Chanced Finance Minister talk about diversifying our economy in a news programme; if we had just began to think in that direction, then it is really unfortunate. Now a post on how I think we should proceed: Nigeria: Activating the Economies of the States Key Points: a unique federation, emergence of the states, fiscal dependency, empowerment of the states, fiscal autonomy, revenue allocation formula, devolution of functions. Background: Nigeria is a federation of thirty-six states and a federal capital territory. These states are in turn divided into a number of local government areas according to the size of each state. There are seven hundred and sixty-eight of such local government areas, excluding six within the federal capital territory known as Council Areas. Before the coming of the present fourth republic, some aspiring politicians met and grouped the states of the federation into six geo-political zones. We now have North-East, North-West and North-Central in northern Nigeria, and South-East, South-West and South-South in the south of the country. Although informal and not constitutionally recognized, this grouping has continued to influence the course of political discuss in the country and also the format for resource allocation, both human and material. A Unique Federation: The Nigerian federation is fundamentally different from other federations of the world like the United States of America and Germany. Typically, the Central Government of a federation is the creation of the federating units. In the case of Nigeria, the converse is the case. The centre created the federating units right from the amalgamation in 1914, of the northern and the southern protectorates, and the colony of Lagos- units that finally made up the country. The result of this difference is that the federating units in Nigeria have not really been what federating units are supposed to be in a federation, fiscal independent entities. During the era of the first republic, the states, then three and later four, maintained a good level of fiscal autonomy. No state was waiting for the centre before commencing the implementation of her annual budget. None was going cap in hand to the centre for fund to resolve any internal financial challenge either. Rather, there was a very healthy competition among the states, then known as regions. There was the Arewa Group in the North and the Odua Group in the West, each controlling a number of viable commercial enterprises. Western Region, under Chief Obafemi Awolowo, could afford to blaze the trail in establishing the first television station in sub-Sahara Africa. Trans-Amadi Industrial Estate in Port-Harcourt and the defunct Cooperative Bank of Eastern Nigeria, were both the products of the spirit of that era. Then and Now What was the fiscal relationship between the centre and the regions then that made these possible and what has changed? The regions then were entitled to one half of the resources generated within their areas. The other half went to the centre. From this arrangement, the regions not only had money to spend, they also had the motivation to invest; to compete and to generate even more revenue. Now the resources of the federation are firmly in the hands of the central government and she allocates to both the states and the local government areas following an extra-constitutional Revenue Allocation Formulae determined from time to time by the Revenue Mobilisation, Allocation and Fiscal Commission, one of the fourteen federal executive bodies of the federation. The consequence of this is that the states, which were originally centres of resource development and revenue generation, are now spending centres, with internally generated revenue of most states in no way close to a tenth of their recurrent bills. What gave rise to this change and almost total dependency? When the military took over the political leadership of the country in the late 1960s, it quickly became obvious to them that the military cannot run a true federal government. The military, with her command structure, can only run a unitary government. The Ironsi regime was honest enough to acknowledge this publicly, albeit, with disastrous consequences. The subsequent regimes were smarter: maintaining the official title, ‘the Federal Military Government of Nigeria’, they ran the country as a unitary state. Under a unitary state, the centre is supreme. She controls everything and the federating units virtually tag along. At present the Nigerian federation is not far from this scenario. The central government controls not only all the apparatus of state but also the resource base of the country, including sizeable proportion of the land on which every other thing is based. The result of this is that the states are greatly hampered in their ability to develop and generate resources. The reasons for this are clear enough from the preceding paragraph but they need restating as outlined below for clearer understanding: Why the States are Dependent: a) Apart from a handful of states lucky enough to have resources developed in their area and thus entitled to derivation fund, most states almost always do not have enough money to meet their financial obligations. After the recurrent bills little is usually left to even provide the most basic of social infrastructure. Under this situation how can such states embark on long term resource development projects? b) Mineral resource development is the exclusive preserve of the central government. Even where a state can mobilize resources to develop and exploit mineral resources within her domain, statutorily she cannot. A number of states of the federation have one mineral resource or another within their domain. The federal government is either not prepared or not interested in developing them and they cannot undertake to develop them either. c) Agriculture may be in the concurrent list. Both the centre and the states can legislate on and invest in this area. But water ways and water resource infrastructure are again, in the hands of the federal government. There is no need to recount here the place of water and water resource infrastructure in large scale commercial agriculture. d) When the military commenced splitting the original four regions first into 12, then 19, 21, up until the present 36 states, little thought was given to the economic viability of the states. Fiscal allocations flow from the centre to the states. There was little incentive to generate fund internally. Existing agricultural resource base, originally the premier income earner for the regions, was neglected. In other words, the present regime of fiscal dependency of the states was the creation of the federal government. Perhaps, this was necessary for a military regime to maintain firm control of affairs. Or was it because the money was then more than enough? Whatever the reason, one thing clear is that the money is no longer enough. The signs are everywhere, even in the supposed few rich states. Now what shall we do as a country? Many countries at par with us at independence in 1960 have long left us behind. Something must be done to turn things around and save the federation. Some people talk about diversifying the economy. Are we diversifying from the centre or from the states? With the current spirit of gathering to share and not to create, how effective can this be? If we are diversifying from the states, where will the states get the funding from? Others talk about fiscal federalism or more commonly, resource control. What resources are you going to control? How many states of the federation have anything to control? The resources our peculiar federalism helped to wipe out long before now? Empowering the States: The only viable way to get out of this very difficult situation we have found ourselves in is for the federal government to commence empowering the states so that they can progressively get back to where the original federating units were before the advent of the military and subsequent creation of more states. The question now is how and where will the money come from? Before we start attempting to answer the above questions, let us first take a look at the possible benefits this change can have on the country and her economy: 1) The states, now with the capacity to generate their own resources, will have far more money at their disposal than they currently can boast of. 2) The federation will also have more money because resources will be coming from many states of the federation as was the case originally. 3) The governments can then afford better wage levels for Nigerian workers and also social security programme for the country. At present wage level across the country is dismally low. There is no social support programme for the citizens. When workers retire they are not sure of their entitlement or their monthly pensions on regular basis. This is partly why corruption level in the country is among the highest globally. 4) The federation will have the chance to diversify her economic base. The current dependency on single resource base, oil and gas, will cease to the relief of the entire nation. 5) The country will have greater capacity to create jobs because the states will become centres of economic activities, not just spending centres as is the case now. Current unemployment level in the country is again, among the highest globally. This will only get worse as the years go by, if we do nothing, considering our high population growth rate, again among the highest worldwide. 6) This will make for robust economy. The spirit of competition among the states will return and every state will be exploring all she can to boast her resource base and gross domestic product. This will no doubt be good for the general economy of the country. 7) There will be healthy population re-distribution in the country. The present concentration of people in few urban areas will give way to people moving to new centres of economic activities which will not necessarily be the current few established urban areas. Pressure on social infrastructure in these few urban areas, a major developmental issue currently, will also ease out. 8) There will be greater social cohesion. Besides population re-distribution contributing to this, the realization that every section of the country is now contributing to the centre will engender social harmony. 9) Current level of corruption in the land will go down drastically. One other thing that fuels corruption in the country is that money tends to flow only from the centre. This creates what could be termed ‘a sharing mentality’ in the country and a sense of “let’s get what we can before the resources run out”. When every state starts producing her own resources, the spirit of competition will come back and incentive to embezzle will go down, more so when wage level has improved and functional social security programme is in place. 10) The change will also dampen the level of political competition in the country, especially, at the centre. Politics will attract more of those coming to serve and not those coming to cheat the system. Politicians will be more interested in the emerging centres of economic activities. The current cut-throat competition at the centre, fuelled and sustained by self interest, will give way to more humane and issue driven politics. The result of this will be greater political stability of the country. The points being outlined here first-hand, might sound idealistic. That will be if we understand the programme in question to be a today and tomorrow project. What is being proposed is not a programme of years, but that of decades. We took long to get to where we are; we should not expect to take over night to re-trace our steps back to where we were. Ample gestation period is needed and this will ensure enough time to carry everyone along; to review and re-direct the programme as experiences are acquired and new facts become available, and finally to ensure value and attitudinal change, as the programme take root. A Rescue Mission: Now, what must we do? To start with, the federal government must understand that she is in a rescue mission to save the economy of the federation and that is what it really is. Once this is understood, empowering the states becomes a key federal policy to be approached with all seriousness and sense of urgency, no matter which party is in power. In line with these, the federal government should start with the following: a) call an economic summit of the federation, b) harmonized her agencies and c) put her finances in order. Economic Summit: The economic summit is necessary because it is the best way the states, which will be the main actors in the programme, will become fully and properly engaged in the scheme. In the summit the following shall be discussed and agreed upon: i) the broad policy thrust of the programme, ii) the expected roles of the federal government in the programme, iii) the expected roles of the states in the programme, iv) harmonisation requirements for government agencies at both the state and the federal levels, v) the modalities for constituting agencies for the programme, vi) the modalities for review and re-direction of policy as situation change and vii) the modalities for devolution of functions from the centre as the programme take root. At the end of the summit a document should be produced for onward transmission to the National Assembly for passage into law and subsequent domestication at state level. This is to ensure that the programme is put above partisan politics and the vagaries of random change as governments change hands. Haven settled this; the government shall turn to the second and third parts. I have already suggested that the government was in a rescue mission. As a body in a rescue mission she must first be sure of her position. You do not begin to rescue someone else if you are not in a good position to do so. At present, the financial standing of the federal government and the operational structure of some of her institutions are not really good. After many years, the federal government has just achieved a recurrent to capital vote ratio of 70:30 in the 2013 annual budget and we are supposed to be celebrating it. Putting the House in Order: To strengthen her position before embarking on this potentially challenging mission, the federal government should do the following: a) Cutback on Recurrent Expenditure Profile: The recurrent expenditure profile of the government at the centre is disproportionately high. This must be reduced. To achieve this, the government should harmonise the ministries, parastatals and other agencies of government. Those performing similar or overlapping functions should be merged and restructured. Those whose functions can be taken up by departments in related ministries should be scrapped while the ones that can better be run as private enterprises should be privatized. With permanent secretaries, directors and deputy directors to every ministry, do we really need more than one minister to each of the ministries? b) Reduce Cost of Governance: The cost of running the federal government is also very high and contributes greatly to the high overall recurrent budget. This should also be reduced. Government should take a good look at her structure and determine whether we really need all the layers of authorities. c) Disinvest from Commercial Enterprises: These are ready loopholes through which government looses money because she allocates annual subventions to such enterprises and gets nothing in return. Government should cease from being part of commercial enterprises like banking, insurance, energy, telecommunication, aviation, transportation, and so on. Government policy here should be develop and disinvest. d) Review Procurement Protocols: Government should review her subsisting procurement protocols to ensure that the current rooms for leakages are removed. Through all the agencies of government, procurement is characterized by leakages and this takes lots of money from the federation account. If a company is tendering for a job in Nigeria, for instance, it should be in the local currency. There should also be no room for local procurement bills separate from offshore procurements bill. These are some of the areas that help bloat costs of contracts in the country. Modalities for direct procurement by government agencies should be re-evaluated. They appear to have given room to leakages and sharp practices. e) Close Windows for Wastages from Government Activities: Government should institute policies to check wastages from her activities. She should be sure every naira she spends is deserved. No more free cheques to individuals, institutions and other countries in whatever guise. If we go on foreign mission, as we always do, we must be sure to recoup our costs. That is what other countries do. If we are hosting any event, it must be commercially driven and government must not lose money as has always been the case. f) Strengthen Anti-corruption Institutions: Corruption takes so much money off the hands of the government and this must be checked before embarking on the programme being proposed. The two anti-corruption agencies in the country, the Independent Corrupt Practices Commission (ICPC) and Economic and Financial Crime Commission (EFCC), may be making arrests and trying people but corruption in the land is not abetting. What should we do? Merge the two bodies into one and restructure the resulting body to become proactive and better focused in her function. Institute special anti-graft courts or tribunals for speedy trials. Slow judicial process in the country is a great incentive to graft. g) Change the Format of the National Budget: At present we budget for every twelve months. For a developing country like Nigeria, this cannot be helpful. We must reorder our budget format to be in the form of development plan of minimum of ten years each. The current annual fiscal budget should be replaced with annual economic performance review which will help government routinely fine-tune and update a running development plan. h) Institute Mechanism to ensure Budgets are implemented: Since the advent of the fourth republic, the national budgets rarely get passed in time. The current 2013 Annual Budget suffered a two-month delay and that was a huge leap forward. Late passage is not the only problem. The budgets, after being passed rarely get implemented: always below fifty percent implementation level. This scenario cannot make for any meaningful development. I have already suggested replacing the current yearly budgeting with ten-year development plans. This will take care of late passage of budgets but not low implementation levels. Government should institute mechanism in place to check this before embarking on the programme being proposed. One way to go about this is to tie benefits to and progress of key officials of government agencies to levels of budget implementation. Officials should be sanctioned specifically for low budget implementation levels. Additionally, verifiable quarterly report on budget implementation should become necessary document for the consideration of the expenditure profile of the subsequent year. i) Address Losses in the Oil & Gas Sector: This sector is the key revenue base of the federation. It funds up to 90% of the federation account. The newly established Sovereign Wealth Fund is exclusive financed by it. Activities in such an important sector should be closely watched. Areas of losses in this sector are legion. I will outline some of them briefly as follows: 1) Losses to International Energy Companies operating the sector due to unbalanced engagement protocols right from the commencement of the industry. 2) Losses to corrupt officials of the agencies of government associated with the sector. Alleged fund disappearances have repeatedly been reported from some of these agencies in the past. 3) Loss of potential revenue to continuing gas flaring and its attendant environmental costs to the nation. 4) Losses to downstream oil companies due to sharp practices in the oil subsidy scheme of the federal government. A little window was opened on this during the 2012 National Assembly Oil Subsidy Probe. 5) Losses to criminal activities in the sector like product pipeline vandalisation; improvised illegal oil refineries and the big one, crude oil theft. This has of late assumed the status of international criminal activity, causing the federation trillions of naira in revenue loss annually. Addressing these problems is no doubt a tremendous challenge. Nonetheless, government should find a way to address them because it is still this sector that will help fund in part, the programme being discussed here. Government should consider the following as possible ways of addressing the problems: a) Do what she can to encourage the National Assembly to pass, without further delay, the Petroleum Industry Bill (PIB). Perhaps, it will help address the slip in the operational protocols of the international energy companies; address the issue of gas flaring and losses to corruption in government agencies associated with the sector. b) Increase local refining capacity with a view to doing away with oil subsidy. This should be handled from two directions: 1) increasing the capacities of the four existing local refineries and 2) establishing new ones through public/private sector partnership. The argument that low product prices in the country cannot allow this is unattainable. We can start off with much reduced subsidy regime than we expend now importing refined products, sustaining the jobs of other people while our local unemployment challenge mounts. c) Consider granting some level of royalty to communities in whose lands the oil and gas infrastructure are sited. It should be made clear to them that loss of revenue originating from their domain should be charged on their royalties. This way the problem of product pipeline vandalisation and improvised illegal refineries would have been address to a great extent. d) It appears the activities of the Joint Military Task Force (JTF) and the Nigeria Navy is making little impact on crude oil theft in the Niger Delta. Shell, one of the major international energy companies operating the oil and gas industry in Nigeria, this March, 2013 threatened to shut down her Nembe Operation in Bayelsa State, South-South Nigerian. Reason: she claims to be losing 60,000 barrels of crude oil monthly to crude oil theft from that axis alone. That disclosure suggests that crude oil theft is no longer a dent on the expected annual revenue and the long term revenue base of the country but a huge crater. Government needs new and different approaches in tackling it. I will suggest just two here: 1) identify the countries their nationals are most involved in this crime and take it up with them at UN level; 2) adopt the approach the British used to stop trans-Atlantic slave trade in the late 19th century: patrol the seas, seize ships with contraband and force them to disembark. International private security agencies can do this effectively. They can be deployed as a second sphere of control beyond that of our National Security Agencies. It will be costly but the savings will be worth it. What has being outlined above will help put more money in the hands of the government. It will also put relevant agencies of government in a better position to help drive the programme. Corruption, waste and laxity in matters of government business can derail any policy, no matter how well thought out. It is therefore, very pertinent that these are reduced to barest minimum before embarking on the execution of the programme being proposed. The Empowerment Programme: Now, let us take a closer look at the programme. At the federal level an agency, to be known as National Resource Base Development Agency, should be statutorily established. An equivalent should be established in each state of the federation. The job outline of the federal agency should include the following: i) Development of policy outline and direction for the programme, ii) Coordination of projects and programmes of the state agencies, iii) Liaison and coordination of project implementation, especially where external interests are involved, iv) Representation of federal interest in the course of program implementation, v) Advises the federal government on the health and direction of the programme, and the possible need for re-direction and fine-tuning, vi) Liaison with relevant government agencies on the effects of the programme on the fiscal health and the development of the economy of the nation as a whole. The state agencies should be the key drivers of the programme at state level. At the beginning, the state agency of each state should carry out detailed study of what is available within her domain with a view to identifying the most economically viable to be developed at the shortest possible time frame. This need not be just one resource base. Once this is achieved, the agency should produce detailed business plan on how the resources can be developed and exploited. Where necessary, specialist consultants should be recruited to assist on this. The phrase, “business plan” should be understood to comprise three key components, namely: a) technical plan, b) financial plan and c) environmental impact study. On completion of this stage, the agency should, in agreement with the federal counterpart, competitively source for and appoint a core investor for the enterprise. With this in place, a team should now be drawn up comprising the following: 1) The federal government, represented by officials from the federal agency, 2) The state government, represented by officials from the state agency and 3) The representatives of the core investor. This team will now fine-tune the business plan and agree on the following: a) The proportion of the enterprise each partner can own, with financial backing, b) What proportion of the total investment will come in as commercial loan, to be guaranteed by the federal government, c) Detailed plan on how the enterprise can pay back this loan, including well thought out and feasible time frame. d) What proportion of returns goes to the host community as royalty, where applicable, e) How the returns should be shared among the partners after statutory deductions and f) The modalities for disinvestment by the governments, and clear and feasible time frame for this. This last point is very important because enterprises need to be turned over to private sector as quickly as possible so that the governments can re-direct attention to new areas. The above format refers to a situation where mineral resources are involved, obviously. Agriculture, to which every state should subscribe, should be approached a little differently. What the agency should be looking for here is a very narrow line of crops the state in question holds the best comparative advantage. Once these are identified, the agency should focus on them and produce detailed business plans on how best to produce and market them, not as raw agricultural produce but as products with value added in first instance and subsequently as finished products. From the beginning, the target should be to produce and export produce as finished products. We must move away from the entrenched tendency to export only raw produce as we started doing long before the colonial era. That is the only way we can maximize the benefits, which includes more jobs for our ever expanding population. Devolution of Functions As the programme progressively take root and the investments begin to contribute to the gross domestic products of both the states and the federation, the federal government should start and continue to gradually adjust the Revenue Allocation Formula in favour of the states and local government areas. This gradual adjustment should also affect derivation. The idea should be to progressively adjust to get to where we were before the advent of the military. In addition, as the federal government surrenders proportionally, more resources to the states, she should also relinquish some functions to the states. In line with this, the federal government should devolve some of her current functions to the states as follows: i) Health: the federal government should concentrate effort at the tertiary level, ii) Education: again, the federal government should limit herself to tertiary level, iii) Agriculture: the focus of the centre should be policy direction and external liaison, iv) Power & Energy: states should be allowed and encouraged to participate and feed to the national grid. Already this is beginning to happen on limited scale. v) Mineral Resources: states should be allowed to work in partnership with the federal government in developing resources in their domain. vi) Lands: the Land Use Act should be revisited and reviewed in such a way that state governors can manage and administer lands within their domain. vii) Roads: the road network of the federation should be reviewed with a view to ceding some stretches to the states. Already some state governments are being forced to take on federal roads and later ask for refund. It will, therefore, be a good idea to cede some of these roads as part of general devolution of functions. viii) Security: states should be allowed to establish their own police and prison services as part of the general devolution of functions from the centre. This should, however be handled with utmost care to avoid problem of jurisdiction between the federal police service and different state police services, on one hand and among the now the state police services, on the other hand. A central body may be necessary for general policy direction, to oversee and to mediate in event of conflict arising from jurisdiction. Perhaps, the Police Service Commission should take up these functions additionally. The question of state police has become topical of late, with some state governors persistently calling for the constitution to be amended to allow states to establish their own police services. They have advanced various reasons for their position. Others have opposed them, including the current Inspector-General of Police (IGP) who believes the country is not ripe for state police. Looking at the current state of the nation, you cannot possibly dismiss the position of the IGP with a wave the hand. But let us examine the set up of the Nigeria Police Force as it relates to her relationship with the states. This might help suggest the real reason behind the current clamuor by some state governors for state police. The 1999 constitution of the Federal Republic, as amended, established two principal offices for the Nigeria Police as follows: a) The Inspector-General of Police (IGP), appointed by the President on the advice of the Nigeria Police Council, heads the Nigeria Police Force and reports to the President. b) A commissioner of Police (CP) for each state of the federation, appointed by the Police Service Commission, heads the Police Command of his state of jurisdiction and is also under the authority of the IGP. The President or a minister of the government authorized by him can issue to the IGP lawful directions pertaining to the maintenance and securing of public safety and public order in the country and he is required to comply or cause it to be complied with. In a similar manner, the governor of a state or a commissioner in his government authorized by him can issue lawful directions to the CP of his state pertaining to the maintenance and securing of public safety and public order within his state but the CP is in no obligation to comply. Reason: the constitution requires the CP to request that the matter be first referred to the President or a minister in his government authorized by him to so act. In other words, the state governor though the chief security officer of the state, has no control over the Police Command of his state. In event of emergences his leverage to act is greatly limited and that is the real reason behind this clamuor for state police by some governors. Again, you cannot dismiss the position of the governors easily. If you take a look at the direction the calls are coming from, you will see that they are coming mainly from the states that believe they can afford their own state police. The governors who are not asking do not necessarily resent the idea. The reason they are not asking could be that you do not begin to ask for fresh responsibilities when the ones you already have are grossly weighing you down. The question of state police and prison service should be seen and approached as part of the general empowerment of the states being proposed here. It should be part of general devolution of functions the federal government should embark on once the programme of empowerment takes root and the states begin to fiscally stand on their feet. I have used the extended phrase “state police and prison service” deliberately here. The reason is that the two must go together. You cannot talk about state police and leave out prison service. You cannot generate arrests and convicts and send them to prisons run by another government. Who picks the expenses? Subsisting Resources: Now, let us take a look at what happens to subsisting resource base of the federation and the states in which they are domiciled? To begin with, it must be understood that these resources did not just come to be. The federal government financed and developed them from aggregate resources from across the federation before the change we discussed earlier. No one is going to say since every state is being empowered; the federal government should hands off. Rather, these resources and the states in which they are based should be taken along in the spirit of the general empowerment already discussed. In any case the resources involved need major investment and development for greater benefits to the nation. We must not continue to export crude oil. We must advance to refined products and down to other derivatives from petroleum. The gas sub-sector needs continuous investment and development to expand it further. The general empowerment being proposed here should see to these to the benefit of all stakeholders. Conclusion: Concluding, it is clear the Nigerian federation is not running as your typical federation. The states, as federating units, are over dependent on the centre due to the circumstance of their emergence. Years of direct revenue allocation from the centre has ensure the states do not generate enough resource of their own. They are now spending centres with virtually only the centre generating revenue for all to share. The result of this is that the resource base of the nation remains narrow and the overall economy struggles. To overcome this, the economies of the states must be developed as a deliberate federal government policy in partnership with the states. As a rescue policy, the federal government should first restructure and streamline the operations of some of her institutions with a view to cutting back on her recurrent expenditure profile and blocking off areas of waste. The states should also, as principal actors in the scheme, be required to do the same as a necessary condition for participation. If properly handled and faithfully implemented, this policy will ensure that the states will in no time become viable economic centres, developing revenue for themselves and for the centre. There will then be more revenue for the states and the federal government. The one-resource feature of the economy of the nation would have ceased and this will be good for the overall economy of the country. This piece is written by Engr Peter A. Ihueze of Bummack Nigeria Limited, an Abuja based Mechanical and Electrical Works Company. Written this day, March 5, 2013.
Posted on: Sun, 19 Oct 2014 00:31:46 +0000