Memo To The Market
Exporters in the country have amped up their well premised and deep concerns over what they see as the Federal Government’s (FGN’s) delayed implementation of the Export Expansion Grant (EEG) Scheme. The scheme, designed to encourage exporters to sell goods abroad with a tacit grant that allows them receive tax charge offs and other benefits is, according to evidence, in limbo. The scheme appears to have fallen flat as a result of the awkward payment arrangement designed by the FGN over the years which is now the responsibility of the Debt Management Office (DMO) to discharge by way of paying grants in the form of a reverse auction promissory note with long tenors.
A cursory review of discussions and robust engagements thus far reveals a consensus on the why and how but a divergence on the executable form and structure.
In a letter to the Vice President sighted on the matter, the Organized Private Sector Exporters Association (OPEXA), noted that they were “constrained to draw [the VP’s] attention to the the continued hardship and ill-treatment being inflcited upon the businesses and investors in the strategically important export sector especially as relates to the Promissory Notes (PN) program of the Federal Government of Nigeria”.
The challenge, as represented, had been that the government desire to ensure the much agreed upon transperancy and integrity of the exporter’s PN scheme, has eqaully stalled progress on the debt repayment project either due to structural inadequacies or consensus on the issue of what is equitable, fair and just.
More importantly, by adopting a reverse auction method of pricing PNs, the government has sacrified exporter funding viability for fiscal convenience and budgetary expedience; the challenge of addressing a lean government wallet has become more important than incentivizing exporters who will generate future revenues that will subsequently be taxed. In effect, The egg and the chicken seem to be in conflict over seniority.
Much Ado About A Program – Understanding the EEG
The EEG scheme was introduced by the FGN in 1999 to encourage non-oil exporters increase export volumes and move away from a mono-cultural economy but was suspended in 2013 before it was reintroduced in 2017. The FGN in 2017 felt that the reason for the scheme which was established by an act of parliament (the Export (Incentives and Miscellaneous Provisions) Act) in 1992 was still relevant.
The ECC has had alternative uses including the following:
- The settlement of FGN taxes e.g. companies income tax, value added tax etc.;
- The purchase of FGN bonds;
- The settlement of credit facilities by the Bank of Industry, Nigeria Export-Import (NEXIM) Bank and Central Bank of Nigeria (CBN) intervention facilities; and
- The settlement of liabilities owed to the Asset Management Company of Nigeria (AMCON).
Supporting Exporters v Ease of Doing Business – The Paradox
In line with the VP’s well-intentioned commitment to the ease of doing business in Nigeria, OPEXA’s letter of 10th, April 2019 requested that the VP’s office look into a number of issues surrounding the DMO’s administration of the EEG payment. The letter addressed to the head of the administration’s economic team, recalled that when the EEG was reintroduced in 2017 there was no prior discussion with the Debt Management Office over what it currently calls a reverse auction process for Promissory Note (PN).
OPEXA’s executives note succinctly that the FGN had previously approved a Promissory Note (PN) programme in 2017 which was finally passed by an Act of the national assembly (NASS) in 2018 for the payment of N195bn in claims due for payment in January 2019.
While the local exporters waited patiently for the NASS approval to be implemented by the DMO; they were not contacted in the intervening period until the 4th of April, 2019 when the public Debt Authority (DMO) called exporters to explain how the PN payment would work.
It was at this parley that it came to the attention of exporters that PNs will be issued on the basis of what the DMO referred to as a reverse auction.
Beneficiaries of the EEG are entitled to an export credit certificate (ECC). The ECC is similar to the previous negotiable duty credit certificate (NDCC) which was given to beneficiaries and used as a negotiable tax credit. However, quite different from the NDCC which was transferable between traders without restrictions on its title and tenure, the ECC is just valid for two years after it has been issued and is transferrable only once within the period.
This means that rather than an auction in which the value of an asset or debt is bided up, this auction approach actually sees the asset or debt bided down. In other words, the DMO represented to exporters that they would bid against themselves to give the government the largest discounts on their respective PNs and this would serve as the basis for payment over the next ten (10) years; an outcome that exporters frowned at.
Unhelpful to the exporters’ understanding of this approach was the knowledge that “some other beneficiaries in an equally critical sector covered by the PN program had been issued their Promissory Notes, without subjecting them to any further verification after the NASS approval and without any deduction/reduction being made by DMO on the PN approved for them by the FGN and the NASS.”
The exporters went on to note in their case against the reverse auction that, “imposing further reduction in value of Promissory Notes on non-oil exporters on the Promissory Notes receivable by them is not only unfair and unjust but this kind of discriminatory approach is clearly contrary to the generally accepted standards of proper Due-Process’’.
OPEXA requested that the VP concede to its request by:
- Withdrawing the reverse auction process of PN issuance;
- Reducing the tenor of PNs to the shortest period possible but certainly less than the 10 year tenor of the present Notes. In addition all categories of PN holders should be treated equally; and
- PN holders should be issued Notes with maximum tenor of three (3) years. This is against the background that most of the instrument holders have already suffered a delay of between 3 and 12 years in deferred payments. This they argued would galvanise the scheme and encourage larger production activity, employment and foreign exchange inflows.
The DMO Rebuttal
In response to the VPs enquiry over OPEXA’s discomfort in respect the reverse auction and the huge discounts likely to occur on the PNs issued exporters, the DMO made a number of observations in defense of its approach to managing the exporter’s promissory instruments:
The Resolution of the National Assembly approving the issuance of Promissory Notes for the settlement of Exporters Claims in sum N195.09 billion for 270 Exporters was conveyed to the DMO by the Honorable Minister of Finance on February 8, 2019. As shown in the steps taken by the DMO in the processing of the issuance of Promissory Notes to Exporters.
- a) Based on the Terms approved by FEC for the issuance of Promissory Notes, one of which was that there should be a Document Review by an International Accounting Firm to be appointed for this purpose, the DMO could not have issued the Promissory Notes without first appointing the International Accounting Firm. The DMO completed the selection process for the appointment of the International Accounting Firm and other Transaction Parties (Financial Advisers and Legal Advisers) for the Programme and submitted a Memo to Council for approval in December 2018. Council’s approval was obtained on April 3, 2019.
- b) While still awaiting the approval of Council for the appointment of Transaction Parties, the DMO, on February 1, 2019, wrote to the NEPC requesting for documents evidencing the claims of the Exporters under the Promissory Note Programme in preparation for the review of documents by the International Accounting Firm.
- c) As a follow up to the letter to NEPC in paragraph 4(b), the DMO in a letter dated March 1, 2019, invited the NEPC for a meeting to discuss the modalities for the issuance of the Promissory Notes to Exporters. The meeting which was attended by the Executive Director/CEO of the NEPC held on March 6, 2019 with an agreement to hold a joint meeting with the beneficiary Exporters to explain the modalities to them.
- d) The NEPC/DMO joint meeting with the Exporters held on April 4, 2019 at the NEPC Conference Hall with the Executive Director/ CEO, NEPC in attendance
At the meeting, the DMO made a Presentation on the Promissory Note Programme as approved by FEC. In the Presentation, the following Terms approved by FEC were highlighted for clarity and preparation by the Exporters:
- That there will be a Document Review to be conducted by an International Accounting Firm;
- That the Promissory Notes are to be issued through a Reverse Auction based on Discounts to be offered by the creditors including the Exporters; and,
- That Notes are to be issued for tenors up to 10 (ten) years.
On the subject of verification claims, the DMO insisted that verification claims should continue to ensure that fraud and false claims are checked and nipped early. It made no reference to the multiple exercises carried out thus far or how such will be discharged in a more efficient manner.
The DMO took time to also respond to the issue of the reverse auction for PNs. The agency noted that; the Council Memo issued on the matter, advised the process to proceed with the following actions/guidelines:
- a) The Promissory Notes will be issued through a Reverse Auction where creditors will Bid and the Discounts offered by them will be the determining factor in the allocation of the Promissory Notes.
- b) A total Discount of N718.77 billion at an estimated discount rate of 27.06% on the total claims of N2.655 trillion of the obligations to be settled from the issuance of the Promissory Notes was estimated. The Discounts were to save funds for the Government and complement the Document Review
On the vexatious matter of possible discrimination amongst PN holders the DMO observed that:
Promissory Notes have been issued to Oil Marketing Companies and State Governments without Document Review and application of Discounts (Reverse Auction). FEC’s approval exempted the claims of State Governments from the Document Review as these had already been verified by a Presidential Panel and further reviewed by the Bureau of Public Procurement. The claims of OMCs were not subjected to Document Review due to the social and economic implications of Fuel Scarcity that would have been caused by a strike planned by the OMCs. Also Mr. President’s approvals were obtained for the waiver of Document Review and Discounting for the OMCs and also for Discounting for State Governments
With regards to the lengthy tenor of the PNs, the DMO insisted that:
The provision of the Council Memo was that in order to manage the impact of the Promissory Notes on the Public Debt Portfolio, the Notes would be issued over a three year period with maturities spread over 10 years. This provision which is consistent with prudent management of the Public Debt, will achieve 2 objectives:
- The increase in the Public Debt Stock will be gradual; and,
- Maturities will spread out to ensure that the Government can meet its obligations as and when due without default.
For this purpose Promissory Notes have been issued as follows:
Table 1: Promissory Notes Issued To Oil Marketers and State Governments
|S/N||Creditor Category||Date of Issue||Amount (N)||Tenor|
|1||Oil Marketing Companies||Dec. 14, 2018||177.448 bn||1-year|
|2||State Governments (I)||Dec. 28, 2018||153.82 bn||2-year|
|3||State Governments (II)||Feb. 2019||31.44 bn||2-year|
|4||State Governments (III)||April 1, 2019||277.89 bn||3-year|
Source: Nigeria’s Debt Management Office (DMO)
- 2020- N153.82bn;
- 2021-N178.98bn (N31.44 bn already issued and an additional N147.54bn already approved to be issued to MDAs and Oil Marketers);
- 2022- N277.89bn.
This story is reproduced courtesy of Proshareng and available at https://www.proshareng.com