VisionScape, Green Note Investors And Lagos State Government
The State’s Green Note was issued in 2018 as a response to addressing the problems of Lagos State’s street sanitation in a sustainable manner. The intention of the Note was to create a framework within which the state government could clean up the environment and recycle waste generated in the process while creating a sub-economy that was self-financing and self-sustaining with the added advantage of a clean cityscape.
The Note proceeds was to be used by a state-supported private Special Purpose Vehicle (SPV), Municipality Waste Management Contractors Limited to acquire modern refuse collection, separation and processing equipment to achieve the goal of collecting refuse and transferring them to designated facilities where they would be processed for conversion into a variety traded byproducts. The project started optimistically but has since hit a roadblock.
Unexpected political push backs compelled the govt. to revisit the business template. The model adopted by the Fashola’s administration was a private public partnership (PPP) between the LAWMA & private individuals who employed thousands of women who served as roadside cleaners.
The new arrangement adopted by the current administration, though quite laudable, was a disruption of the old order and was considered a violation of the understanding between the administrations party leadership and its grass root party support base. The consequence has been a reversal to the old Private Sector-supported Participation (PSP) and the resumption of the army of female street cleaners across different local governments. This has thrown a monkey wrench into the revenue flows expected by the Note Issuer.
The project managers failed to scale & sequence the project appropriately, leading to a situation where the state was left at the mercy of unorganized small-scale private refuse collectors while Municipality Waste Management Contractor was still under construction. This burden has led to the project failing to meet the cash flow expectations of the Note’s Information Memorandum and left the state in a financial bind. As of the time of this writing, the Note’s sinking fund is still underfunded and has limited capacity to meet the cash flow expectations of the investors on a sustainable basis. This will continue if the shortfalls in fund accretion persist.
The Sinking fund is expected to grow monthly to ensure that investors get paid fixed incomes on a semi-annual basis. But the Cleaner Lagos Initiative Note has not received funding from the state government treasury (or the Issuer) since October 2018.
The normal practice for such Bonds and Notes is that the Issuer funds the sinking fund on a monthly basis according to a pre-arranged payment plan, thereby building up revenues from which to meet Coupon and Principal payments to investors.
By not meeting the strict payment terms of the Green Note, the State government would be conveniently deferring cash outflows before a new administration takes over. It would also be damaging the state’s credit rating, resulting in a situation where the new administration will
have to face:
- A collapse of its Credit rating and a rise in the states cost of funds or its short and medium term borrowing costs.
- Lower Credit ratings would discourage institutional investors from lending to the state government
The Note, with a four and a half year tenor, was meant to pay both coupon & principal to investors in the first week of March 2019. However, the poor state of the Note’s sinking fund and the slow response of the state to the payment of the fixed income obligation has raised anxiety among investors.
As things stand today, investors are petrified of the growing likelihood that the State Government would skip payment for the month as the administration awaits the outcome of the governorship election to be held on Saturday 9, March 2019.
Original Post: proshare.ng