Federal government’s debt to road contractors

By The Editorial Board [The Guardian]

When Minister of Power, Works and Housing, Babatunde Fashola said the Federal Government owes N1.0 trillion to road contractors handling over 200 on-going projects in the country during the 2016 budget defense session the other day, that staggering amount of debt actually should stagger the mind of any Nigerian. But the fact that the projects are on-going and that the original debt was three time that amount, meaning that government has already paid N2.0 trillion or about 66.67 per cent of the real contract amount is some comfort, albeit in need of explanation.

Some questions that arise include: what is the nature of the road contracts? Was due process followed in awarding the contracts? Does the amount already paid represent real value to the extent the projects have been executed? Since the projects are still ongoing, is the amount being owed really due for payment? If the debt is paid in full today, what would happen to the uncompleted parts of the projects?

All these notwithstanding, this is a very substantial debt burden that mirrors the poor priority government over the years have attached to road infrastructure development or maintenance. This level of indebtedness, of course, can lead to abandonment of the projects, cost inflation, poor execution of the projects, disengagement of workers thereby exacerbating the unemployment situation and even litigations.

Furthermore, if the contractors borrowed money from banks to ensure progress of work on the projects, the consequences of non-payment by the government become hydra-headed, especially as the contractors would be unable to repay the borrowings from banks. When that happens, the amount of interest charges may not only over-run the entire contract amount but may necessitate the lending banks making substantial provisions for non-performing loans or outright bad debts. The capacity of the banks to extend credit facilities to other needy economic agents will therefore be curtailed. Most assuredly, the stability of the banking system may become impaired with grave adverse consequences such as bank distress and/or failure, disengagement of employees, loss of investments by investors and hard-earned deposits by customers.

At this point in time when the Nigerian economy is plunging into a dangerous and unacceptable depth, and indeed, at any other time for that matter, any case of bank distress or failure will be like driving a six-inch nail into the heart of the banking system. That will be enough to dislocate the economy further and disenable such noteworthy and audacious government programmes as cashless Nigeria and financial inclusion as well as calls for more bank credits to the real sector and small and medium scale enterprises.

But before the acceptance of the position that the government is owing road contractors as much as N1 trillion, an amount more than enough to meet minimum capital requirement of all the commercial banks in the country, it is absolutely exigent to evaluate the contracts in terms of authenticity, level and quality of performance vis-a-vis the amount already paid, outstanding work to be done to bring the projects to full completion. Undertaking such evaluation, once again, will show if the country has received value for the N2.0 trillion already expended and whether the outstanding debt has fallen due for payment. The need for such evaluation is also to ensure the debt did not arise as a result of the widespread corruption and lack of transparency in almost all facets of government business and indeed, across the economy.

Once the indebtedness is verified and due for settlement, the projects fully completed, it is strongly advised that the government should, without further delay, meet its obligation to the contractors. If, however, it is only a part of the debt that is due for payment as a result of level of completion, the government should settle what is certified due. In turn, the contractors should quickly complete these projects that form part of the needed infrastructure that will give the economy some fillip. They should also meet any obligations owed their banks and other creditors.

It is imperative to observe that the challenge of huge government’s indebtedness to road contractors, once again, raises the need for government to reform classification, financing and management of road projects in Nigeria and establish a Federal Roads Authority, with the responsibility of resolving all road-related issues. Actualisation of these long outstanding canvassed necessaries, that had been repeated over and over again, will facilitate streamlining of responsibilities, accountability and prevention of such unhealthy situations as government becoming a chronic debtor to its contractors.

Finally, it is worth re-emphasizing that Nigeria cannot afford any form of instability in the banking or any other sector at this crucial moment of gravel challenge to the economy. It must be understood that, if the said N1.0 trillion debt is not urgently verified and settled, it can induce such preventable instability, especially in the banking sector where the deposit gaps resulting from implementation of Treasury Single Account (TSA), are yet to be fully covered and the level of non-performing credits is rising.

- The Guardian