The Oasis Reporters
June 21, 2021
By Dr. Jekwu Ozoemene
“Productivity, Governance and Nigeria’s Fiscal Federalism” – My thoughts over the last two days preparing for the Kwechiri Conversation of June 19, 2021 (held at the Conference Auditorium, ASUU Secretariat, Unizik Awka).
Nigeria as a country may be “rich in oil” but is not “oil rich”. It is this false “oil rich” narrative that our politicians deploy to justify profligate government expenditure, the irrational cost of our bureaucracy, irrational salaries for political office holders and the various subsidies on consumption.
A friend succinctly breaks it down thus.
“With a population of less than 2 million people, Qatar produces 1,240 barrels of oil per day for each of its 1000 people. Saudi Arabia produces about 371 bpd for each 1000 people. Kuwait produces about 1,100 bpd for each 1000 people. United Arab Emirates is about 663 bpd for each 1,000 people, even Angola that the country produces more oil than, attains an output of 139 bpd for each 1000 people while Gabon produces 167 bpd for 1000 people.
Nigeria on its part produces 17 barrels per day for each 1000 people, making her the poorest country in terms of oil per capita, far below the OPEC countries average of 371 bpd.
So we can see that the difference between a country like Nigeria and a country like Gabon is the difference between having three cubes of sugar placed in a 1000 litre tank and having one cube of sugar placed in a teacup.
Who has more sugar?
Of course the person with three cubes.
But who enjoys the effect of sugar more?
Definitely the man with one cube in a teacup.”
This “3 cubes of sugar in a 1,000 litre tank”, essentially a poor productivity / revenue generation per capita situation and the “Nigeria is oil rich” fallacy largely accounts for why we run a very strange economic model that I can only describe as a procurenomy, defined as “an economy based on the distribution of gross national income via inflated contracts to a chosen few, inflated contracts which are paid for using public debt or income from natural resources”.
Our politicians know that Nigeria is poor, they are fully aware that they are incapable of the intellectual rigour to drive the ideation and project implementation required to catalyse the latent resources of the nation, increase the revenue generation capacity of the country and improve the standard of living of its people. So they sell the sexier narrative of “Nigeria is oil rich, only plagued by corruption and will be okay once we plug all the leakages” to the electorate, to distract them from querying their conspicuous consumption, humongous security votes and irrational salaries and perks.
But I digress.
The strange economic model that we run is driven by a stranger Fiscal Federalism structure that discourages productivity, stifles competition, asphyxiates innovation, and rewards mediocrity.
Strange because in theory Nigeria is supposed to operate a Fiscal Federalism (also known as Fiscal Decentralization), a state of affairs where federal governments have decentralized revenue-raising powers to sub national governments (SNG) such as regional, state and local governments, enabling them fund local services. Taxation and expenditure in this instance is allocated between all tiers of government while the nature of transfers between them is also determined.
In theory, Nigeria operates Fiscal Federalism yet almost all the states and local governments in the country are unviable without the support of the federal government. Depending on the size of their recurrent expenditure bill, without the feeding tube and life support machine from the centre, these states will have to radically reduce their expenditure, salaries, wages and pensions bill or become insolvent.
The present parasitic relationship between most of the states and the centre is largely so because the Federal government has in the past, tinkered with the country’s fiscal federalism to favour itself rather than the regions, states or local governments.
In theory, it is expected that federal countries are to be more decentralized than unitary states.
However as observed in Nigeria and other developing federal countries, this is hardly ever the case. Though often citing poor data, inadequate infrastructure, weak systems, administration and capacity, a lot of the reluctance to decentralize is usually based on political, or sectional interests.
Dominant players at the centre are very reluctant to relinquish power / revenue generation and expenditure control to local players as this, they believe, whittles down their relevance.
This is even more pronounced in a country with major socio-economic imbalances such as Nigeria. Those from states that struggle to generate revenue are afraid that they will be unable to survive without fiscal centralization. State Governments are afraid that their revenue will be constrained if they allow true Local Government fiscal autonomy.
Notably, countries who are facing secession, nationalist movements, war or the threat of war tend to be more centralized for obvious reasons.
The truth however is that fiscal federalism / decentralization spurs competition, leads to innovation, efficiency and better accountability amongst sub-national governments. Fiscal decentralization also leads to a significant improvement in the calibre and pedigree of aspirants to office in local and state governments and reduces the focus on the centre. In the same vein, it engenders Fiscal Puritanism; i.e., fiscal abstinence (little or no waste of money) as available funds are applied to imperative projects, and fiscal rectitude as the need to increase revenue collections leads to efficiency in tax collection.
Anecdotal observations indicate that the more Nigeria moved away from fiscal federalism to (what is in practice) fiscal centralization, the less the sub national governments have seen the need to drive productivity, competition and innovation and the more politicians and the electorate have focused on the centre.
What has happened over time is that competition has now been reduced to how much oil revenue a state can get from the centre while productivity (for most states) is the State Commissioner of Finance travelling to Abuja, cap-in-hand, to collect allocation from FAAC.
Developed countries deploy fiscal federalism to ensure an alignment between public expenditure to the different needs of the local and state governments within the federating units. This way, management is brought home, and is very local. Accountability is also significantly enhanced as residents / constituents close to the points of service delivery can hold their immediate local and state elected officials who live in their midst accountable.
Local and State governments are also likely to be more efficient, responsible and accountable if they have to generate the revenue they spend.
Development and services will be specific to the needs of the locals and expenditure adjusted to what is affordable.
So why do some states generate more Internally Generated Revenue (IGR) than others?
The component of States generated IGR is basically Pay-As-You-Earn Tax (PAYE), Direct Assessment, Road Taxes and revenues from Ministries, Departments and Agencies (MDAs). States who exploit their Comparative Advantages tend to do better in revenue generation.
Lagos’ aggressive tax collection, Ogun State’s rebates on land, tax cuts, and tax holidays to attract investors (plus proximity to the nation’s ports for these two states), Anambra State with its investment in Agriculture, provision of social infrastructure and a large network of internal roads that has opened up the agrarian communities in the hinterlands.
Yet even for the states that are doing well in terms of IGR, we know that a lot of the “levies, taxes, tickets, stickers and fines” generating revenue are allowed to “leak” to fund political patronage and enrich cronies.
Available data shows that property taxes on the average accounts for 50% of tax revenue in federal (as against unitary) countries. Not surprising because the most stable and predictable form of taxation is wealth based taxes like those on land and property, given that these are on an immobile tax base, and of a fixed supply thus difficult to evade.
Therefore, why is Nigeria different?
The reason is that the country is focused on crude oil revenue and nobody bothers to register all the land.
Because we appear not to realise that elections have long-term consequences so we focus on electing people from our tribes, religious extractions, regions or the anointed protégé of our political money-bag Godfather of the moment.
Embedded in this is a selfish anti-intellectualism that is ever willing to mortgage the State and Nigeria’s future to individuals who are incapable of understanding the intricacies, fiscal policies and economic theories required to run a modern state and unleash the human capital potentials of a multi-ethnic, religiously diverse country of over 200 million people.
Most states in Nigeria struggle with revenue generation yet only 3% of Nigeria’s land owners have transferable title (C of O). Property taxes have low compliance costs for the taxpayer and are relatively simple to collect, but they require some assessment of property value and a record of ownership, such as a land registry. Our politicians may find this difficult to achieve because driving property taxes requires that the state shows that it has met its own part of the social contract with the people, an area where they have failed woefully.
We have significant wealth, tax revenues and equity trapped literarily, beneath our feet. Add that to the quantum of debt equity that can be released to MSMEs via collateralized lending if we undertake a long overdue land and general governance reforms.
We have vast human capital both resident in Nigeria (Anambra State) and in the diaspora largely untapped.
We know that the MSME sector (not Dangote, not Government) provides between 80-90% of the jobs in every economy, yet we have a well-tested Nwaboyi Entrepreneurship and Private Equity model that can be enhanced to transform Anambra state’s MSME space.
We can attract private equity funding and technical assistance to invest in this MSME space, create much needed jobs for Anambra citizens and catalyse an economic boom in the State largely delinked from FAAC oil revenues, for instance.
But then, these kinds of ideas, that kind of wealth creation directly benefits the people (who will demand accountability if taxed), is not driven by our much loved “Procurenomy” and its attendant 10% kickbacks.
Besides we have oil, so who cares?