FGN Green Bond Issuance is Commendable but Unaffordable

green-bonds

Financing development in a sustainable pathway requires a mix of innovative means of sourcing for money, which green bond is essential part, and it can help in closing financing gap to meet current development agenda at global, national and sub-national levels. In responding to its dearth of funds for climate change adaptation and mitigation projects, the Federal Government of Nigeria (FGN) on 18th Dec. 2017 issued green bond of ₦10.69 billion for a five years tenor with fixed rate of 13.48%.

This issuance is in lieu to the country’s Paris Agreement commitment, and this is the smartest action this government has taken so far. In the same vein, I think people who are responsible for the successful green bond issuance are to be commended by Nigerians. At the same time, appreciating the FGN for issuing African maiden sovereign green bond by Nigerians is not enough but they need to make sure efficient implementation of projects designed for the proceeds from the green bond.

It is well documented how huge the cost to meet 1.5 Celsius climate goal for both adaptation and mitigation. Nigeria’s commitment to the Paris Accord is to reduce emission by 40% by 2025, which had been estimated by the Federal Ministry of Environment’s Department of Climate Change to cost US$142 billion translating to about US$10 billion per annum. This annual estimated cost is 41.22% of 2017 Federal Government budget, in other words, if Nigeria had to meet its 2017 climate financing demand, it will cost the country ₦3.05 trillion of ₦7.4 trillion of it federal appropriation for the same year.

It is obvious from the country’s budget constraint that Nigeria cannot afford to finance its climate adaptation and mitigation projects by spending 41.22% of its annual budget, which is about double of the capital expenditure, moreover other equally or more prioritize sectors are competing for the same budget.

The more reason for Nigeria to finance its smart projects out of conventional means like issuing of the green bond is this wide gap in financing our climate resiliency, the gap is almost 100% in Nigeria, because the just issued green bond closes the gap by just 0.04% without including the effect of issuer cost.

Costing the Federal Government of Nigeria Green Bond

One of the challenges for issuers of green bond is that they incur an additional cost associated with issuing this type of bond, for example, when the additional costs associated with obtaining independent verification, ongoing reporting, and the auditing of the use of proceeds are considered, some issuers may choose to refrain from placing a green label on their bonds.

In the same vein, the FGN incurred additional cost by issuing the green bond. The volume of this cost depend, among other things, on the bond’s value, its complexity, number of market it is issue, risk profile of the FGN, and cost of impact reporting.

In order to attract investors and to make Nigerian green bond profitable for its investors, the FGN discounts the green bond by 14.50%. That is, the actual (market) price of the bond is ₦855.00 against the ₦1,000.00 face value, which translates to a discount of ₦145.00 per Note Unit. At the bond’s maturity date, the government will have to pay extra ₦1.6 billion to meet up its obligation to investors.

Given the fact this is a maiden sovereign bond, the FGN has to discount its green bond beyond other conventional bonds in order to woo various investors and this form part of additional costs for issuing green bond.

Another additional cost is strict framework for sovereign labeled green bond issuance, in Nigeria case, the Climate Bonds Standard Board certified the Federal Government of Nigeria Green Bond. In addition, Moody’s Investors Service conducted a due diligence on FGN Green Bond and assigned it GB1 (Excellence) green bond assessment to the government of Nigeria’s Green Notes, noting that the country fulfills the Green Bond Principles and Climate Bond Standards.

The United Nations Development Programme beliefs that sum of fees pay to rating companies and financial service providers can reach five per cent of the face value. In corollary, the cost of engaging private financial institutions for FGN Green Bond is ₦534.5 million.

Putting the additional costs of issuing the green bond together and the cost of coupon payment, it is evident that the cost of the green bond is at least 40% of the face value for this series of the FGN Green Bond alone. As much as any sustainable development practitioner will like to see her country or world investing in green economy. However, investment of this nature needs not only to be environmentally sustainable but also to be economically and socially viable.

The implications of this heavy cost of issuing the green bond are failure to fully implement the three identified projects – Renewable Energy Mini Utility Programme, Energising Education Programme, and Afforestation Programme – heavy financial burden on already stressed Federal Government and dissecting future green bond by the government.

Therefore, issuing green bond in Nigeria is a commendable effort for resilient development and should be applauded, but the purpose of issuing the green bond will be forfeited if the cost of issuing it and reporting its impacts are almost half of the green bond face value.

As regard to the FGN Green Bond, it will not be able to implement targeted project 100% because of its heavy cost. As a result, the government has to find a way around the heavy cost of green bond issuance, which should include indigenous solution to climate change issues. The next series on this page will discuss some of the steps governments need to take in building resilient economies.

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