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Sunday, October 1, 2023

“Asset recycling” – A disingenuously creative financing transaction

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By Lamino Lang Comma

Quite a buzz.  Public concern over the affairs of government has become an important part of the political space.  Annual budget sessions have generated intense debates with a dissection of the various parts of the expenditure. Unfortunately, the outcome has always been the same.  The budget is approved anyway.  The funding arrangement to finance national projects is no exception to such a debate and outcome.

There is already a host of comments on the financing scheme of the bridge at Farafenni.  No need to take that road.  The concern here is the use of buzzwords as way to create an environment of controversy and to circumvent a process with a final outcome of getting away with a proposal.  

The bridge generates a flow of income on a monthly basis over the lifespan of the bridge.  What does one call obtaining a capital sum now by giving up that flow of income over a particular period – 25 years.  The new buzzword is – “recycling” of an asset for the “monetization of cash flow”.  Interestingly, monetization occurs by turning a non-income generating asset into cash flows.  Sure, there may be several ways of doing so but whatever method used, the asset is not producing income at that point in time. On the other hand, it could also be called “capitalization” for an income generating or cash flow outfit. 

In very, very simple terms… Someone has a house that produces a certain sum of money (income) every month. The owner wants to build some more houses.  He walks into a bank and tells the manager – listen, I have this house at a very good location which has a high demand by tenants and it provides a rent of D40,000 per month. (The monetary unit matters not – US dollars or Gambian Dalasi).

Furthermore, the house is worth around D250 million dalasi in the market if the owner sells it – that is the income is capitalized over the lifespan of the house to get the market value. In other words, he gets D250 million now by completely and forever giving up his right of ownership of the house and to the monthly income of D40 million.  But the house owner needs only D100 million for his project, so he does not sell.

Naturally, the bank manager is interested in whether the income (rent) coming from the house can pay off this amount requested and how long it would take to get his money back. But, the manager also wants some profit for giving up D100 million.  So, he asks for a 15% interest so that at the end of the period of getting back his money, the bank manager gets an extra 15million on top of the original sum of D100million – D115 million.

The bank manager will certainly want security – some form of guarantee for the D100 million.  Naturally, the house owner puts forward the house as a guarantee. Simply put, the house owner has sought a loan of D100 million from the bank to finance his project.  The bank grants him D100 million with an interest of 15% payable over 25 years.  Well, that’s called a mortgage.  Plain and simple. Or is there some buzzword for this arrangement?

With the case of a house, there is a title to the property which is usually in the form of a say 99-year lease or a freehold which is an ownership in perpetuity – forever. A national asset like a bridge is government owned and does not have a title deed like the house owner which it can be put forward as a guarantee. But creatively, the bank manager requests to manage the bridge as the guarantee to get back his money over a period of 25 years. 

In other words, the bank requires government to give up the possession of the bridge to the bank in order to collect the D40 million every month over 25 years.  In this arrangement, the bank can hike up the rent to collect more money or it could be lucky to have more tenants (traffic) using the bridge and thus allow him to recover D100 million plus D15 million in a shorter time.  Or he can manage it over the entire 25 years for the same purpose – whichever is quicker to settle the amount given plus interest.

What’s difference between the house owner and the owner of the bridge?  In both cases a capital sum was acquired – not free – that is to be paid over a period. In simple and normal parlance, a loan has been acquired to be paid over a period.  It certainly is not a gift.

The standard definition of a loan is basically a sum of money that is taken and is expected to be paid back with interest.  In both cases, a sum of D100million is taken from a bank and it is expected to be paid back with interest at 15%.  Undeniably, the common feature in both cases is the fact that a loan has been taken.

The difference is the process (emphasis) of payment.  That is to say, for the house owner, he retains the possession of his house, continues to collect the monthly rent and pays the bank monthly.  In other words, he continues to possess and manage his property. 

In the case of the bridge, the possession is passed on to the bank who then manages the bridge because that is the guarantee for the bank to ensure that the money is collected and paid.

By the way, it is interesting that there seems to be some latent question of trust in both cases.  The bank trusts the house owner by leaving him with his house to manage and make periodic payments.  In the case of the bridge – ah well – the bank does the management – why?  Anyway, that’s again beside the point here.

This is where the buzzword semantics comes in.  

 In the case of the house owner, the asset (house) is mortgaged, in the traditional sense of the word because the possession remains with the owner of the house after taking the loan.

In the case of the bridge, its possession by the bank may not completely fit the traditional meaning of the word “mortgage” and more so in a political context for governments – not a suitable word politically.  On the other hand, in cases where the possession of assets is taken over by the provider of the loan because of failure of repayment schemes it is called “foreclosure”.  That again is not a correct description of the case of the bridge in losing possession over a period to secure a loan.  A bit tricky, isn’t it? It appears that “recycling” could be a good buzzword for qualifying the process (emphasis) whereby possession is transferred as a guarantee to pay off the loan. 

Out of curiosity:

Ain’t there some less complicated and cheaper ways of funding infrastructure projects with low interest rates?  Why use this method at a higher and market cost or commercial interest in addition to its less transparent procedure and cumbersome and potential controversial management framework?

Governments are traditionally known to obtain funding through concessionary loans with very very low interest rates.  Market-rate funding schemes are normally for middle to high income nations with a good per capita income and which may want an urgent funding arrangement.  Is there some urgency in obtaining such a costly financing scheme for a low-income country?  Such funds are usually pumped into investments that yield higher income – productive sectors (tourism and agriculture, maybe) – but not in non-productive and perhaps non-essential infrastructure under questionable management and procurement policy. 

Another creative response to concerns raised over possible redundancies of current staff is that the staff at the bridge is under the payroll of the Accountant General and will, therefore, remain so even if fired by the new managers, presumably to be absorbed elsewhere – whether needed or not.

“Recycle” – seems to be quite a disingenuously creative use of a buzzword in a new era of management policies that keeps one really bewildered especially for a country that is more or less a guinea-pig for such a funding scheme – i.e. being the first user of the type of funding in the a continent………

Under controversial circumstances of definitions and interpretations, would a bank manager disburse funds for a loan that has not been ratified or approved by the collective owners of the asset that is being put forward as a guarantee, especially if the financing agreement could be legally challenged on the basis of the nomenclature given to the sum that has been given and which seems to qualify more as a loan (than as a “monetized” cash flow) and should thus have been tabled before such owners. That could perhaps be a case of ultra vires by the agent of the collective owners and foolhardy?

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