Debt Management In Enugu State - A Model For Success

Transcription

1 ENUGU STATE GOVERNMENT DEBT MANAGEMENT POLICY AND PROCEDURE MANUAL For DEBT MANAGEMENT DEPARTMENT MINISTRY OF FINANCE APRIL 2011 Enugu State Debt Management Policy and Procedure Manual Page 0

2 Table of Contents Figures... 2 ACRONYMS... 3 PART ONE INTRODUCTION Coverage and Scope of the Manual Purpose of the Manual Users of the Manual Areas of Improvement Layout of the Manual LEGAL AND INSTITUTIONAL FRAMEWORK Legal Framework Institutional Framework DMD and its Mandate Organisational Structure... 7 Figure 1: Organogram of Debt Management Department... 8 Figure 2: The FMB Office Model Roles and Responsibilities of Institutions/agencies involved in debt management operations10 PART TWO DEBT MANAGEMENT POLICY Introduction Debt Management Objectives Borrowing Process Borrowing Limits Use of Funds Risk Management Benchmarks Debt Database Management Co-ordination Accounting Principles Capacity Building PART THREE DEBT MANAGEMENT PROCEDURES Borrowing Process Enugu State Debt Management Policy and Procedure Manual Page 1

3 1.1.1 Establishment of Financing Gap Defense of Financing Gap in the Annual Budget Sourcing of Internal Loans for the State Sourcing of External Loans for the State Debt Recording, Settlement, Monitoring and Risk Analysis Debt Recording Debt Settlement Debt Analysis and Reporting Monitoring and Compliance Debt Portfolio Review and Debt Sustainability Analysis Debt Portfolio Review Debt Sustainability Analysis (DSA) Appendices Appendix One Sub-national Debt Strategy (FDMO) Appendix Two Debt Reporting Flows Appendix Three List of Texts Consulted Figures Figure 1: Organogram of Debt Management Department... 8 Figure 2: The FMB Office Model Enugu State Debt Management Policy and Procedure Manual Page 2

4 ACRONYMS CS-DRMS DMC DMD DMTC DPR DSA ENSG EXCO FAAC FGN FMF IT MDAs MoF EMTDP MTEF PFMU Commonwealth Secretariat Debt Recording and Management System Debt Management Committee Debt Management Department Debt Management Technical Committee Debt Portfolio Review Debt Sustainability Analysis Enugu State Government Executive Council Federation Accounts Allocation Committee Federal Government of Nigeria Federal Ministry of Finance Information Technology Ministries, Departments and Agencies Ministry of Finance (State) Enugu State Medium Term Development Plan Medium Term Expenditure Framework Project Finance Management Unit Enugu State Debt Management Policy and Procedure Manual Page 3

5 PART ONE 1. INTRODUCTION 1.1 Coverage and Scope of the Manual This manual covers the policy guidelines and procedures for managing the liabilities of the Enugu State Government. These liabilities make up the State s public debt namely internal or domestic debt, external debt and publicly guaranteed debts. The manual is guided by the Federal Debt Management Office s (DMO) Template for the Establishment of Debt Management Departments (DMDs), as well as established best practices in debt management. 1.2 Purpose of the Manual This manual is aimed at providing practical guidance to the staff of newly created Enugu State Debt Management Department (DMD) and others associated with debt management in the State. This will improve the efficiency and effectiveness of the ENSG s debt management and operations including attendant risks, by clarifying institutional roles, responsibilities and accountabilities to avoid overlaps and conflict in the management of the State s public debts. Therefore, the manual will assist stakeholders in the State debt management to: 1. Understand institutional and legal framework necessary for effective debt management; 2. Understand the relationship between the DMD and other Ministries, Departments and Agencies (MDAs) of the State as well as other external parties to the State; 3. Understand the procedure and work processes in public debt management; 4. The roles and mandates of various participants in debt management operations; 5. Understand the human and financial resource requirements for managing public debt; 6. Know the reporting requirements of the DMD; 7. Understand and appreciate the importance and use of Information Technology in debt management; and 8. Control the quality of inputs, outputs and processes in managing the public debts of the State. 1.3 Users of the Manual This manual is primarily meant for the staff of the DMD in the Enugu State Ministry of Finance. Besides, the staff of other MDAs including Ministry of Finance, Accountant General s Office, Ministry of Budget and Planning, Enugu State Economic Planning Commission, Project Finance Management Unit, Office of the Hon. Attorney-General and Commissioner for Justice, Auditor General s Office, line MDAs, etc., who may be involved in debt management at one time or the other will find it useful. The manual should be used in conjunction with other extant public finance laws and regulations in the State, the accounting system and procedures manuals; as well as the Federal Government s Debt Management laws, regulations, policies and strategies since the Federal Government has regulatory function and oversight on sub-national debt management, as well as the public debt market. Enugu State Debt Management Policy and Procedure Manual Page 4

6 1.4 Areas of Improvement Enugu State Government is yet to acquire and deploy any IT-based debt management system such as the Commonwealth Secretariat s Debt Recording and Management System (CS-DRMS). When this is done, the manual will require revision and update because the CS-DRMS or any other IT-based public debt management software will greatly enhance the operations of the DMD and its performance. Besides, at the moment the staff compliment of the DMD is not complete. The office will need about eight staff members to function very effectively as proposed by the DMO Template for State DMDs. 1.5 Layout of the Manual The manual is arranged in three parts as follows: Part One has two main sections the Introduction, and the legal and institutional framework for the Enugu State public debt management. Part Two deals with the Debt Management Policy guidelines for the State. It provides the guidance for policy level actions with respect to debt management in the State. Part Three provides the debt management procedures for the State including borrowing procedures; debt recording, analysis and monitoring; and debt portfolio review and debt sustainability analysis. 2 LEGAL AND INSTITUTIONAL FRAMEWORK 2.1 Legal Framework The laws regulating debt management in Nigeria and Enugu State include: 1. The Constitution of the Federal Republic of Nigeria: The Constitution in items 7 and 50 of the Second Schedule in Exclusive Legislative List vests the powers to make laws that regulate external and domestic borrowing in the Federation (Federal, State and Local Government), exclusively on the National Assembly. 2. The Debt Management Office (Establishment) Act, 2003, Act No. 18: This law establishes the Debt Management Office (DMO) which has the responsibility, amongst others of issuing public borrowing guidelines by the Federal, State and Local Governments, as well as their agencies and public enterprises. The Act provides that the Federal Minister of Finance should approve any loans extended to the Federal and State Governments and their agencies by banks and other financial institutions. In pursuance of this law, the DMO External Borrowing Guidelines provides that the State Governments should obtain Federal Government approval in principle before embarking on external borrowing; the terms and conditions of which must be approved by the National Assembly. In other words, the State Governments cannot directly contract external debts; they have to pass through the Federal Government who undertakes the borrowing on their behalf. 3. The Local Loans (Registered Stock and Securities) Act: This Act provides for the creation and issues of Registered Stock, Government Promissory Notes and Bearer Bonds for purposes of raising debts in Nigeria. 4. Treasury Certificate Act: This Act empowers the FGN to raise short term loans not exceeding 2-year tenor through issuing of Treasury Certificates, the proceeds of which the FGN can on-lend to the States of the Federation. Enugu State Debt Management Policy and Procedure Manual Page 5

7 5. Investment and Securities Act No.29, 2007: The Act gives powers to the Securities and Exchange Commission (SEC) to regulate borrowing activities of the Federal, State and Local Governments, as well as other public agencies from the Nigerian domestic capital market. 6. Central Bank of Nigeria (CBN) Act 2007: Under this Act, the CBN has powers to rediscount projecttied bonds issued by State and Local Governments, and Federal and State corporations; which have been publicly offered for sale and with maturity of not more than 3 years. 7. Enugu State Loans Law A Law to authorise the raising in Nigeria of loans by the Government of Enugu State of Nigeria: This law provides for the raising of Development Programme Loans, Loans for Agriculture, Industry and Other Purposes, and Registered Stock for Loans for Enugu State Government. 2.2 Institutional Framework The Institutional framework for debt management in Enugu State comprise the Debt Management Committee, the Debt Management Technical Committee, the Debt Management Department, and other MDAs that are involved in debt management and related activities in the State including: 1. Enugu State House of Assembly 2. State Executive Council 3. State Attorney General 4. State Ministry of Finance 5. Enugu State Economic Planning Commission 6. State Accountant General 7. State Auditor General 8. State Ministry of Budget and Planning. The Enugu State Debt Management Department (DMD) was established by Executive fiat in January 2010, under the State Ministry of Finance. The Ministry of Finance is the primary Ministry with responsibility for debt management in Enugu State in line with the DMO Template for the Establishment of DMDs in States, which provides that the DMD could be created within the Ministry of Finance or the Executive Governor s Office DMD and its Mandate The mandates of the DMD include: 1. Coordination of borrowing activities of the Enugu State Government (ENSG); 2. Keeping track of the State s foreign and domestic debts; 3. Recording, accounting and reconciliation of the State s debts with relevant internal and external bodies; 4. Undertaking economic and financial analysis and forecasts in pursuance of the State s debt, financial and economic management; 5. Participating in the State s financial needs assessment, debt sourcing, negotiation and contracting; 6. Participating in the determination and recommendation of the State s funding gap for the annual budgets; and 7. Recommending of and proposing review of the State s debt policy and strategies. 1 Debt Management Office of Nigeria: Template for the Establishment of Debt Management Departments (DMDs) in States Enugu State Debt Management Policy and Procedure Manual Page 6

8 In furtherance of these mandates, the DMD will performance the following core functions: 1. Maintaining a reliable database of all loans taken or guaranteed by the ENSG or any of its agencies; 2. Preparing and submitting to the State Government a forecast of loan service obligations for each financial year; 3. Preparing and implementing a plan for the efficient management of the State s external and domestic debt obligations at sustainable levels compatible with desired economic activities for growth and development and participate in negotiations aimed at realising those objectives; 4. Verifying and reconciling the external debts service guaranteed or directly obtained by the ENSG through the Federal Debt Management Office; 5. Verifying and servicing, in collaboration with the Accountant General, domestic debts guaranteed or directly obtained by the State Government; 6. Servicing, on an agency basis, domestic debts taken by Local Governments and any of their agencies within the Enugu State, especially where such debts are guaranteed by the State Government; 7. Advising the ENSG on the restructuring and refinancing of all debt obligations; 8. Advising the Debt Management Committee (DMC) of the ENSG on the terms and conditions on which monies are to be borrowed; 9. Submitting to the State Government, for consideration in the annual budget, a forecast of borrowing capacity in local and foreign currencies; 10. Preparing a schedule of any other ENSG s obligations such as contingent liabilities, both implicit and explicit, and providing advice on relevant policies and procedures for their management; 11. Establishing and maintaining tripartite relationships between the ENSG, International Financial Institutions (IFIs)/Donor Agencies, and the Federal DMO; 12. Collecting, collating and disseminating information, data and forecasts on the State s debt management; 13. Carrying out such other function(s), which may be delegated to it by the Commissioner of Finance or by an Act of the State House of Assembly; and 14. Ensuring that any debt management IT software/hardware deployed by the ENSG is adequately maintained to ensure system and data integrity, and optimal performance of the system. 15. Performing such other functions which, in the considered opinion of the Department, are required for the effective implementation of its functions Organisational Structure The organisational structure of the DMD will comprise: The organisational structure for the DMD prescribed by the DMO template for setting up DMDs in States is as illustrated in Figure 1 below: Enugu State Debt Management Policy and Procedure Manual Page 7

9 Figure 1: Organogram of Debt Management Department DMC DMD Admin Sec Front Office Middle Office Back Office Operations Officer Operations Officer Operations Officer The academic backgrounds of the officers occupying the positions in the Organogram above are as follows: 1. Head of DMD Directorate level officer with background in Economics, Finance, Law or Accounting. 2. Head of Front Office Unit Background in Economics, Law or Finance. 3. Head of Middle Office Unit Background in Economics or Finance 4. Head of Back Office Unit Background in Economics, Finance, Accounting or Statistics. 5. Operations Officer (Front Office) Background in Economics, Law or Finance 6. Operations Officer (Middle Office) Background in Economics or Finance 7. Operations Officer (Back Office) Background in Economics, Accounting or Statistics The Debt Management Committee (DMC), The DMC is composed of Commissioner for Finance (as Chairman), State Attorney General and Commissioner for Justice, Executive Secretary Enugu State Economic Commission, Economic Adviser to the Governor, Commissioner Ministry of Budget and Planning, Accountant General of the State, the Auditor General; besides, any Commissioner in-charge of any Ministry whose agency s loan is being considered by the DMC should be co-opted during the DMC meeting for that purpose. The DMC is responsible for advising the State Government on all issues relating to debt management policy, and ensuring an efficient, effective and professional public debt management in the State. It roles specifically include: i. Formulating debt policy taking into account the State s development objectives and macroeconomic policies; ii. Formulating debt-ceiling policy and approving debt strategy; iii. Formulating and reviewing the legal, institutional, organisational responsibilities as well as rules and procedures for DMD; iv. Ensuring that, recording, analysis, control and all operations relating to debt management are performed by qualified personnel; which involve recruiting, motivating, training and retraining Enugu State Debt Management Policy and Procedure Manual Page 8

10 DMD staff as well as equipping the Department as ensuring a conducive work environment for the staff; v. Building awareness of political office holders and the larger public on the State s debt issues; vi. Developing transparent and enforceable sound policies for new borrowing, comprehensive debt management strategies that pay attention to medium-to-long term implications of economic policies and the resulting implications of debt sustainability, and advise the Commissioner for Finance accordingly; vii. Monitoring the State debt management strategy implementation; viii. Monitoring, directing and coordinating all debt management activities in the State; and ix. Reviewing and approving recommendation by a Technical Debt Management Committee (DMTC) where one exists Debt Management Technical Committee (DMTC) The DMTC should comprise the senior technical staff (of Deputy Director level and above) appointed from the MDAs represented in DMC; which include Ministry of Finance, DMD, AG s Office, ENSEPC, Ministry of Budget and Planning, Office of the Attorney General, and Office of the Auditor General. The functions of the DMTC shall include: i. Making policy recommendations to the Debt Management Committee (DMC); ii. Making recommendations to the DMC on the coordination of information flow among stakeholders in such a way as to enhance harmony and avoid duplication of roles; iii. Reviewing analytical reports from the DMD; iv. Screening all new debt proposals from MDAs; v. Proposing medium to long term external and domestic borrowing targets in line with State government policy; vi. Reviewing reports on debt service costs of different borrowing strategies to ensure that they are consistent with the pattern of State Government revenues, expenditures and financial assets based on which it will make recommendations to the DMC on debt management benchmarks; vii. Reviewing debt sustainability reports and identifying the costs and risks government may be exposed to; and viii. Reviewing result of stress tests to understand how recommended strategies will perform in different economic and financial scenarios; Debt Management Department (DMD) The DMD according to the DMO template should be organised in line with Front, Middle and Back (FMB) Office model i. The Front Office The Front Office is responsible for mobilizing funding for the State Government within the provisions of existing laws and policies. This involves contracting of loans, issuing of guarantee and issuing government securities in an efficient and effective manner in order to minimize the cost of borrowing and attendant risks ii. The Middle Office The key remit of the Middle Office is debt analysis and strategy formulation for the State Government. This function will enable the Government to meet its financing needs and debt service obligations at the lowest Enugu State Debt Management Policy and Procedure Manual Page 9

11 possible cost with a prudent degree of risk exposure. Besides, the Middle Office should monitor the Front Office to ensure that the later complies with DMD s established debt strategy, risk and cost benchmarks iii. The Back Office The Back Office is responsible for information management and payments. It should maintain a high quality database of the State s debt portfolio that is complete, accurate and consistent. The Office should confirm debt repayments and produce periodic reports on the State s debts. Figure 2: The FMB Office Model FRONT MIDDLE RESOURCE MOBILISATION Implement borrowing plan Mobilise Resources from domestic and external sources Negotiate loan/subsidiary agreements Participate in Debt Management Committee Liaise with creditors/stakeholders on review missions Comply with conditions preceding effectiveness DEBT ANALYSIS AND STRATEGY FORMULATION Develop debt management and risk management strategy based on portfolio review and sustainability analysis Assess future debt service prospects and problems Assess long term sustainability of future borrowings Determine vulnerability of future portfolio to interest and exchange rate changes, and other economic factors. BACK INFORMATION MANAGEMENT AND PAYMENTS Maintain the debt database and related paper records Monitor disbursement claims Receive payment-made advices from DMO Enter Payment Advices as actual transactions and bills Provide information that inform analytical work Forecast debt service payments for cash management purposes Prepare data for debt-related development and recurrent budget Roles and Responsibilities of Institutions/agencies involved in debt management operations Debt management requires multi-disciplinary activities involving different stakeholders with financial, legal, accounting and planning dimensions. Therefore, many MDAs including the following are involved in the debt management process of the State: The Enugu State House of Assembly (ESHA) The State House of Assembly is the highest law-making body for the State. It is has the responsibility of making laws for debt management in the State The State Executive Council The State Executive Council has the responsibility of considering loan requests forwarded to it by the DMC; thereafter, it sends the Debt Plan of the State for the financial year for final approval of the SHA. Enugu State Debt Management Policy and Procedure Manual Page 10

12 The State Ministry of Finance The Ministry of Finance is the supervisory Ministry of the DMD. It should: i. Present borrowing requirements of the State to the Executive Council and the SHA for authorization or approval as the case may be; ii. Spearhead the negotiation and renegotiation of terms and conditions of external debts; iii. Sign loan agreements, indemnity or security in respect of any financial commitment or guarantees entered into by the State Government or its agencies; iv. Verify that the project/loan proposed by a State agency or private entity for a State Government indemnity qualifies for such a guarantee and processes the application as required; v. Submit annual debt strategies (including public debt statement and gross funding plan), and quarterly debt reports to the Executive Council for its information; vi. In collaboration with the ENSEPC integrate debt variables into the broad macroeconomic and financial aggregates of the State; and vii. Participate in liquidity forecasting in collaboration with other central PFM MDAs of the State State Auditor General The State Auditor General should: i. Verify and authorise debt service payments of the State; and ii. Conduct audit to ensure compliance with benchmarks set for financial and debt management transactions Department of Government responsible for Investment and Public Enterprise (Ministry of Finance Incorporated - MOFI) The MOFI should: i. Monitor performance of beneficiaries for on-lent loans and guarantees by the State Government; ii. Manage on-lent loans and publicly guaranteed debts; iii. Prepare and undertake restructuring programmes for parastatals; iv. Collect and analyse information on slow-disbursing loans; and v. Establish and review loan disbursement procedures and record keeping The Attorney General The Attorney General should: i. Provide legal opinion on behalf of the State Government with respect of any instrument and transaction that may bind the State Government; ii. Draft and scrutinize legal documents related to borrowing, lending and guarantees by the State Government; iii. Participate in negotiation of external loans; and iv. Verify that projects proposed for loan guarantees indeed qualify for such guarantees The Accountant General The Accountant General should: i. Prepare cashflow forecasts and manage liquidity of the State Government; ii. Process debt service payments; Enugu State Debt Management Policy and Procedure Manual Page 11

13 iii. iv. Monitor and report on loan disbursements; and Obtain the details of State s financial assets for the purpose of computing the State s net debt position Enugu State Economic Planning Commission (ENSEPC) The ENSEPC should formulate the State s development plans, prioritize projects in line with the State Government s social-economic objectives and work with the Ministry of Finance to identify ways and means of closing any budget deficits by borrowing either domestically or externally or both Ministries, Departments and Agencies (MDAs) The MDAs requesting for loans or guarantees as the case may be should: i. Prepare project proposals and submit them for approval to the State Ministry of Finance; ii. Provide regular progress reports on all programmes/projects to the Ministry of Finance; iii. Prepare expected disbursement profiles of their loans; iv. Submit loan disbursement claims approvals to responsible offices; v. Confirm disbursements received to the DMD and treasury; vi. Comment on draft loan agreement from the Ministry of Finance; vii. Participate in all consultations and negotiations of all loan agreements for projects and programmes under their jurisdiction; viii. Implement; monitor and evaluate, in collaboration with the ENSEPC, all projects and programmes within their control; ix. Submit details of debt service obligations to the DMD and Ministry of Finance; and x. Ensure prompt payment of their debts. Enugu State Debt Management Policy and Procedure Manual Page 12

14 PART TWO 1. DEBT MANAGEMENT POLICY 1.1 Introduction The main objective of a debt policy is to ensure that Government s financing needs are met and repayments of debts are made at the lowest possible cost over the medium to long term, and consistent with a prudent degree of risk. The debt management policy should always seek to be in accord with the goals of prudent State economic and public financial management implemented through proper planning and budgeting, prompt disbursement and servicing of debt obligations. The Enugu State debt policy will serve to implement the Enugu State Medium Term Development Plan. Besides, prudent risk policy and management is necessary to enable government prevent dangerous debt structures and strategies that will mitigate the unsavory social and economic consequences of defaulting on debt obligations. A clear State debt management policy is required to administer the borrowing and management of all debt financing activities of the government. It establishes the rules and regulations to guide borrowing and management of the State s debts, as well as confirming the commitment of State government to comply with sound financial, fiscal and reserve management practices including full and timely repayment of debts, attainment of the cheapest borrowing cost at the best degree of risk. The debt management policy includes debt management objectives; borrowing process; borrowing limits; use of funds; risk management; benchmarks; debt database management; co-ordination; accounting principles; and capacity building. 1.2 Debt Management Objectives The key Enugu State debt management policy objective is to ensure that the State s financing needs and payment obligations are met at the lowest possible cost both in the short, medium and long term, and should be within a prudent degree of risk. The objectives entail: 1. Determining the amount to be borrowed including its currency composition and terms of debt service; 2. Identifying suitable sources of financing and choices of debt instruments; 3. Optimising the social and economic benefits to be derived from external and domestic borrowing; 4. Developing positive debt management indicators; and 5. Increasing the capacity to manage risks. The following are the main Debt Management Policy objectives to be followed by the DMD: 1. Ensure well structured debt portfolio, i.e. in terms of maturity, currency, interest rate composition and large contractors and unfunded contingent liabilities; 2. Ensure low risk, i.e. sustainable debt levels to avoid risk of default, including risk of high rollover costs as well as market risks associated with changes in market prices, e.g. interest and exchange rates; 3. To minimize cost of debt, i.e. excessive level of debt that results in large interest payments can have severe adverse effects on fiscal stability of the State Government. 4. To promote professionalism and improve technical capacity in debt management, including transparency and accountability Enugu State Debt Management Policy and Procedure Manual Page 13

15 5. To identify and comply with all laws related to debt issuance and management; 6. To have citizens and residents as well as stakeholders informed of contemplated and outstanding debt and all costs proposed and actual; 7. To minimize the use of short-term cash flow borrowings by maintaining adequate cash reserve2 and authorizing only the minimum amount required to offset mismatches between available cash and cash outflows determined by cash flow analysis; 8. To issue debt to finance projects only which are included in the Enugu State Government Medium Term Development Plan (MTDP) 9. To establish criteria to determine any use of general obligation debt, revenue and tax debt, revenue debt, conduit debt, short-term debt; and capital leases; 10. To establish criteria for the use of pay-as-you go financing versus debt financing; 11. To establish the maximum life, or the criteria for establishing the maximum life, of a debt transaction; 12. To minimize interest costs at the lowest level of financial risk to operations; 13. To assess and mitigate debt portfolio risks to the Enugu State Government s short and long term operations; 14. To provide for sound financial guidance to staff; 15. To achieve a debt portfolio structured with 65% (but not less than 50%) of principal repaid in ten (10) years; and 16. To move the Enugu State Government toward achieving international best practices in transparency and accountability in debt management and reporting. 17. Enugu State Government shall seek to obtain, short-term and long-term debt rating from at least one international rating agency (e.g. Fitch, Moody or Standard & Poor) and one national/regional rating agency. 18. Enugu State Government shall seek to maintain an investment grade debt rating at all times The following statements are expected to be produced and published by the debt management office on a regular basis to ensure minimum level of transparency and disclosure requirements. 1. Production of Monthly Debt Accounting Statement 2. Production of Annual Debt Risk Assessment Reports 3. Preparation of Debt Sustainability Statement 4. Preparation and disseminations of Needs Assessment report 5. Preparation of Loan/Borrowing Transaction Evaluation report; 1.3 Borrowing Process The borrowing process for Enugu State is based on the Debt Management Office (DMO) template. The process reflects the important roles of the Debt Management Department (DMD), and the Debt Management Committee (DMC). The borrowing process outline amongst others: 1. the authorization processes; 2. composition of negotiating teams; and 3. preparations for negotiation. The borrowing process for the State is detailed in PART THREE of this manual. 2 Cash in Hand and at Bank (or Working Capital) Enugu State Debt Management Policy and Procedure Manual Page 14

16 1.4 Borrowing Limits Borrowing limits are dynamic; therefore, Enugu State borrowing limits will be determined by law, need, prevailing economic circumstances, cost, capacity to repay, etc. Generally, borrowing limits could be categorised into legal limits, public policy limits and financing limits. Legal Limits: The Enugu State Government shall not exceed limits on outstanding debt and annual debt service payments as required by Statute. The legal limit on outstanding debt is.. The legal limit on annual debt service is. Public Policy Limits: 1. Enugu State Government shall not procure debt instruments connected with derivatives. 2. Debt may only be issued for projects included in the current year s Capital Budget or Medium Term Development Plan, or MTEF as the case may be. 3. The State Government shall not procure loans on variable interest rate under any circumstances except with the approval of the State House of Assembly. 4. The last maturity of debt issue may not be more than 25 years with a goal maturity of 20 years. 5. Debt may be issued for economic development only if an independently performed feasibility study shows that the benefits outweigh the costs of the project to the Enugu State Government attested by an internationally/nationally reputable Economic Research Institution. Financial Limits: Enugu State Government shall not embark on single loan package which is in excess of 200% of its net revenues for the preceding fiscal year. 1.5 Use of Funds The borrowed resources by Enugu State Government are to be applied to the funding of projects in the State s priority areas. 1.6 Risk Management There will be technical analyses of any loan offer to the State to evaluate the costs and risks that the State may be exposed to with respect to such loan. These may include: 1. market risk (interest rate, exchange rate); 2. rollover risk; 3. operational risk; 4. liquidity risk; 5. credit risk; 6. settlement risk, etc. 1.7 Benchmarks The State Government should establish benchmarks for: 1. share of domestic to external debt; 2. share of variable to fixed interest rate debt; 3. duration of debt; 4. average life of a loan portfolio; 5. share of different currencies in the loan portfolio; and 6. cost of debt. Enugu State Debt Management Policy and Procedure Manual Page 15

17 The following ratios have been formulated in accordance with good practices and would represent standard benchmarks for the DMD: 1. Ratio of total debt to (sub-national) GDP in: 25% 2. Ratio of total debt to total revenues: 40% 3. Ratio of service payment to total revenues: 15% 4. Ratio of internal debt (including contractors debts) to total revenues: 50% 5. Ratio of external debt to total debt: 70% 1.8 Debt Database Management The State s database and debt information will be managed in such a manner as to ensure information sharing and accessibility by key institutions/departments interested or involved in State debt management. 1. Information on any loan contracted by the State should be made available to the DMD. These information which will be contained in the loan agreement may include: i. Date of procurement of debt ii. Lender iii. Interest rate iv. Currency v. Period for repayment 2. All loans repaid by the State Government should be notified to the DMD to enable the department track, monitor loan repayments and update its database. 3. The DMD should be equipped with a local area network (LAN), Wide Area Network (WAN) and connected to the internet to enable information flow between the department and other departments and agencies in and outside the State involved in debt management. 1.9 Co-ordination Government will ensure proper coordination between it, the Federal Government (DMO), creditors, and other such institutions that are connected with the State s debt management Accounting Principles The State Government will ensure that all external and domestic debts whether direct, on-lent, or guaranteed are properly accounted for following sound accounting principles Capacity Building There will be adequate DMD staff training and other capacity building to ensure that they are able to discharge their functions effectively. These may include attachment programmes with relevant institutions, in-house trainings and training courses on debt management by relevant institutions. Enugu State Debt Management Policy and Procedure Manual Page 16

18 PART THREE 1. DEBT MANAGEMENT PROCEDURES 1.1 Borrowing Process The DMO Template for DMDs provides for the following procedures to be followed in State level borrowing: 1. Supporting the State Planning Commission, the Ministry of Budget and Planning and Central Budget Committee to establish the financing needs/gaps of the State Government for the financial years and advise the DMC; 2. Supporting the Ministry of Budget and Planning and State Planning Commission to defend the financing gap in the Appropriation Bill at the State House of Assembly; 3. Upon approval of financing gap, identify and evaluate possible funding sources to fill the financing gap (from internal or/and external sources) in consultation with the beneficiary MDA(s) and recommend to the DMC; 4. On approval of financing sources by the DMC, initiate loan negotiation with a team comprising the DMD, MOF, Attorney General s Office, Accountant General s Office, Auditor General s Office and the benefiting MDA; 5. Prepare a brief to the DMC on a recommendation to accept or reject the loan; 6. With respect to external loan, obtain advice from the Federal DMO on compliance of the terms and conditions of the loan with the external borrowing guidelines before giving a accept or reject recommendation to the DMC; 7. If external loan will be taken, secure Federal Government s guarantee on the loan; which will require the involvement of the Governor s Office, State Attorney General, State Ministry of Finance, DMD, DMO and Federal Ministry of Finance; 8. Obtain loan approval from the State House of Assembly and State Executive Council; 9. Loan contracting involving the DMD, the State Ministry of Finance, and loan signature by the Honourable Commissioner For Finance; 10. Registration of loan with the State Accountant General; and 11. Recording of Loan Agreement by DMD Establishment of Financing Gap In establishing the financing gap for ENSG, the DMD should follow the under-listed detailed steps: 1. In collaboration with the ENSEPC/Ministry of Budget and Planning/Central Budget Committee, using historical data and forecasting tools, forecast the State Government s financing gap; 2. Then weigh the above against projected revenue to establish the financing gap which should be consistent with the ENSG MTDP; 3. Thereafter, prepare a project schedule showing the details of the gap to be financed and forward same to the DMC; and 4. DMC should then forward the project plan to the State EXCO for inclusion in the Appropriation Bill Defense of Financing Gap in the Annual Budget The DMD should prepare a brief for the Honourable Commissioner for Finance to defend the established financing gap in the Appropriation Bill before the relevant committee of the State House of Assembly. Enugu State Debt Management Policy and Procedure Manual Page 17

19 1.1.3 Sourcing of Internal Loans for the State At the approval of the financing gap through the passage of the Annual Appropriation Bill by the State House of Assembly, the DMD will: 1. Commence the process of identifying the possible sources of financing the funding gap through either internal or external borrowing options or both; 2. Prepare a brief on possible sources of loans, their terms and conditions and make appropriate recommendations to the DMC; 3. Upon approval by the DMC, commence loan negotiation with a team comprising DMD, State Ministry of Finance, State Ministry of Justice, State Accountant General, State Auditor General and the beneficiary MDA; 4. Upon completion of negotiations, prepare a brief to the DMC recommending the contracting or rejection of the loan; 5. The DMC will then forward details of the terms, conditions and use of the loan for approval of the State EXCO/House of Assembly; and 6. on receipt of the approval from EXCO/SHA, DMD will make arrangements and organise a public loan contract signing ceremony where the Honourable Commissioner for Finance will sign for Enugu State. Sub-national Governments and their agencies may from time to time source for funds in the capital market to finance a specific project in the course of governance. This could be through the issuance of Registered Bonds or Promissory Notes. To check possible abuses, a limit on amount of loans outstanding at any particular time including the proposed loans shall not exceed 50% of the actual revenue of the body concerned for the preceding 12 months Sourcing of External Loans for the State Following the approval of the financing gap through by the passage of the Appropriation Bill by the SHA, the DMD will: 1. Receive proposal (Term Sheet) from the Commissioner in charge of the agency seeking to obtain the loan; 2. Review and determine compliance of the proposal, which must include feasibility and impact assessment, with existing borrowing guidelines; 3. Make recommendation to the DMC on the appropriateness and compliance of the proposal to guidelines; 4. The DMC will then meet the Stakeholders including DMD, the Lender and Loan Beneficiary Agency, to negotiate and harmonise terms and conditions; and approve recommendations of the DMD and authorise the DMD to seek Federal DMO s advice on the compliance of the terms and conditions of the loan with existing external borrowing guidelines; 5. The DMD will send a request to the DMO for advice, outlining all the terms and conditions of the proposed loan; Enugu State Debt Management Policy and Procedure Manual Page 18

20 6. The DMO will receive DMD s request, assess the terms and conditions of the proposed loan and advice (not guarantee) the DMD on compliance with existing guidelines on external loans and Federal Government guarantees; 7. The DMD will receive DMO s advice, comply with any recommendations that would bring the terms and conditions in harmony with existing guidelines and prepare a brief to the DMC on conditions for Federal Government guarantee and recommend the contracting of the loan; 8. The DMC will forward the details of the terms, conditions and the use of the loan for approval by the State House of Assembly; 9. On receipt of the approval from the State House of Assembly, the DMC then forwards the details of the loan and its terms and conditions to the Minister of Finance copying DMO requesting Federal Government guarantee; and 10. On DMO s advice to the Minister, the DMC will secure Federal Government s guarantee and arrange for public signing of the loan contract where the Commissioner signs for the ENSG while the Minister executes the Federal Government guarantee. 1.2 Debt Recording, Settlement, Monitoring and Risk Analysis Debt recording and validation, accounting, settlement, quality control, monitoring, analysis and reporting are essentially the work of the Back Office of the DMD. A good debt management practice requires accurate, up-to-date information and an efficient storage and retrieval systems. The summary of the Back Office s activities include: 1. Managing debt information systems and maintain an accurate and up-to-date loan database; 2. Preparing debt service forecasts for external and domestic borrowing of the public sector; 3. Reconciling all debt transactions with stakeholders; 4. Ensuring timely and accurate debt service for public and publicly guaranteed debts; 5. Monitoring and implementing of loan agreements, including disbursements, utilisation of loans and other obligations of government; 6. Monitoring disbursements and repayment of loans guarantees; 7. Monitoring of on-lending agreements; 8. Monitoring all contingent liabilities and ensure that adequate loan loss provisions are made in the budget to meet likely defaults; 9. Preparing forecasts of government cash requirements to provide guidance on the volume and timing of issuance of debt by the government; 10. Validating debt data regularly; 11. Preparing statistical and management reports; and coordinating with the Front Office so that the recording and monitoring of new financing is carried out on timely manner Debt Recording 1. Debt recording involves maintaining a reliable database of all loans taken or guaranteed by the State Government or any of its agencies, and requires DMD to specifically: i. Record and maintain records all new and existing debts in collaboration with the State Accountant General, ENSEPC, Ministry of Finance, and line ministries both internal and external loans, debt resulting from on-lent loans, grants and counterpart funding, contractors debts and contingent liabilities of ENSG; ii. Undertake, at least once a quarter, debt data reconciliation and validation with Federal DMO; Enugu State Debt Management Policy and Procedure Manual Page 19

21 iii. Promptly update the electronic platform for debt management in use by the State with both new disbursements and debt service payments. 2. The DMO is responsible for ensuring that debt repayments made on behalf of the ENSG are made timely. Therefore, the DMD will rely on the DMO to provide, on a timely manner, details of all bill transactions and actual payments made in respect of that portion of the external loan relating to the ENSG. 3. With respect to bills, the DMD will ensure that the ENSG s portion of the bill is submitted by the World Bank to the Federal Government stating the due date of payment, the transaction amount and bill currency of payment. 4. For each actual transaction the transaction date and amount (in loan currency and Naira-equivalent) is required. This will require DMO to disaggregate transactions made to World Bank by State (ENSG), loan account and transaction account. 5. Once these disaggregated actual and bill transactions are recorded, the DMD will be able to accurately report on any arrears. 6. Since the World Bank as a precondition for drawing down its loan facilities insists on States establishing a Project Finance Management Unit (PFMU), DMD should be routinely provided with disbursement data by the PFMU. 7. The data from PFMU should include claims for disbursements submitted to the creditors through PFMU and advices received from creditors on disbursements directly to suppliers/contractors or beneficiaries and periodic statements of transactions from creditors Debt Settlement 1. Debt settlement activities in summary will comprise the following: i. Reconciliation of internal debt service payments by the DMD, State MoF and Accountant General; and ii. Reconciliation of external debt service between DMD and the Federal DMO. 2. With respect to external debts, the DMD will: i. Prepare on an annual basis, budget for debt service payments and their due dates for the approval of the Commissioner; ii. At the beginning of each year send a copy of the projected debt service payment schedule to the Accountant General of the State; iii. Advise the Accountant General, at least one month earlier, of the due dates for debt service payments; iv. Obtain demand note/bills from creditors; v. Obtain statements of monthly deductions made from FAAC; vi. Obtain from the State Accountant General the payment advice (received from the DMO) of external debt payments made by the Federal Government on behalf of the ENSG; vii. Reconcile bill and payment made with the earlier forecast made with debt management system reconciling the Naira-equivalent of transactions entered with ENSG s monthly FAAC deductions made at source by the Federal Government; and viii. Investigate any significant discrepancy between the forecast figures and the at-source deductions by FAAC. Enugu State Debt Management Policy and Procedure Manual Page 20

22 3. With respect to contractors debts, DMD will: i. Enter each contract as a separate loan in the debt management software; ii. Obtain a monthly return from each MDA on its existing contracts; iii. Use these returns to enter (into the system) value of work completed and payments made to contractors for work delivered during the preceding month; iv. Enter any fund releases from the Treasury account to the MDA account set up for the particular contract and any advance payments made to the contractor; and v. Enter forecast of when and the value of the future work to be delivered. This includes forecasting retention amounts falling due between four to six months after anticipated completion of contract Debt Analysis and Reporting With respect to debt analysis and reporting, the DMD will: 1. At the beginning of each MTEF cycle, make input to the ENSG MTDP by articulating the policy, strategies and objectives of the State s public debt management; 2. On a semi-annual basis, undertake a portfolio review to analyse the risks and suggest mitigating factors for existing and anticipated debt portfolio. Using a debt management software, it is possible to forecast the future debt obligations of the State Government under various scenarios and assumptions regarding future interest rate and exchange rate regimes 3. At least annually conduct a Debt Sustainability Analysis (DSA) in consultation with the State MoF, ENEPC and the MTDP secretariat; 4. Undertake research, document and publish quarterly and annual reports on the operations of the DMD; and circulated to all MDAs, and the Federal DMO; 5. Generate and avail all officers involved with debt management in the State with copies appropriate debt management reports generated by the DMD including amounts outstanding, currencies, the principal and interest rate, due dates and terms and conditions of loans, etc; and 6. Generate other reports including contract-specific reports by MDA as well as corresponding aggregate reports on contracts, report on Treasury Release to MDA accounts showing debt and credit transactions and current MDA account balances, and other reports based on request Monitoring and Compliance The DMD will in respect of monitoring and compliance: 1. Forward disbursement and amortization schedules for all categories of loans to appropriate beneficiary agencies; 2. Review MDA inspection visit reports on projects funded with loans and prepare reports on projectby-project basis ensuring compliance with loan agreements; and 3. Constantly keep track of the debt portfolio and maintain effective correspondence with the Federal DMO to ensure that the DMD is supplied with the relevant debt information/data on a timely basis. 1.3 Debt Portfolio Review and Debt Sustainability Analysis Debt Portfolio Review Debt Portfolio Review (DPR) should be conducted twice a year (for mid-year, and year end) for the following reasons including to: i. Quantify and monitor the level of indebtedness and debt servicing obligations of government; Enugu State Debt Management Policy and Procedure Manual Page 21