Indications that the lines that seperates public and private sector are thinning out became clearer last week when the global rating agency, Standard and Poor beamed its searchlight on Rivers State. In the latest ratings, S&P revised to pos­itive, its outlook on Rivers and affirmed its ‘B’ long-term issuer credit rating and its ‘ngBBB’ Nigeria National Scale rating on the state.

The assessment which focused on the government’s ongoing public sector reforms and huge investment in infrastruc­ture, has given vent to the argument that running government like a business entity can place government at the disposal of the citizens without stress.

S&P confirmed that the Rivers State gov­ernment is taking steps to modernise public sector administration, including a substan­tial Information Technologies (IT) upgrade, and a move toward greater accountability and transparency.

In its report made public last week, S&P predicted an increasing budgetary pres­sures ahead but equally predicted recourse to the bond market. “We see increasing budgetary pressures ahead, as Rivers is scaling up expenditure to upgrade the state’s infrastructure and modernise the public administration. Consequently, we anticipate after-capex deficits hovering around 15 percent in the period 2010-2012, and borrowing needs of some Nl00 billion ­which may be tackled by a bond issuance next year.

“Based on the above, we expect Rivers to continue to generate large operating rev­enues, which together with a Nl00 billion bond issuance should enable it to carry out some N200 billion in annual investments in the period 2010-2012, and maintain a comfortable liquidity position.

“Weakening budgetary performance is a negative rating factor. In the case of Rivers, the latter is offset by our expectation that the state will continue to post excellent operating surpluses in 2010-2012; self-­finance a large portion of programmed investments; continue to enjoy a very good liquidity position; and back the bond serv­ice by’ an Irrevocable Standing Payment Order (ISPO) by means of which debt serv­ice payment will be deducted by the central government from Rivers’ large statutory allocation.

It argued that since larger spending sets the foundation of a more diverse economy and improves the efficiency of public ‘administration, the overall impact on rat­ings would be positive.

Our base-case scenario also assumes that Rivers will gradually increase its inter­nally generated revenue to approximately N80 billion by 2012; that capital expendi­ture will not surpass N200 billion on annu­al average in the period 2010-2012; and that oil prices and national oil and gas produc­tion will not substantially diverge from our current forecast.

According to S&P latest reports, the long-term outlook for the state is revised upwards to “Positive” from “Stable” in the 2009 rating, on the strength of significant ongoing infrastructure investments (in roads, IT, healthcare, education and urban renewal) and relentless effort to transform the public finance framework. All this should help lift the state’s social and economic status in” the long run.

Notwithstanding the current weakness of the system, Standard & Poor’s views this modernisation as a key element of Rivers’ credit profile.

Perhaps, one of the steps taken by the present administration in the state that attracted the positive ratings from S&P is the state’s very low-though improving ­information quality and disclosure by international standards and weak public finance system, which hinders management capabilities.

Other factors’ working in its favour, according to the rating agency is the credit quality which reflected in the state’s cur­rent strong cash holdings, low debt and very-healthy operating balance.

Additionally, expenditure flexibility is limited because of large development needs that entail capital investment pres­sure. Also, Rivers has high exposure to oil revenues, which we expect to be lower dur­ing 2010-2012 than at the 2008 peak.

“The rating action reflects our view that Rivers State’s commitment to modernise the public finances may start yielding results gradually but steadily. Also, we believe that the current low sophistication of Rivers’ financial management cannot jeopardise debt service. At present, debt is virtually zero; and we believe that, were Rivers to issue debt, the debt service would be- deducted at the source by the central government from Rivers’ oil revenues,” the report stated.

A very substantial part of the nation’s natural gas deposits and, to a smaller extent, crude oil production, is located in Rivers. Major operators in the state include the main multinational oil companies, which are accompanied by a cluster of pri­vate local companies. Although periodic episodes of violence in the Niger Delta can temporarily affect GDP growth and! or relocate economic activities, oil-related activities bolster sustainable employment in the long run-as evidenced by per capita GDP that is triple the domestic average­and, thus, form a relatively solid tax base. “While our issuer credit rating on Rivers is ‘B’, we would not automatically assign the same rating to Rivers’ debt issuances. Specifically, Some types of debt issues could contain structural features that enhance credit quality-for example, an ISPO. In these cases, Standard & Poor’s may analyse the transaction structure and assign a rating that is different to the issuer credit rating.

“Rivers liquidity is strong. At year-end 2009, Rivers had N83 billion in cash hold­ings. As of July 2010, Rivers continued to enjoy a very comfortable liquidity position. It had N43.9 billion in local currency and $11 million in US dollars, mainly deposit­ed at the First Bank of Nigeria Plc and Skye Bank Plc. We expect that cash holdings at year end should be at around N50 billion, based on our capex assumption of NGN200 billion.”

Rivers has no substantial debt burden. As of year-end 2009, outstanding debt of N3.3 billion comprised a foreign currency source from the statutory allocation.

The assessment is premised on the expec­tation that the state government will contin­ue to make good disclosure of its activities since international ratings are usually relied upon by international investors to make investment decisions. The rating agency therefore said it expects Rivers to continue to improve its financial management and that this will shortly yield substantive results. “Specifically we expect that the state will progressively implement the main ongoing IT developments, and particularly, the full deployment of properly functioning budgetary, accounting, and financial mod­ules. We thus expect Rivers to start disclos­ing sufficient information for a timely and comprehensive assessment and forecast of its. budgetary performance and liquidity.

Senior Adviser, media and publicity to the Governor Mr. David Iyofor, said the lat­est report was based on the strength of sig­nificant ongoing infrastructure investments in the state. He said the investments should help lift the state’s social and economic sta­tus in the long run.

According to him, continued heavy Capi­tal Expenditure (CAPEX) might require ulti­mately tapping external resources such as the capital market, which should help ease pressure on the state’s reserve and revenue allocation.

He said the credit rating initiative under­scores the commitment of Governor Amaechi to build the right institutions for long term sustainable devel0l’ment of Rivers State, while adhering to principles of transparency, accountability and due process in its financial management.

“The state will ride on the momentum of the rating process to continuously improve upon its fiscal policy framewotk and sys­tematically modernise, strengthen and stan­dardise its public accounting functions based on global best practices, to attract and reinforce investor confidence in the econo­my of Rivers State,” he said.

He said that Rivers State remains the first and only state in Nigeria with dual interna­tional credit rating. In September last year, it was rated B+ by Fitch Agency with “Stable” long term financial outlook and A- domes­tic rating? This year’s rating opinion by Fitch Agency is expected later in the year.

“The state considers such independent financial opinion as very crucial guideline for continuing the modernisation of its gov­ernance standard, in other to firmly entrench accountability and information transparency, while strengthening public finance operating framework,” he said.

Akanbi writes for Thisday