Subnational Debt Management Performance Assessment (SN DeMPA) Ogun State, Nigeria November 2019 The Sub-National DeMPA (SN-DeMPA) is a methodology for assessing public debt management performance at a sub-national level through a comprehensive set of indicators spanning the full range of government debt management functions. It is adapted from the Public Expenditure and Financial Accountability (PEFA) framework. The SN-DeMPA tool presents 13 debt performance indicators along with a scoring methodology. For additional information on the World Bank's Debt Management Technical Assistance Program, including more on the SN DeMPA Tool, please visit our website at: http://www.worldbank.org/debt. 2 Contents Abbreviations .......................................................................................................................... 4 Executive Summary ................................................................................................................. 5 Overview of Ogun State .......................................................................................................... 7 Nigerian Fiscal Federalism ...................................................................................................... 7 Ogun State Fiscal and Debt Overview ....................................................................................... 8 Subnational DeMPA Methodology and Coverage ......................................................................10 DeMPA Summary of Scores .....................................................................................................11 Governance and Strategy Development.....................................................................................13 DPI-1 Legal Framework.........................................................................................................13 DPI-2 Managerial Structure ....................................................................................................17 DPI-3 Debt Management Strategy............................................................................................20 DPI-4 Debt Reporting and Evaluation.......................................................................................22 DPI-5 Audit..........................................................................................................................24 Coordination with Fiscal and Budgetary Policy .........................................................................26 DPI-6 Coordination with Fiscal and Budgetary Policy.................................................................26 Borrowing and Related Financing Activities..............................................................................28 DPI-7 Domestic Borrowing ....................................................................................................28 DPI-8 External Borrowing ......................................................................................................30 DPI-9 Loan Guarantees, On-lending and Derivatives ..................................................................31 Cash Flow Forecasting and Cash Balance Management .............................................................33 DPI-10 Cash Flow Forecasting and Cash Balance Management....................................................33 Debt Recording and Operational Risk Management ..................................................................36 DPI-11 Debt Administration and Data Security..........................................................................36 DPI-12 Segregation of Duties, Staff Capacity, and Business Continuity .........................................38 DPI-13 Debt and Debt-Related Records ....................................................................................39 3 Abbreviations AG Accountant General CBN Central Bank of Nigeria CMU Cash Management Unit DeM Debt Management DMC Debt Management Committee DMD Debt Management Department DMOA Debt Management Office Act DPI Debt Management Performance Indicator DSA Debt Sustainability Analysis DTO Director of Treasury Operations ECOWAS Economic Community of West African States EXCO State Executive Council FAAC Federation Account Allocation Committee FDMO Federal Debt Management Office FGN Federal Government of Nigeria FGIF Federal Government Intervention Funds FMoF Federal Ministry of Finance FRA Fiscal Responsibility Act GDP Gross Domestic Product IDA International Development Association IFMIS Integrated Financial Management Information System IGR Internally Generated Revenue ISPO Irrevocable Standing Payment Order LGAs Local Government Authorities MoF Ministry of Finance MoBP Ministry of Budget and Planning MDAs Ministries, Departments and Agencies MTDS Medium Term Debt Management Strategy MTFF Medium-Term Fiscal Framework N/A Dimension rating: not applicable to be considered for rating NGN Nigerian Naira N/R Dimension rating: not rated due to lack of information/ other factors NASS National Assembly OAG Office of the Accountant General OSG Ogun State Government PEFA Public Expenditure and Financial Accountability tool PFMU Project Finance Management Unit PIU Project Implementation Unit SEC Securities and Exchange Commission of Nigeria SN-DeMPA Subnational Debt Management Performance Assessment SNG Subnational Government VAT Value-Added Tax WAIFEM West African Institute for Financial and Economic Management 4 Executive Summary At the request of the authorities, a World Bank (WB) Subnational Debt Management Performance Assessment (SN-DeMPA) mission visited Ogun State, Nigeria between April 8-12, 2019. The team comprised Signe Zeikate (mission leader), Per-Olof Jonsson and Juan Carlos Villanova (International Consultants, WB). The mission was joined by Lamin Jarjue (Program Manager, the West African Institute for Financial and Economic Management (WAIFEM)). The main objective of the mission was to assess, jointly with the authorities, the current debt management performance of Ogun State. To meet this objective, the team worked closely with the Debt Management Department (DMD) and met with other relevant state agencies and departments involved in public debt management (see Annex 2 for a list of officials met). The team would like to thank the DMD for its excellent cooperation and hospitality. The SN-DeMPA observed several debt management functions that may benefit from improvements to meet the minimum effectiveness in DeM. The main findings are summarized in the table below: Governance and Strategy Development Main Findings Areas of Improvement ▪ Domestic and external borrowing decisions ▪ Include clear authorization to borrow, are approved by the Executive Council and and to issue loan guarantees on behalf of the House of Assembly. the state in the primary legislation. ▪ Good organizational structure. The Debt ▪ Specify borrowing purposes and debt Management Department (DMD) is the management objectives as well as principal debt management entity reporting reporting requirements in the primary directly to the PS Treasury/ Accountant legislation. General. ▪ Amend the law on Establishment of the ▪ The high-level Debt Management Ogun State Debt Management Office Committee meets quarterly to discuss and for Connected Purposes. relevant DeM issues. ▪ Prepare and publish annual (semi- ▪ There is compliance with FDMO quarterly annual) government debt statistical reporting requirements for domestic debt. reports. ▪ The debt stock and flow data for both ▪ Prepare reports on debt management external and domestic debt is included in the operations to the State House of annual State Financial Statements. Assembly. ▪ Analysis for key debt ratios e.g. debt service- ▪ Conduct compliance and performance to-revenue, debt-to-revenue is prepared by audit of DeM operations (largest the DMD. financial portfolio of Government). ▪ External financial audit of government ▪ Take action upon audit financial accounts, with some elements of recommendations. compliance and performance auditing but not related to DeM operations, is conducted annually. 5 Coordination with fiscal and budgetary policies Main Findings Areas of Improvement • Timely debt service projections. • Improve reliability of debt services projection. • Undertake forward looking debt sustainability analysis. Borrowing and Related Financing Activities Main Findings Areas of Improvement ▪ Legal advisors participate in the loan ▪ Improve domestic and external borrowing negotiation process. planning. ▪ Increase awareness about facilities offered by IFIs, e.g. currencies and types of interest rate and potential sources of financing. ▪ Develop and document borrowing procedures, including policies and procedures for issuing loan guarantees and on-lending of borrowed funds. Cash Flow Forecast and Cash Balance Management Main Findings Areas of Improvement ▪ Cash flow forecasts are produced. ▪ Establish a target for the cash buffer and invest surplus cash. ▪ Improve cash flow forecast accuracy. Debt Recording and Operational Risk Management Main Findings Areas of Improvement ▪ Creditor invoices are checked (for credit ▪ Prepare written procedures to guide DeM schemes without ISPO) against internal records operations and mitigate operational risk, before making a payment. including: ▪ Payment instructions are subject to a minimum ❑ processing debt service payments; two-person authorization process. ❑ data recording and validation; ▪ Payments are made by due date. ❑ storage of records; ▪ Segregation of duties for loan contract ❑ controlling access to database; back- negotiations, data recording in the system and ups. initiating debt service payments. ▪ Prepare individual training programs. ▪ Qualified staff with job descriptions. ▪ Improve document storage and debt data ▪ Accurate database for external and domestic back-up systems. debt. ▪ Upgrade the debt recording system to facilitate analysis and forecasting. 6 Overview of Ogun State Ogun State is situated in southwestern Nigeria and was established in 1976. Abeokuta is the capital city and the largest urban center of Ogun State. It is bordered by Ondo State in the East, Oyo and Osun States in the North, and Lagos State and the Atlantic Ocean in the South. The Republic of Benin is on its West. This location makes Ogun State an access route to the Economic Community of West African States (ECOWAS). The State has abundant natural resources that include forests and water reserves as well as large quantities of mineral deposits, such as limestone, phosphate, granite stone, gypsum, bauxite, bitumen, feldspar, clay, glass sand, gemstones and crude oil are available in commercial quantities. The state is the largest producer of cement in Nigeria. Ogun State has very high literacy rates and a skilled workforce. Out of the State’s estimated population of 7.1 million (as at 2016), 57 percent are of working age. The State is a major economic hub. It has one of the largest concentration of industries in the country and serves as the major corridor for transportation of goods, services and people between the nation’s commercial center Lagos, and the rest of the country as well as the largest West African markets. Nigerian Fiscal Federalism Nigeria is a federation of 36 states and the Federal Capital Territory, which share sovereignty with the Federal Government. The States are divided into 774 Local Governments. The States and Local Governments are responsible for most of the social services and local infrastructure. Nigerian States operate with a high degree of autonomy in services provision and financing. The Constitution allocates responsibilities across different levels of government, and inter- governmental fiscal transfers are based on a revenue allocation formula proposed by the Revenue Mobilization Allocation and Fiscal Commission and approved by the National Assembly for a period of at least five years. Revenue-sharing arrangements through the Federal Government of Nigeria (FGN) (i.e. Federal Account Allocation Committee – FAAC) comprise the bulk of State s’ income. Under the current revenue-sharing arrangement, 13 percent of oil revenues are first allocated to oil producing states and then the remaining revenues are split between FGN (53 percent), State Governments (27 percent), and Local Governments (20 percent). Revenues from customs, excise, and corporate income taxes are divided by the same formula. Revenues from the value added tax (VAT) are divided in the following way -- 15 percent is allocated to FGN, 50 percent to state governments, and 35 percent to Local Governments. All the funds appropriated for the States and Local Governments are first allocated into the Federal Allocation Account (FAA). The revenue-sharing mechanism from the FAA to the states, after application of the derivation formula, is the following: 40 percent is allocated equally to all states, 30 percent is based on number of people, 10 percent is allocated proportionately to land mass, 10 percent accounts for socio-economic needs e.g. education, health, and water, and 10 percent based on internally generated revenue (IGR) share, rewarding states with a higher revenue collection. VAT revenues are divided as follows: 50 percent is allocated equally to all states, 30 percent in proportion to 7 population, and 20 percent based on relative state contributions to VAT revenues (derivation principle). Ogun State Fiscal and Debt Overview The main source of Ogun State revenues is IGR. Until 2014, transfers from the FAAC used to average over 50 percent of the State ’s revenues. However, since the authorities increased effectiveness of the IGR collection, it has become the main revenue source, which now accounts for about 48 percent (2014 – 2017) of total revenues. IGR is followed by FAAC (32 percent), and then by capital receipts (see table 1). In 2017, the personnel accounted for about one fourth of the total expenses. Overhead costs averaged around 21 percent of the total. Debt service payments accounted for about 10 percent, whilst capital expenditures were around 42 percent of the total expenditures. Public debt charges to IGR accounted for about 33 percent and to FAAC 40 percent (see table 2). Table 1. Ogun State: Revenues and Other Receipts for FY 2013-2017 in NGN Million DESCRIPTION 2017 2016 2015 2014 2013 FAAC Allocations 40,806 32,618 38,664 49,869 57,642 IGR 74,836 71,553 64,337 62,228 29,745 Capital Receipts 30,787 12,827 25,718 22,897 29,136 Other Receipts 38,744 10,710 - 3,792 1,740 TOTAL 185,173 127,708 128,719 138,786 118,262 Source: Ogun State Government Financial Statements. 2017 Report. Table 2. Expenditure in NGN Million DESCRIPTION 2017 2016 2015 2014 2013 Personnel Costs 45,806 39,567 42,780 41,322 39,197 Overhead Costs 37,170 30,437 18,922 20,654 19,697 Public Debt Charges 16,766 12,804 19,662 16,464 19,837 Capital Expenditure 73,213 40,189 46,872 59,609 36,794 TOTAL 172,955 122,997 128,237 138,049 115,525 Source: Ogun State Government Financial Statements. 2017 Report. 8 Total public debt is around 74 percent of the state’s revenues. Domestic debt stood at N105,040 million or 76 percent of total debt outstanding in 2017. External debt was N32,849 million or 24 percent of the total debt. The total Ogun State debt in nominal terms has been on an upward trend since 2013. See table 3.1 Table 3. Evolution of Ogun State Debt Stock, 2013 - 2017 (in NGN Million) Debt Profile 2017 2016 2015 2014 2013 Domestic Loans 105,040 79,542 74,302 52,955 47,818 External Loans 32,849 22,726 21,446 18,246 18,322 Total (Naira Million) 137,890 102,268 95,748 71,201 66,140 Memorandum items Ogun State GDP (US$ million) 13,935 13,362 13,564 13,188 12,395 External Debt (% Total Debt) 24% 22% 22% 26% 28% Domestic Debt (% Total Debt) 76% 78% 78% 74% 72% Total Public Debt (% Total Revenue) 74% 80% 74% 51% 56% Public debt charges (% Total Revenue) 9% 10% 15% 12% 17% End-Year Exch. Rate (US$ to Naira) 305.5 304.5 196.5 167.5 167.5 Total Public Debt in % of Ogun State GDP) * 3.2% 2.5% 3.6% 3.2% 3.2% Note: * Ogun State GDP data was converted in Naira using the Central Bank of Nigeria end year exchange rate ** Public debt charges include only interest payments Source: Ogun State Government Financial Statements. 2017 Report. 1 Based on currency denomination. 9 Subnational DeMPA Methodology and Coverage The SN-DeMPA tool assesses 31 dimensions of subnational debt management activities (and closely related areas), organized into 13 debt performance indicators (DPIs). It aims to measure subnational government debt management (DeM) performance and capture the elements that are indispensable to achieving sound DeM practices. The SN-DeMPA does not assess the ability to manage the wider public debt portfolio, including implicit contingent liabilities (such as liabilities of the pension system) or the debt of public enterprises, unless these are explicitly guaranteed by the government though contractual agreements. While the Subnational DeMPA does not specify recommendations on reforms and/or capacity and institution building, the performance indicators stipulate a minimum level of performance that should be met. Consequently, if the assessment shows that the minimum requirements are not met, this indicates an area requiring management attention and should constitute a priority for reform. Each DPI has one or more dimensions linked to the topic-area of the DPI, and each dimension is assessed separately. The scoring methodology assesses each dimension and assigns a score of either “A”, “B”, or “C” based on the criteria listed. The evaluation starts by checking whether the minimum requirements for that dimension have been met, corres ponding to a score of “C”. Meeting the minimum requirement is a necessary condition for effective performance under the dimension being assessed. If the minimum requirements set out in “C” are not met, then a score of “D” is assigned. “B” is an intermediate score, falling between minimum requirement and sound international practices “A”. There are situations in which a dimension cannot be assessed. These could be because (a) the dimension is not applicable when an activity is not undertaken (for example, there are no derivatives or loan guarantees are not issued), in which case the term N/A (not applicable) should be assigned; or (b) the dimension is difficult or impossible to assess due to insufficient information, in which case a designation of N/R (not rated or assessed) should be assigned. When criteria for a specific score require certain legislation and procedures manuals to be in place, they must be followed. If that is not the case, these laws, manuals, or instructions should be considered nonexistent for the purpose of the scoring. The same principle applies to the requirement of a DeM strategy to steer daily borrowings and other DeM activities. When the strategy document in practice is not respected, the strategy should be considered non-existent. The Subnational DeMPA tool in practice utilizes the same scoring methodology as the Public Expenditure and Financial Accountability (PEFA) assessment tool. The PEFA tool has broader coverage as it assesses public financial management in general, while the DeMPA focuses only on government debt management and closely linked activities. The SN-DeMPA covers subnational government DeM activities and closely related debt management functions. It assesses debt incurred by municipal owned enterprises or other public sectors entities when guaranteed by the assessed subnational government, but not otherwise. While evaluating SNG’s DeM activities, the assessment focuses on borrowing activities, such as borrowing planning, issuance of subnational bonds and other debt sec urities, borrowing from external creditors (through the central government), issuance of loan guarantees to support a certain entity or projects, on-lending, and cash flow forecasting and cash balance management. The SN-DeMPA, does not assess the ability to manage implicit contingent liabilities, such as the capacity of the SNG to monitor and supervise the non-guaranteed borrowings and other activities of its public enterprises . 10 DeMPA Summary of Scores Performance Indicators and Dimensions Score DPI-1 Legal 1. The existence, coverage, and content of the legal framework for D Framework authorization to borrow, undertake other DeM activities, and issue loan guarantees. 2. The extent of a limit to direct access to financing from the central D bank DPI-2 Managerial 1. The managerial structure for SNG borrowings and debt-related C Structure transactions 2. The managerial structure for preparation and issuance of SNG loan N/A guarantees DPI-3 DeM 1. The availability and quality of the DeM strategy document D Strategy 2. The decision-making process and publication of the DeM strategy N/A DPI-4 Debt 1. Quality and timeliness of the publication of a debt statistical bulletin D Reporting and (or its equivalent) covering SNG debt, loan guarantees, and debt-related Evaluation operations 2. The presentation and content of an annual evaluation report to the D local assembly or similar body on DeM activities and performance and report to central government (if applicable) DPI-5 Audit 1. Frequency of financial audits, compliance audits, and performance D audits of the effectiveness and efficiency of SNG DeM operations, including the internal control system, as well as publication of the external audit reports 2. Degree of commitment to address the outcomes from the audits N/A DPI-6 Coordination 1. Support of fiscal policy makers through the provision of accurate and D with Fiscal and timely forecasts on total SNG debt service under different scenarios Budgetary Policy 2. Availability of key macro variables, an analysis of debt sustainability, D and the frequency with which it is undertaken DPI-7 Domestic 1. The preparation of an annual plan for the aggregate amount of D Borrowing borrowing in the domestic market, divided between the debt securities and other sources; assessment of the most cost-effective domestic borrowing terms and conditions; and the publication of an auction calendar for securities if applicable. 2. The availability and quality of documented procedures for domestic D borrowing DPI-8 External 1. Documented assessment of the most beneficial or cost-effective D Borrowings borrowing terms and conditions (lender or source of funds, currency, interest rate, and maturity) and a borrowing plan 11 2. Availability and quality of documented procedures for external D borrowings 3. Availability and degree of involvement of legal advisers before signing C of the loan contract DPI-9 Loan 1. Availability and quality of documented policies and procedures for D guarantees, On- approval and issuance of loan guarantees lending, and Derivatives 2. Availability and quality of documented policies and procedures for D on-lending of borrowed funds 3. Availability of a DeM system with functionalities for handling N/A derivatives, and availability and quality of documented procedures for the use of derivatives DPI-10 Cash Flow 1. Effectiveness of forecasting the aggregate level of cash balances in D Forecasting and SNG bank accounts Cash Balance 2. Effectiveness of managing this cash balance in SNG bank accounts D Management (including the integration with any domestic debt borrowing program) DPI-11 Debt 1. Availability and quality of documented procedures for the processing D Administration and of debt-related payments and receivables Data Security 2. Availability and quality of documented procedures for debt and D transaction data recording and validation, as well as storage of agreements and debt administration records 3. Availability and quality of documented procedures for controlling D access to the SNG’s debt data recording and management system and audit trail 4. Frequency and off-site, secure storage of debt recording and D management system backups DPI-12 Segregation 1. Segregation of duties for some key functions, as well as the presence C of Duties, Staff of an operational risk monitoring and compliance function Capacity, and Business Continuity 2. Staff capacity and human resource management C 3. Presence of an operational risk management plan, including business D continuity and disaster recovery arrangements DPI-13 Debt and 1. Completeness and timeliness of SNG records on its debt, loan D debt-related guarantees, and debt-related transactions. Records 2. Complete and up-to-date records of all holders of SNG securities in a N/A secure registry system, if applicable. 12 Governance and Strategy Development DPI-1 Legal Framework Dimension Score 1. The existence, coverage, and content of the legal framework for authorization to borrow, D undertake other DeM activities, and issue loan guarantees. 2. The extent of a limit to direct access to financing from the central bank D Dimension 1. The rationale is to ensure that the legal framework clearly assigns authority to borrow at the Subnational level, undertake debt-related transactions (such as debt exchanges and currency and interest rate swaps, where applicable), and issue loan guarantees. The legal framework comprises both primary legislation (laws enacted with approval of the parliament or congress or local legislature) and secondary or delegated legislation (executive orders, decrees, ordinances, and so forth) determined by the executive branch of government. 1. The following Federal and State Laws pertain to debt management in Ogun State: ▪ Federal Laws: • Constitution of the Federal Republic of Nigeria (1999) • The Debt Management Office Act (2003) • The Federal Fiscal Responsibility Act (FRA) (2007) • The Investments and Securities Act (2007) ▪ State Laws: • “Establishment of the Ogun State Debt Management Office and For Connected Purposes” (2012) • “P rovide for the Raising of Loans Through Issuance of bonds, Notes and Other Securities and for Connected Purposes” (2012) • “The Establishment of the Fiscal Responsibility Commission to Ensure Sound Fiscal Management Regime and Other Connected Purposes” (2018) 2. Nigerian States cannot borrow externally without the consent of the Federal Ministry of Finance. According to the Federal Debt Management Office Act (2003) and the Fiscal Responsibility Act (thereafter, DMOA and FRA),2 Nigeria’s States can borrow externally with the Federal Ministry of Finance ’s guarantee or through on-lending from the Federal Government. More specifically, state governments requiring external loans need to get the Federal Ministry of Finance approval in-principle. To receive such approval, the Ministry examines debt indicators to ensure that the state’s debt level is below specific thresholds. 3. Regarding external borrowing through on-lending from the Ministry of Finance, the states must submit the proposals to the Federal Minister at least 90 days before the start of the year. Approved proposals are incorporated into the public sector external borrowing program. Once approved in the budget, negotiations and signing of a loan agreement between the external creditor and the Federal Ministry of Finance takes place. A subsidiary loan agreement for the on-lending operation between the Federal Ministry of Finance and the Commissioner of Finance of the State follows. 2 DMOA and FRA Sections 21 and 47, respectively. 13 4. The Federal Ministry of Finance also issues guarantees on behalf of the Federal Government of Nigeria (FGN). States requesting a guarantee need to provide 1) an approved resolution from its State House of Assembly and State Executive Council (EXCO); 2) audited annual financial statements for the past five years; 3) cost-benefit analysis of the loan under scrutiny; and 4) a feasibility study of the project to be funded. The Federal Debt Management Office (FDMO) will determine and charge a guarantee fee. 5. To service external loans, a State Government is required to issue an Irrevocable Standing Payment Order (ISPO) to the Federal Accountant-General, authorizing the Federal Government to deduct at source from the respective State’s FAAC allocation the amount required to service its debt. 6. To issue securities domestically, States must comply with the Investment and Securities Act and the Securities and Exchange Decree. Among other, States need to obtain 1) an approval of the Securities and Exchange Commission (SEC); 2) an approval of the State House of Assembly, including an ISPO for settlement of debt service obligations; 3) a credit rating report by an accredited rating agency registered by the SEC; and, 4) to prove that the total amount of loans outstanding, including the proposed issuance, will not exceed fifty percent of the actual revenue of the State for the preceding year. 7. Upon contracting a commercial bank loan, States should provide details on such loan to the FDMO. The lending bank is also required to provide information and to obtain approval from the FDMO. The FDMO verifies that the total debt service payments of a State are within a set ceiling (i.e., monthly debt service does not exceed 40 percent of its monthly FAAC allocation of the preceding 12 months) and then issues its opinion or approval. For more details on the Federal legislation pertaining to the States see box 1. 8. According to the Establishment of the Ogun State Debt Management Office and For Connected Purposes Law, thereafter Ogun State DMO Law,3 Ogun State shall have a Debt Management Office established as a corporate body with the purpose to manage the state internal and external debts. Further, this office is authorized to conduct and implement any debt issuance program for Ogun State. The Debt Management Office shall borrow on behalf of the Government, from any individual or institutional bodies.4 It has been given the authority to issue and manage the state loans as prescribed under law or upon such terms and conditions as may be approved by the Executive Council.5 9. According to the Ogun State DMO Law (Article 9), a Board shall be established, among other things, to: 1) approve policies, strategies and procedures to be adopted by the Office for the achievement of its objectives; 2) review economic and political impact on the State of debt management strategies; 3) recommend for the approval of the Governor, any debt issuance program and other functions. 10. To date, the Ogun State Debt Management Office has not been established as prescribed by the Law. The debt management functions are performed by the Debt Management Department (DMD) imbedded in the Accountants General Office/Treasury. Reference to Accountant-General being responsible for loan servicing and public debt management is included in the Financial Regulations of Ogun State, which is inconsistent with the Ogun State DMO Law. There is also a 3 Ogun State DMO Law, Article 3 (1). 4 Ogun State DMO Law, Article 7. 5 Ogun State DMO Law, Article 8. 14 Debt Management Committee (DMC) led by the Commissioner. De facto , all loan proposals are analyzed by the DMD and further on approved by the DMC, the EXCO and ultimately by the House of Assembly. Although there is a system in place for domestic and external borrowing, it is not in adherence with the Ogun State DMO Law. 11. The purpose for domestic and external borrowing should be made clear in State legislation , according to the SN-DeMPA methodology. The Ogun State DMO Law does not specify borrowing purposes. Broad borrowing purposes are included in the FRA. Further, according to the FRA (Section 41) governments at all tiers shall only borrow for capital expenditure and human development. Section 44 specifies that “… any government in the Federation or its agencies and corporations desirous of borrowing shall specify the purpose for which the borrowing is intended and present a cost-benefit analysis (Project Appraisal) …”. 12. Issuance of government guarantees is described in Articles 21(1) and 24 of Ogun State DMO Law. Accordingly, the Government may authorize and guarantee any loans to be taken by any Local Government or other Agency of Government. A guarantee agreement for external loans shall be executed on behalf of the government by the Commissioner or any other person designated by him in writing. Where any money is due to be paid by the Government in satisfaction of any obligation arising from a borrowing or a guarantee, that money shall be deemed to be charge on the Consolidated Revenue Fund of the State. Any Agreement entered for the purpose of issuing loan guarantees shall be in writing and be executed for and on behalf of the State by the Commissioner or by such other person as the Commissioner may, from time to time, designate. Box 1: Federal Rules for Subnational Borrowing in Nigeria The Constitution of the Federal Republic of Nigeria (1999) grants NASS with the exclusive power to make laws and to regulate domestic and external borrowing in Nigeria. Pursuant to its constitutional mandate, the NASS enacted the following legislation: The Debt Management Office Act (2003). DMOA established the Debt Management Office (DMO) at the Federal level with the following functions: (i) maintaining a reliable database of all loans taken or guaranteed by the federal or state governments or any of their agencies; (ii) prepare and submit to the Federal Government a forecast of loan service obligations for each financial year; (iii) verify and service external debts guaranteed or directly taken by the Federal Government; (iv) on agency basis, service external debts taken by state governments and any of their agencies: where such debts are guaranteed by the Federal Government; (v) advise the Minister on the terms and conditions, whether in the currency of Nigeria or in any other currency, are to be borrowed (Section 6). • The Federal State Government or any of their agencies cannot obtain any external loan except with a guarantee issued by the Minister (Section 21). • All banks and financial institutions lending money to the state governments or any of their agencies, shall obtain a prior approval of the Minister of Finance (Section 24). 15 • The National Assembly may by a resolution approve, from time to time, standard terms and conditions for the negotiation and acceptance of external loans and issuance of guarantees (Section 27). The Fiscal Responsibility Act (2007) introduced the following DeM provisions, among others: • Government at all tiers shall only borrow for capital expenditure and human development, provided that such borrowing shall be on concessional terms with low interest rate and with a reasonable long amortization period subject to the approval of the appropriate legislative body where necessary (Section 41). • Required the President, within 90 days from the commencement of the Act and subject to approval by the National Assembly, to set overall limits for the amounts of consolidated debt of the federal and state governments (Section 42). In the application of the Law, these limits are set by the FDMO as part of the annual budget exercise. • The cost of servicing Federal Government guaranteed loans shall be deducted at source from the share of the debtor Government from the Federation Account (section 43). • Any government in the Federation or its agencies and corporations desirous of borrowing shall specify the purpose for which the borrowing is intended and present a cost-benefit analysis (Project Appraisal), detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied (Section 44). • In the case of foreign currency borrowing, the Federal Government guarantee shall be a requirement and no state, local government or federal agency shall, on its own, borrow externally. Any guarantee granted by the Minister shall be conditional upon the provision of a counter guarantee in an amount equal to or higher than the guarantee obligation, whereby in the case of States it may consist in the appropriation of tax revenue directly collected and resulting from statutory transfers and the guarantor shall be authorized to retain such revenue and use the respective amount to repay overdue debts. (Section 47). The Investments and Securities Act (2007) placed restrictions on the amount of debt securities to be issued by a state (i.e., registered bonds or promissory notes): • The total amount of loans outstanding at any time, including the proposed issuance, shall not exceed fifty percent of the actual revenue of the state for the preceding year (section 223). • The approval by the Securities and Exchange Commission (SEC) of Nigeria must be obtained for issuance of debt securities. The documentation required for states, include: i) A copy of the law authorizing the issue of the bond specifying that a sinking fund to be fully funded from the consolidated revenue fund account of the issuing state be established ii) A copy of a rating report by an accredited rating agency registered by the SEC; and, iii) An irrevocable letter of authority issued by the Accountant-General of the State to the Accountant-General of the Federation, to deduct at source from the statutory allocation due to the issuer in the event of default by or failure of the issuer to meet its payment obligations (Section 224). Furthermore, all capital market borrowings must meet certain criteria stipulated in part IX of the Act. 16 Score: According to the Ogun State DMO Law, the Debt Management Office, as a corporate body, is authorized to borrow on behalf of the Government, from any individual or institutional bodies. Article (8) states that the office shall have power to issue and manage the State loans as prescribed under any law or upon such terms and conditions as may be approved by the Executive Council. However, the Debt Management Office has not been established as envisaged under the Ogun State DMO Law and therefore the law is not adhered to and consequently it is not clear who is authorized to borrow. There is also a need to specify borrowing purposes in the legislation. Since Ogun State DMO Law is not adhered to and there is no clear borrowing purpose specified in the Ogun State DMO Law, the minimum requirements are not met, and the score is D. Dimension 2. The rationale is to ensure that any borrowing by the SNG from the central bank is legally restricted, if allowed. Monetary financing of government deficits, whether by central or subnational governments, imposes undesirable constraints on monetary policy operations by increasing the money supply. 13. The Central Bank of Nigeria Act (CBNA)6 allows, among other functions, the Central Bank of Nigeria (CBN) to discount or rediscount project-tied bonds (specifically, bonds which have been publicly offered for sale with maturity not exceeding three months) issued by state governments, local governments and federal or state corporations. CBNA also provides that CBN may grant advances for a period not exceeding three months against publicly issued Treasury bills of the Federal Government. It may also provide advances for a period not exceeding one year. Such advances should have a minimum interest rate of at least one percentage point above the Central Bank’s rediscount rate and require providing specific cited collaterals (Section 27K). 14. Since 2015, CBN makes resources available to State Governments in the form of FGIF (see DPI 7). These facilities are established specifically for State Governments and there are no regulations regarding borrowing amounts and repayment periods, which is not adequate. Score: Considering that FGIF financing of States is not properly regulated, minimum requirements are not met. Thus, a “D” score is assigned. To obtain a higher score, access to CBN financing should be legally regulated. DPI-2 Managerial Structure Dimension Score 1. The managerial structure for subnational borrowings and debt-related transactions C 2. The managerial structure for preparation and issuance of subnational loan guarantees N/A Dimension 1. The rationale is to ensure that the managerial structure for borrowing and debt-related transactions7 is effective and includes a clear division between the political level (namely the State Assembly, the Executive Council, the Governor, and the State Minister of Finance) who are in charge of setting the overall DeM objectives and decide on the risk level that the government is willing to tolerate by 6 The CBNA Section 27F. 7 Debt-related transactions are transactions in the market, such as swaps to change the risk profile of the debt portfolio, or debt buybacks of illiquid debt securities. 17 approving the medium-term DeM strategy; and the execution level, which includes the entities responsible for implementing policy decisions and the DeM strategy. 15. The DMD is the principal debt management entity reporting directly to the Permanent Secretary Treasury/ Accountant General. It is located at the Treasury Office and consists of five technical staff members – a director, a principal accountant (deputy director) and three accountants. It is organized according to front-, middle- and back-office functions (see figure 1). The director performs the front office functions. The deputy director performs middle office functions. The three staff members perform the back-office functions. 16. Ogun State DMO Law, Article 7, lists functions of the DMO. Most but not all these functions8 are performed by DMD. According to the Article 7, DMO shall: 1) Issue, on behalf of the State, such instruments as the State may desire to issue, from time to time; 2) Borrow on behalf of the Government, from any individual or institutional bodies; 3) Maintain a reliable data base of all instruments, loans or guarantees and all contingent liabilities related to it; 4) Prepare and submit forecast of loan service obligations for each financial year; 5) Prepare and implement a plan for the efficient manageme nt of the State’s debt obligations; 6) Verify and service debts guaranteed or taken directly by the Government; 7) Regularly reconcile the debt figures with the FDMO; 8) Set guidelines for managing state and local government financial risks; 9) Advise the Government on the restructuring and refinancing of all debt obligations; 10) Advice the Governor on the terms and conditions on which monies are to be borrowed; 11) Submit to the Government, for consideration in the annual budget, a forecast of the State borrowing capacity; 12) Prepare schedule of any other government obligations – - contingent liabilities-- and provide advice on their management; 13) Establish and maintain relationship with international and local financial institutions , creditors ...; 14) Collect and collate data on debt management and disseminate it with the approval of the Board; 15) Provide information, advise, monitor and exercise control on the internal and external loans; 16) Carry out other functions delegated by the Commissioner. 8 Functions listed in items 1;2;8; and 12 have not been performed. 18 Figure1: Ogun State: Organogram of the Treasury Office/ Office of the Accountant General Source: MoF. 17. Article 4 of the Ogun State DMO Law requires the establishment and regulates the composition of the Ogun State Debt Management Office Board (therea fter “the Board”). Accordingly, the Board shall consist of: 1) the Commissioner for Finance who shall be the Chairman; 2) the Commissioner for Budget and Planning who shall be the Vice-Chairman; 3) the Attorney General of the State; 4) the Economic Advisor to the Governor; 5) the Accountant General of the State; 6) the Director General of the Office, who shall be the secretary to the Board; 7) two representatives of the private sector appointed by the Governor. 18. The Government has established a Debt Management Committee (DMC)9 which meets quarterly to discuss relevant DeM issues. The DMC follows the functions prescribed by the Ogun State DMO Law for the Board and is the formal vehicle to coordinate debt management issues between the MoF and other involved ministries (i.e., Ministry of Budget and Planning (MoBP) and departments. 19. The Board’s functions are as follows 10: a) approve policies, strategies and procedures to be adopted by the office for the achievement of its objectives; b) review, from time to time, the economic and political impact on the State of debt management strategies; c) appoint technical committees; d) recommend for the approval of the Governor any debt issuance program or restructuring; e) perform such other functions as may be necessary to achieve the objectives of the Office. 20. DMD is assisted by DMC and the Commissioner of Finance in execution of front office functions. Ministries, Departments and Agencies (MDAs) initiate projects and submit requests for financing to the MoF. DMC with DMD’s participation discuss es projects and potential sources for their financing. Once considered viable, projects are proposed for the EXCO ’s approval, and loan negotiations led by the Commissioner of Finance commence. The loan agreements are 9 The DMC consists of Commissioner of Finance (chair), Commissioner of Budget, Attorney General, Accountant General, Economic Advisor and the Director of DMD. 10 DMO Act Article 9. 19 approved in DMC, EXCO and ultimately by the House of Assembly. The loan agreements are signed by the Accountant General (AG) and the Director of Treasury (DT). 21. The main function of the DMD is to keep accurate records of domestic and external debt data. However, it also estimates domestic debt service for the purpose of payments. It does some analysis of debt burden indicators and complies with FDMO domestic debt reporting requirements, but there is no strategy in place to guide borrowing activities. Score : Since DMD is the principal DeM entity and DMC meets quarterly to coordinate debt related issues among the relevant Ministries, the minimum requirements for this dimension are met and a “C” score is assigned. For a higher score, borrowings must be steered by a formal DeM strategy. Dimension 2. The rationale is to ensure that the managerial structure for preparation and issuance of SNG loan guarantees is effective. Loan guarantees extended to third parties are explicit contingent liabilities. Since this is a political decision, the use of the guarantees can be decided at the political level. However, as with debt transactions, it is desirable to leave overall responsibility for the preparation and the actual issuance of the loan guarantees to one entity, that is, a principal guarantee entity. 22. According to the Ogun State DMO Law (Article 21), the State Government may authorize and guarantee any loans to be taken by any Local Government or other agency of Government. No guarantee has been issued over the past couple of years and there are no outstanding loan guarantees. According to the Law, any agreement entered to issue loan guarantees shall be in writing and be executed by the Commissioner or by such other person as the Commissioner may designate. Where money is due to be paid that money shall be deemed to be a charge on the Consolidated Revenue Fund of the State. Score: The Ogun State has no outstanding loan guarantees and has not entered any loan guarantees during the last couple of years. In the absence of transactions, the score cannot be assessed, and the score is N/A, therefore. DPI-3 Debt Management Strategy Dimension Score 1. The availability and quality of the DeM strategy document D 2. The decision-making process and publication of the DeM strategy N/A Dimension 1. The rationale is to ensure that the SNG has prepared and approved a medium-term DeM strategy that is based on the longer-term DeM objectives and set within the context of the SNG’s macroeconomic assumptions and budget framework. 23. According to sound international practice, DeM activities should be steered according to a medium-term debt management strategy based on pre-defined objectives. The strategy essentially is a decision on market risk tolerance (i.e. interest rate risk; rollover risk and foreign currency risk). The strategy document should be updated annually to reflect the latest macro-fiscal and domestic market conditions. The DMD should review the strategy document as part of the budget process, and if the existing strategy is viewed as appropriate, the rationale for its continuation should be stated. 20 Box 2: Debt Management Strategy The DeM strategy should specify a target range for key risk indicators of the portfolio over the projected horizon. As an interim step, it would be enough to express the strategy as guidelines indicating the direction in which certain key indicators are expected to evolve.11 The following indicators are most likely to be assessed in order to select a DeM strategy: • Total debt service under different scenarios, particularly sensitivity to interest rate and exchange rate volatility • Maturity profile of the debt under different scenarios. Key risk indicators, such as: • ratio of foreign currency debt to domestic debt; • currency composition of foreign currency debt; • minimum average maturity of the debt; • maximum share of debt that can fall due during one and two budget years; • maximum ratio of short-term (up to one year) to long-term debt; • maximum ratio of floating rate to fixed rate debt; and • minimum average time to interest rate re-fixing. The content of the strategy and risk indicators will vary depending on the stage of economic development, and the sources of State’s funding. The DeM strategy document will preferably include the following: • DeM objectives and categories of debt covered (domestic, external, guarantees) and strategy timeframe • Description of the market risks being managed • Historical context for the debt portfolio • Description of the future environment for the State’s DeM, including fiscal and debt projections; assumptions about interest and exchange rates; and constraints on portfolio choice, including those relating to market development • Description of the guidelines to indicate the direction of key indicators that are expected to evolve over time in line with the DeM objectives • Description of the analysis undertaken to generate the recommended DeM strategy, clarifying the assumptions used and limitations of the analysis • Recommended strategy and its rationale. 24. The State has an estimated financing gap of NGN 12 billion for 2019. The sources of financing for this gap were yet to be identified. The authorities were relying on the possibility that the Federal Government will introduce a new FGIF facility and at the time of the mission did not plan to borrow commercially or to reduce expenditures to cover the financing gap. 25. As discussed under DPI-1, Nigerian States cannot borrow externally directly. All external resources are either on-lent or guaranteed by the FGN. The FDMO borrows the external funds and thereafter on-lends the proceeds to the states following the signing of a subsidiary loan agreement between the FGN and the states. In addition, the limits for state governments’ borrowing and debt levels, as well as sources of funding (i.e., external borrowing should be concessional) are regulated explicitly in Federal legislation. Although the regulations offer broad guidance for debt 21 management decisions (e.g. portfolio composition), the preparation of a medium-term debt management strategy for the State would help the decision-making process by highlighting cost and risk considerations of any resulting debt portfolio. 26. No medium-term DeM strategy has so far been prepared and approved by Ogun State. Currently there is no domestic or external market-based borrowing conducted. In response to fiscal problems related to oil prices and resulting decrease in the revenues of the States, the Federal government introduced FGIFs in 2015. Before the FGIF, the Ogun State Government domestic borrowing was conducted commercially. However, with the introduction of FGIF funds at subsidized interest rates, all commercial borrowing was repaid. The State also used FGIFs to repay outstanding arrears. All Ogun State’s domestic debt is now composed of various forms of FGIF funds (for more discussion, see DPI-7). Score: As there is no medium-term debt management strategy in place, the minimum requirement is not met, and consequently a “D” score is assigned. Dimension 2. The rationale is to ensure that the SNG has a robust decision-making process for strategy development, and that the strategy is published. A DeM strategy should be developed in an open and transparent manner. The principal DeM entity (or DeM entities together) prepares a strategy proposal; and the executive council, the governor or mayor, or SNG political decision-making body approves the strategy document. For extra quality assurance, the SNG may set up a specialized advisory board to comment on the draft strategy before it is approved. Score : This dimension is not applicable as there is no medium-term debt management strategy prepared by Ogun State. Therefore, the score is “N/A.” DPI-4 Debt Reporting and Evaluation Dimension Score 1. Quality and timeliness of the publication of a debt statistical bulletin (or its equivalent) D covering SNG debt, loan guarantees, and debt-related operations 2. The presentation and content of an annual evaluation report to the local assembly or D similar body on DeM activities and performance and report to central government (if applicable). Dimension 1. The rationale is to ensure that the SNG periodically prepares and publishes a debt statistical bulletin (or its equivalent). A debt statistical bulletin or its equivalent covering domestic and external SNG debt, loan guarantees, and debt-related operations ensures transparency of the debt portfolio and outstanding loan guarantees. 27. A debt statistical bulletin or its equivalent covering domestic and external state debt, loan guarantees, and debt-related operations ensures transparency. This information is vital for investors, lenders as well as, for the public. A debt statistical bulletin can be published in printed media, posted on official websites, or both. 28. The bulletin should be published at least annually (preferably quarterly or semiannually) and needs to provide information on State’s debt stocks (by creditor, instrument, currency, interest 22 rate basis, original, and residual maturity); debt flows (principal and interest payments); debt ratios and indicators such as the share of debt to State level GDP, share of debt to revenues, share of debt service to revenue and basic risk measures of the debt portfolio. 29. DMD does not prepare a statistical bulletin on debt, loan guarantees, and/or debt-related transactions. However, the Annual Financial Statements prepared by the Accountant-General Office and submitted to the House of Assembly contain debt statistics. The information provided include: 1) total domestic and external debt stock at the end of the reporting period disaggregated by debt instruments, 2) amortization, 3) disbursements and 4) interest payments. In addition, the DMD prepares the “Ogun State Debt Ratios” report that covers the last five financial years. The latest report was issued for 2013-2018. The analysis includes debt ratios, such as total debt stock- to-revenues, debt service-to-revenues, domestic debt stock-to-IGR. The report also includes information on nominal amounts of the outstanding debt stock and debt service payments. The latter report is not published; it is submitted for the Accountant General and the Commissioner’s information. 30. Existing debt reports do not meet the minimum requirements for a debt statistical bulletin because they do not contain interest rates, original and remaining maturities of outstanding debt or original loan contract currency. In addition, the “Ogun State Debt Ratios” report is not publicly disclosed. 31. Based on FGN mandates12 , all States are required to submit domestic debt data to the FDMO on a quarterly basis. The reporting template was introduced in 2005, and includes information on debt category, debt stock, and quarterly debt service payments (interest and principal) for each loan. The required data also include new disbursements and arrears to contractors and other suppliers. Ogun State complies with the Federal Government reporting requirements and provides this information within 60 days after the end of the reporting quarter. Aggregate amounts of domestic and external (on-lent or guaranteed) debt stocks are published by the FDMO on its website. Score: Considering that Ogun State does not prepare a stand-alone debt statistical bulletin or its equivalent, the minimum requirement for this dimension is not met, and a “D” score is assigned. Ogun State could benefit from higher score if adding the existing information to new basic indicators and publishing timely in a consolidated report. Dimension 2. The rationale is to ensure that the SNG is accountable for its DeM operations to the local assembly or similar body and to the citizens by providing frequent reports on DeM and debt-related operations and making these reports publicly available; and reports regularly to the central government if required by law and other legislation. 32. In addition to disclosing full information about public debt outstanding in a debt statistical bulletin, accountability is also strengthened by submitting a detailed annual report evaluating the DeM operations, including borrowing, to the State House of Assembly and then publishing the report on the State’s website. The report should include enough information to enable the House of Assembly to evaluate how successful the DeM operations were. 12 DMO Act, Section 6. 23 33. The Annual Financial Statements prepared by the Accountant-General are submitted to the House of Assembly.13 Nevertheless, there is no information on debt management operations undertaken during the last fiscal year. Score: Considering that the State does not report to the House of Assembly on DeM operations the minimum requirements for effective reporting are not met, and a “D” score is assigned. DPI-5 Audit Dimension Score 1. Frequency of financial audits, compliance audits, and performance audits of the D effectiveness and efficiency of SNG DeM operations, including the internal control system, as well as publication of the external audit reports 2. Degree of commitment to address the outcomes from the audits D Dimension 1. The rationale is to ensure that the DeM activities, policies, and operations are subject to scrutiny by the external and internal audit bodies. 34. Financial, compliance and performance audits are important to enhance transparency and efficiency of debt management operations. In general, accountability for DeM operations is strengthened by assessing the reliability and integrity of the financial and operational information. It is also important to ensure effectiveness, and compliance of DeM operations with the stated DeM objectives, strategy, existing laws and regulations. 35. According to the “Financial Regulations of Ogun State ”, paragraph 101, the Accountant- General should conduct routine and in-depth inspections of the accounting books of the State Ministries and Boards as well as Institutions and Corporations. The inspections should cover compliance with rules, regulations, policies decision and maintenance of Accounting Codes and Internal Audit Guides. The Accountant-General is also responsible to investigate cases of fraud, loss of funds, assets and store items and other financial malpractice in Ministries /Boards, Institutions and Corporations. The Inspectorate Department at the Accountant-General Office supports these functions. Within the Inspectorate Department, the Internal Audit is set up to service all government agencies. 36. Internal audit in Ogun State Government needs to be strengthened as reported by the Auditor-General in its annual report. It is mostly limited to financial auditing. No evidence of any internal financial, performance or compliance audit related to DeM operations were available to the mission. 37. External audit of the State Government’s operations is conducted by the Auditor- General of the State. The powers and functions of the Auditor General are described in the “Financial Regulations of Ogun State” 14. Accordingly, the officer responsible under the Constitution for the 13 The content of debt information included in the Annual Financial Statements is described under the first dimension of this DPI. 14 Chapter 1 paragraph 102 of the “Financial Regulations of the Ogun State”. 24 audit and report on the public accounts of the State, including persons and bodies established by law entrusted with the collection, receipt, custody, issue , sale, transfer,…, property of the State Government and for the certification of the Annual Accounts of that Government is the Auditor General for the state, hereinafter referred to as the Auditor-General. The Auditor-General shall examine and ascertain in such manner as he may think fit the account relating to public funds and property and shall ascertain whether in his opinion: 1) The accounts have been properly kept; 2) All public monies have been properly accounted for, and the rule and procedures applied are sufficient to secure effective check on the assessment, collection and proper allocation of revenue; 3) Monies have been expended for the purposes for which they were appropriated, and the expenditures have been made as authorized; and 4) Essential records are maintained, and the rules and procedures applied are sufficient to safeguard and control public property and funds. 38. Accordingly, the Auditor- General produces and publishes an annual Audit Report that includes financial audit of Government operations, including debt management. The audit report includes some elements of compliance audit of various Government agencies and departments but not related to DeM operations. Furthermore, it does not include performance audit of Government operations. Score: Since there is no compliance audit conducted on DeM operations during the last two years and the external audit report only covers financial audit of debt service payments included in the budget, the minimum requirements for this dimension are not met. A score of D is given for this dimension. Dimension 2. The rationale is to ensure that the relevant SNG decision makers are committed to address the outcomes from the audits. 39. Commitment to address audit findings on debt management issues cannot be rated since no compliance and performance audits have been conducted on debt management operations in Ogun State. Nonetheless, there is evidence of slow response to audit recommendations and queries in other sectors. In the latest audit report undertaken by the Auditor General on the accounts of the Government of Ogun State (2017), it is mentioned that there has been a prolonged lack of response. In the section dealing with the Ministry of Finance, for example, the report draws attention to the fact that “despite the advice given in the last report, the Ministry was yet to respond to the reports of the last two years…”. Score: Since no audits of DeM operations have been conducted over the past two years, the authority’s commitment to address audit findings cannot be assessed and therefore this dimension is not rated, and the score is N/A. 25 Coordination with Fiscal and Budgetary Policy DPI-6 Coordination with Fiscal and Budgetary Policy Dimension Score 1. Support of fiscal policy makers through the provision of accurate and timely forecasts D on total SNG debt service under different scenarios 2. Availability of key macro variables, an analysis of debt sustainability, and the frequency D with which it is undertaken Dimension 1. The rationale is to ensure that reasonably reliable and timely forecasts on debt service are provided during the annual budget preparation process. For budget formulation and execution, total debt service forecasts under different scenarios should be prepared for the fiscal authorities. In addition to debt service forecasts based on baseline assumptions on exchange and interest rates, budget authorities should also receive alternative forecasts in case those variables deviate from their expected values. 40. MoBP is responsible for the preparation of the annual budget and the medium-term fiscal framework (MTFF). According to the MoBP, the DMD provides timely inputs of projected debt service payments for the budget preparation. MoBP receives quarterly updates from the DMD. However, the mission noticed that realism of budget projections and consequently debt service projections could be improved. As an example, in 2018 the Budget expected capital receipts from disbursements of external borrowing for NGN 76 billion – in fact there were no receipts at all from this item. 41. The DMD does not forecast external debt service payments. External debt service projections are prepared by the FDMO and reconciled bi-annually with the DMD. The FDMO estimates debt service payments for the following six months based on a projected disbursement plan. The State services debt through twelve equal installments during the year. The annual financial statement summary produced by the Accountant-General captures the actual debt service paid. Adjustments for foreign exchange rate fluctuations or in actual disbursements are made at the end of the year. 42. The DMD prepares domestic debt service forecasts. Based on the data included in the MoBP ’s Budget of Accelerated Development Performance Report as of end 2018, the forecast error of total projected public debt charges versus actual payments in 2018 was far larger than ten percent.15 The table below shows the significant discrepancies. 15The DeMPA methodology requires to verify accuracy of projected debt service payments for the last three fiscal years. The mission team received data for the last two years. 26 Table 4: Public Debt Charges in NGN, 2017-2018 2017 2018 Planned Actual in percent Planned Actual in percent Public Debt Charges (overhead) 15,000,000,000 11,104,671,976 74% 22,150,000,000 11,274,923,632 51% Public Debt Charges (capital) 3,000,000,000 5,661,677,656 189% 5,000,000,000 7,692,458,019 154% Total 18,000,000,000 16,766,349,632 93% 27,150,000,000 18,967,381,651 70% Data source: MoBP. DeMPA team estimates. Score: Although the total central government debt service forecasts are provided as part of the budget preparation in a timely manner, they cannot be considered reasonably reliable since the forecast error is larger than ten percent of actual debt service payments thus the score is D. Dimension 2. The rationale is to ensure that key macroeconomic variables are available and shared with the principal DeM entity (or DeM entities) and that debt sustainability analyses (DSAs) at the SNG level are undertaken and shared with the principal DeM entity (or DeM entities). Key macroeconomic variables and consequent DSAs are essential for effective analysis of the cost and risk of the debt portfolio and development of DeM strategy. Both the projections of the key fiscal variables and the DSA are the responsibility of the fiscal authority. 43. A DSA is undertaken to assess the sustainability of public debt, considering a given macro- fiscal framework. A DSA exercise is prepared by projecting a baseline trajectory for the state’s debt (stock and flow) based on the assumptions underlying the macroeconomic framework. It then tests these baseline assumptions and analyzes how materialization of various shocks would affect the debt stock and debt service projections. 44. The MoBP is responsible for preparing a MTFF, covering three years. Nonetheless, longer- term key macroeconomic variables for undertaking a debt sustainability analysis (DSA) are not produced. The DMD prepares analysis of key debt ratios, including debt stock and debt service payments as a share of state revenues; domestic debt service as a share of IGR and external debt service as a share of FAAC. These ratios are compared with predetermined debt thresholds. This exercise however, is not forward looking, instead it looks back five years – the most recent one covered 2013-2017. Until 2011, the analysis was supplemented with a brief write-up on fiscal developments and debt sustainability outlook, which is now discontinued. Score: Since key macroeconomic variables (long-term forecasts) are not available, and a forward looking DSA has not been undertaken in the last three years, the minimum requirements are not met, and a “D” score is assigned. 27 Borrowing and Related Financing Activities DPI-7 Domestic Borrowing Dimension Score 1. The preparation of an annual plan for the aggregate amount of borrowing in the domestic D market, divided between the debt securities and other sources; assessment of the most cost- effective domestic borrowing terms and conditions; and the publication of an auction calendar for securities if applicable. 2. The availability and quality of documented procedures for domestic borrowing D Dimension 1: The rationale is to ensure that the SNG prepares a borrowing plan, documents and accesses the most beneficial domestic borrowing terms and conditions, and publishes an auction calendar whenever it regularly issues debt securities (short-term bills and longer-term bonds) through auctions. 45. Domestic borrowing by the State has been subject to large changes after the introduction of the so-called interventions funds by the FGN and the CBN. These funds were created to assist in solving the fiscal problems associated with falling oil prices and the consequent decrease in transfers from the Federation to the States. Before 2015, the State domestic borrowing was conducted commercially. After the introduction of intervention funds with subsidized interest rates commercial borrowing and arrears were paid back, see figure 2. All state domestic debt is now composed of various forms of intervention funds. The same tendency can be seen on an aggregate basis for all states, see figure 3, although less extreme since other forms of domestic borrowing, including arrears still exist. Figure 2. Ogun: Domestic Debt, NGN bill, Figure 3. Domestic Debt in all States, 2017 estimate 2017 estimate Source: World Bank. 46. Previously, the domestic and external borrowing was ear-marked for special projects. MDAs initiated projects and submitted requests for financing to MoF, which in turn discussed the project and options for financing in the DMC. The DMD together with the DMC identified financing options. The projects were approved by the EXCO. Loan negotiations started with local banks and the best terms were selected. The loan agreement was approved in the DMC, the EXCO and ultimately by the House of Assembly. As mandated by the FDMO Guidelines, the MoF had to get approval from the FGN also. Banks providing credit to states had to seek approval from the 28 FGN. The loan agreements were signed by the AG and the Director of Treasury Operations (DTO). With the FGN implementation of the intervention funds the State decided to pay back existing commercial debt as well as expenditures arrears, and now relies only on these facilities for its domestic financing. The domestic debt is currently composed of: • Restructured Term Loans, financed from FGN bond issuance • State Bail Out, financed by CBN through a commercial bank • Infrastructural Loan financed by CBN through Access Bank • Budget Support Facility financed by CBN through a special financing vehicle • Special Socio-Economic Development Intervention financed by CBN through Sterling Bank • Commercial Agricultural Credit Scheme financed by CBN through Sterling Bank (this CBN facility has been in place for a longer period than other interventions funds). Table 5: Evolution of Domestic Debt Stock, 2016-2017. In Naira Million 2017 % of Total 2016 % of Total Restructured Term Loan 49,489 47.11% 52,556 66.07% FGN: State Govt. Bail Out 8,267 7.87% 8,974 11.28% Access Bank: Infrastructural Loan 8,658 8.24% 9,398 11.82% Budget Support Facility 14,160 13.48% 8,614 10.83% Special Socio-Economic Development 19,655 18.71% - - Comm. Agricultural-Credit Scheme 4,810 4.58% - - T OT AL 105,040 100% 9,542 100% Source: Ogun State Government Financial Statements, 2017 and 2016 Reports 47. The procedures for accessing these facilities are similar to those described above with the exception that the starting point for the state is to utilize the existing facilities and develop projects meeting their requirements. There are also no negotiations since the terms and conditions are predetermined and the interest rates are subsidized by CBN. See Annex 1 for more details on FGIF. 48. The only other form of domestic borrowing consists of very short-term bank overdrafts agreed in case of delays in the disbursement of federal allocations. These overdrafts are agreed between Treasury and local banks and are repaid within 7 days. 49. For 2019 there is a financing gap in the Budget amounting to NGN 12 billion that is planned to be filled with domestic borrowing. There were no concrete plans for how to fill the gap; the facilities mentioned above were no longer available. The authorities expected that a new facility will be introduced, and no commercial borrowing was therefore planned. However, even the total borrowing envelope is sometimes far from being implemented. For example, in 2018 the aggregate domestic borrowing plan in the Budget amounted to NGN 15 billion (shown under capital receipts), but nothing was borrowed in the year. Score: The domestic borrowing planning activity does not lead to a borrowing plan identifying the borrowing sources. Thus, the minimum requirements for the first dimension are not met and the score is therefore D. 29 Dimension 2: The rationale is to ensure that written procedures are available for all domestic borrowing operations. The procedures for domestic borrowing operations should include all steps in the borrowing process. 50. The overall procedures for domestic borrowing are partly documented in the DMOA. However, the procedures described are not always followed because a DMO has not been established and there are gaps in the coverage of the complete domestic borrowing process. The FDMO borrowing guidelines also contain some guidance but since the document is drafted from the perspective of the FGN and FDMO, it does not define or allocate specific responsibilities at the state level. The borrowing guidelines only refer to the “States” as actors. The FDMO borrowing guidelines, in addition, do not cover procedures for the intervention funds or for bank overdrafts. Score: Since there are no documented borrowing guidelines within the DMD and/or the OAG the minimum requirement for the second dimension are not met and the score is therefore “D”. DPI-8 External Borrowing Dimension Score 1. Documented assessment of the most beneficial or cost-effective borrowing terms and D conditions (lender or source of funds, currency, interest rate, and maturity) and a borrowing plan 2. Availability and quality of documented procedures for external borrowings D 3. Availability and degree of involvement of legal advisers before signing of the loan C contract Dimension 1. The rationale is to ensure that the external borrowing operations are carefully planned and subject to a thorough analysis of the expected terms and conditions from all potential creditors and markets. 51. The states cannot borrow externally directly; instead they must get access to external financing through the FDMO. The FDMO borrows the external funds and thereafter on-lends the proceeds to the states following the signing of a subsidiary loan agreement between the FGN and the states. Currently, Ogun State has 17 external loan contracts where the primary creditors are the African Development Bank (ADB), Arab Bank for Economic Development in Africa (BADEA) and World Bank/IDA. No loan is currently disbursing, but a US$ 350 million infrastructure loan from the World Bank-IDA was expected to be signed at the time of the mission. 52. The overall borrowing process is described in the FDMO borrowing guidelines. See also Box 1 of this report. The states develop project proposals in line with the national development priorities. Such state projects must be approved by the EXCO and the House of Assembly and put forward to the FDMO. Following a positive FDMO decision, projects are proposed to the FGN EXCO and the National Assembly for approval. Following these approvals, loan negotiations between FGN and the creditor starts. The State representatives participate in these negotiations. When the loan agreement is signed, a subsidiary loan agreement, mirroring the terms and conditions of the loan agreement, is signed between the FGN and the State. 53. For Ogun State the Commissioner of Finance leads in the discussions with the FDMO, with limited assistance from the DMD. The DMD is not fully aware of the standard terms and conditions 30 offered by the various creditors and the options provided in terms of currencies and interest rate basis. Thus, these key features of the contract are determined solely by the FGN/FDMO and are incorporated in the subsidiary loan agreement. The subsidiary loan agreement is signed by the Commissioner. Typically, this activity is led by debt managers, which should use their expertise to assess the cost-risk characteristics of the instrument, in line with debt guidelines and strategy. 16 Score: Considering the absence of proper borrowing planning and the fact that DMD or other entity does not analyze the terms and conditions offered by creditors, the conclusion is that no cost-effectiveness analysis of the most beneficial debt instrument is conducted. Therefore, the minimum requirements for the first dimension are not met and score is a D. Dimension 2. The rationale is to ensure that borrowing activities from external sources are well documented, covering all creditors and funding sources. 54. The only documented procedures concerning external borrowing are contained in the FDMO borrowing guidelines. As mentioned, these guidelines are drafted from the perspective of the FGN and do not regulate the procedures within the states. Score: Since the Ogun State procedures for contracting external debt is not documented the minimum requirements for the second dimension are not met; the score is therefore D. Dimension 3. The rationale is to ensure that sound legal features are included in the loan agreements. Debt managers should receive appropriate legal advice to ensure that the transactions they undertake are backed by sound legal documentation. In doing so, debt managers can help SNGs clarify their rights and obligations and protect their position to the greatest degree possible in the relevant jurisdictions. 55. The Attorney General/ Minister of Justice provides legal advice to the Commissioner in the external borrowing process. When a draft subsidiary agreement has been received it is shared with the legal advisors who issue their legal opinion. This process meets the minimum requirements for the third dimension. However, higher requirements are not met because at the time the legal advisors are involved, the key elements of the subsidiary agreement have been agreed in the signed underlying contract between the FGN and the external creditor. The score is therefore C. DPI-9 Loan Guarantees, On-lending and Derivatives Dimension Score 1. Availability and quality of documented policies and procedures for approval and issuance D of loan guarantees 2. Availability and quality of documented policies and procedures for on-lending of borrowed D funds 16 The planned disbursements under existing loans (currently none) and new loans are included in the Budget under capital receipts as an aggregate amount. For 2019 the amount expected to be disbursed from the World Bank loan amounts to NGN 59 billion. This corresponds to approximately US$ 170 million, which in turn is approximately half of the prospective loan. The mission considers it highly unlikely that half of the loan amount can be disbursed this year, considering that the loan agreement has not been s igned yet; the loan is for infrastructure purposes and the procurement process has not started; contractors have not been selected; work has not commenced, and no invoices been received. 31 3. Availability of a DeM system with functionalities for handling derivatives, and availability N/A and quality of documented procedures for the use of derivatives Dimension 1. The rationale is to ensure that the SNG has documented policies for the approval and issuance of loan guarantees and, for the higher scores, that these procedures include (a) a requirement to assess the credit risk embedded in any loan guarantee before the decision has been made to issue the guarantee, and (b) a requirement to monitor this risk during the life of the loan guarantee. 56. The MoF should prepare operational guidelines for approval and issuance of loan guarantees. At a minimum, the procedures for approval and issuance of loan guarantees should include a) the eligible purposes of guarantees; b) the decision-making process; and c) procedures for monitoring guarantees. Such procedures should be updated regularly and approved by senior management. It would be better practice that the procedures also contain the requirements for credit risk assessments and the analysis of the financial impact if the guarantee is called. 57. Since the Ogun State DMO Law (Article 21) allows the Government to authorize and guarantee any loans to be taken by any Local Government or other agency of Government, the guidelines for approval and issuance of loan guarantees should be in place, which is not the current practice. Score: In absence of operational guidelines for approval and issuance of loan guarantees the rating is D. Dimension 2. The rationale is to ensure that the SNG has documented policies and procedures for on- lending of borrowed funds (domestic or external). SNGs often support public investment programs, regional business developments, as well as the business needs of state-owned enterprises through direct lending or on-lending of borrowed funds. Such on-lending instruments are expected to provide an adequate supply of credit for the legitimate business or investment needs of the beneficiary, as defined by the respective policy. The SNG is also expected to price that credit reasonably in line with competitively determined market interest rates. 58. The Sterling Bank Commercial Agricultural Credit used NGN 5 billion for on-lending purposes. The funds were on-lent to a fish-farmers´ society in the state being eligible for the scheme as defined by CBN. The current on-lending is a continuation of a state scheme supporting farmers starting in 2012. The original scheme was managed through a committee in which the Ministry of Agriculture and the Ministry of Commerce had leading roles (e.g. assessed the financial strength of the society and its members). As far as the mission understands, the state borrowed the funds at an interest rate of 6 percent and on-lent the proceeds at an interest rate of 9 percent. The justification for this 3 percentage points increase in the interest rate is not clear to the mission. 59. The on-lending credit agreement was signed by the AG and the DTO. Under the contract the society shall pay the debt service to the State’s bank account in Sterling Bank. The bank in turn accounts for the proceeds as part of the Ogun State debt service of the total credit. The monitoring of the repayments is conducted by the Planning Department in the Ministry of Agriculture. The credit had to be repaid by the end of April 2019. The Auditor-General made a remark in the audit report for 2017 that no repayments under this scheme have been made during the last two years. 60. The processing of the on-lending under this scheme was briefly documented by the Ministry of Agriculture. The document states that the loan facility is for farming purposes only. 32 The steps include application and payment of a fee for the application. The application shall include a feasibility plan and be submitted to the Ministry of Agriculture. An evaluation team will assess the feasibility plan and conduct on-site inspection. If approved, the society must pay 5 percent of the total loan amount as an initial payment before disbursement. 61. The Ogun State lacks overall procedures for approval and issuance of on-lending contracts. In the future, on-lending may take place in other sectors and not be limited to Agriculture. Therefore, the MoF as the responsible entity for the State’s debt management should have overall procedures for management of on-lending activities. At a minimum such procedures should include: a) the purposes of the on-lending; b) the decision-making process; and c) monitoring procedures. Approval and issuance procedures for on-lending contracts should be updated regularly and approved by senior management of the state MoF. It would be even better practice that procedures contain requirements for credit risk assessment and analysis of the financial impact if the on-lending beneficiary fails to repay the loan. Score: Since there are no MoF’s documented procedures for overall approval and issuance of on- lending contracts, the minimum requirements for this dimension are not met and the score is therefore D. Dimension 3. The rationale is to ensure that the SNG has a debt recording and management system with proper functionalities for handling financial derivatives; that documented procedures are in place for the use of derivatives, if applicable. Score: The Ogun State has not entered any swaps or derivatives. The dimension is not applicable, and the score is N/A. Cash Flow Forecasting and Cash Balance Management DPI-10 Cash Flow Forecasting and Cash Balance Management Dimension Score 1. Effectiveness of forecasting the aggregate level of cash balances in SNG bank accounts D 2. Effectiveness of managing this cash balance in SNG bank accounts (including the integration D with any domestic debt borrowing program) Dimension 1. The rationale is to ensure that reasonably reliable forecasts of the SNG cash balance are produced and available to the principal DeM entity (or DeM entities). Some of the forecast information, such as debt servicing, will be produced by the DeM entity, while other information, such as revenues forecast including revenue transferred from the central government and locally generated, may be provided to the DeM entity by the relevant SNG authority. 62. The MoBP is involved in key aspects of budget execution that typically belong to the Accountant General and the Treasury. The budget execution is partly centralized and partly devolved to the MDAs. An IFMIS is currently being implemented but so far it seems to be operational only between the MoF and the MoBP. Salary payments are conducted centrally 33 through a centralized payroll system. Payments are conducted directly to bank accounts of employees. For overhead expenditures and capital expenditures, large payments are centralized whereas small payments are conducted directly by the MDAs from their own bank accounts funded by the State. Invoices for larger amounts are submitted by the MDAs, along with certificates of work and services supplied, to the Governor for approval. After such approval, the invoices and the supplementary documentation are submitted to the MoBP. The MoBP checks the correctness of the claim and its compliance with the Budget. 63. Before processing the invoice further, the MoBP brings the total claims to the Cash Management Committee (CMC), including the Governor and the Commissioners of Finance and Budget. The CMC works closely with the EXCO. Due to cash constraints the CMC meets often, sometimes daily. At the meetings, the Cash Management Unit (CMU) presents its cash flow forecasts for the short-term. These cash flow forecasts are typically a mixture of actuals and forecasts. For instance, the starting point for the month is the actual allocation from the Federation. Then the projected IGR, based on previous month collection, is added to the Federation allocations. Based on the cash flow forecast, the CMC decides on the overall envelope for the various ministries and MoBP implements the decision by releasing corresponding ministry-wise warrants to the OAG – which allows OAG to make payments within the amounts of the warrants. The warrants are submitted to the OAG which together with the Commissioner decides on which invoices are to be paid, based on actual cash availability. 64. Within this process of multiple steps and clearances, invoices may fall in arrears at different stages for different reasons. The MDA may not submit an invoice to the Governor if it considers it will not be approved. The Governor may not approve the invoices submitted. The MoBP may not release warrants to the OAG corresponding to the budgeted amount. The OAG, in turn, may not be in a position to pay the invoice according to the warrants, in case of insufficient funds on the bank accounts. In practice, the compilation of arrears is conducted by the MDAs and submitted to the OAG for further submission to the DMD and the FDMO. 65. In addition to short term cash flow forecasts, the CMU is compiles revenue estimates for the Budget from various MDAs involved in revenue collection, e.g. Ogun State Internal Revenue Service and other MDAs. The revenue estimates for the Budget are based on the estimates for the current year plus an increase in line with an estimate of the growth rate. For 2019 the estimate for IGR is NGN 159 billion compared with an estimate of NGN 149 billion for 2018. This is an increase of 7 percent, which seems prudent. However, the actual for 2018 was only NGN 84 billion. The increase from NGN 84 billion to NGN 159 billion corresponds to a 90 percent increase, which must be considered unrealistic unless there are major changes to tax policy and/or collection procedures, which is not the case. 66. The annual forecast is formally included in a monthly cash plan for the entire year with equal monthly collection. The monthly forecasts are furthermore broken down on weekly basis using previous experience, see figures 4 and 5. Daily forecasts are also conducted for the CMC meetings. 34 Figure 4. Monthly IGR 2018, NGN Figure 5. Weekly IGR, Jan 2018, NGN Source: World Bank CMU 67. The monthly forecasts for 2018 missed the actuals substantially because they were based on unrealistic revenue estimates in the Budget; in addition, the forecasts lacked adjustments for seasonality. The weekly forecasts for January 2018 included some seasonality but except for one week the forecasting errors are large. Such inaccurate cash flow forecasts cannot be effectively used in the expenditure management process. Thus, the cash flow forecasts used for decision making in the expenditure management process instead consisted of very short-term forecasts for the almost daily meetings in the CMC. Score: Since the cash flow forecasts on monthly and weekly basis cannot be considered reasonably reliable, the minimum requirements for the first dimension of this indicator are not met. The score is therefore D. Dimension 2. The rationale is to ensure that the cash balance is actively managed. It is important that the SNG cash balance target be set at a point that provides sufficient protection against periods of market instability and that actions be taken to keep the cash balance at this level. 68. The OAG ensures sufficient cash balances mainly through cash rationing, i.e. postponing payments due and creating arrears. In the absence of a well-developed short- term financing program the State agrees with its three main banks on overdrafts to be repaid within 7 days. This negotiation is managed by the CMU. The overdrafts are mainly used to overcome cash shortages should the Federal allocation be delayed allowing the salaries to be paid on due dates. Otherwise the State must use the cash balances to overcome any temporary cash shortages. However, the cash balances are small and are therefore all deposited in current bank accounts in three banks, which do not pay interest on current accounts. Score: Ogun State does not have enough cash balances as a minimum cash buffer and does not invest any surplus cash in interest earning instruments, such as term deposits. Thus, the minimum requirements for the second dimension are not met and the score is D. 35 Debt Recording and Operational Risk Management DPI-11 Debt Administration and Data Security Dimension Score 1. Availability and quality of documented procedures for the processing of debt-related payments D and receivables 2. Availability and quality of documented procedures for debt and transaction data recording and D validation, as well as storage of agreements and debt administration records 3. Availability and quality of documented procedures for controlling access to the SNG’s debt D data recording and management system and audit trail 4. Frequency and off-site, secure storage of debt recording and management system backups D Dimension 1. The rationale is to ensure that there are documented procedures for the processing of debt- related payments, including the following requirements: (a) all payment notifications are checked with internal records before payments are made; (b) payment instructions are subject to a minimum two-person authorization process; and (c) payments are made by the due date. This set of rules and processes should be documented in a procedure’s manual. 69. The key responsibilities of DMD’s back office (BO) are processing and controlling payments to effect settlement of government debt and other debt-related transactions. These functions must be performed accurately and timely, minimizing operational errors. To minimize the operational risk involved, the whole process should be described in a written procedures manual to guide staff – which could be revised to improve efficiency and effectiveness. 70. Currently, there are no written procedures across the Ministry of Finance for the different processes undertaken by its agencies and departments – including written procedures for processing of debt related payments. 71. However, the undocumented procedures for processing debt-related payments seemed to work well in practice. Currently, the BO prepares, on a monthly basis, a calendar of domestic debt service payments falling due during the following month. The calendar is then checked by the DMD’s director who approves and sends it to the OAG, then the Treasury Department. 72. There are six different domestic financing instruments of which two are serviced from IGR and closely managed by DMD. For debts serviced by the IGR, commercial banks submit a debt service invoice to the Treasury Department which then checks the invoice against the monthly calendar prepared, but not the internal records, by DMD and makes the payment. The other four domestic financing instruments are serviced with ISPOs. An ISPO permits a debt service payment to be made automatically from the State’s revenue account on a due date. The DMD then verifies the bank statement against the projections made for the month. 73. For external debt service, the FGN externalizes the debt service on its due date from the consolidated account. Then, the debt service payment is deducted from the Ogun State’s FAAC monthly allocation. On a by-annual basis, the DMD reconciles with FDMO the actual debt service paid. Score: Since there are no written procedures for processing debt related payments, the minimum requirements for this dimension are not met and the score is D. 36 Dimension 2. The rationale is to ensure that there are documented procedures for recording and validating debt data (new debt, disbursements, and repayments) as well as for storing agreements and debt administration records, including the following requirements: (a) accuracy of debt data is ensured by segregation of responsibilities for data entry and confirmation of the accuracy by separate staff before the entries are deemed to be completed; (b) debt data are constantly validated against received payment notifications; (c) all original, signed copies of loan and derivative agreements are stored and filed in a secure location; and (d) all debt administration records are kept in a secure filing system. 74. There are no documented procedures for recording and validating debt data in Ogun State. The domestic debt database of Ogun State is currently in an excel file and managed by the DMD. It is updated monthly based on statements of accounts received from the FAAC and information provided by the Treasury (for two loans paid from the IGR). The BO staff update the database and the head of DMD validates it. The external database is updated upon receiving statements from the FDMO on a bi-yearly basis. 75. Subsidiary loan agreements of external debt are kept at the OAG and a copy at DMD. Debt related files are kept at the DMD. All documents and copies are kept at the same building, and they are not located in a secure and safe environment. There is no protected access to the files and no fire or flood prevention facilities available. Score: Since there are no written procedures for recording and validating debt data and storage of debt related documents is unsecured, the minimum requirements for this dimension are not met and a score is D. Dimension 3. The rationale is to ensure that there are documented procedures for controlling access to the debt recording and management system. The debt data in the debt recording and management system or database must be secure, the system should be located in a locked area, and access to the system by users and information technology specialists should be tightly controlled through access permissions and password controls. 76. There are no documented procedures for controlling access to the debt recording system. All debt data are kept in three excel-files. The master files are kept at the director’s computer which is only protected by the password required to enter the computer when turning it on. Access to the database is given on an ad-hoc basis to all DMD staff. The FO and MO staff monitor changes in the debt database and updated files are saved at the Director’s laptop as the last version of the database. BO staff have access to the databases as required to prepare their monthly projections and other reports. No audit trail system is available, and all staff have indiscriminate access to all the data. Score: Since there are no documented procedures for accessing the debt recording system and access to the system is not controlled, the minimum requirements are not met. A score of D is given, therefore. Dimension 4. The rationale is to ensure that debt recording, and management system backups are made frequently and that the backups are stored in a separate and secure location. A copy of the debt data (backups) should be made frequently and stored in a secure location outside the building in which the debt database is located. 77. Back-ups are made on a weekly basis but kept in the same building the DMD is located. A copy of three excel files containing debt data is kept in an external drive and left at the OAG, which 37 is located at the 4th floor of the same building as the DMD. DMD is not connected to the Ministry’s existing computer network, although there are plans to establish a network connection within the Ministry. Score: Since the back-up copy of the debt files is not kept in a separate and secure location, the minimum requirement for this dimension is not met and a score of D is given. DPI-12 Segregation of Duties, Staff Capacity, and Business Continuity Dimension Score 1. Segregation of duties for some key functions, as well as the presence of an operational risk C monitoring and compliance function 2. Staff capacity and human resource management C 3. Presence of an operational risk management plan, including business continuity and disaster D recovery arrangements Dimension 1. The rationale is to ensure that the internal organization of the principal DeM entity (or DeM entities) is based on the segregation of duties between debt managers with the authority to negotiate or contract the loan agreement and enter the contract information in the debt management system, and those responsible for (a) confirmation of contract information, and (b) initiating and processing payments. It is also to ensure that there is a separate risk monitoring and compliance function. 78. The process for contracting loans, entering loan information in the debt recording system, as well as the system for debt data entry confirmation and initiation of payments is fairly disaggregated in Ogun State. The Minister of Finance, after consultation with DMC, negotiates external (through the FDMO) and domestic loans. The loan agreements are then passed to the OAG and then to DMD for appropriate recording into the excel database, which is done by the BO. The data entry is then verified by the FO and MO staff. The payment process for external loans is externalized on its due date by the FGN from the consolidated account and deducted from Ogun State’s FAAC monthly allocation. For domestic debt service, the BO prepares a domestic debt service payment calendar which is approved by the FO. When a debt service payment invoice is received, the Treasury Department checks it against the monthly payment calendar and services it. 79. According to the job descriptions, the DMD director oversees “risk management related functions of public debt management”. This function however, was understood as related to debt portfolio risk assessment rather than to operational risk management. In practice there are no staff assigned to monitor that all DeM operations are (a) within the authorities and limits set by government policies; (b) in compliance with statutory and contractual obligations; and (c) within the risk parameters included in the approved DeM strategy and in accordance with the operational risk management plan. Score: Considering the existing segregation of duties for negotiating and contracting loans, recording debt data in the system, verifying information and initiating debt service payments, the minimum requirements for this dimension are met and the score is C. To receive a higher score (i.e. B), there must be at least one staff member responsible for risk monitoring and compliance of debt management operations. 38 Dimension 2. The rationale is to ensure that a sufficient number of DeM staff are employed and are adequately trained, and that individual job descriptions have been prepared. 80. There is sufficient number of staffs to perform existing DeM functions. DMD consists of 5 staff members. The director of DMD is responsible for FO functions and supports MO functions. The deputy director is responsible for MO functions and supports BO functions. There are three staff members assigned to BO functions. DMD also has a clerical officer. All staff have accountant backgrounds. Debt related trainings for the staff at the DMD have been limited. The director has participated in two training events organized by the WAIFEM on CS-DRMS and DeMPA. The BO staff have received on-the-job-training since joining DMD. No training has been provided on loan negotiations, DeM strategy preparation, or any other debt related subjects. Training programs at the Ministry level are also very limited. Nonetheless, Ogun State manages to send two staff to the Administrative Staff College of Nigeria in Lagos every year. 81. All staff members have job descriptions which include their current tasks. There is a staff evaluation process called “Progress Evaluation Report” which is conducted every six months during the first two years after joining the Government. After that, staff is evaluated on a yearly basis through the “Annual Performance Evaluation Report” which takes place at the beginning of each year. 82. When joining the Civil Service, all staff are required to sign an oath of secrecy limiting the information and data they can discuss outside the Government. Staff are required to sign the oath every two years. There are no conflict-of-interest guidelines available for DMD staff. Score: Since there are sufficient and adequately trained staff with formal job descriptions reflecting their current tasks, the minimum requirements for this dimension are met and a score of C is given. To receive a score of B, the DMD staff should also have conflict-of-interest guidelines. Dimension 3. The rationale is to ensure that there is a business continuity and disaster recovery plan as well as. Business continuity planning allows an organization to prepare for future incidents that could jeopardize the performance of its duties, the ability to meet business objectives, a nd its long-term health. Such incidents include local incidents such as building fires, regional incidents such as earthquakes, or national incidents such as pandemic illnesses. Score: There are no business continuity and disaster recovery plans available at Ogun State Government. The minimum requirements for this dimension are therefore not met and the score is D. DPI-13 Debt and Debt-Related Records Dimension Score 1. Completeness and timeliness of SNG records on its debt, loan guarantees, and debt-related D transactions. 2. Complete and up-to-date records of all holders of SNG securities in a secure registry system, N/A if applicable. Dimension 1. The rationale is to ensure that the SNG has complete records of its debt, loan guarantees, and debt-related transactions, such as currency and interest rate swaps. Sound practice requires a comprehensive debt management system that records, monitors, settles, and accounts effectively for all SNG debt and debt-related transactions. 39 83. A comprehensive debt management system should allow to record, monitor, settle, and account effectively for all State Government debt and debt-related transactions. This system should provide for an accurate, consistent, and complete database of domestic, external, and guaranteed debt. It forms the base for all DeM activities, including the cost-risk analysis of the debt portfolio, DeM strategy development, borrowing plans, and debt service payments. 84. Ogun State Government debt records are kept in three excel spreadsheets. One spreadsheet includes six domestic debt loans. Another spreadsheet includes seventeen external loans (on-lent by FDMO). The third spreadsheet is used to calculate and maintain debt service projections for all loans. The database is accurate. The domestic debt database is updated with repayment information monthly. Domestic loan disbursement information is available from the Budget Ministry and Project Coordination Units on a quarterly basis. However, the external debt database is updated on a bi-yearly basis with the FDMO information on disbursements and debt service payments. Note that DeMPA requires complete records within a three-month lag for States domestic, external, and guaranteed debt, as well as all debt-related transactions. The Ogun State has no outstanding loan guarantees. Score : Since the time lag for updating the debt database is longer than three months, the minimum requirement for this dimension is not met and a score of D is given. Dimension 2. The rationale is to ensure that there is an accurate and secure registry system f or SNG debt securities issued in electronic form. Score: Ogun State does not issue government securities and therefore does not keep a registry of holders. This dimension is therefore not applicable, and the score is N/A. 40 Annex 1: FGN/CBN Lending Schemes/Facilities available to Nigerian States Scheme Description Commercial Agriculture CBN established the scheme in 2009 to provide finance for the Credit Scheme (CACS) agricultural value chain (production, processing, storage and marketing). Increased production arising from the intervention would moderate inflationary pressures and assist CBN to achieve its goal of price stability in the country. The scheme which is a subcomponent of the FGN Commercial Agriculture Development Program (CADP) was initially financed through a NGN200 billion bond raised by the FDMO. Loans to eligible entities under the Scheme are disbursed at a maximum interest rate of 9 percent. The subsidy arising from this stipulated rate and the market rate on all loans granted, and the administrative expenses of the Scheme are borne by the CBN. The bond has now been repaid and replaced with direct CBN financing. Each state government could borrow up to NGN1 billion for on-lending to farmers’ cooperative societies and other areas of agricultural development provided such initiatives/interventions are in line with the objectives of the CACS. Small and Medium The scheme is a voluntary initiative of the Bankers’ Committee Enterprises Equity in 1999. The scheme requires all banks in Nigeria to set aside Investment Scheme ten percent of their profit after tax (PAT) for equity investment and promotion of small and medium enterprises. The 10 percent of the PAT to be set aside annually shall be invested in small and medium enterprises as the banking industry’s contribution to the Federal Government efforts towards stimulating economic growth, developing local technology and generating employment. The funding to be provided under the scheme shall be in the form of equity investment in eligible enterprises and or loans at single digit interest rate. A state may benefit from the scheme by borrowing and on-lending (or providing the funds for free) to companies owned by the state. The Power and Aviation The CBN provided a NGN300 billion facility for investment in Intervention Fund (PAIF) debentures to be issued by the Bank of Industry (BOI). The funds are to be channeled through the BOI for on-lending to the Deposit Money Banks for disbursement at concessionary interest rate of not more than 7.0 percent and a tenor of 10- 15 years. A state may benefit from the facility by borrowing and on-lending (or providing the funds for free) to companies owned by the state. 41 CBN Salary Arrears Bail The salary bailout intervention fund was initiated by the Federal Out Government due to the reduced FAAC allocations to states following drop in oil prices in 2014. The states could access the facility if they cleared the salary arrears. The facility provided loans with a maturity of 20 years at an interest rate of 9 percent. CBN provided the funds to commercial banks that in turn provided the funds to the states. CBN Excess Crude This facility was also directed towards the states and provided Concessionary Credit similar terms and conditions for the loans, as in the case of the Facility salary bail out. CBN provided the funds to commercial banks that in turn provided the funds to the states. CBN Budget Support The budget support facility (BSF) was also directed towards the Facility states as part of the Fiscal Sustainability Plan introduced by the Federal Government. The states must undertake reforms in order to qualify for the facility. The terms include a 10-year maturity period and 1-year grace. Nonetheless, as of the time of the mission the grace period has been extended. The interest rate is 9 percent. CBN provided the funds to a company, BSF Special Purpose Funding Limited, that in turn provided the funds to the states. Debt Restructuring Facility The FDMO has provided a facility for supporting the states to conduct domestic debt restructuring with commercial banks. FDMO issued bonds and paid back expensive short-term financing owed by the states and provided new loans to the states with 20 years maturity and an interest rate of 14.8 percent. Source: Mission team with information collected from FDMO, CBN and DMD. 42 Annex 2: List of Ogun State Officials Met APRIL 8 – 12, 2019 No NAME TITLE DESINATON / CONTACT E-mail Address INSTITUTION NUMBER 1 Dada O.A. Mrs. Permanent Secretary 08037126532 dadaolufunmilayo@yahoo.com Ministry of Finance 2 Adekunle H.T. Mr. Permanent Secretary Min. 08033189778 omomeji@yahoo.com of Budget & Planning 3 Adetayo Arinola Mrs. Director – Debt Mgt. Dept. 08030509377 adetayo0903@yahoo.com Nusirat Ministry of Finance 4 Kilaso Risikat Mrs. Deputy Director Debt Mgt. 08038127698 ganiyuwunmi@yahoo.com Olawunmi Dept. Ministry of Finance 5 Isinkaye Olulana D. Mr. Accountant 1 - Debt Mgt. 08054107611 enezzer@yahoo.com Dept. Ministry of Finance 6 Olurinade Modupe A. Mrs. Accountant 2 - Debt Mgt. 08036160469 follydupsy@yahoo.com Dept. Ministry of Finance 7 Adetona Ahmed B. Mr. Director - State Audit 08033462266 adebayohammed@yahoo.com 8 Towolawi Adesina Mr. Director Inspectorate 08035199967 okegbwo@yahoo.com M. Office of the Acct. Gen. 9 Salako Iyabo O. Mrs. HEO – Acct. Debt Mgt. 07034835453 salakaolayinka24@gmail.com Dept. Ministry of Finance 10 Alatise Hammed O. Mr. Clerical Debt Mgt. Dept. 08164555791 halatise@yahoo.com Ministry of Finance 11 Odulaja Kelvin A. Mr. Senior Accountant Min. of 07055995444 biodunodulaja@yahoo.com Budget & Planning 12 Elemide Musibau A. Mr. Senior Accountant Min. of 08062148947 elemidealao1975@gmail.com Budget & Planning 13 Osibodu A.O.O. Mr. Director - Min. of Budget 07034590972 tomiwaosibodu@yahoo.com & Planning 14 Ogunsan A.A. Mrs. Deputy Director F.A. 08027814470 ogunsanadenike@yahoo.com Ministry of Finance 15 Sulaiman A.J Mr. Director CAD State 08121318101 heywaiho@yahoo.com Treasury Office 16 Oladipupo Olajide Mr. Director Admin & Supplies 08033665741 oladipupoolajide5@gmail.com .A. State Treasury Office 17 Adekunie Adebayo Mr. Head PFMU Office of the 08037150680 adelemlebayo2006@yahoo.com Acct. General 18 G.O. Olukoga Mr. Director Compliance 08035070038 olukogagabriel@gmail.com Ministry of Finance 19 J.O. Ojo Mr. Director ADMIN. Ministry 08035644772 muyitapa9@gmail.com of Finance 20 R.O. Eleyowo Mr. Director PR&S Ministry of 08033812920 eleyowo.richard@gmail.com Finance 21 D.O. Alao Mr. Director of Statistics 08033929041 davidolawalealao2017@gmail.com Ministry of Finance 22 K.O. Ogunsiji Mr. Deputy Director Special 08034481330 kunleogunsiyi@gmail.com Duties Ministry of Finance 23 Oyekanmi T. Mr. Director Finance & Acct. 08030811955 taiwo.oyekanmi@yahoo.com Ministry of Finance 43 24 A.O. Adewole Mrs. Director, Ministry of 08054583728 jumokeadewole@gmail.com Justice 25 T.F. Oretade Miss Senior State Counsel 08055056553 teeteeoret@yahoo.com Ministry of Justice 26 Balogun A.L. Mr. Deputy Director Office of 08056326225 akoredebalo@yahoo.com the Acct. General 27 Taiwo Olalekan Peter Mr. Accountant central pymt. 08037454519 olalekan-peter@yahoo.com Unit State Treasury Office 28 Odusanya Abdulfattai Mr. Head IT. State Treasury 08035607282 fatai_odusanya@yahoo.com Office 29 Adeyemi Ademuyiwa Mr. Supporting Staff Debt Mgt. 08137890665 Adeyemiademuyiwa.aa@gmail.com Dept. Ministry of Finance 30 Idowu M.O. Mr. Deputy Director Office of 08033455892 michaeloluidom@gmail.com the Acct. General 31 Adekunle Kamoni A. Mr. Project Coordinator Min. 08039447100 katilab@yahoo.com of Budget & planning 32 Musa Abdullahi Mr. Supporting Staff Debt Mgt. 07064887155 abdullahmusa@yopmail.com Dept. Ministry of Finance 33 Aregbesola T. Mr. Director of Finance & 08061313093 baragbesola2007@yahoo.com Babatude Accts Ministry of Agriculture 44