost it more as the operators will source funding from banks, and interests paid on such loans secured by the oil firms will be factored into the cost of production.

    The source said if the government lacks capacity to pay its cash calls, let it choose from some alternative options including divesting some of its equity holdings to indigenous firms, adopt crude for cash calls or privatise the NNPC. According to the source, NNPC has only been able to meet only 30 per cent of the 60 per cent cash call it is supposed to pay. “As long as the funding issues exist, production will adversely be impacted,” the source said, warning that JV oil production has since dropped to one million barrels per day (bpd) as against about 2.5 million bpd in the past due to JV budget delay.

  • Fed Govt to pay states’ March deferred debts

    Fed Govt to pay states’ March deferred debts

    Creditors have got some assurance from the Federal Government on states’ debts that were due for payment last month.

    The debts will be paid, the Ministry of Finance, in a statement, said.

    It said the clarification became necessary following the states’ debt repayment deferral announced last week.

    “Further to the states’ debt repayment deferral for the month of March that was announced last Thursday, the Federal Ministry of Finance has clarified that the debt repayments due to the states’ creditors will be fully paid, notwithstanding the deferral. All creditors, including bondholders, will not be adversely impacted,” it stated.

    It said the deferral is not a bailout but “a responsive measure by the Federal Government to put states in a better position to meet their salary obligations”. The deferral is N10.9 billion.

    All states will receive the relief in this instance, but further deferrals will be “subject to the agreement of a Fiscal Restructuring Plan to be prepared by each state with clear measurable objectives.”

    The statement said the ministry was keen in ensuring that the financial discipline being driven by the Federal Government is replicated in all tiers of government, including elimination of payroll fraud and increased spending efficiencies in overhead.  It called for enhanced financial transparency by the publication of audited accounts and submission of debt profile.

    President Muhammadu Buhari  approved the states’ deferred payment on account of the backlog of salaries owed by many states to their workers and the abysmally low revenue (aboutN299.7billion) available for sharing for the month of March.

    The government said last week that with about 27 states experiencing challenges meeting their salary payments and in response to the obligatory repayments due to the Federal Government from the states in respect of their restructured loans, the Federal Government offered to defer for March, the repayment of their obligations to all their creditors.  The deferral amounted to a total of N10.9 billion.

  • Fed Govt, stakeholders parley on power sector debts

    •MDAs debts hit N60b

    The Federal Government has begun talks
    with players in the power sector value chain (generation, transmission, distribution and regulatory bodies) on how to find ways of paying the huge arrears of unpaid electricity bills owed by Federal Ministries, Departments and Agencies (MDAs) put at N60 billion, The Nation has learnt.

    The Executive Director, Research and Advocacy, Association of Nigerian Electricity Distributors (ANED), Sunday Oduntan, stated this when he spoke with The Nation on the 2016 budgetary allocation to the Ministry of Power, Works and Housing.

    Oduntan said he could not measure the impact of the budget on the power sector until it is broken down and Nigerians know how much goes to the power sector.

    He however said that whatever allocation that is due to  the power sector would be for the transmission segment of the value chain because other segments are private sector owned and controlled.

    He said: “The budget is not broken down so I wouldn’t be able to assess how it would impact the electricity power sector. But remember that among the value chain, government needs only to fund the transmission. Actually what we need from the government is conducive policies and environment, encouragement of direct foreign investment into the power sector.

    “The government should also encourage investors in the sector, ensure steady and adequate supply of gas to power generation stations because if the power stations generate more power, the distribution companies will have more power to distribute. What Nigerians need is let there be light.”

    He said whatever is allocated to the power sector may not matter much, saying what matters is, “let the allocation be judiciously utilised. What matters now is let every stakeholder do what is supposed to be done.”

    On the MDAs’ debt, Oduntan said, it was N58 billion at the end of last year. It has gone up to N60 billion now, but he did not disclose the details of the ongoing discussion with the government on the issue.

    “Negotiations are ongoing because the debt is for the entire value chain and each segment of the chain needs funds for effective performance. They (government) are on it. They are working on it that is all I will tell you,” he stated.

  • Military’s, MDAs’ debt to DisCos soars to N45b

    •Utility providers engage Presidency for payment

    The debts owed the Electricity Distribution Companies( DisCos) by the military and ministries, departments and agencies (MDAs),  has risen from the N32 billion to N45 billion as at the end of last year, it was learnt yesterday.

    The Executive Director, Association of Nigerian Electricity Distributors (ANED), Sunday Oduntan, told The Nation that the distribution companies were going through several challenges, especially in collection of payment for electricity supplied customers, adding that the worst debtor-customers are Federal Government’s MDAs and the military.

    He said previously, the outstanding debt owed by MDAs was N32 billion, but has grown to N45 billion. Owing to the difficulty in collecting this debt, the distribution companies are discussing with the Presidency on method of payment.

    Oduntan said the DisCos have been discussing with the government on method of payment since the time debt was N32 billion because they need that money dearly to purchase equipment such as meters, among others, and also oil the operation to serve the customers satisfactorily.

    He said Vice President Yemi Osinbajo has promised to intervene in the case and he is optimistic that government may start to deduct future bills and debt from source. He noted that the military and agencies have budgetary provisions for utility bills payment, and have no justification to owe. In the budget, they actually have allowances for utility bills’ payment.  These military formations are properly metered. It is not that they are on estimated billing or over-billed, and don’t have reasons not to pay but they felt it is their right not to pay for the power they consume forgetting that the current power sector is under the private sector control, he added.

    “We had a meeting with the Federal Government presided over by the Vice President, Prof Yemi Osinbajo, and he listened to all the stakeholders including the Nigerian Electricity Regulatory Commission (NERC), Market Operator (MO), Nigerian Bulk Electricity Trading (NBET), generating, and distribution companies. We all tabled our problems and the government assured us of looking at the issues. The Vice President promised us that the MDAs will pay the debts. We will continue to discuss with the government until the debt is paid,” Oduntan said.

    The ANED chief stressed the importance of the government agencies to pay the huge debt and the need for all electricity consumers to be committed to payment of bills promptly.

    He said due to supply value chain inefficiencies, about 50 per cent of power bought by the DisCos is not paid for. These include power theft, inadequate collection infrastructure, and insufficient/non-cost reflective tariff.

    The challenges, according to Oduntan, have put the distribution companies under serious financial pressure because DisCos are collection agents for the entire power industry. Therefore, shortfall in revenue collection by the DisCos affects the entire value chain, he added.

    He said for the country to have the desired level of electricity supply, all categories of customers should endeavour to pay their electricity bills appropriately and the government should encourage massive investment in the sector, he said.

  • NCAA to airlines: remit over N6b debts from ticket sales

    NCAA to airlines: remit over N6b debts from ticket sales

    Nigeria Civil Aviation Authority (NCAA) has expressed concern about airlines’ failure to remit charges collected for Federal Government’s agencies.

    Domestic airlines owed the authority over N6 billion from the five per cent ticket, charter and cargo sales charges collected from the public.

    The charges, according to the NCAA, were paid to airlines to avoid collection before flights, thereby creating confusion and delays.

    In a statement yesterday, NCAA’s spokesman, Mr. Sam Adurogboye, called on the affected airlines to offset the debts, which were stunting the growth of aviation agencies.

    The statement reads:  “The NCAA notices with serious concern the huge debts of airlines as a result of failure to settle promptly invoices as at when due.

    “This poses serious financial challenges to parastatals that benefit from the five per cent ticket, charter and cargo sales charges.

    “Consequently, the NCAA would be pleased to see that the airlines put plans in place to liquidate all outstanding indebtedness. The settlement of those debts will assist the authority fulfill its statutory obligations to the country and the world.

    “The NCAA has tried many times  to get  the money from airlines that sometimes falsify and misrepresent the payment of the charges to the travelling public, accusing them of concealing the real reason behind the charges.”

    Adurogboye added that the five per cent charge was enshrined in the Civil Aviation Act and embedded in passengers’ fares, adding that airlines were supposed to collect it from passengers and pay to the NCAA.

    He explained that in line with the Civil Aviation Act 2006, the NCAA was saddled with the collection of five per cent sales charge on all tickets originating from Nigeria, cargo operations and charter/contract flights.

    After collection, the ticket sales charge is shared among aviation agencies namely: Nigeria Meteorological Agency (NIMET), Accident Investigation Bureau (AIB) and the Nigeria College of Aviation Technology (NCAT) as approved by the Civil Aviation Act 2006.

    He denied insinuations  that airlines were paying five per cent of their earnings to the NCAA as ticket sales charge.

    Adurogboye said: ‘’I wish to correct a serious misconception being sold to the public by some airlines. NCAA has reports that some airlines are purporting that the five per cent TSC is being paid to us from their earnings. This, they say, is adversely affecting their operations.

    “This is absolutely false and a misrepresentation. The TSC is content charged in the ticket sold to passengers. The airlines’ role is to collect and remit to the regulatory authority.”

  • Reps to probe AMCON’s N5trillion debts

    Reps to probe AMCON’s N5trillion debts

    The House of Representatives is to investigate the huge debt profile of the Assets Management Corporation of Nigeria (AMCON).

    It will set up an ad hoc committee, which will also examine whether the acquisition and sale of assets, banks, shares and landed property by AMCON was consistent with due process and extant laws.

    The committee will ascertain if the operations of AMCON are devoid of fraud, and determine the losses, if any, suffered by Nigeria as a result.

    The committee is to report back to the House within six weeks.

    The resolution of the House was sequel to the passage of a motion by a member, Hon. Gabriel Onyenweife who claimed that AMCON had accumulated over $25 billion (about N5trillion) debts as against the mandate of a debt profile of N800 billion as a ceiling, and thus has exceeded its debt ceiling  by N4.2trillion.

    “The AMCON balance sheet has a shortfall of N3.8 trillion ($19 billion) and that the geometric accumulation of debts by AMCON will no doubt endanger the dwindling national reserves put at $30 billion  since the Federal Government is the guarantor of AMCON bonds as enshrined in Section 27 of AMCON Act, 2010,” he said.

    The lawmaker said the accumulated debts of AMCON in five years were more than the debts owed by the Federal Government to the Paris Club of creditors in 50 years.

    He said: ”Over N2trillion was lost in the not-too-transparent process adopted in the sale of some banks, including Oceanic Bank, Intercontinental Bank, Enterprise Bank, and MainStreet Bank.”

    The lawmaker alleged that the disposal of assets, such as shares landed property, plant and equipment acquired by AMCON was shrouded in secrecy.

    “Most of the assets disposed were alleged to have been sold to cronies and close associates of the officials of the corporation without recourse to due process or extant laws.

    “If these practices of AMCON are not urgently addressed , its negative impact on the banking sector, which is the soul of the Nigerian economy, will not only impact negatively but will also jeopardise its health,” he said.

    The motion was passed when the Speaker, Hon. Yakubu Dogara, called for a vote.

  • Unfunded US pension debts exceed $3tr

    It’s well-known that there’s a huge financial hole in state-sponsored retirement plans for public employees, a hole that states will eventually have to fill with tax increases and spending cuts.

    There is, however, still considerable debate as to the size of this government debt owed to public employees. In July 2015, the Pew Charitable Trusts released their latest issue brief, reporting that as of 2013, the nation’s state-run retirement systems had a $968 billion funding gap GPS +0.00 per cent, not far from the “Trillion Dollar Gap” they reported in 2010.

     

    The Gap is Actually Bigger

    As serious as this sounds, the true magnitude of unfunded pension promises for the systems tracked by Pew is much larger. The system of measurement and budgeting for public pension promises has fallen prey to one of the fundamental fallacies in financial economics: undervaluing a risk-free stream of promised cash flows by assuming that the promises can be met with high, anticipated returns on smaller pools of risky assets.

    When I correct the calculations to reflect the expectation of public employees that these promises will be honored, the market value of unfunded liabilities proves to be far larger: $3.28 trillion (as of 2013). Moreover, this figure excludes local government obligations such as those of U.S. cities and counties.

    Pew collects its information from state government disclosures. Its 2013 data suggest that, across 237 state-level pension systems, there were $3.43 trillion of liabilities backed by $2.47 trillion of assets. In other words, this implies a net gap GPS +0.00% of around $1 trillion.

    These liability measures are far too low. They are based on state assumptions of high assumed returns on risky asset portfolios: the median assumed return was 7.75% (and the liability-weighted average 7.66%). The funding gap amounts to a mere $1 trillion only if the public plans can achieve these high compound annualized returns over the horizon during which these benefits must be paid. Yet governments have promised to pay the pensions regardless of what happens to the pension investments. As such, pension promises should be treated like the senior government debt they are, akin to default-free government bonds.

     

    Recommended by Forbes

    For a proper financial market valuation, the promised pensions should first be adjusted to reflect only accrued benefits, or retirement payments that employees would be entitled to receive under their current salary and years worked. This is not how governments do it today, but my 2011 paper with Robert Novy-Marx did this recomputation for most of the plans in the Pew study.

     

  • DMO sells N80b 2020, 2034 debts at mixed yields

    DMO sells N80b 2020, 2034 debts at mixed yields

    The Debt Management Office has sold a total of N80.20 billion ($403 million) in bonds maturing in February 2020 and August 2034 at an auction on Wednesday with mixed yields.

    Total bids stood at N153.48 billion, more than the N119.53 billion at the previous auction.

    A total of N40 billion of the February 2020 bond was sold at the auction, while additional N10.20 billion of same tenor paper was allotted on non-competitive basis.

    It said the 2020 paper fetched a yield of 15.38 per cent, compared with 15.28 per cent at the last auction.

    The debt office sold N30 billion in the August 2034 debt at 15.19 per cent versus the 15.29 per cent the paper fetched at the last auction. The 2020 debt closed at 15.41 per cent at the secondary market on Wednesday, while the 2034 paper closed at 15.19 per cent.

    The DMO regularly issues bond instruments which creates more debts for the economy. The DMO was established on October 4, 2000 to centrally coordinate the management of Nigeria’s debt, which was hitherto being done by a myriad of establishments in an uncoordinated fashion. This diffused debt management strategy led to inefficiencies.

    It was expected that the coming of DMO would lead to good debt management practices that make positive impact on economic growth and national development, particularly in reducing debt stock and cost of public debt servicing in a manner that saves resources for investment in poverty reduction programmes.

    The body is also expected to prudently raise financing to fund government deficits at affordable costs and manageable risks in the medium- and long-term; achieve positive impact on overall macroeconomic management, including monetary and fiscal policies; avoid debt crisis and achieving an orderly growth and development of the national economy.