Economic analysis

Can a bond offering help cure poverty on Native reserves?

Why it may be a win-win solution for Aboriginal communities and Ottawa

www.fnfa.ca

Money, goes conventional wisdom, comes with strings attached. Especially other people’s money. Especially when it comes as lump-sum transfer. And, as the ongoing Attawapiskat saga shows, the strings tie both ends of the money chain, with receivers accusing Ottawa of stinginess and neglect, and lenders always keen to point to suspicious accounting practices–or at least maladministration.

Yet, there’s a smart way around all this: borrowing from the markets. Though few seem to have noticed, First Nations are working on it. They plan to issue their first bonds in the fall of next year, in a collective offering worth at least $100 million. The money raised will serve for things like housing and to build badly needed infrastructure, which will create jobs and the conditions for banks and private business to set up shop on Native reserves, says Steve Berna, chief operating officer of the First Nations Financial Authority, the voluntary not-for-profit organization tasked with issuing the bonds.

Financing pricey public projects by borrowing on the market is common practice for governments at all levels, from federal to municipal, notes Berna. But it wasn’t until 2005 that Parliament empowered First Nations to do so as well, passing a grass-roots bill that had been at least six years in the making. Initially, the First Nations Fiscal and Statistical Management Act allowed First Nations to issue bonds backed only by their tax revenues.  Thanks to an amendment approved in September of this year, though, they’ll also be able to back debentures with revenue streams from things such as royalties, government transfers and interest earned on deposits, investments or loans.

South of the border, Indian tribes have long been issuing bonds, mostly backed by casino money. The Navajo Nation, the largest American Indian tribe, is expected to sell its first bonds in a $120 million offering using revenues from oil and gas royalties–and it has a better credit rating than the government of California.

But what about small, resource-poor communities that just don’t have the numbers to issue a debenture? Here’s where the Canadian approach is innovative. Canada’s First Nations opted to pool their revenues rather than going it alone, which allows smaller communities to access the bond market as well. But a bigger, collective offering means that even large, wealthier bands will benefit from lower rates and more advantageous conditions than they would have been able to obtain on their own. First Nations took their cue for this from B.C.’s Municipal Finance Authority, whose cooperative borrowing model allowed all 210 of the province’s local governments to issue bonds on the global market, with an AAA rating. Tellingly, FNFA’s Berna used to be the MFA’s CEO.

The setup may also represent an incentive for some band chiefs to finally get their books in order. In order to participate in the collective debenture, in fact, First Nations must qualify for it. The First Nations Financial Management Board, which operates independently from the FNFA, manages the vetting process, looking at financial administration practices, executing liquidity tests and demanding to see at least five years of audited financial statements, among other things. Those that don’t meet the bar get a do-list to fix their financial management and can try again later. It’s peer pressure at its best with no easy scapegoats.