Report No. 25710-UNI Nigeria States Finances Study April 2003 Macroeconomics 3 Division (AFTP3) Africa Region Document of the World Bank Niperia States Finances Studv NIGERIA-FISCAL YEAR January 1- December 31 CURRENCYEQUIVALENTS ((as of April 2003) CurrencyUnit = Naira O.O079US$ = 1Naira WEIGHTSAND MEASURES Metric System Vice President CallistoMadavo CountryDirector Mark Tomlinson SectorDirector Paula Donovan SectorManager CadmanAtta Mills Task Leader Victoria Kwakwa Nigeria States Finances Studv 2 April 2003 Nigeria States Finances Study ABBREVIATIONS AND ACRONYMS AGF Accountant General o f the Federation C B N Central Bank o fNigeria CIT Companies Income Tax CPAR Country Procurement Assessment Review D M O DebtManagement Office ETF EducationTax Fund FA FederationAccount FCT Federal Capital Territory FGN Federal Government o fNigeria GDP Gross Domestic Product IGR Internally Generated Revenue IMF Intemational Monetary Fund ISA Investmentand Securities Act JVC Joint Venture Company LGA Local Government Area LNG LiquefiedNatural Gas NEC National Economic Council M O F FederalMinistryo f Finance MTEF MediumTerm ExpenditureProgram NPC National Planning Commission PAYE Pay-As-You-Eam PEM Public ExpenditureManagement PDP Peoples Democratic Party PPT Petroleum Profit Tax PTF Petroleum Trust Fund RMFAC RevenueMobilization and Fiscal Allocation Commission sc ssc Supreme Court State Steering Committee UBE Universal Basic Education V A T Value Added Tax Nigeria States Finances Study NIGERIA STATES FINANCES STUDY TABLE OF CONTENTS PREFACE........................................................................................................................ 8 Background..................................................................................................................... Relevance and Objective o f States Finances Study ........................................................ 8 8 9 Limitations.................................................................................................................... Selection o f States and StudyApproach......................................................................... 11 11 EXECUTIVE SUMMARY .............................................................................................. Links with Ongoing World Bank Activities ................................................................. 12 12 Nigeria's Fiscal FederalismArrangements................................................................... Introduction................................................................................................................... 14 Highlights o f States' Recent FiscalPerformance ......................................................... 15 Sources o f Soft Budget Constraints For States............................................................. States' Budget and FinancialManagement................................................................... 16 17 Prospects for Reform .................................................................................................... Options for Sound Finances and FiscalDiscipline inNigerian States ......................... 18 22 Chapter 1: Overview o f Fiscal FederalismArrangements inNigeria.............................. 24 A. Introduction.,......................................................................................................... 24 B. The Structure oftheNigerian Federation................................................................ C. Current Revenue Assignments ................................................................................ 25 26 Federal Taxes and Revenues..................................................................................... 26 27 Local Government Revenues..................................................................................... States Taxes and Revenues....................................................................................... 29 Implications o f the RevenueProfile ......................................................................... 29 D.Revenue 31 40 E The April SupremeCourt Ruling............................................................................ . Expenditure Assignments ....................................................................................... Sharing Arrangements ............................................................................... 42 Chapter 2. Reviewo f States Finances 1997-2001 ........................................................... 45 A.Introduction.............................................................................................................. 45 B. FiscalPerformance o f States 1997-2001................................................................. 47 Memo ........................................................................................................................ 47 States RevenuePerformance..................................................................................... 49 States Expenditure Performance ............................................................................... 51 C.FiscalTerm Prospects and Structural Issues For MediumTerm Attention .............. 60 Balance ........................................................................................................... 58 Short Chapter 3: Promoting Fiscal Discipline Through HardBudget Constraints ...................62 A. 62 B. Introduction........................................................................................................... 62 System of intergovernmental transfers and States' RevenueAutonomy ...................63 Sources o f Soft Budget Constraints for Nigerian States....................................... States' Autonomy to Control Costs and Stay WithinBudget Constraints ................65 Chapter 4. C.Arrangements . 66 Hardening Budget Constraints for Nigerian States........................................... Regarding States Borrowing............................................................ .........73 A. Introduction........................................................................................................... State Budget and Financial Management Processes and Institutions 80 B. InstitutionalArrangements for Budget andFinancialManagement inStates ........80 80 Nigeria States Finances Study 4 April 2003 Nigeria States Finances Study 83 D. C. BudgetPreparation................................................................................................ 85 E. ReformingState Budget andFinancialManagementProcesses............................. BudgetImplementation......................................................................................... 89 Move TowardsA Medium Term Approach to Budget and Fiscal Management.......90 Enhance Accountability and Transparency through Modern Finance and 91 Modernize Systems and Build Budget and Financial Management Skills................92 Procurement Laws .................................................................................................... 93 Source: WorldBank Estimatesfrom Field Reports of Consultants.................................. STATISTICAL ANNEX .................................................................................................. 99 Source: WorldBank Estimatesfrom Field Reports of Consultants ............................... 106 Source: World Bank Estimatesfrom Field Reports of Consultants ............................... 110 Source: Compiledfrom Data Obtainedfrom the Debt Management OfJice of the Federation....................................................................................................................... 111 BIBLIOGRAPHY........................................................................................................... 114 Nigeria States Finances Study 5 April 2003 Nigeria States Finances Study List o f Tables Table 1.1 - FederalBederationRevenues Table 1.2 - State IndependentRevenues Table 1.3 - Vertical FA Revenue Sharing Formula after SC Decision Table 1.4 - Horizontal RevenueSharing formula For States Table 1.5 - Horizontal RevenueFormula: States Table 1.6 - Horizontal Revenue Formula: Local Governments Table 1.7 - V A T PoolAccount Distribution Formula, 1994- 2001 Table 1.8 - States' Horizontal V A T Formula Table 1.9 - Nigeria: Allocation o fresponsibilities by Government Level Table 2.1 - Nigeria: Contribution o fDifferentTiers to SpendingIncreases Table 2.2 - Shares o f Sub National Governments inConsolidated Government Fiscal Aggregates In2001 Table 2.3 - Summary o f States and FCT Finances 2001 Table 2.4 - Composition o f States Revenues (1997-2000) Table 2.5 - States' Revenue Per Capita in 1995 Constant Naira Table 2.6 - Composition o f States Expenditures Table 2.7 - Fiscal Balance Performance inSample States Table 3.1 - Local Borrowing Rules Box 1.1 - Federation Account Revenue Allocation Formula List o f Boxes Box 1.2 - TheRecentSupreme CourtRuling Box 3.1 - Market Discipline and Sub nationalBorrowing Box 3.2 - Brazil's limitson sub national borrowing Box3.3 - Box4.1 - DualBudgets South Africa. InstitutingCredibleHierarchicalControls. - Box 4.3 - Changingthe Roleof the FinanceMinistry Box 4.2 Role of the LegislatureinBudgeting Box 4.4 - Developing a MediumTerm ExpenditureFramework (MTEF) Figure 1.1 - Distribution o fEcological FundFor 2000 and 2001 Listof Figures Figure 1.2 - Distribution o fRevenuefrom the Federation Account Figure 1.3 - Trends inthe Distribution o fVAT Revenues, 1994-2001 Figure 1.5 - Distributiono fFederally Collected Revenue to StatesPer Capita Figure 1.4 - Educational Tax: Allocations vs. Disbursements, 1999-2001 Figure 2.2 - Revenue Per Capita inSample States Figure 2.1 (b) - Trends inExchange Rate and Consumer Price Inflation Figure2.l(a) - Trends inConsolidated Government Spending Figure2.3 - Share o fPersonnel Costs Coveredby (IGR) Figure2.4 - Trends inPersonnel Costs Figure2.5(a) - Per Capita SpendingInEducation Figure2.6(a) - Current Balance as Proportions o fRevenues ,1997-2000 Figure2.5(b) - Per Capita SpendinginHealth Nigeria States FinancesStudv 6 April 2003 Nigeria StatesFinances Study Figure 2.6 (b) - Overall Balance as Proportions o fRevenues, 1997-2000 Nigeria States FinancesStudy 7 Am42003 Nigeria StatesFinances Study PREFACE Background 1. Nigeria was created in 1914 from the amalgamation o f the Britishprotectorates o f Northern and Southern Nigeria. A federalist constitution was adopted in 1954, with clear provisions for decentralized fiscal federalism. However, over much o f its post- independence history', Nigeria has operated de facto as a unitary state under the military. The returnto democratic civilian rule in 1999 i s rapidly moving Nigeria inthe direction o f greater decentralization, including fiscal decentralization. Sub national governments and especially states have increasing autonomy, and constitutional provisions on intergovernmental fiscal relations -particularly regarding revenues--are now being more strictly adhered to. There i s continued agitation inNigeria for sub national governments to be given greater control o f resources, commensurate with their expenditure responsibilities. 2. Decentralization makes sense for Nigeria, given its large size, its heterogeneity, resource - oil. Nevertheless, given the limited experience in true federalism, it i s not its dependence on and the constant struggle within Nigeria, for control o f one natural surprising that Nigeria i s grappling with several challenges that are common during the transition to a mature federation. O f current particular concern inNigeria i s the challenge o f ensuring that the practice o f fiscal federalism i s consistent with macroeconomic stability. This has been made more acute with the simultaneous increases in the world price o f oil since late 1999. 3. During late 2000 and 2001, macroeconomic instability increased significantly, driven by difficulties in managing massive oil windfall revenues in a context where institutions for fiscal coordination between the different tiers are completely absent and sub national governments are understandably anxious to defendtheir growing autonomy in the area of fiscal management. In addition, all levels of government are anxious to deliver some tangible improvements in the living standards o f their populations. Oil windfall revenues, estimated at about $8 billion in 2000 and 2001 has been distributed betweenthe three tiers and fully spent. Efforts by the FGNto save some of this windfall were successfully thwartedby states and local governments2. Relevance and Objectiveof States Finances Study 4. One o f the important lessons emerging from this recent macroeconomic experience i s the increasingly important role o f states and local governments in shaping macroeconomic outcomes. Fiscal prudence i s thus important at all levels if macroeconomic stability objectives are to be achieved. States account for a large and growing share o f consolidated public spending in Nigeria. Similarly, states revenues Since 1960. A more detailed discussion ofrecent macroeconomic developments inNigeria i s providedinthe Nigeria Macroeconomic Update Note. Nigeria States FinancesStudy 8 April 2003 Nigeria States Finances Study have increased significantly: between 1999 and 2001: from about N317 billion to about N819 billion. States are no longer required to submit their budgets to the Federal Government for approval, as was the case under the military. Yet despite the growing importance o f the sub-national governments in consolidated spending inNigeria, there i s little reliable information on fiscal matters and overall management o f public finances at these levels. Anecdotal evidence suggests that financial management institutions and systems at both the state and local government levels are very weak. A recent study on govemance and capacity in six states3 raises this concern especially given the considerable theoretical and empirical evidence4 on the importance o f strong public expenditure management systems at sub-national levels for realizing the potential benefits o f decentralization. 5. The objective o f the Nigeria States' Finances Study is to get a better understanding o f the public finance picture in Nigerian states and to identify both policy and institutional reforms at state level and nationally that could help states better manage their public finances and be more fiscally prudent'. It i s hoped that this work will provide an important entry point for dialogue with states on public expenditure management issues. This work i s motivated by the fundamental objective o f the World Bank's interim assistance strategy to Nigeria: to help Nigeria manage and use its considerable resources with much greater effect and forms part o f a larger multi-year work program o f public expenditure analysis and support being carried out by AFTP3 and AFTPR. Selection of States and Study Approach 6. Fourteen o f Nigeria's thirty -six states are included in the study. Since all thirty six states could not be included in the study, every effort was made to ensure that the sample was highly representative on several fronts. Nigeria's 36 states are informally sub-divided into six geopolitical zones, roughly along the lines o f ethnic and cultural affinity. States were selected to ensure representativeness across these geopolitical zones. The National Planning Commission the key federal government counterpart for the Public Expenditure Review work initially suggested eighteenstates-three from each geopolitical zone. The selected states also reflect differences in economic base and include oil producing states as well as the larger states such as Lagos and Kano. Finally only states that confirmed their interest and willingness to be part o f this study were included. Two states-Enugu and Niger-who had initially expressed interest, were dropped from the study due to difficulties in getting their collaboration incollecting even the minimum data needed for the analysis. The states include some o f the largest- Lagos, the largest interms o fpopulation and size o f economy, and Kano--as well as some o f the smallest-Ebonyi. Lagos and Kano are also amongst those with the strongest Nigeria: States Governance and Capacity Study, preparedby AFT12 inFYOl See for example, Tanzi, 1995: Fiscal Decentralization: A Review of SomeEficiency and Macroeconomic Aspects. A concept review meeting inJanuary 2002, hadagreed that the study scope be scaledback to focus on these issues. Niperia States Finances Study 9 April 2003 Nigeria States Finances Study industrial base, while Ebonyi and Kebbi are amongst the most rural based economies.. The Table below shows the list o f the states selected. Table 1:List of ParticipatingStates 7. The study was conducted jointly by State Officials, local consultants and World Bank Staff. Each participating state set up a State Steering Committee (SSC) to oversee the work in the state. A lunch workshop was held in Abuja in November 2001, which brought together the study team (World Bank, State SSCs and Local Consultants) to discuss and agree on the content, approach and timeline for the study. State Public Expenditure Reports were prepared by local consultants working closely with the SSCs and under close supervision o f World Bank staff. Drafts o f the state reports were submitted to and discussed with the SSCs. This overall report draws on the individual state reports and on additional research and analysis by World Bank staff. A Workshop to bring the study team, other state and federal government officials together to discuss the overall report and possible reform options was held in Abuja during the third week of June 2002. Comments from these discussions havebeenincorporated into the report. 8 Much of the raw data for the study was collected from primary sources by the field consultants working in the states. Detailed guidelines given to the consultants required reliance on data from the state Accountant General's office. Additional informationnot usually kept by the state Accountant Generals was collected from source. Bank staff collected other primary data from official institutions such as the Stock Exchange, the Securities and Exchanges Commission, the Ministryo f Finance, the Office o f the Accountant General o f the Federation and the Central Bank o f Nigeria and the Debt Management Office. In addition, secondary data was collected from official publications o fthe Federal and State Governments. 9 Data was collected through both structured questionnaires administered by the field consultants on relevant state government officials and by unstructured interviews conducted by the field consultants andby Bank Staff. 10 Bank staff reviewed and provided extensive comments on first drafts o f each individual state report and before drafts were discussed with SSCs. States comments on these revised drafts were incorporatedinthe final state reports. Nigeria States Finances Study 10 April 2003 Niperia States Finances Studv Limitations 11 The most important difficulty encountered in the course o f this study was obtaining reliable data. Several field consultants reported conflicting data from various sources. In a number o f cases, audited reports were not available for some or even the entire period under review. In situations o f conflicting data, the consistent approach adopted was to prefer data from the Office o f the Accountant General wherever available, to data from other sources. This was considered the most prudent course o f action inthe circumstance, even though future reconciliation and/or audit may produce changes. In some states, data was more complete than inothers but generally there were several areas o f missingdata and data on arrears and other debts was often impossible to obtain. Linkswith OngoingWorld BankActivities 12 This work has helped some o f the participating states compete successfully for inclusion in the upcoming States Govemance and Capacity Project. Four o f the five states selected for support under the project all participated in the study. It i s hoped that they will able to draw on the analysis intheir states indefiningtheir detailed programs to be supported under the project. This study is also playing a role in facilitating the Bank Nigeria Team's deeper engagement with states inNigeria. It has improved understanding of some o f the key budget and financial management issues and has opened up the dialogue with states on these issues. It will be part o f the instruments for engaging incoming administrations following the April 2003 elections. Nigeria States FinancesStudy 11 April 2003 Nigeria States Finances Studv EXECUTIVESUMMARY Introduction 1. Fiscal management and broader macroeconomic policy i s complicated when government financing i s highly dependent on natural resource revenues and therefore susceptible to wide fluctuations. This challenge i s compounded further in a context o f fiscal federalism, particularly when sub national governments have considerable autonomy over their spending, constitute a significant share o f consolidated government financing and lack a tradition o f strong fiscal discipline. Nigeria happens to be in this situation: government i s highly dependent on oil revenues and inappropriate management o f the oil revenue cycle has historically been at the heart o f macroeconomic instability in the country. In recent years, Nigeria's new fiscal federalism context and the increased autonomy o f states, has added additional challenges to the conduct o f fiscal and macroeconomic policy. 2. Sub national governments, especially states, are increasingly important in Nigeria's overall fiscal picture. During the last few years, their share in consolidated government revenues, expenditures and the deficit has risen considerably, reaching 43 percent and 38 percent o f consolidated government revenues and expenditures respectively in2001. This emerging trend reflects the return to democratic governance in 1999, after over two decades o f military dictatorship when Nigeria was runvery much as a centralized unitary state. In addition, democratically elected state governments feel under much greater pressure from their populations to deliver on their constitutionally assigned expenditure mandates and see massive increases in spending as the main instrumentfor achievingthis. F i g u r e : S H A R E S O F S L G IN C O N S O L I D A T E D R E V E N U E A N D E X P E N D I T U R E ( p e r c e n t ) 4 5 40 3 5 3 0 2 5 2 0 1 5 1 0 5 0 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 - S h a r e S L G In C o n s R e v - S h a r e S L G In C o n s E x p 3. The importance o f states i s likely to continue to grow inthe near future: the April 2002 Supreme Court ruling on some aspects o f intergovernmental fiscal relations (Box 1) will increase resources flows from federation revenues to states. There i s Nigeria States FinancesStudy 12 April 2003 Nigeria States Finances Studv also a strong perception inNigeria that states and local governments have inadequate resources to carry out their expenditure mandates while the federal level has proportionately greater resources than needed for its assigned responsibilities. Thus there are continued calls for greater resources to be provided to states and local government. Following the Supreme Court Ruling, a new revenue allocation formula that would increase the share o f states in federation revenues to 33 percent from current 24.7 percent has beenpresented to the legislature for approval. Box 1: The April 2002 Supreme Court Ruling For a long time, the Federal Government has made a distinction between oil revenue from onshore and offshore sources, applying the revenue derivation principle only to oil extracted from onshore deposits. Oil extracted offshore-Le. from the deep sea in the country's territorial waters-is defined as from the "commonwealth", accruing jointly to the Federation. With the return to democratic rule in 1999, states challenged this principle and sought to have this distinction ended. The Federal Government went to court to seek clarification o f this. Some oil producing states counter sued challenging other practices of the Federal Government relating to Federationrevenues. The major rulings o f the Court are as follows: That oil mined in the deep seas belong to the Federation as a whole and not to the nearest state and as such i s as not subject to 13 per cent derivation That only onshore mineral resource is subject to the 13 per cent derivation payment to states That natural gas i s a mineral resource and, where produced onshore, is subject to 13 per cent derivation (the practice o f the Federation had been to exclude natural gas from its definition of mineral resource) That all revenues accruingjointly to the federation, including unexpected extra earnings from oil, are subject to distribution in the usual manner, the FG having no power to "save" any part o f it without the consent o f the constituent governments. That payment o f the 13 per cent derivation should be with effect from M a y 29, 1999 when the constitution came into effect and not from January 2000 as effected by the Federal Government That the practice o f making certain first line charges on the Federation Account for priority projects and debt service i s unconstitutional and should be ended That the Federal Capital Territory i s not a state and its area councils not properly local governments and so could not benefit from direct allocation o f resources from the Federation account as hadbeenthe case before the ruling That primary education is a function o f the state government in which local governments could 4. The growing importance o f states has occurred in parallel with and is not unrelated to growing difficulties in managing fiscal policy. The Federal government's efforts to sterilize at least part o f oil revenue windfalls has been thwarted by states who have argued successfully that constitutionally the federal government does not have the authority to withhold their share o f oil windfall revenues. Huge oil revenue windfall (about $8 billion) in 2000 and 2001 has been fully monetized, generating strong inflationary and exchange rate pressures. In effect, states have established that the federal government alone cannot decide the conduct of Jiscal policy for thefederation. They have also demonstrated that the success of any efforts to achieve overall macroeconomic stability inNigeria must recognize states as key players and will depend to a good degree, on ensuring that states are fiscally disciplined and set fiscal targets for themselves consistent with macroeconomic stability objectives. Nigeria States Finances Study 13 April 2003 Nigeria States Finances Study 5. These issues have come strongly to the fore o f the policy debate inNigeria over the last year and a half. This study aims to contribute to a better understanding within Nigeria and in the World Bank o f the emerging challenges and to put forward a set o f options for the consideration o f policy makers at both federal and state levels. Chapter One discuses Nigeria's fiscal federalism context as provided for by the 1999 constitution; Chapter Two reviews finances for a sample o f fourteen states inNigeria, highlightingthe extent o f disequilibrium and the nature o f expenditure and revenue imbalances; Chapter Three examines how hard budget constraints could be instituted to promote greater fiscal discipline in Nigerian states; while Chapter Four discusses process and institutional reforms to states' budget and financial management that will also support improved fiscal discipline and higher quality and efficiency o f spendinginstates. Nigeria's Fiscal Federalism Arrangements 6. The Nigerian Federation comprises three tiers: the federal government; 36 state governments and the federal capital territory; and 774 local governments. But over much i t s history, Nigeria has operated as a unitary state with power centralized in federal military governments. The 1999 constitution has reverted to a federal arrangement but it will likely take a while for the different tiers to fully understand what their responsibilities are and how they work together to ensure the success o fthe federation. 7. Revenues arrangements in Nigeria are unique in that the power to legislate on taxes does not always coincide with the power to administer those taxes, while power to administer and collect a particular tax does not always meanpower to retainthe proceeds. Thus, federal government legislates on many state taxes, including personal income tax, capital gains tax, stamp duties, registration and renewal o f business premises, and so on, but these are administered by states who also retain the proceeds. However, the federal government legislates on and administers the value added tax, essentially a state tax, but returns the proceeds to states and local governments, keeping 15 percent to cover the cost o f administration. Overall, the most important taxes and revenues are centralized at the federal government level, which legislates and administers them on behalf o f the tiers o f government. Oil revenues and taxes are all federally legislated and administered. Revenues accrue into a common pool--the Federation Account-and are shared among the three tiers o f govemment according to a set formula, which is revisedonce every five years (currently 54.7 percent, 24.7 percent, and 20.6 percent for federal, states and local government respectively). States and local governments depend heavily on the revenue flows from the center. 8. Expenditure assignments are largely in line with similar arrangements in other federations. But assignments lack clarity and there i s much overlap betweenvarious tiers o f government (eg in education, health, water, roads etc.), leading to considerable duplication o f effort inpractice but also to gaps in coverage in some areas. Overall, the system is characterized by considerable vertical and horizontal imbalances. States and local governments are not required to inform or seek approval from the federal government on their budgets and their fiscal perfonnance and there i s no national fiscal framework within with budgets at all tiers fit. Several institutional and policy aspects o f Nigeria States Finances Study 14 April 2003 Nigeria States Finances Study current fiscal federalism arrangements will clearly require review and reform to ensure that macroeconomic stability and allocative efficiency objectives can be achieved. The April 2002 SupremeCourt Rulinghas already set the process inmotion. Highlights of States' Recent Fiscal Performance 9. In recent years, fiscal perfonnance in Nigerian states has been marked by both revenue and expenditure expansion, but more importantly by disturbing evidence o f growing imbalance, increased vulnerability and unsustainable finances. With decade high prices o f oil on world markets, and massive revenue increases, several states are findingit hardto meet basic expenditure obligations and inaggregate, are runninga small deficit on their overall fiscal operations. 10. Between 1997 and 2001, Nigerian states enjoyed strong revenue growth-about three fold inreal terms, boosted by the oil boom, depreciation o f the Naira, an increase in the share of federation revenues paid as derivation to oil producing states, andby stricter adherence to constitutional provisions for sharing revenues between the different tiers o f government. In leading oil producing states like Akwa Ibom and Delta, real revenue increases have been as high as five fold. Revenueeffort, proxied by revenues per capita6 also strengthened, rising from an average o fN739 ($9) in 1997, to N 1213 ($12) in2000. Nevertheless, performance i s still low, ranging from a higho f N5651 ($55) inDelta state to only N983 ($10) in Kano state in 2000. Expenditure expansion has been equally dramatic-as high as nine times in Cross River, and six times in both Akwa Ibom and Delta. Average expenditures in the sampled states rose from N2868 billion in 1997, to N8787 billion in 2000. Per capita expenditures ranged between N6073 ($60) in Delta state and N1172 ($11) inKano state. Lagos State, the largest inthe federation, appears to be the strong outlier with both its revenue and expenditure increases (23 percent and 41 percent respectively) significantly lower than the rest o f the sample. This reflects largely its much smaller dependence on oil revenues that the averageNigerian state. 11. Recent revenue trends have increased states' vulnerability to oil price shocks. The share o f statutory allocations from federation revenues instates' receipts increased to about 82 percent in 2001 from about 66 percent in 1997. In Bauchi state, own revenue sources contributed as little as 3.8 percent to total revenues in 2000. States are also increasingly less able to fund basic expenditure obligations from their own resources. For all but one o f the states reviewed (Sokoto state), the share o f personnel costs covered by intemally generated revenues has declined reaching as low as only 8.5 percent in Ebonyi state and 9 percent in Bauchi state in 2000. This reflects rapid growth in personnel obligations driven by large size o f states' civil service, and by two wage increases enacted by the federal government in late 1999 and 2000. In 2000, personnel expenditures represented an average o f 47.2% percent o f recurrent spending and 34.2% percent o f total expenditures. In contrast, states' spending on health and education, which are key areas intheir constitutionally assigned expenditure mandates, have lagged State GDP data is not produced inNigeria. NiPeria States Finances Study 15 Ami12003 Nigeria States Finances Study behind other components of spending and amount to as low as only $0.3 and $0.5 per capita respectively. II Fig. 1: Current Balance as Percentage of Revenues - 80.00% lla 19971 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% I f 12. As a group, states recorded a small deficit of about 0.5 percent o f GDP and 4 percent o f their aggregate revenues on their fiscal operations 2001. While small, this i s nevertheless o f concern given strong world market oil prices. Moreover, data gaps- especially on local contractor obligations, pensions arrears and states' public enterprise debts - mean that several elements o f government commitments are not fully captured in the official data. Thus the true fiscal picture could be worse than these numbers suggest. More importantly, the underlying structural imbalances mentioned above, mean that states have little or no headroom and would face severe fiscal crises in the event o f a sharp drop in world market oil prices. This would have strong implications for overall macroeconomic stability. 13. In addition, in several individual states, the fiscal balance picture is clearly unsustainable and suggests already emerging crisis. Eight o f the 12 sample states for which complete data could be assembled, recorded on average an overall deficit position over the period, with levels over 10 percent o f revenues inthree cases. Cross-River state recorded an average deficit o f over 56 percent o f revenues between 1997 and 2000. Bauchi, Oyo and Lagos states recorded average annual deficits o f 46 percent, 26 percent and 13 percent o f revenues respectively (Fig 2). Much o f these deficits are being financed through commercial bank borrowing and the accumulation o f arrears in the system. Sources of Soft BudgetConstraintsFor States 14. States face a soft budget constraint if they can expect the federal government to accommodate and share in any excessive expenditures. Three key issues present important sources o f soft budget constraints for Nigerian states: (i) centralization o f the revenue levers at the federal level; (ii) weak autonomy to control their costs and states' stay within their budget constraints; and (iii)a weak framework for sub national borrowing and debt. As mentioned above, states are extremely dependent on resources from the federal level and do not have autonomy and discretion to change rates and bases on several o f the taxes assigned to them. Moreover, dependence on revenues from the Nigeria States FinancesStudy 16 April 2003 Nigeria States Finances Study center has not promoted strong tax administration function in states. Thus states have low ability to raise additional revenues when faced with adverse shocks. This dependence on transfers from the center, combined with considerable vertical imbalances in a context where controls and oversight from the federal level are weak, raise the likelihood o fhighsub national deficits and related macroeconomic instability. Fig. 2: Overall Balance as Percentage of Revenues 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% -60.00% -80.00% -100.00% -120.00% 15. States' ability to stay within their budget constraints i s weakened first by the operation o f a policy o f a harmonized set o f public sector pay scales across the tiers o f government since 19757. States have had to increase their wages following increases granted to federal public servants in 1999 and 2000, dramatically increasing the share o f inflexible expenditures in their budgets. In addition, federal government's direct engagement in areas such as primary education and basic health, which are the constitutional responsibilities o f states, presents some difficulties. The introduction by the federal government o f Universal Basic Education to be implementedby all states i s a case in point. Finally, current arrangements for borrowing-especially as regard domestic borrowing-is a considerable source o f risk that states could spend much more than they can afford, funded through borrowing from domestic sources, especially commercial banks-some owned by states. Conditions do not exist for market forces alone to be relied on to deliver prudent and sustainable levels o f borrowing and debt in states. Inparticular, information on states' financial standing which would allow proper assessment o f their debt carrying capacity i s extremely limited and o f poor quality. Secondly, financial markets are not well developed--not open or competitive. However, there is no framework o f appropriate controls from the center inplace to ensure prudent borrowing and debt by states. States' Budget and Financial Management. 16. Over years o f military dictatorship, budget processes and institutions at all levels and particularly in states and local governments were severely weakened. Thus budget processes across states consistently perform poorly against the three criteria o f well functioning budget systems: (i) consistency between aggregate spending and available resources; (ii) consistency between budget allocations and development objectives; (iii) 'Following recommendationo fthe Udoji Public Service Commission. Nigeria States Finances Study 17 Am412003 Nigeria StatesFinances Study and efficiency and effectiveness o f resource use. State spending increasingly exceeds available resource envelopes. N o effort i s made to smooth spending over the oil price cycle: spending increases on the upswing, often beyond revenue increases, and on the downturn, states resort to cash budgeting, funding only the highest political priorities. Nevertheless, budgets or commitments are left intact and arrears accumulate. State budgetsare largely incrementalfrom one year to the next with little evaluation o f changes needed to align with desired development objectives. Moreover, an inordinate share o f budgets i s tied up in staff salaries and allowances. In such a context. budget efficiency and effectiveness can be expected to be low. 17. Key financial management processes are also weak. Procurement i s not open and competitive and there i s a high incidence o f political/personal considerations in contract awards. Intemal control, audit, and monitoring and evaluation are severely hamperedby weak human capacity, outdated accounting systems and by the fact that most budget operations are done manually. Optionsfor Sound FinancesandFiscalDisciplineinNigerianStates 18. Achieving sound finances and the fiscal discipline in states needed for sustained macroeconomic stability will require first and foremost the institution o f a strong framework for fiscal and macroeconomic coordination between the three tiers o f government in Nigeria. Within this framework, specific actions along two interrelated tracks are needed: (i)hardening budget constraints; and (ii)strengthening and modemizing state budget and financial management processes and institution. Both federal and state governments will have specific responsibilities for actions in these two areas. Federal government will have to lead innational level efforts to ensure that fiscal federalism arrangements provide the conditions for fiscal discipline in states; states will have to take actions on specific issues at their level; and finally federal government will needto find ways to motivate and encourage states to take action. A Framework For Fiscal Coordination Between Tiers 19. The recent challenges to fiscal and macroeconomic management in Nigeria have demonstrated clearly that a mechanism for fiscal and macroeconomic coordination between tiers i s urgently needed. Such mechanisms exist and functions well in several other federations and will provide the needed institutional underpinning for measures to harden states budget constraints and strengthen budget processes and institutions. The obvious place to begin in setting this up would appear to be to amend the 1999 constitution to establish basic principles and institutions for cooperation and coordination o f fiscal and budgetpolicy amongst the three tiers o f government. 20. However, amending the Nigerian constitution will not be easy. In the interim, a political process to reaching consensus on the need for coordinated fiscal and budgetary Nigeria States FinancesStudy 18 April 2003 Nigeria States Finances Study policy, and on the central role o f the federal government in the process i s necessary. While such an agreement will be largely informal andnot backedby law, the inclusiono f sub-national governments in the process o f setting national agenda could engender a sense o f ownership and instill discipline into the process. This forum could be used to discuss and agree appropriate incentives to promote commitment to prudent fiscal management at all levels o f government. 21, The National Economic Council (NEC)8 could assume this coordinating function. The overall macroeconomic agenda, economic targets and the implications for the fiscal behaviour o f individual federating units could be discussed and agreed to and implementedthrough this mechanism. A technical and professional agency, comprising technocrats from key federal economic agencies (CBN, Ministry o f Finance, Debt Management Office) and state ministries o f finance and planning, could bejointly set up by the three levels o f government to take responsibility for the technical work to inform and underpin recommendations for the discussion and agreement by the NEC. This technical body could also regularly obtain and widely publish economic and fiscal performance data and indicators from all the governments o f the federation to help improve accountability and transparency o f government at all levels of government. 22. The forum could also be used to discuss and agree the reform agenda between states and federal government. In several aspects, the federal government faces similar issues in the management o f its finances and will also have to consider similar measures as states may be undertaking at their level. The consistency in reforms across all levels needed for ensuring success and appreciable impact on overall macro stability objectives could be promoted through this forum. In areas where federal government has already begunreforms, states could learn from the federal process and ininstances where reforms are yet to beginat the federal level, the reform agenda at different levels could be defined together. States could also learn form each other's experiences. 23. Another important issue that could be addressed through this forum i s whether and how a fiscal policy rule could be implementedinNigeria's federal context. A fiscal policy rule makes sense in Nigeria given the complete absence o f a tradition o f fiscal discipline. Because a rule commits government to a certain level o f conduct infiscal and budgetary management, it will help begin to build government credibility in fiscal management and over time promote strong fiscal discipline across all tiers o f government. A rule based on oil prices will also help address the issue o f vulnerability o f all tiers to oil price swings. For example states could consider balancing their budgets at a benchmark price for oil-save revenue inexcess o f this and draw down to allow budget balance when earnings fall short. The coordination mechanism could allow the in depth analysis and agreement betweentiers on what rule could be institutedandhow it could be implemented. 24. Finally, it i s also clear that in Nigeria's current socio-political context, any measures taken by the federal level to promote fiscal discipline in states, should also aim *Consists o f Vice President as chairman, all 36 state governors, and the Governor of the Central Bank o f Nigeria. Nigeria States FinancesStudy 19 April 2003 Nigeria StatesFinances Study at building trust o f the centre by states and avoid perpetuating the undue dominance of the states by the federal level that existed under the military. The federal government will need to signal clearly to states that it fully believes inthe merits o f fiscal federalism in Nigeria and seeks to ensure its effective implementation. A heavily top down approach, allowing little room for understanding and awareness amongst states of the fundamental issues i s unlikely to build such trust and hence achieve much. Moreover, federal government lacks strong constitutional and legal cover for such an approach. A more consensual approach inwhich the Federal Government seeks to raise awareness and convince state governments on the importance o f fiscal prudence at all levels perhaps has greater chance o f success. Hard Budget Constraintsfor States 25. Actions here could aim at: (i) increasing states' reliance on their own revenues; (ii) giving states greater control over their costs-especially over wage costs; and (iii) strengthening theframework for borrowing by states. ' 26. Federal policy makers could consider the following measures at their level to promote hardbudget constraints instates: 0 Discuss with states the recently drafted Fiscal Responsibility Act and pass this into law. 0 Give states greater flexibility to control rates on taxes currently assigned to them. This will provide more policy levers to help states adjust to adverse revenue shocks. Greater responsibility for states to raise their own revenues will enhance states' accountability to their own citizens. One option to devolve responsibility for taxes with minimum likelihood for chaotic tax competition i s to let states piggyback a rate, up to a certain level on an existing federal tax-like personal income or VAT. On the same VAT base as the federal tax, states could piggy back a VAT or a sales tax. 0 Enact law to endpractice o funifiedcivil service pay and pensionpayments across the three tiers o f government. Ineffect this law would separate public services at the three tiers making them autonomous of each other and independent. This i s likely to be strongly resisted by Labour Unions. Nevertheless this i s important enough for states' ability to set affordable wage rates for their employees that federal government needs to explore ways o fhaving this done. 0 End federally driven initiatives in areas that are the primary responsibility o f states in order to ensure states' control over their spending priorities and budget size i s not compromised. Instead, federal government could explore the possibility o f performance-based grants from its own resources to encourage states to achieve certain desirable objectives inkey areas. 0 Initiate process to institute a rules-based framework to complement market forces inensuringprudence insubnationalborrowing and debt. For new debt, federal government could consider endingthe practice o f servicing states' debts through deductions at source from their statutory allocations and allow private sector lenders to take on more o f the risk and responsibility. This Nigeria States Finances Study 20 April 2003 Nigeria StatesFinances Study rule could be enacted to allow states to arrange with creditors to collaterize debt service with such deductions as i s done inMexico. 27. State policy makers could on their part, consider specific actions: Strengthen state tax administration through systems modernization and computerization, including better identification o f tax bases; identifying and prosecuting tax cheats; and buildingstaff skills Identify and move towards an affordable size of state public services to reduce inflexible expendituresinstatesbudgets. Initiate and implementcontributory pension plan that i s fiscally sustainable. Divest out o f state owned commercial banks to promote a competitive banking sector and encourage banks to carry out the needed due diligence in any lending to states; Undertake a full accounting o f government debt obligations, including arrears in the systemandprepare a time plan for addressing this. Define a clear borrowing and debt strategy consistent with sustainable and sound finances. Ultimately this should be consistent with the national framework on sub nationalborrowing and debtwhen this comes into place 28. And a few actions by federal government could play an important role in motivating states to act. Federal government could: a Lead by example and demonstrate clearly its own strong commitment to fiscal discipline and to hard budget constraints to create an incentive for states to want to move inthe same direction. a Promote a coordinated approach to training and formal certification o f tax officials. Specifically enact legislation to empower Joint tax Board establish minimumstandards of qualification for tax officials; set up atax training institute; and establish a uniform code o fconduct for public revenue officials. a Provide technical support to interested states in defining their pension reforms Perhaps invite interested states to closely observe the federal reform process, and leam how to handle their cases through the federal level process a Outline rules and regulations on how fiscal crises in states will be handled. This should state clearly that federal government will not bail out states but should include option for fiscal pact between federal and the state that provides some fiscal relief-Le. debt rescheduling and work out--to states and ensure that critical social services continue to be delivered. The key thing will be to get adequate conditionality to allow states returnto a sustainable fiscal path and ensure that the federal government retains leverage to keep states reforming. Modern and Strong Budget and Financial Management Institutions and Processes 29. Actions here could aim at (i) building government credibility in budget andfiscal management including returning to" due process"; (ii) evolving a new approach to budgeting that is responsive to oil revenue swings; (iii) enhancing accountability and transparency; and (iv) modernizing systems and building staffskills. Nigeria States Finances Study 21 April 2003 Nigeria StatesFinances Study 30. State level policy makers could consider the following specific actions to modernize and strengthentheir budgetand financial management: Move towards a medium term framework (MTEF) for budget and financial management. This would address states' increasing vulnerability to oil price fluctuations by setting a middle course for spendingwithin which annual budgets could be framed and implementedwithout recourse to cashbudgeting. Within this MTEF, adopt a fiscal policy rule that will allow state governments to begin to build their credibility in fiscal and budget management. As mentioned earlier the details o f this and how this would work in Nigeria's fiscal context would have to be discussed and agreed in the context o f the proposed fiscal coordination mechanism. Complete outstanding fiscal accounts and ensure their regular preparation going forward. Upgrade and modernize budget and financial management systems, taking advantage o f the power o f computers and the availability o f more integrated accounting packages Train and build staff skills in all aspect o f budget and financial management, tailoring such training towards meeting human resource needs in the new budget and financial system that i s beingevolved. States could come together to put inplace for the first time an organic finance law in respect o f their own governments. A group could be formed to adapt both federal level drafts together with laws passed in recent years in other advanced countries. Institute procurement reforms so that public procurement i s consistently conducted on the basis o f open competitive tendering with award to the lowest evaluated tender. To encourage states to act inthis area, federal policy makers could consider: Providing technical assistance to interested states on the key budget and financial management reform issues, especially on the areas o f procurement regulations, and financial management laws where a federal reform process i s already underway. Helpingstates define and implement appropriate training programs for budget and financial management staff, working in collaboration with national training institutions. Prospectsfor Reform 32 The proposed reform will take concerted effort over a period o f time nevertheless it is critical that actions be initiated soon and locked in within the next year or two. Delays risk a weakening o f incentives to reform. While oil prices can be expected to weaken over the medium term compared to levels in the last two years, it i s anticipated that Nigeria's gas receipts will increase dramatically in the next few years. It would be much more difficult to initiate reforms when this happens. Unless some o f these difficult Nigeria States FinancesStudy 22 April 2003 Nigeria States Finances Study reform issues are tackled before then, Nigeria will most likely see a replay o f the macro instability and worsening competitiveness that has historically accompanied large revenue inflows to the country. Secondly the next national elections are plannedfor 2007 and preparations for this are likely to kick inby mid to end 2005. Policy makers need to move quickly once new administrations are inplace inmid-2003, capitalizing on the post election "honeymoon period" to launch a broad reform agenda to tackle the emerging challenges. There are also signs that the April 2002 Supreme Court ruling could steer things in the right direction by fostering greater dialogue betweenthe different tiers and by confronting stateswith the full extent o ftheir individual debt obligations. Finally, the stronger majority o f the rulingPeople's Democratic Government at both federal and state levels following the April 2003 elections, presents an opportunity for closer cooperation and collaboration between the states and the federal government. This needs to be exploited to achieve some o f the reform objectives. Nigeria States FinancesStudv 23 April 2003 Nigeria States Finances Study Chapter 1: Overview of Fiscal Federalism Arrangements inNigeria A. Introduction 1.01 Nigeria is a federation with power and responsibilities shared betweenthe Federal Government and thirty-six constituent state governments' Local governments are constitutionally recognized but are subject to the creation, control and regulation o f State governments'o. As in similar federal structures, the power and ability o f state governments to manage their public expenditure depend largely on the fiscal federalism arrangements inplace. It i s necessary therefore to begin this report on States Finances by examining how fiscal powers and responsibilities are sharedbetween the various levels o f government and what mechanisms are in place for securing synergy and avoiding dysfunction. 1.02 Duringdecades o f military dictatorship, Nigeria was runas a unitary government with powers and authority centralized at the federal level. State military administrators, like their federal counterparts were not particularly accountable to their populations. Since the retum to democratic governance in 1999, state governments now feel greater accountability to deliver to their populations and there i s renewed agitation for greater decentralization o f fiscal powers to allow states and local governments deliver on their mandates. However, changing fiscal federalism arrangements would require fundamental changes to the Constitution, a difficult task given the diverse nature o f Nigerian society and politics". 1.03 Faced with this situation, state governments are trying to: 1) extract maximum autonomy from existing arrangements-including through rejecting federal efforts to determine how oil revenue windfalls should be managed and through insistence that federal government efforts in areas such as primary education which are states' responsibility should be channeled through them and not operated as parallel federal programs; and 2) find creative and practical ways o f improving their finances and deliveringpublic goods including through increasedborrowing from domestic money and capital markets, with the usual attendant risks to macroeconomic stability. 1.04 The next section briefly describes the nature o f the Nigerian federation. This i s followed by a discussion o f revenue assignments for funding the various levels o f government. This will be closely tied with the arrangements for sharing common revenues, a very important feature o f Nigeria's fiscal federalism. Section D discusses 'The status o fthe Federal Capital Territory (practically treated as the 37" state) was recently clarified ina Supreme Court judgment. It i s simply a federal capital territory and its area councils are no full-fledged local govemment councils. 10See sections 7 (1) - (3) and 8 (3) o f the 1999 constitution Amending the 1999 constitution will require two-thirds majority vote inthe national assembly and at least two-thirds of the 36 State assemblies. GivenNigeria's fractious nature, this i s anuphilltask, to say the least. However, there are currently, several initiatives to amend the constitution, one from the executive, and another from the legislature and a few from civil society organizations. Itremains to be seen to what extent the necessary consensus required to amend the constitution will be reached. Nigeria States Finances Study 24 April 2003 Nigeria StatesFinances Study expenditure assignments. The concluding section briefly discusses key implications o f the April 2002 Supreme Court ruling on certain aspects o fFiscalFederalisminNigeria. B. The Structure of the Nigerian Federation 1.05 At independence in 1960, Nigeria was a federation of three powerful regions, Northern, Eastern and Western". Each region was provided a tax base composed largely o f revenues thought to be easily identifiable as originating from that region. Thus, personal income taxes, licensing fees, etc. were regional taxes. A pooling account was also established for sharing revenues considered to be o f national significance such as mining rents and royalties and custom duties - import and export - excise duties and company taxes. The principle o f derivation played an important role in the sharing o f pooled resources at this time because the country was concerned with setting the right incentives for tapping local revenue sources and encouraging fiscal responsibility in the regions. However, the need for the provision o f basic services in all the regions was not forgotten, therefore, the formula for revenue sharing took into account existing levels o f public spending. Although several revenue commissions were appointed between independence and military takeover in 1966, the country retained the largely decentralized fiscal system inplace13. 1.06 In 1967, the military introduced a 12 state structure to replace the existing four regions14 and through a series o f decrees issued from 1970, set about the process o f re- centralizing fiscal powers. First, in 1970 the military allocated the bulk o f federally collected revenue to the central government. It also jettisoned the principle o f derivation (for need15) and a lump sum transfer to cover the fixed cost o f running a government, in regional allocation. In 1971, the federal military government introduced a dichotomy between onshore and offshore16mining and assigned offshore rents and royalties to itself. The channeling o f all distributable revenues through a pool account in 1975 expandedthe scope o f revenues collectible by the Federal Government and shared by the various governments17. 1.07 The process o f re-centralization was completed with the introduction in 1980 o f the Federation Account (FA) to hold all federally collected revenues, including the 20 per cent onshore miningrents and royalties hitherto conceded on the basis o f derivation, and l2A fourth region, Midwestern, was created out o f the Western Regionin 1963 when Nigeria became a federal republic. l3The Binns Commission of 1964 recommended the abandonment o f the principle o f derivation for regions own efforts ininternal revenue mobilization and quality o f services provided. However, the commission's report generated muchcontroversy and mistrust because o f the secrecy that surrounded it; the report had not really taken effect when the military came to power. l4The process o f state creation was repeatedlyusedby the military bothto whittle-down the political influence o f the states and to create rivalry among the numerous players inthe polity thereby effectively reducing opposition to the center. 15Measured by population l6This dichotomy has remained an irritant inNigeria's intergovernmentalrelations andwas the subject o f a recent suit betweenthe Federal and State governments. 17The only exception being 20% o f onshore mining rents and royalties acceded onthe principle o f derivation to the state o f origin Nineria States Finances Studv 25 Awil2003 Nigeria States Finances Study the inclusion o f local governments inthe FA revenue sharing arrangement. The principle o f derivation was now given only token recognition by the introduction o f a special fund for mineral producing areas to receive a small transfer from the FA and to be shared by states on the basis o f derivation18. This arrangement did not change significantly during the brief civilian reprieve o f 1979 to 1983 and the second military period o f 1983 to 1999. In order to find avenue for expending the increased resources at its disposal as a result o f this centralization o f revenue, the federal government began to extend its activities to areas o f expenditure once reserved for states, first by the process o f encroachment and later by formal legislation-backed takeover. Thus the Federal Government, in 1975, took over all existing regional universities and proceeded to set up new ones. The Federal Government became directly involved in primary and basic health and education, agriculture, industry and commerce, banking, etc. Some of these involvements were later formalized inthe 1979 Constitution. C. CurrentRevenueAssignments 1.08 Assignment o f revenue powers has not changed markedly in over a decade and not at all since the inception o f the current civilian administration". Revenues and tax powers are still highly centralized with the Federal Government shepherding the most important and buoyant taxes and other revenue sources, albeit intrust for the component governments o f the Federation. These revenues are aggregated in the Federation and other accounts and shared periodically among the various governments. Governments at all levels - especially state and local govemments - depend heavily on statutory allocations from this centralized arrangement. 1.09 Two peculiar features o f the Nigerian fiscal arrangements need immediate definition. First, although taxing powers are constitutionally assigned, there is not necessarily a convergence o f legal and administrativejurisdictions over a tax inone level o f government. Thus, one level o f government may have power to make laws on a particular tax while another level administers it. Second, that a tax belongs to one tier o f government by administration and collection does not necessarily imply its right to appropriate its proceeds to itself. Indeed, most federally administered taxes are collected on behalf o f the entire Federation, to be shared among the various governments. Federal Taxes and Revenues 1.10 As already stated, under laws that date back to the military era, the most important taxes and revenues are collected by the FGNon behalf o f the constituent governments o f the federation. These include company income, petroleumprofits and value added taxes, import and excise duties, education tax as well as proceeds o f crude oil sales, mining rents and royalties, upstream gas sales, liquidified natural gas (LNG) sales, domestic crude oil sales and tax on petroleum products, pipeline fees and penalties for gas flaring. '*At the exit o fthe military in 1999, this fundreceived only 1% o f the Federation account revenues. l 9Except for 13% mineral derivation introduced by the military into the Constitution at its exit in 1999, and the recent changes introduced by an executive order of the President inthe wake of the April 2002 Supreme Court ruling (see below). Nigeria States FinancesStudy 26 April 2003 Nigeria States Finances Study All these revenues (with the exception of education tax) are paid, by constitutional requirement, into the Federation Account for distribution among the three tiers of government. Education tax, i s paid into an education tax fund, managed by an independent trust, and distributed among public educational institutions at all levels, primary, secondary and tertiary, throughout the country. 1.11 Aside fkom these taxes, the Federal Government also collects personal income and capital taxes form residents o f the Federal Capital Territory, personnel o f the armed forces, the police and the Foreign Service as well as non-residents. These constitute the bulk o fthe so-called independentrevenueo fthe federal government, which is not shared with sub-national governments. Table 1.1presents a summary o f federal taxes and their retention. Table 1.1:FederaVFederation Revenues Retention FederationAccount FederationAccount Federation Account Education Tax Fund (ETF) FederationAccount FederationAccount Federal Government FederationAccount FederationAccount Crude oil sales Mining rents and royalties Upstream gas sales NLNGgas sales Domestic crude sales FederationAccount Tax on domestic sale of petroleum Table1.1:FederaVFederation Revenues Source: compiled the 1999 Constitution and other Legislation States Taxes and Revenues 1.12 The most important state tax i s the personal income tax (PIT), leviedby a state tax authority on individuals deemed, under the Personal Income Tax Act (PITA), 1993, to be resident in that state. This tax, which i s state by administration and collection only, consists of two types: pay-as-you-eam (PAYE) levied on persons in formal paid employment, and self-assessment for others. Other important state taxes (by administration and collection only) include capital gains tax on individuals, stamp duties Nigeria States Finances Studv 27 ADril2003 Nigeria StatesFinances Study on instruments registered by individuals, registration and renewal of business premises, development levy (on individuals) and naming o f streets inState capitals. 1.13 Under the constitution, states also have residual tax powers and are therefore free to expand their tax bases. Currently, some regular State taxes by both legislation and administration include the "lesser" taxes o fpools bettingand lotteries, gaming and casino taxes, road taxes, right o f occupancy fees in State capitals and markets where state finances are involved. 1.14 However, a number o f intemal and extemal factors hamper the ability o f states to effectively administer these taxes. The most important intemal constraint i s lack o f sufficient commitment to intemal revenue as a major source o f state finances. (There i s probably no strong incentive to do so given the significant amount o f resources that continue to flow from the center.) Evidence o f this include 1) absence of reliable database on potential tax bases in nearly all states 2) poor emphasis on parastatals revenue in the form o f user charges 3) dearth o f well trained and motivated professional personnel 4) absence o fthe necessary administrative andjudicial machinery for enforcing existing revenue laws and 5) the existence o f all sorts o f obstacles and impedimentsinthe way o f successful prosecutiono f tax offenders. For example, revenue courts do not exist in most states; in some states where they exist, prosecutors are re uired to provide courtrooms, provide materials and pay the allowances o f court officials!0z'. The external constraints include the prevailing economic conditions and the lack o f regulatory powers over the more important state taxesz2. 1.15 Other revenue sources for states include statutory allocations from the Federation, including, share o f Federation Account revenues, share o f value added tax revenues and (depending on whether they are mineral producing) share o f 13 percent derivation for mineral producing states. Transfers are also made directly from the Education Trust Fundto state institutions; while these do not constitute direct revenue flow to the states, albeit indirectly. Although these transfers are made directly to educational institutions, they nonetheless benefit the state since they arguably relieve them o f some funding burden23. ' OThis actual experience was narratedby an official o fa state government who tried to prosecute tax offenders at a workshop held inJuly 2002 to discuss an initial draft o f this report. z1 Other factors contributing to poor revenue generation in states include administrative and internal control problems, both o f which, it canbe argued, result from a lack o f incentive to increase revenue efforts inthe face o fmassiveflow offunds fromthe center. "Forafullerdiscussionofthis,seeparagraph1.22below. 23 It is entirely arguable as some states suggest, whether direct transfers to state institutions is an efficient way o f allocating resources fromthe center. Whether the Federal Government can set spending priorities for the sub-nationals and whether it would not be more efficient to channel all regular transfers through the state governments, which should be inthe best position to efficiently and effectively allocate such resources is another issue. Of course, nothing stops the federal government from making conditional or project tied grants from its resources to sub-national institutions. Besides, it has not been fully settled that sub-national governments spending are, inall cases, always more efficient than Federal spending. States are subject to their own predilections. However, the point to note is that the moneys disbursedthrough the Nigeria States Finances Study 28 April 2003 Nigeria StatesFinances Study Table 1.2: State Independent Revenues Tax Legislation Admin. /Collection Retention Personal income tax (PIT) II I Pay as you eam (PAYE) Direct (self & government) assessment Federal State Withholding tax (individuals only) State Capital Gains tax (individuals only) Federal State State t Stamp duties (instruments executed by individuals) Federal II State State Pools Betting and Lotteries, Gaming & Casino taxes State I State II State I Road taxes State I State I State I Business premises registration and renewal levy Federal State State Development levy (individuals only) Federal State State Naming o f Street fee instate capitals Federal State State Righto foccupancy fees inState Capitals State State State Markets where State finances are involved State State State Other revenue sources Fines and fees Licenses Earnings and sales Renton government property Interest and dividends on investments Reimbursements Miscellaneous Local GovernmentRevenues 1.16 Since state governments have residual tax powers, it i s understandable why the tax powers o f local governments depend largely on the discretion o f the relevant state government. Under the current jurisdiction, local governments collect taxes such as property taxes (tenement rates), bicycle licenses, licenses and fees on non-mechanically propelled carts, cattle tax, birth and death registration charges, radio and television licenses, liquor licenses and fees, outdoor advertising fees, pet license, restaurant fees, motor park fees and licenses, market fees (where no state finance i s involved), etc. Typically, the various state governments regulate the more important of these taxes, for example property taxes. 1.17 Under the 1999 Constitution, local governments are entitled to a share o f Federation Account revenues. They also receive a share of VAT revenues and (indirectly) proceeds o f the Education Tax Fund and are entitled to a share (currently 10 percent) o f states total revenue24. Implicationsof the RevenueProfile 1.18 Two principles underlie the concentration o f the more important taxes on the Federation. Firstly, such taxes are considered important for the execution o f the broader Educational Tax Fundare not Federal Government's, but the Federation's. This i s the mainpoint o f States' complaint. 24See section 162 (7) o f the 1999 constitution; as this studyrevealed, several states do not actually make these transfers to their LGAs claiming that LGAs do not refund to them the PAYE collected for LGA staff. Nigeria States Finances Study 29 Auril2003 Nigeria States Finances Study economic goals o f income redistribution and price level stabilization because o f their relative values. Leaving them to sub-national regulation will therefore seriously constrain the central government's ability to conduct macroeconomic management. Secondly, huge economies o f scale apply to centralized collection o f such taxes. This was one reason the Federal Government insisted on the collection o f the essentially sub- national tax, VAT, from the center25. During the military era, states did not have sufficient autonomy to seek a reversal o f this fiscal centralization. Surprisinglyhowever, states do not seem particularly interested in wresting tax collection powers from the center. There are three possible explanations for this. The first i s a tacit acceptance o f the argument at the beginningo fthis paragraph (if,for instance, each state were to collect customs duties, then we have 36 countries instead o f one). The second reason i s the ironclad constitutional provisions that cede exclusive rights to the regulation and administration o f these revenues to the center. The third i s the apparent reluctance o f states to pushfor a change becausethey stand to gain more under the status quo26. 1.19 However, this arrangement has not been without consequence. Dependence on oil revenues and block transfers o f substantial sums from the Federation Account, with no incentives, have, together, constituted serious disincentives to building own revenue capacity at all levels o f government. Block transfers to sub-national govemments without restrictions as to use may be seen as "manna from heaven" or "free money" - something generated without apparent cost to them27.For as long as such large sums o f "free money" continue to flow, the incentive to develop other revenue sources may continue to be lacking. This partly accounts for the low intemal revenue effort o f the sub-national governments notwithstanding that they have, at least in theory, substantial residual tax powers28. 1.20 Current fiscal arrangements are also (at least) partly responsible for the weak tax administration capacities prevalent among sub-national govemments. As shown above, although state governments collect personal income and capital taxes, the laws regulating them are made at the center. There is therefore very limitedroom for maneuver. The central military government used arguments o f the need to encourage uniform tax regimesacross the federation inorder to promote even social and economic development to maintain legislative control over state taxes2'. The merits o f this approach are at best doubtful. One principle o f federalism and decentralization i s the freedom it affords sub- nationals to set their own agenda and priorities for development and to make their choices 25The other reasonis to ensure uniformity. See Nwoko, C. 0.(1999): Notes on PublicExpenditure Management,pp, 145, 153). 26This muchcame out of a workshop to discuss this report at the draft stage whenrepresentatives o f participating states recommended continued collection o f Value Added Tax at the center so as to maximize the proceeds. However, several states ledby Lagos advocated distributionof the revenue on the basis o f 100% derivation after deducting a percentage for administrative costs. 27Taiwo, I. (2002) State Public Expenditure Review Study: Ondo State Report page 22; Egwaikhide F. 0 (2002): Sokoto State Public expenditure Review, 1997-2000 page 54 28For other factors responsible for low internal revenue efforts inthe SNGs, see paragraph 1.16 above. 29The civilian government that took over in 1999 has not changed the system; that will require a constitutional amendment, something that is not easy under the 1999 Constitution, as has already been explained above, see footnote 3. Nigeria States Finances Study 30 April 2003 Nigeria States FinancesStudy within the broad, minimum regulatory framework of the Federation3'. The varying emphasis and approaches o f sub-national governments to development could create healthy competition and rivalry among them, which could benefit the entire country. a heavy handed central control o f state taxes therefore could stifle initiative, dampen healthy rivalry and stand inthe way o f attracting and mopping up development funds. 1.21 This centralized approach further raises the question o f efficient allocation o f resources. Centralized distribution o f revenues without due regard to their point o f origin (as i s shown below) may act as disincentive for increased production and growth. Depriving territories that produce the resources the benefits of deploying them to greater advantage and shifting the revenue to areas where they could be less productively employed could engender waste and ineffi~iency~~. Of course, it can also be argued that the need for even development and greater equity cannot be sacrificed for market forces inthe distributionjoint revenues. Besides, the applicability ofthe doctrine of efficiency can be questioned here given that the bulk o f the resources shared are natural resources, which accrues naturally without conscious human intervention and so does not imply that the area from which they are generated have beenmore efficient in the use o f resources. However, not all the revenues accruing jointly by law come fi-om natural resources. Value added and companies income taxes, excise and stamp duties are some important joint revenue sources to which the principle o f derivation does not apply. Eventhen the least that can be said i s that there should be proper balance between the requirements o f efficiency and the need for even development in the distribution o f common revenues. This is clearly not the case at the moment and this is a source o f growing tension, resentment and agitation for change. Revenue SharingArrangements 1.22 Ifassignments ofrevenuepowers have remainedrelatively stable over the years, the same cannot be said for arrangements for sharing revenues accruing jointly to the governments3*. The formulas changed as fi-equently as the military governments redefined their priorities. There are three categories o f revenues accruing jointly to the federation, each with a distinct sharing arrangement. These are Federation Account Revenues, Value Added Tax Revenuesand EducationTax FundRevenues. The power to determine both vertical (between the levels o f government) and horizontal (between states and between local governments) sharing ratios i s constitutionally vested in the Federal Legislature. 1.23 Federation Account The sharing o f FA revenues has long been dogged by credibility problems eventually culminating in litigation between the Federal and state 30Such framework should for instance, seek to avoid unnecessary tax competition among states. 3'This is generally the argument where productive efficiency engenderedbyhuman intervention is involved. To what extent the same argument can apply ina situation o f exploitation o f a natural, self- occurring resource involving little or no realproductive intervention by states i s open to debate 32However, there has not been any serious adjustment to the revenue formulas under the current civilian administration. The ratios currently applied were inherited from the military and were only adjustedby the President inthe wake o f the Supreme Court ruling o f April 2002 (see below). Nigeria States Finances Study 31 April 2003 Nigeria States Finances Study governments at the Supreme Court in2002. Thejudgment o f the Court deliveredinApril 2002 contains important rulings with far reaching implications on intergovernmental fiscal relations inNigeria (this rulingi s discussed in a Section E below). Box 1.1:Federation Account Revenue Allocation Formula I Federal Government 48.5% State Governments 24.0 Local Governments 20.0 Special Funds 7.5 Total -100.0 1.24 The first area o f concern was with the vertical revenue formula. UntilApril 2002, FA revenues (apart from proceeds o f VAT) were shared as follows: 48.5 percent to the Federal Government, 24 percent to state governments, 20 percent to local governments and 7.5 percent to special projects (see Box 1.1). The 7.5 percent allocation to special funds was controlled by the Federal Government and distributedina manner that was not entirely transparent. Allocations were made therefrom to the Federal Capital Territory (l%), ofmineralproducingstates(3% ofrevenuefrommineralresources development only, not o f FA revenues), general ecological funds (2%), derivation (1% o frevenue from minerals resources) and stabilization funds (0.5 percent). 1.25 There were two issues o f transparency with the special funds. Firstly, although the global distribution o f the funds nominally added up to 7.5 percent, inreal terms, it did not since some o f the percentages for distribution are not based on FA revenues but on the smaller mineral revenues. Secondly, it was not clear how the ecological and stabilization funds were disbursed,who was entitledto what and why. (Figure 1.1shows the distribution o f Ecological Funds for 2000 and 2001. Out o f a total o f N15.5 billion accruing to ecological fund in 2000, the Federal Government and its agencies (the National Emergency Management Agency and Abuja) kept a total o f 5.8 billion or 37%. This increased to 57% in2001 when it kept N28 billion o f the accruing N60 billion. The rational for this increase or distribution was not explained. The criteria for distribution were not stated.) This meant, effectively, Federal Government controlled 56 percent of declared33Federation Account revenues, and not the 48.5 percent statutorily allocated to it (Figure ~ 2 ) The~Supreme Court upheldthis argument inits April 2002judgment. ~ . 33 were actually paid into it. . Under the military, inaddition to the above, there was also the case that not all monies due to the FA 34As explained later inthis chapter, the Supreme Court inthe Resource control suit declaredthe practice of setting aside the ecological fund from the FederationAccount as a first line charge unconstitutional. Nigeria States Finances Study 32 April 2003 Nigeria States FinancesStudy Figure I.1:Distribution of Ecological Fundfor 2000 and 2001 Distributionof Ecological Funds,2000 2001 - 30 25 2e I O -.-Z 5 20 15 .- 5 0 2000 2001 Source: Office of the Accountant General for the Federation (OAGF) Figure 1.2:Distribution of Revenuefrom the Federation Account - 1.26. Some state governments Share of Funds from the FA considered the special fund o f 7.5 percent an unconstitutional way o f LGS increasing allocation to the Federal 20% Government. Their argument was that special projects are not a government and the constitution requires funds to be shared only between governments. Therefore, the allocation o f funds to 1 1 Special Funds, which the Federal Government spent according to its discretion, was improper. The manner o f disbursement o f ecological funds seemed to buttress this viewpoint. 1.27 The second issue was the practice o f debiting certain first line charges to the FA before applying the sharing formula. Thus, not all revenue meant for the FA was paid into the account. The nature and composition o f these charges differed depending on the priorities o f the government of the day. Under the military, the charges consisted o f undefined national priority projects, the Petroleum Trust Fund (PTF), external debt service, and so on. Between 1991 and 1995, 52 percent o f revenues due for the FA were withheld in this manner35. Under the current civilian dispensation, first line charges (approximately 29 percent in 2000) were applied as follows: 1) 13 percent mineral 35See Nwoko C. 0.(1999):Noteson Public ExpenditureManagement, pp. 149 to 151 Nigeria States Finances Study 33 April 2003 Nigeria States Finances Study derivation; 2) joint venture cash calls (JVC) consisting o f government's share o f the cost o f oil production; 3) external debt servicing; and 4) funding o fthejudiciary. 1.28 Of all these charges, only the 13 percent derivation is constitutionally provided for. The SC consequently declared the other first line deductions unconstitutional (see Section E>. The effect therefore that all revenues in the FederationAccount i s subject i s to distribution to the three tiers o f government after deducting the constitutionally approved first line charge o f 13 percent o f revenue accruing from mineral resources. However, because some o f the deductions declared unconstitutional are necessary Federation costs (it i s the manner o f their funding that was ruled illegal, not the items themselves) the governments o f the Federation have had to agree on how to account for those charges. In the months immediately following the SC ruling, these arrangements were made on an ad hoc monthly basis pendingthe agreement o f a lasting formula and its enactment into law by the legislature. Table 1.3 shows the defacto revenue formula in a recent, post SC decisionmonth. Allocation YO Share of Onshore Oil YOShare of Offshore Oil Revenue Revenue andNon-OilRevenue I 13.0000 I Nil Federal Government 45.6162 52.43 State Governments 22.5730 25.95 Local Governments 18.8108 21.62 Total 100.0000 100.00 1.29 The agreement o f such a formula by the governments proved to be a tall order and the President, relying on powers conferred on him in a rather obscure section o f the constitution, issued an executive order amending the revenue sharing formula to 54.68%, 24.70% and 20.62% for the federal, state and local governments respectively. Once again, some state governments challenged the President's order at the Supreme Court. The challenge was, however, unsuccessful andthis formula is currently inuse36. 1.30 The Proposed New RevenueAllocation Formula Since the completion o f the draft report, and in the aftermath o f the Supreme Court ruling o f April 2002, the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC) has completed work on a new revenue sharing formula and, in December 2002, submitted same to the National Assembly (through the President as requiredby the constitution) for enactment into law. The recommendation is for a vertical sharing formula o f 46.63%, 33% and 20.37% o f Federation Account revenue (excluding value added tax) to the Federal, State and Local Governments re~pectively~~. 1.31 One notable feature o f the Commission's recommendations is that although it considers allocation to special funds inevitable, it did not propose any direct allocation to 36 The Revenue Mobilization, allocation and Fiscal Commissionhas proposed a new formula, which is currently awaiting enactment into law by the National Assembly (see paragraphs 1.32 - 1.36 below). 37That is, after taking care o f 13% derivation Nigeria States Finances Study 34 April 2003 Nigeria States Finances Studv cover the now defunct first line charges and national priority project3'. The Commission therefore proposed that governments at all levels should jointly contribute and manage (through special disbursement agencies set up for the purpose) a special fimd o f an amount equivalent to 3.5% o f the Federation Account. The Federal, states and local governments would be compulsorily required to contribute the amount in proportion to their respective shares of Federation Account revenue, Le., about 46.33%, 33% and 20.67% respectively. This translates to 1.63%, 1.16% and 0.71% o f the Federation Account respectively. Horizontally, andlocal governments4' wouldberequiredto make contributions on an equal basis and not in proportion to their take o f Federation Account revenue. The Commission also recommended that steps be taken to amend section 162 o f the constitution to reinstate Special Funds as a direct beneficiary from the Federation Account. 1.32 The Commission also proposed a new horizontal formula for distribution of revenue among states, including the Federal Capital Territory, Abuja (see Table 1.8). The proposal is onlymarginally different from the current one inuse (see Table 1.4). For instance, the weights attached to equality, population and terraidlandmass were changed from 40% to 45.23%, 30% to 25.60% and 10% to 10.70% respectively. 1.33 The Commission recommended retention o f the current 13% derivation for mineral resource revenue to be paid over to states. However, it introduced a novel idea into the process not only by recommending the manner in which the revenue should be shared within the beneficiary states, but also by including communities as direct beneficiaries. Thus, it suggested a vertical sharing formula of 60%, 30% and 10% respectively for states, local governments and communities. Horizontally, the Commissionrecommended that the 30% share o f local governments shouldbe distributed according to the principles o f production quantum (50%), equality (20%), population, (20%) and self-help projects 10%. Finally, the Commission recommended that the 10% share to communities should be distributed according to a formula to be determined by 38This is inkeeping with the Supreme Court ruling that declared such allocation unconstitutionalunder current provisions 39Including the Federal Capital Territory, Abuja, which under this proposal will be treated the same as states for revenue allocation inline with section 299 o f the constitution 40Including Area Councils of the Federal Capital Territory Nigeria States Finances Study 35 April 2003 Nigeria States FinancesStudy the respective State Houses o f Assembly. This new formula i s yet to be approved by the Legislature. 1.34 By constitutional arrangement, the Federal Legislature also determines the horizontal revenue sharing formula between the states on the one hand, and local governments on the other. The constitution specifies some o f the principles to be taken into account in determining the formula to include population, equality, internal revenue effort, land mass, terrain, population density and derivation. The current formulas for horizontal sharing between states and betweenlocal governments shown in Table 1.4 and Table 1.6were put in place by the military and have not yet beenrevisedby the current civilian government. The formula does not attach any weight to the principle o f derivation inthe distribution o fFA revenues. 1.35 Value Added Tax Revenue Sharing Formula The value added tax was introduced in 1994 to replace the states' sales tax. The tax is both centrally legislated upon and administered by the FGN in order to ensure uniformity and enhance receipts. This has had the impact o f further weakening the revenue generating capacity o f sub-nationals by acting as a disincentive to develop own revenue sources and aggravating dependence on transfers from the center. Federal tax offices had to be opened in all state and local government offices, recruitment and training o f professionals were enhanced and incentives were put inplace for revenueofficials to enhance the collection o fthe revenue. These measures have continued to yield results, as the value added tax has become an important source o f revenueto sub-nationals eventhough sub-national tax institutions are not strengthenedthrough it. Table 1.5: Horizontal Revenue formula: States I Index Weight Table 1.6: Horizontal Revenue Formula: Local Equality of States 0.400 Governments Population 0.300 Land mass and Terrain 0.100 Index Weight LandMass 0.050 Equality o f states 0.40 Terrain 0.050 Population 0.30 Social development factors 0.100 Land massherrain 0.10 Primaryschool enrolment 0.024 Internalrevenue effort 0.10 Direct sec./comm. Sch. Enrol. 0.008 Social development factors 0.10 Inverse sec./comm. Sch. Enrol. 0.008 Total 1.00 Hospital beds 0.030 Water supply spread 0.015 Proportiono f rain fall 0.015 Revenue effort 0.100 I Performance incentive 0.025 Equality 0.075 Total 1.000 Nigeria States Finances Study 36 April 2003 Nigeria States Finances Study 1.36 The military government maintained a separate VAT Pool Account into which the proceeds o f the tax were paid41. At the inception, the vertical revenue sharing formula o f 20:50:30 for federal, States and local councils respectively, reflected the sub national nature o f the tax, the Federal share being merely intended to recover cost o f administration. As VAT's importance became recognized, the central military government allocated half the proceeds to itself. This was later gradually adjusted to the current ratio o f 15:50:35 (Tablel. 6 and Figurel. 2). 1994 Jan April 1995 May 1995-December 1996 - 1997-1998 1999 2001 - Federal 20 50 40 25 15 States 50 25 35 45 50 Local 30 25 25 30 35 Total 100 100 100 100 100 I Figure 1.3: Trends in the Distributionof VAT Revenues, 1994 2001 - 60 1 50 40 +Federal 30 20 -::I 10 0 1994 Jan April, May 1995 - - 1997-1998 1999-2001 1995 Dec. 1996 Table 1.8: States' Horizontal VAT Formula 1.37 The horizontal VAT formula among states is described in Table 1.7. It attaches some weight to the principle of derivation. Even so, some highly industrialized states such as Total Lagos, Rivers, Ogun and Kano that produce the bulk o f V A T revenues feel deprived o f an important source o f internal revenue with the failure o f the formula to recognize 100percent derivation. Indeed, Lagos state has enacted a new sales tax law in 2001 in addition to the federal Value Added Tax law. Some companies are challenging the validity o fthe new law incourt. 1.38 The EducationTax FundRevenue for the Fundis derived from a 2 percent tax on corporate profits. The proceeds are devoted to insfrastructural development in public schools at all government levels. Transfers are made directly to benefiting institutions for specific projects only. To continue to benefit from the fund, institutions must comply 41Under the current civilian dispensation, VAT revenues are paid into the Federation Account as required bythe constitution but shared usinga separate formula. NiPeria States FinancesStudy 37 April 2003 Nigeria States Finances Study with strict standards of management and accounting for previous transfers set bythe trust board. The criteria for transfer assign definite proportions respectively to tertiary, secondary and primary schools. 1.39 Distribution i s not without its own controversy. For instance, funds meant for primary schools are shared on the basis o f equality o f local governments, i.e., all local governments in the country receive an equal amount notwithstanding the number o f primary schools it has or its primary school enrolment. Since some states have more primary schools than others, a situation i s created whereby some states benefit more than others. Ineffect, disbursement i s not based on equitybut equality, since more funds (per primary school capita) flow to those states with more local councils and fewer schools. Coincidentally, Lagos State where most o f the companies that pay the tax are located have more primary schools and fewer local councils than others, and therefore benefit less. 1.40 This also ignores the principle o f derivation o f the revenue. Since there is not an even distribution o f companies among states, this also i s a source o f agitation. Similarly, the states with more tertiary institutions, university, technical and vocational, receive a greater flow o f funds fromthis source than those that have less. 1.41 Although the funds are transferred directly to schools, they indirectly fund states by relieving them o f some their financial responsibilities. However, unlike in FA and VAT revenues, these are not block transfers to states without commitment. Eventhough votes are made yearly for all qualifying schools, disbursements are made only to institutions that utilized previous grants inaccordance with laid down rules and that meet strict monitoring and accounting standards. Unutilized votes for any period are held back until full compliance is achieved. Figure 1.4 below is a comparison of allocations and disbursements for the period 1999 to 2001. As the figure clearly shows, the correlation between allocation and disbursement between 2002 and 2001 i s not positive; in fact, disbursements declined even though allocations were rose sharply. This may not be unconnected with the inability o f user agencies to meet with the stringent accounting and reporting guidelines imposed by the Fund. Fig: 1.4: Educational Tax:Allocations vs. Disbursements, 1999 2001 - Educational TaxFund: Total Alocation Vs. Total Disbursement, 1999-2001 (naira million) -.-.-z.-e C 0 zm 1999 2000 2001 I-+-Alocation I1 8.71 I1 4.47 II 10.64 II +Disbursement 8.57 1 3.46 2.11 Nigeria StatesFinances Study 1.42 This arrangement has two obvious advantages for macroeconomic management. Firstly, there are fewer tendencies to disrupt price stability through the injection o f massive extra budgetary funds into the economy. Secondly, the funds are project tied and since they do not flow through the state governments, are likely to act less as a disincentive to intemal revenue efforts. However, as proceeds o f the fund increase, so will these indirect transfers to states. If the transfers become large enough and as more institutions leam to meet the timely accounting and reporting criteria, such unbudgeted flows may have some disruptive effect on cash levels inthe system thereby compounding the task o f macroeconomic management. Since the operation of the Education Trust FundBoard is not within the day-to-day control o f any government, it will not be easy to restrict the flow when necessary. There i s always this danger when governments set up parallel independent autonomous bodies to disburse funds42. Figure 1.5: Distribution of Federally Collected Revenue to Statesper Capita Dlstributlon of Federally Collected Revenuesto States, 2001 25000 00 20000 00 -B15000 00 m ,E % zm 10000oc 5000 OC 0 oc - Slates, ranked by poverty lndlcalor(1888) 1 QFA wr OGSM 1 42The Educational Trust Fundarrangement was forced on the military government in 1992 by the powerful university teachers' union. Nigeria States Finances Study 39 April 2003 Nigeria States Finances Study D. ExpenditureAssignments 1.43 Although also constitutionally assigned, expenditure responsibilities are not as clear-cut. There i s much overlap between the various tiers o f government. The main Federal Government's exclusive spendingpowers i s inbroad conformity with the pattern found in other federal democracies, encompassing the traditional areas o f defense, foreign affairs, international trade, law and public order, post and communications, air, sea and road transport, currency, as well as roads o fnational interest. However, the FG's exclusive responsibilities include prison, interstate waterways, etc. In addition to these exclusive matters, the Federal Government has concurrent jurisdiction with states on post primary and tertiary education, electric power, a g r i ~ u l t u r eantiquities and monuments, ~ ~ , archives, etc. 1.44 State governments have residual legislative and spending powers and so can make laws on areas outside the Federal Government's competence. Their spendingpowers are therefore as extensive as they want to make it44. Primarily, they cover agriculture, primary and secondary education45, health care delivery, rural electric power supply, water supply and the like. 1.45 Notwithstanding this, the Federal Government has over the years extended its spending to areas that were not contemplated under the constitution. Examples include primary education, primary health care and a g r i ~ u l t u r e ~Two inter-related factors ~ . account for this. Firstly, as already discussed above, successive military governments gradually concentrated more revenue at the center than was needed to hlfillits statutory spending functions. The way to justify such centralization was to also take on spending additional responsibilities that traditionally belong to lower levels o f government. Secondly, with so much money concentrated at the center, the current civilian dispensation i s yet to overcome the spendingtendencies inherited from the military. This explains the current civilian FG's programmes on poverty alleviation and universalbasic education (DE) on which large sums o f money have been paid out. Transfer o f such funds to the sub-nationals by way o f specific purpose grants would probably make for more efficient and effective allocation. 1.46 The exact role o f local governments inNigeria's emergingdemocracy i s yet to be properly defined. N o precise authority to make laws or raise revenue47 i s conferred on them under the constitution. However, their spendingresponsibilitiesare specified under 43To the extent o f establishing agricultural research and finance institutions 44They are also authorized to spend money inareas o f competence o f the Federal Government, ifthey so desire, provided however, that they do so within the provisions o f laws made by the Federal Government. 45States can also establishuniversities and other institutions for technological or professional education. 46For instance, the Federal Government has introduced the Universal Basic Education (UBE) scheme to cover the first nine years o f schooling from primary through junior secondary. However, the Federal Government has no powers to make laws on primaryeducation. That i s a residual matter, which falls under the jurisdiction o f States. Besides, the Federal Government keeps spending heavily o n agriculture whereas infact, that is not an area o f competence envisaged for itunderthe constitution. 47Although a 1998 law sets out taxing powers for local governments, State governments have sufficient powers under the constitution to over ride any local council law. Nigeria States Finances Studv 40 April 2003 Nigeria States Finances Study the constitution to include sewage and refuse disposal, maintenance o f public conveniences, construction and maintenance o f roads and streets, street lightings, drains and other public highways, parks, gardens, etc. and such other public facilities as may be prescribed from time to time by the House o f Assembly. They are also charged with the responsibility to maintain cemeteries, burial grounds and homes for the destitute or infirm. Table 1.9: Nigeria: Allocation of responsibilities by Government Level Exclusively Federal Concurrent Federal Concurrent state Local Government and State and local Defense Tertiary Secondary Markets External education education Cemeteries affairs Justice Healthcare Waste disposal Lawand Electric delivery Local streets - order power Water supply construction and Post and Bankingand State roads maintenance Communicati Finance fire service Motor parks and ons Agriculture Landuse open spaces Interstate and industry Primary Establishment o f transportation Education destitute homes Aviation, sea Slaughter houses and rail Public conveniences transport Currency Oilandgas 1.47 An important spending assignment to local governments i s the funding o fprimary school education including the payment o f primary school teachers48. Payment o f salaries to primary school teachers constitutes the single most important item o f expenditure for local government councils. The burdenproved too much for most o f the councils resulting in huge arrears o f unpaid salaries, which in tum resulted in frequent disruption o f the school calendar as angry teachers pressed for their pay. To save the school system, the FG instituted the practice o f deducting payment o f primary school salaries at source from LG's share o f the Federation Account. At the end o f the day, many local councils were left with practically nothing to meet other expenditure, giving rise to the phenomenon known as zero-allocation. 1.48 Insummary, there is inadequatebalance betweencurrent revenue and expenditure assignments. Stateshave important residual spendingpowers, but their residual revenue sources are not as important. The FG on the other hand, has had to dabble into many areas o f expenditure where it has, at best, questionable competence, so as to find necessaryjustification and avenues for spending the hugeresources at its disposal. Local govemments completely lose out in the current equation. Briefly, while constitutional distribution o f spendingpowers inNigeria may be largely inline with generally observed trends, the practical realities might not make for allocative efficiency. O f course, the quest for allocative efficiency could jeopardize macroeconomic stability. This indeed i s 48This assignment is a carryover fromthe military era and is not supported y the constitution. NiPeria States FinancesStudy 41 April 2003 Nigeria StatesFinances Study the challenge o f any future re-arrangement o f inter-governmental roles and responsibilities: to strike an optimum balance between, on the one hand, the necessity for macroeconomic discipline and the need for efficient use o fresources, on the other. E. TheApril Supreme CourtRuling 1.49 Last year, littoral states - Akwa Ibom, Bayelsa, Cross-River, Delta, Edo, Ogun and Rivers- demanded that the natural resources located off-shore should be regarded as located within their respective states for the purposes o f calculating the 13 percent natural resource derivation payments to them. The states also challenged the constitutionality o f several practices by the Federal Government as far the FA and revenues allocation are concerned. The details o fthe Supreme Court ruling, which was handed down inApril 2002, are provided inBox 1.2. 1.50 Following the supreme court ruling, states as a group will receive more revenues from the federation account, due both to the cancellation o f first line charges @ara. 1.29) and due to the arrears accruing on the derivation fund. The inclusion o f natural gas revenues for calculation o f 13 percent natural resource derivation will boost revenues o f natural gas producing states. Capital gains tax and stamp duties, which up till the ruling were expropriated by the Federal Government, will now be paid into the FA; and shared between all tiers. Box: 1.2: The Recent Supreme Court Ruling This suit arose out o f the Federal Government's dichotomization o f oil revenue between onshore and offshore sources. Its position was that the principle o f derivation was applicable only to oil extracted from onshore deposits; offshore oil extracted from the deep sea inthe country's territorial waters i s "commonwealth", accruing jointly to the Federation. Some oil states countered by challenging certain practices o f the Federal Government relating to Federation revenues. The major rulings o f the Court are as follows: That oil mined in the deep seas belong to the Federation as a whole and not to the nearest state and as such i s as not subject to 13 per cent derivation That only onshore mineral resource was subject to the 13 per cent derivation payment to states That natural gas is a mineral resource and, where produced onshore, is subject to 13 per cent derivation (the practice o f the Federation had been to exclude natural gas from its definition o f mineral resource) That all revenues accruing jointly to the federation, including unexpected extra earnings from oil, are subject to distribution inthe usual manner, the FG having no power to "save" any part o f it without the consent o f the constituent governments. That payment o f the 13 per cent derivation should be with effect from M a y 29, 1999 when the constitution came into effect and not from January 2000 as effected bythe Federal Government That the practice o f making certain first line charges on the Federation Account for I priority projects and debt service i s unconstitutional and should be ended I That the Federal Capital Territory i s not a state and its area councils not properly I local governments and so could not benefit from direct allocation o f resources from I the Federationaccount as hadbeen the case before the ruling I Nigeria States FinancesStudy 42 April 2003 Nigeria States Finances Study 1.51 But the revenue impact i s likelyto be unevenacross states (Box 1.2). For Delta and Bayelsa States whole oil deposits are predominantly on-shore, their 13 percent derivationpayments will be unaffected by the ruling. Additionally, these stateswill earn new revenues from gas proceeds, capital gains tax and stamp duties. These states stand to gain substantial revenue increases. In contrast, oil-producing states whose resources come largely from off shore deposits (inAkwa Ibom about 90 percent) couldbe the largest losers. Some will have to reimburseto the FA, the excess offshore funds paid to thembeforethe court judgment. This amount hasbeenput at about N33.4 billionandN8 billion for Akwa Ibom and Ondo States respectively4'. States expenditures will also increase as they take on their external debt service obligations and their share of obligations on oil exploration and production5'. 1.52 The Supreme Court ruling forces greater transparency and clarity on important aspects o f intergovernmentalfiscal relations under the Nigerian Constitution and i s inline with stricter observance of constitutionalprovisions on fiscal federalism51. In declaring first line charges unconstitutional, the SC throws a challenge to govemments at all three tiers to dialogue and agree on how to resolve issues o f common interest including how to fund oil exploration and production and promote the development o f the capital territory. 1.53 However, the increased revenue flows to sub national governments will increase challenges to effective macroeconomic management. Current political calculations in Nigeria's multi-ethnic society make it uncertain that the federal government can force cooperation from states and local governments on implementing its macroeconomic policy objectives. 1.54 There i s also the concern that this increased aggregate flow o f funds to sub- national governments combined with considerable weakness in public expenditure management and accountability and in the service delivery capacity, could further compromise effectiveness o f public expenditures and end up in less and not more services being deliveredto Nigerians. 1.55 In the coming months, the debate on fiscal federalism arrangements in Nigeria will continue and agitations for greater decentralization could intensify as elections approach. A key challenge will be ensuring that fiscal federalism i s practiced within a 49The Guardian. April 5, 2002. 50It is yet to be agreed how this willbe handled. "TherehavebeenanumberofimportantdevelopmentsinreactiontotheSupremeCourtrulingsinthe months since the preparation o f the draft report. Firstly, the President, exercising constitutional but seldomly used powers, issued an executive order amending the revenue sharing formula ina way that effectively restored what it lost inthe decision. The states are still protesting this action and have, infact, suedthe FederalGovernment, questioning the powers o fthe Presidentto amend the Revenue Act inthat manner. Secondly, having reached political consensus on the matter, a government sponsored Bill abolishing the onshoreloffshore oil dichotomy was rushedthrough the National Assembly and has been passed. It i s currently awaiting Presidential accent to become law. Thirdly, the Revenue Mobilization and Fiscal Allocation Commission (RMFAC) resumed work on a new revenue allocation formula. Fromall indications, work has been completed on this. What remains i s a formal approval by the Federal Executive Council and its subsequent presentationto the National Assembly for enactment into law. Nigeria States Finances Studv 43 Ami12003 Nigeria States Finances Studv framework o f institutions and mechanisms for accountability o f all tiers, and for policy coordination and cooperation betweentiers. This will be important for ensuring that both macroeconomic stability and allocative efficiency objectives are achieved and ultimately for guaranteeing Nigeria's new democratic experiment. Nigeria States Finances Study 44 April 2003 Nigeria States Finances Study Chapter 2. Review of States Finances 1997-2001 A. Introduction 2.01 Nigeria's move towards greater decentralization, coupled with strong world market price o f oil, provide a unique opportunity to begin to seriously address the country's enormous development needs. But this opportunity can be seized only if the related challenges-in particular ensuring that states and local governments can efficiently harness the massive increases in their revenues for development, and in a manner that i s sustainable and consistent with macroeconomic stability-are well managed. 2.02. Nigeria has been grappling with these challenges over much o f the last two years. Severe weaknesses instate public expenditure management and service delivery capacity have limited states' ability to translate their revenue increases into desired development objectives. Moreover, as states and local governments have gained greater control over increasing public resources, fiscal policy has become more difficult to manage: between 1999 and 2001, consolidated5* government spending rose an estimated 100 percent, generating rapid increase in liquidity and with it strong inflationary and exchange rate pressures (fig 2.1 (a) Total govemment expenditure was estimated at about N2.4 trillion or 52.5 percent o f GDP in 2001, significantly higher than in other developing countries. Figure2.1(a) Fig.2.l(b) Figure :TRENDSINCONSOLIDATED Figure:TRENDS INMCHANHERATESAND GOVERNMENT SPENDING CONSUME! PRICEINFLATION (naira billion) (period average, percent) 2500 1 2000 1500 1000 500 I 0 1998 1999 2000 2001 1999 2000 2001 +Consolidated -Federal StateslLocal Govts. ~~~ +Inflation -Parallel Market Remium 52 Refers to the three tiers o f govemment but does not include their parastatal sectors for which data is not available. 53 A more detailed discussion of recent macroeconomic developments inNigeria i s providedin:World Bank2002, NigeriaMacroeconomic Update Note. Nigeria States Finances Study 45 April 2003 Nigeria States Finances Studv 2.03 States and local governments are clearly important in Nigeria's overall fiscal picture. Between 1999 and 2001, their expenditures increased the fastest compared to other tiers o f government, contributing over 50 percent o f the increase in consolidated government spending (Table 2.1)". FirstLine Charges Federal Government States and LGAs 25.4 21.9 52.6 2.04 As a result o f this rapid growth, the share o f states and local governments inboth consolidated government revenues and expenditures has risen rapidly. In 2001, these tiers accounted for about 42.6 percent o f total government revenues and 38 percent o f total government spending. Excluding first line charges which reflect expenditures on behalf o f all levels o f government and are deducted fkom federation revenues before distribution amongst tiers, their expenditure share increases to 53 percent, a level comparable to that in other highly decentralized federations (Table 2.2). This trend i s likely to continue inthe wake of the April 2002 Supreme Court ruling and the proposed new revenue sharing formulation which would increase the share o f states and local governments infederation revenues to over 53 percent (see chapter 1). Table 2.2. Share o f Sub National Governments inConsolidated Government Fiscal Aggregates In2001 (%) Argentina India Indonesia Nigeria Revenues 18.7 51.5 3.39 42.6 Expenditures 40.1 51.7 31(budget) 38 Overall Deficit NIA Sub national -1.8 0.2( 1999) Deficit /GDP 2.05 Addressing Nigeria' immediate macroeconomic difficulties and building the foundations for sustained macroeconomic stability will need to be centred on improved fiscal discipline at all three tiers, including through instituting a framework for policy coordination between tiers. Unfortunately reliable and regular data on state and local government fiscal trends i s extremely sparse and hard to find. Performance i s not regularly recorded and monitored-despite constitutional provisions requiring this. For several states, compilation o f final fiscal accounts for the period since the mid 1990s i s only now being carried out. In some, available data on actual fiscal outcomes covers only part o f the fiscal year. Assessment o f long term fiscal trends and their implications 54States and Local Governments' share i s probably even larger since the estimates inTable 2.1 are based onbalance budgets for bothtiers, the convention usedinconstructing aggregate government fiscal tables. This is due to weak data on spending at the state andlocal government levels. Nigeria States FinancesStudv 46 April 2003 Nigeria States Finances Studv i s thus impossible. These and other weaknesses in public expenditure management (PEM) at state and local government levels, constrain their ability to effectively manage the considerable resources now at their disposal. 2.06 The next section analyzes details o f fiscal performance in the sample o f states studied for 1997-2000. Data collected from individual states in this exercise i s supplemented by more aggregated data on elements of fiscal performance in states provided by the Central Bank o f Nigeria (CBN) and by the Office o f the Accountant General o f the Federation, to build a picture o f trends in overall fiscal performance in Nigerian states over the last four years. Section C discusses short-term prospects for states' fiscal performance and key issues that need to be addressed to promote fiscal discipline and sound public finances instates. B. Fiscal Performance of States 1997-2001 2.07. A 1994 study by the World Bank on states' public expenditures, found that between 1988 and 1991, state governments' budgetary operations resulted ina very small deficit o f about N2.6 billion, or 0.8 percent o f GDPSS.This could have been due as much to good intentions as to the sates' lack o f creditworthiness and their consequent inability to borrow from banks or the capital markets6. Almost a decade later, states' overall fiscal balance relative to GDP, appears not too different. Data from the C B N shows that in aggregate, states spent about N596 billion in 2001, against revenues o f about N 573 billion, resulting in an overall deficit o f about N23.4 billion or 0.5 percent o f national GDP. As shown intable 2.3, other key indicators of states' aggregate fiscal performance appear reasonable compared with performance inother countries. Table 2.3 Summary o f States and FCT Finances 2001. NBillion 1 Revenues 1 Expenditures I Curr Balance IOverall I DomesticBank 1 Balance Borrowing 573.5 596.9 287.8 -23.4 19.23 Memo % of GDP 12.5% 13.6% 6.6% -0.5% 0.4% % ofRevenues 50.2% -4.1% 3.4% 2.08 But this aggregate picture masks extremely poor performance in some individual cases. In several states, fiscal balance positions recorded in the recent past are clearly unsustainable a few reaching as high as 50 percent or more o f revenues (Table 2.7). Anecdotal evidence o f growing arreas on government obligations, especially on wage and pensions, suggest that states' fiscal health could be much worse than i s portrayedby these numbers. Inaddition, behindthis seeminglycomfortable overall fiscal Performance lie a few potentially destabilizing trends: (i)large and growing share o f inflexible 55 World Bank 1994a. Nigeria Public Expenditure Management At the State Level 56 As discussedinchapter three, several states hadgone on a borrowing spree inthe precedingperiodwhich was unsustainable. Nigeria States Finances Studv 47 April 2003 Nigeria States FinancesStudv commitments, especially salaries incurrent and overall expenditures; (ii) declining ability to meet these inflexible commitments from states own revenue sources, thus increasing states' vulnerability to world market oil price movements; and (iii) rapid increase in states' borrowing inthe absence o f an adequate framework to ensure that such borrowing i s in line with their debt carrying capacity and with overall macroeconomic stability. Data on extemal debt show that in some sates per capita obligations are as high as about $250, not much lower than Nigeria's income per capita o f about $290. Finally, at decade highworld market oil prices, sates should berecordingmuch stronger fiscal performance to give them some buffer when oil prices fall. These factors suggest that complacency about states fiscal and public expenditure performance would be misplaced. Fig. 2.2a: StatesExternal Debtper Capita 2.09 In addition, the oil boom of the past two years has deflected attention from fundamental reforms that are needed for states to achieve sustained fiscal discipline and contribute to macroeconomic stability. Critical areas include addressing the large state civil service bureaucracy, and largely inefficient parastatal sector; and building budget and financial management systems that are consistent with good govemance and more efficient use o f public resources. But it i s striking that even while enjoying significant revenue increases; some states are encountering growing difficulties in managing their public finances. 2.10 Lack o f complete data including, data on states' aggregate debt obligations makes it impossible to provide credible concrete analysis and analyses on the degree to which states - both individually and in aggregate - deviate from what might be a fiscally sustainable path and the details o f the adjustment that could put states on this path, Putting together this basic information base to allow more detailed analysis will have to be a key part o f states' efforts to get a better handle on their fiscal and public expenditure management, Nieeria States Finances Studv 48 April 2003 Nigeria States Finances Study States Revenue Performance S o u r c e , S t a t e s , W o r l d B a n k S t a f f E s t i m a t e s 2.11 States have enjoyed strong revenue growth between 1997 and 2001. In real terms, states' revenues increased over 300 percent from N 69 billion in 1997 to about N274 billion in2001. States share inconsolidated government revenues also increasedto 42.6 percent in2001, and from about 3 percentto 12.5 percent of GDP. Inthe individual states reviewed, real revenuesrose on average over 260 percent during the period (Table Niperia States Finances Studv 49 Ami12003 Nigeria States Finances Study 2.4). Revenue effort, as proxied by per capita revenues5' has also strengthened considerably, rising from an average o f N 739 in 1997, to N 1213 (equivalent o f about $12) in 2000 (Table 2.5). Despite this strong growth, performance i s still quite low, ranging in 2000 from a high o f N5, 651 (about $55 equivalent) in Delta state to only N983 (about $10 equivalent) inKano. 2.12 As referred to earlier, revenue increases in Nigerian states, reflect recent world market oil price increases between 2000 and 2001, depreciation o f the nairas8,increase in share o f derivation payments to oil producing states, and stricter adherence to the constitutionally mandated revenue sharing formula. Between 1999 and 2001, states' aggregate receipts from federally collected revenues, increased over three times from N131.8 billion to N556 billion. States' receipts from the excess crude account-4 ~indfalls~~-increasedfrom 1.8 percent o f their revenue receipts to over 21 percent in 2001. If this windfall had been saved, states' total disposable revenues would have been about 19.5 percent lower in2001 2.13 Revenue increases are generalized across states, but also vary considerably in size between states. Not surprisingly, the largest oil producers in the sample have experienced some o f the strongest revenue increases, due inpart to the increase innatural resource derivation payments from 1percent to 13 percent. Akwa Ibom and Delta state the large oil producing states in the sample experienced total revenue increases in real terms o f about 500 percent. In 2000, the two states received N14.4 billion and N18.7 billion respectively from the 13 percent derivation payment, in both cases, the single largest item in their revenue profile. Lagos state i s a striking outlier, recording revenue increase o f only 24 percent during the period. This reflects the state's strikingly lower dependence on oil revenues than most other states. IKwara I 839.7 I 1498.2 I 1128.9 I2666.0 I 1533.2 I Lagos 1617.3 1183.3 1806.8 118884.3 I 1622.9 I Ondo* 757.3 916.9 1- 1 12.5 I - -_ 299n.n I I L - 444.2 ~ OYO 549.9 f"" ' I 030.1 688.0 1340.9 804.2 Sokoto 719.5 1182.28 I 1285.57 2496.6 1421.0 Average I 739.6 I 946.3 I 993.5 I3812.0 I 1213.8 I ''Individualstate GDP numbers are not available. 58N85 to the dollar in 1997 and about N112 to the dollar in2001 59Defined as revenues inexcess o f oil price usedinbudget. Nigeria States Finances Study 50 April 2003 Nigeria StatesFinances Study Fig 2.2: RevenuePer Capitain SampleStates Revenue Per Capita at Constant 1995 Naira 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 2.14 Receipts from states' own sources also increased, but by much less, thus deepening their dependence on federation revenues. In2001,in aggregate, states raised only 10 percent of total revenues from their own sources; the remaining 90 percent coming from federally collected revenues, compared to 28 percent and 72 percent respectively in 1997. Inthe individual states reviewed, the share of own revenues intotal revenue ranged from as l o w as 3.9 percent and 2.1 percent in Bauchi and Ebonyi states respectively, to a high of about 33 percent and 42 percent in Oyo and Lagos states respectively in2000. 2.15 One obvious implication o f states' growing dependence on federation revenues is their increased vulnerability to o i l price shocks. In contrast, states' share in internally generated revenue and VAT proceeds has grown less rapidly. Expected additional increases in federation resources to states from the recently adopted revenue sharing formula are likely to further accentuate this trend. What appears to be emerging is somewhat reduced exposure at the federal level, while vulnerability is increasing at the state and local government level. States' ability to outline and implement an effective strategy to cope with this increasing variability will be critical for achieving their development objectives and for promotingoverall macroeconomic stability. StatesExpenditurePerformance 2.16 In aggregate, states' expenditures increased slightly faster than revenues, rising about 330 percent in real terms. Similar expenditure expansion is evident in most of the individual states studied with period average increases ranging from as high as almost nine fold in Cross River State, to a much smaller increase o f about 41 percent in Lagos state-which is again a strong outlier. The largest expenditure increases generally seem to have occurred inthe o i l producing states-Akwa Ibom, Delta--in the sample driven by the much larger increases inrevenues they have enjoyed. Per capita expenditures ranged from N6073 in Delta State to N1172 inKano state in 2000 (equivalents o f $60 and $11 Nineria States FinancesStudy 51 April 2003 Nigeria States Finances Study respectively). 2.17 Expenditure programs in Nigerian states are largely recurrent in nature. Typically, after personnel and overhead obligations have been taken care of, little is left over for capital operations. Over the period, recurrent expenditures constituted 65 percent on average o f total expenditures in the states studied. Personnel outlays account for a large and growing share o f recurrent expenditures, ranging on average from around 33 percent in Lagos and Bauchi states, to as much as 82 percent in Cross Rivers State. Several states are encountering increasing difficulties meeting their wage obligations, evidenced inmountingpersonnel arrears and frequent strike action by state civil servants. InEnugu State, salary payments are regularly two to three months inarrears. Workers have been on strike for several months protesting the non-payment o f wages. Salary arrears stood at N 3 4 1 million in real terms at the end o f 2000 in Cross River State. In contrast a few of the wealthier oil producing states-Delta and Rivers states--who receive revenue from the 13 percent derivation fund are being able to cope better with their personnel obligations. 2.18 The increases inpersonnel spending are most noticeable in 1999 and 2000 and are attributable to a combination o f both wage increases and increases in personnel size. In addition to raising the minimum wage to N3, 000 and N5,500 representing increases o f 140 percent and 83 percent, general average increases o f 150 percent and 200 percent respectively were effected in federal civil servants wages in 1998 and 2000. Given the practice o f harmonized civil service wages across different tiers o f government (see Chapter 3), states' civil servants' unions, supported by the central labour union, insisted on receiving the higher federal wages leading to major wage disputes between state governments, and their public service unions. Federal Government stepped in to broker an agreement between the parties in which the lowest paid worker in states public services received, not the minimum wage of N5, 5000 instituted in 1999, but N6, 500 representing an increase of 117 percent6'. Salaries in states public service were also adjusted across the board by a similar margin. It is not exactly clear the nature and extent of bailout o f states by federal government that formed part of this agreement, however, it is known that the Federal Government extended N 1 billion to Ondo State to help pay wage arrears arising from the arrangement. It is likely that similar assistance was extended to other states6'. 60Stilllower than the minimumwage ofN7,500 for federal workers. 61Ithas not beenpossibleto verifying this from the individual state public expenditurereportsbut this issue will be raised againwith participatingstates duringthe formal discussionsof the reportswith themlater in June 2002. Nigeria States Finances Study 52 April 2003 Nigeria States Finances Study Fig 2 2aTrendsinPasonrdCosls 1997.2000(1995wrst~ billionwra) Source World BmkSta'fEslimries NigeriaStates FinancesStudy 53 April 2003 Nigeria States Finances Studv Source: World Bank StaffEstimates Table2.6 Composition of States' Expenditures, I997 -2000 (I995 Constant Billion Naira) 2.19 Pensions were also affected by the recent wage increase and i s emerging as an increasing area o f difficulty for several states. Public sector pensions in Nigeria are funded exclusively from current public incomes. There are no public sector pension funds and employees are not required to make a contribution to the funding o f their retirement. Different tiers o f government are responsible for their own pension obligations. This arrangement i s clearly not sustainable and anecdotal evidence suggests that the pensions issue could trigger major fiscal crises in states. Unfortunately it is very difficult to get reliable numbers on the extent of state pensions arrears. This i s an area where considerable work is needed to outline possible solutions. In states like Cross Nigeria States FinancesStudy 54 April 2003 Niperia States Finances Studv Rivers where the problem with personnel costs appears the most acute, govemment has less and less flexibility inmanaging its resources and without findamental reforms o f its civil service will be forced to borrow to enable it deliver services inother areas. -.--,"/A.lbom Bauchi IC. River1 Delta I 1Ebonyi 1Imo IKano /KwaraILagosI OndoI Oyo 1SokotoI 1997 79.01% 40.25% 38.52% 174.34%137.50% 28.57% 135.66% 78.94% 333.36%220.59% 61.89% 12.53% .I998 52.37% 14.15% 31.41% 164.02% 24.07% 17.80% 144.92%111.20%383.86%168.00% 39.70% 17.07% 01999 29.16% 8.38% 9.37% 99.47% 14.08%,12.05% 46.42% 55.00% 250.06% 67.09% 29.28% 17.68% ~02000141.58% 9.07% 111.28%159.52% 8.58% I18.17% 127.41%~120.21%~119.75%~53.26% 114.65%135.08% 1 11 1 Figure 2.3 Share of Personnel Cost Covered by IGR. 2.20 A second factor is the expansion in political office holders and in the public service since civilian administrations assumed office in 1999. For example, the Ondo state govemment has employed 3, 500 new senior civil servants and 2, 700 new teachers in the last two years. In some states, public sector personnel increases have come through increased number o f parastatals, whose personnel costs are finded largely through state government subventions. In Lagos state for example, the number of parastatals rose from 5 in 1997 and 1998 to 11 in 1999. Salaries o f staff o f these parastatals grew in real terms, from N980 million in 1997 to N3.03 billion in 2000 in constant terms and equivalent to about 62 percent o f its recurrent spending. 2.21 Expenditure expansion has exceeded internal revenue effort. In the sampled states, in 1997 IGR covered on average about 47 percent o f recurrent expenditures but this declinedto 19 percent in2000. InEbonyi state, IGRwas sufficient to cover only 8.6 percent o f personnel costs in 2000. Even Lagos state, which has historically performed strongly on this score, recorded a reduction o f about a third in internally generated revenues relative to personnel spending. Sokoto state stands out as the only state in the sample in which the share o f personnel costs covered by IGR increased--from 12.5 percent in 1997, to 35 percent in 2000. This could reflect the fact that over the years, Nigeria States Finances Study 55 April 2003 Nigeria States Finances Studv Sokoto state has lost a good proportion o f its civil servants to new states (Kebbi and Zamfara) that have been created out o f it. 2.22 Revenue increase in the last two years i s allowing expansion o f funding for capital expenditures across states, thus redressing somewhat the balance between recurrent and capital expenditures intheir spending. However, it i s also clear that several states are embarking on big capital projects with little economic or technicaljustification or little attention to their poverty impact. Inaddition, as discussed inChapter 4, spending on capital and recurrent items are not closely linked in a budgeting framework that ensures consistency betweenthem. Instates such as Akwa Ibom, capital spendinglevels have risen ten fold. It i s doubtful that the existing PEM systems can handle such a massive increase over a short period. This i s likely to compromise govemance and effectiveness o f such spending Fig. 2.4 Trends in PersonnelCosts, 1997-2000(1995 Constant Billion Naira) 1 1 6.000 4.000 3.000 2.000 ~ 1.000 ~ 1 0.000 1997 1998 1999 2000 ~ 2.23 Sectoral spending patterns are also o f concem. In the sample states, general administration gets the largest shares o f state spending-again indicating the weight of the bureaucracy in states' expenditures. Allocations for governors' offices also receive considerable levels o f funding. Several states (Ondo, Oyo, Ebonyi, etc.) have instituted programs for free primary health, basic education and in some cases free health services for pregnant mothers. In several, specific poverty programs have also been put inplace. Most states-perhaps with exception o f Kwara -have significantly increased their education and health spending in aggregate as well as per capita terms. But per capita spending levels inboth o fthese critical sectors remained quite low in2000, ranging from N303 ($ 3) toN31 ($0.3) for healthand from N597 ($6) to N52 ($0.5) for educationin Akwa Ibom and Kwara states respectively. Growth ineducation and health spendinghas lagged behindgrowth inother sectors. Nigeria States Finances Study 56 Ami1 2003 Nigeria States Finances Study I Per Capita Spending on Education (1995 Constant Naira) 700 600 500 400 300 200 100 0 Akwa ibom Bauchi Cross River Imo Kwara Lagos Oyo Sokoto I Per Capita Spending on Health (1995 Constant Naira) 250 200 150 100 50 0 Akwa lbom Bauchi Imo Kwara Lagos Sokoto Fig. 2.5 (a) and (b): Per Capita Spendingon Education and Health 2.24 Recent revenue increases and related improved borrowing opportunity, has essentially supported and deepened patterns o f spending in states that cannot b e sustained inthe mediumterm. States havebeen able to continue with "business as usual" pumping spending increases into funding o f a large government machinery while much less is actually being translated into actual services and results for Nigerians. It is also allowing states to begin to mimic the federal focus o n big but poorly justified capital projects. Their expenditure autonomy is becoming increasingly limited as inflexible commitments expand as a share o f budgets and as internally generated revenues lag behind growth in these commitments. Addressing these emerging issues and the impact of rapid spending increases on macroeconomic stability is a critical challenge. NipreriaStates Finances Studv 57 April 2003 Nigeria StatesFinances Study Fiscal Balance 2.25 As noted above, in 2001, states recorded a small deficit o f about 0.5 percent of GDP and 4 percent o f revenues on their fiscal operations. But given mounting arrears on personnel obligations, and the fact that state parastatals balances are not captured, the true picture o f states' fiscal health i s likely to be considerably worse than is captured inthese numbers. Over 80 percent o f this aggregate deficit was financed from proceeds o f domestic bank borrowing, which increased from just over N 3 billion in 2000, to N19 billion. 2.26. Most o f the states in the study sample recorded on average a deficit position on overall balance during the period. Inmost states, performance worsened in the last two years-surpluses got smaller or moved into a deficit or deficit balances increased. Inthe sample, Kwara state recorded the best fiscal balance Performance over the period-an average annual surplus o f over 25 percent o f revenues during the period. In contrast, Cross Rivers State recorded on average an overall deficit o f close to 60 percent o f revenues over the period. Bauchi, Oyo and Lagos states also recorded deficits over much o f the period, averaging 46 percent, 26 percent and 13 percent respectively o f their revenues. Two oil producing states - M a Ibom and Ondo are amongst the best performance in the sample but there does not appear to be a clear link in the sample, betweenbeing an oil producing andhaving healthier fiscal position. States like Kano and Sokoto who are not oil producing have performed relatively well and small oil producers such as Cross River State have performed poorly. State Fiscal Balance State Fiscal Balance Akwa Ibom 18.8 Kano -0.7 -Bauchi -46.0 Kwara 25.1 Cross River -56.6 Lagos -12.8 Delta -2.2 Ondo 20.6 Ebonyi -7.6 oyo -26.3 Imo -9.6 Sokoto 3.6 2. 27 For states like Cross River, Bauchi, Oyo and Lagos, it is immediately obvious from even the limited data that their fiscal balance positions are not sustainable over the medium and longer term. It is harder to make such a judgement for other states whose fiscal balance numbers are a little better given the extensive data gaps in fiscal indicators-especially on indebtedness. These information gaps also make it difficult to define concretely and credibly what would be a sustainable fiscal path and the adjustment neededto get there. But even inthe absence o f immediate answers to these larger issues, it is clear that all states need to urgently address the emerging imbalances intheir fiscal performance. 2.28 The issue o f increasing states borrowing to cover their shortfalls i s o f particular concern. This can only be a temporary palliative but has also generally exacerbated the Nigeria States Finances Study 58 April 2003 Nigeria States Finances Study fiscal situation o f states. Loans have been at high interest rates-typically 25-30 percent and with short payback period. As discussed in chapter 3, since much o f this i s secured on future federation account transfers, the result has been to make the fiscal situation o f statesmore precarious. Some states-Lagos and Enugufor example--have sought to Fig. 2.6 (a) and (b): Current and Overall Balances as Percentagesof Revenue Fig. 2.6a: Current Balance as Proportion of Revenues, 1997 2000 - Source: Estimates By WB Staff avoid this problem by quickly turning over borrowed funds through investment in projects such as construction o f housing units, which are sold off on completion to bidders, thereby recovering the borrowed funds. However, the prices and conditions at which these services are sold make them pure economic ventures capable o f being providedby the private sector. Between 1999 and 2001 deductions from states' statutory allocations to cover such debt obligations increased from about 8 percent to 15 percent o f their allocations62. 62These are not the only debt service obligations. Nigeria States Finances Study 59 April 2003 Nigeria States Finances Studv Fig. 2.6b: Overall Balance as Proportion of Revenues, 1997-2000 ~ ~ Q Q R0306 / 1-0430 I 0273 I0111 I 0157 I 4 0 1 2 10195 10369 1-0089I0453 1-0432 10097 01999 1 -0308 -1 064 -0032 -0 145 1-0402 0064 0020 0084 0209 -0454 -0074 C. Short Term Prospects and StructuralIssues For MediumTermAttention 2.29 In the near term, four key issues are likely to determine fiscal performance and outcomes in Nigerian states: (i) the April 2002 supreme court ruling and the proposed changes in the revenue allocation formula; (ii) world market oil prices: and (iii) possible expansion in spending-including for additional wage increases--ahead of elections in 2002 and early 2003 respectively. In the absence o f strong measures to promote fiscal discipline, these factors are likely to lead to a worsening o f states' fiscal performance in the near term. 2.30. As explained inChapter 1, as a group, states' revenues are likely to be boosted by the April 2002 Supreme Court ruling as a result o f both the cancellation o f first line charges and the arrears accruing on the derivation fund. But the impact on different states could be quite different with even revenue reductions possible in some cases. It i s also likely that states' additional expenditure obligations, from having to now take on their share in external debt service obligations will be proportionately smaller since the bulk (75 percent) of outstanding external debt stock is on account of federal government obligations. On the surface then this would suggest that states' fiscal balance position would improve. The proposed new revenue sharing formula will also support a similar trend since states' share in federation revenues would increase from 24.7 percent to 33 percent. But anticipated lower world oil prices in 2002 and 2003, compared to 2001, i s likely to mitigate the revenue expansion that states enjoy. Projections for federation account receipts in 2002, are based on a price o f $18 a barrel but trends so far suggest NigeriaStates FinancesStudy 60 April 2003 Nigeria States Finances Study that average oil prices in 2002 could be above this but still lower than the average o f $24.5 abarrel receivedin2001. 2.31 Even if the effect o f these two opposing impacts is a net revenue increase, how this increase impacts on states' fiscal balance outcomes will depend very much on whether increases in states' resources are likely to trigger a disproportionately greater expansion intheir expenditures. Estimates show that between 1997 and 2001, for every naira in additional revenue receipts, states in aggregate, incurred slightly more than a naira and 14 kobo in additional new spending. This suggests that the impact on states' fiscal performance o f their expected larger revenue flows could be negative. Moreover, it i s unlikelythat states' will be able to make some of the difficult policy choices neededto beginto improve their fiscal performance inthe run-upto elections. Infact, expenditures are likely to increase considerably in the pre-election period, including on possible additional wage increases, in view o f wage demands by unions. Overall then it can be credibly argued that states' fiscal positions will likely worsen inthe near term. 2.32. In the medium term, states' will need to vigorously address the structural constraints to their improved fiscal Performance. This will require specific actions to: (i) build a tradition o f strong fiscal discipline; (ii) and manage states' vulnerability to reduce oil price swings; (iii) reduce the share o f inflexible commitments in states' expenditure profiles; (iv) promote prudent borrowing and debt; and (v) strengthen budget processes and institutions to support fiscal discipline and expenditure efficiency and effectiveness. 2.33. These issues will not be easy to tackle and will require policy actions, which are likely to have difficult political economy considerations. But reforms are critical for Nigeria to succeed in building the foundations for sustained macroeconomic stability. Projections indicate that Nigeria's gas revenues will increase dramatically inthe next five to six years. Without strong fiscal discipline and improved fiscal management systems at all three tiers and especially at state and local government level, Nigeria i s likely to see a replay o f the macroeconomic instability and the erosion o f competitiveness that accompanied major oil booms o f the 1970s and 1980s. Policy makers at both federal and state levels could exploit the public good will towards government inthe immediate post 2003 election period to begin to outline and launch some o f the difficult measures required. Ideally reforms should be firmly underway within the next two years since resolve to tackle difficult issues i s likely to weaken as preparations towards the next national elections in2007 kick in. The discussion inchapter 3 and 4 will lay our some concrete proposals for the consideration o f state and federal governments. World Bank projections on average world oil prices for 2002 i s about $23 a barrel. Nigeria States FinancesStudv 61 April 2003 Nigeria States Finances Studv Chapter3: PromotingFiscalDisciplineThroughHardBudgetConstraints A. Introduction 3.01 As discussed in Chapter 2, Nigerian states have rapidly expanded their expenditure programs in the last few years. While the fiscal numbers do not suggest a major crisis overall, the fiscal data i s weak and incomplete, in particular, significant arrears are not captured and a picture o f state debt positions i s only now being put together64. Nevertheless, it i s already clear that some states in the sample studied (Cross River, Bauchi, Oyo, Lagos) are already in an unsustainable position. Growing evidence o f potentially destabilizing underlyingfactors (including wage and pensions arrears) across the board i s also worrisome. The impact o f these factors could be aggravated and the chances o f crisis increased if states face and exploit soft budget constraints to delay needed fiscal adjustment. 3.02 Budget constraints facing states are softened if states can expect that the federal government will accommodate and share in their excessive expenditures. If states can appeal to federal govemment for additional resources, then they can over spend and over borrow, with harmful consequences for overall macroeconomic stability. For the individual state however, this would be a very rational response to an incentive framework that encourages them to be fiscally imprudent at little or no cost to them. 3.03 This chapter discusses aspects o f current fiscal federalism arrangements including arrangements for borrowing that might encourage imprudent or fiscally irresponsible behaviour by Nigerian states. It also examines mechanisms that could be used to harden budget constraints and promote the fiscal discipline needed for overall macroeconomic stability and for efficient use o f states' public resources. Actions will be neededat both state and federal govemment levels, with the latter playing a lead role, including through demonstrating a credible commitment to fiscal discipline. B. Sources of Soft BudgetConstraintsfor NigerianStates 3.04 Global experience shows that decentralized countries are particularly susceptible to overspending in situations of soft budget constraints because sub national governments are likely to put their own interests before those o f the larger country65. This risk i s perhaps even stronger inNigeria's current context. Under recent political opening, states are asserting their autonomy. States feel that the earlier effectively "unitary" arrangements, did not serve their interests well and that they now have a chance to focus on their "individual" needs and deliver to their populations. After several decades o f economic mismanagement and misrule, development needs are staggering and the 64Following the recent Supreme Court ruling, the Debt Management Office (DMO) has worked with states to break downNigeria's total extemal debt into federal and individual state obligations. The DMO and the Federal Ministry o f Finance are also working with states to determine the extent o f state domestic indebtedness. Rodden et a12001 Niperia States FinancesStudv 62 April 2003 Nigeria States Finances Study majority o f Nigerians-increasingly cut o f f from the federal level-are looking more to their state and local governments for improved living conditions. Despite overwhelming evidence o f weak effectiveness o f public spending, improving living standards of Nigerians is seen by politicians and policy makers largely as a matter of even larger public budgets. In parallel, as explained in Chapter 2, rising world market oil price has considerably increased government revenues and the risk of governments at all levels spending considerably above levels that would be sustainable over the medium term. 3.05 Unlike other federal countries in Latin America, Nigeria has not experienced episodes o f severe financial crises at state and local governments levels that have had to be resolved through bailouts by the federal level. This could largely reflect the fact that over much o f the recent past, Nigeria has operated very much as a unitary state with states given limited fiscal autonomy. But as explained in earlier chapters, things have changed dramatically since democratic elections in 1999. Moreover, global experience suggests that even when a central government has n o history of bail outs and has adopted a policy o f not helping out sub national governments under fiscal stress, basic institutional structures and arrangements could make this stance untenable and not credible66. InNigeria important sources of soft budget constraints for states can b e found in the current system of intergovernmental transfers, states' expenditure autonomy and control, and the arrangements for borrowing by states. System of intergovernmental transfers and States'RevenueAutonomy 3.06 A system o f intergovernmental transfers that is unclear and not rules based could allow sub national governments to bargain and manipulate resources received from the center thus encouraging them to spend more than they should. In Nigeria's case, to a large degree, the system of revenue sharing is rules based, clear, and transparent (see discussion in Chapter l)67. Under the military these rules were often set aside and there was room for states to bargain on what they received. States could also make specific requests to the federal government for assistance in funding some o f their activities. It was at the discretion of the federal government to decide whether to grant these requests and how much to grant to individual states. This practice implied inprinciple, that states could easily overspend and expect to be bailed out by the Federal Government. However, this risk was counterbalanced by the fact that states had to have their budgets approved by the federal military government each year. Since 1999, with constitutional provisions for revenue sharing being implemented more strictly, there is less possibility for states to negotiate and bargain with the federal government for funds68. 3.07 Nevertheless, current rules do not provide adequate incentives for states' own revenue performance, thus perpetuating their dependence on federation revenues (see 66Roddenet al. 2001. 67Heavy dependence o n oil for federation revenues however reduces the predictability o f flows. Two percent o f federation revenues was untilrecently allocated to the ecological fund for which there were no clear rules on how funds should be distributed. This provided a small window o f opportunity for states to bargain on how much they received. The recent Supreme Court ruling has however ruled allocation o fFA revenues to this fundunconstitutional. Nineria States Finances Study 63 April 2003 Niperia States Finances Studv Para 3.09 below) and lack o f revenue autonomy. The existing horizontal revenue sharing formula i s significantly weighted infavour o f equal treatment o f all states and the need to achieve distributional objectives. Relatively little weight-1 0 percent o f pooled resources-- i s placed on states' own revenue performance. Furthermore, only 2.5 percent o f this i s distributed on the basis o f revenue effort. The remaining 7.5 percent i s distributed equally to all states for having made any local revenue effort at all. This could be partly responsible for weak intemal revenue effort o f states. 3.08 The 1999 constitution allows the Federation to make grants to a state to supplement its revenues. It stipulates that the terms and conditions under which this i s to be done are to be determinedby the National Assembly. Since such grants would come from federation resources-not federal government part o f federation revenues alone- states bear part o f the costs o f such assistance. Nevertheless, it could still provide opportunity for states to overspend and then get more resources from the central pool to help them out. There is no record of this facility having been extended since this administration came into office. However this cannot be ruled out. Given the current configuration o fNigerian politics, and inparticular concerns to treat different geopolitical interests equally, this provision may lead to pressure to give similar treatment to other states once a precedent i s set and one state i s granted such support. Inother words, once a state benefits from such help, it may be extremelyhard to preventother states accessing the facility even when no genuine case can be made for similar treatment o f other others. This could potentially have serious implications for fiscal discipline. 3.09 The more serious source o f danger in the current revenue arrangements as described in the previous chapters, i s that states are extremely dependent on resources from the federal level. Most o f the buoyant taxes are centrally administered. States do not have autonomy and discretion to change tax rates and tax bases on several o f the taxes assigned to them6'. Between 1997 and 2000, states raised on average only 14 percent o f their revenues from their own sources while the remainder came from federation account revenues. 3.10 This is combined with a strong perception amongst Nigerians-despite increased decentralization since 1999-that still too much resources are held at the center and that states and local governments do not have access to adequate resources befitting their expenditure obligations. This means that since states have little flexibility to raise additional revenues when faced with adverse shocks, they could with justification blame federal government if they were to end up in a fiscal crisis. Federal government could come under pressure to intervene on behalf o f the state and therefore position the state for a bailout. 3.11 Reflecting this general perception, the Revenue Mobilization and Fiscal Allocation Commission (RMFAC) has put forward a new revenue sharing formula, which would increase the share o f federation resources going to states and local governments to 53.3 percent, while reducing federal level share from 48.5 percent to 46.6 69But as explained inchapter 2, it is also clear that states could and shouldbe collecting more revenues even under current tax arrangements Nigeria States Finances Studv 64 April 2003 Nigeria States Finances Study percent". While this new formula would transfer more resources to states, it would not address the fundamental problem o f lack o f revenue autonomy o f the states and would further increase states' dependenceon funding from the center. Addressingthe low fiscal autonomy o f states inNigeria i s complicatedby the country's dependence on oil. Natural resource revenues are generally very poor candidates for local collection for several reasons: (i) the bases o f these taxes are very unevenlydistributedacrossjurisdictions; (ii) extraction o f resources could be held to be a national prerogative which should benefit the country as a whole, and (iii) because the volatility and uncertainty associated finally with such revenues should perhaps be absorbed by the central government which generally may have alternative resources at its disposal rather than by sub national levels7'. Inaddition, tax administration inNigerian states i s very weak. 3.12 Other countries' experiences show however, that high vertical imbalances need not soften budget constraints for sub national governments. Inthe cases o f Hungary and Norway, relatively hardbudget constraints have been achieved even with the existence o f highvertical imbalances. But this has been made possible through effective controls and oversight from the center. The evidence7' shows incontrast, that the highest sub national deficits and therefore the greatest risks o f macroeconomic instability, obtain where high vertical imbalances and transfer dependence o f sub national governments combine with weak rules from the center. Unfortunately this i s the situation inNigeria. States' Autonomy to Control Costs and Stay Within Budget Constraints 3.13 If states are to be fiscally disciplined, they must have not only the capacity but also the autonomy to stay within their budget constraints. States should have the authority to control their costs and not be thwarted in this by federally set rules that bind them to certain levels o f costs that they cannot afford. If such constraints exist, then states can build expectations that they will be bailed out if they run into difficulties. InNigeria's case, states' autonomy to stay within budget constraints i s weakened by two main issues: (i) practiceofsettingstatecivilservicewagesandpensions; and(ii) current federally driveninitiatives and programs that require fundingby states. 3.14 There are currently no laws requiring states to follow the Federal government's lead in matters o f wages and pensions across the board. In other words, civil service wages are not federally legislated. However several factors combine to makes this effectively the practice. In 1975, the then military government adopted and implemented the recommendations o f a Public Service Review Commission73to unify public service wages and pensions across the board. Since this time, Nigeria has operated in effect a policy o f a harmonized set o fpublic sector pay scales: just as pay i s harmonized between the various branches o f the federal civil service, so it is across tiers o f govemment. The same i s true for pensions. There i s also minimumpay legislation at the bottom end o f the ' OThe increase instates' share is largely from share that was allocatedto special hndsunder the old formula. A bill to enact this new formula has beenpresented to the National Assembly. 71 Norregaard, 1997. 72 Rodden 1999, Eichengrenet al. (1996) 73 Udoji Commission during the military govemment o f General Yalcubu Gowon. NigeriaStates Finances Study 65 April 2003 Nigeria States Finances Study scale, which i s federally determined. Finally, there i s a huge amount o f informal/political pressure to follow federal government practice on civil service wages, from unions and from civil servants t h e m ~ e l v e s ~ ~ . 3.15 States therefore have little room to maneuver, in determining unit personnel costs and therefore staying withinwage budgets that are affordable for them. As explained in Chapter 2, recent minimum wage increases and federal level civil service salary and pensions increases have significantly increased the personnel obligations for states, in many cases, beyond what they can afford. This would make it easier for states to prevail on federal government to help them meet these obligations if they become fiscally distressed. The significant under fundingo f pensions i s also a time bomb that needs to be resolved. 3.16 The Federal government's continued direct engagement inprimary education and basic health, which are constitutionally responsibilities o f states and local governments, could also have the same effect75. Inthe case o f basic education, the federal government introduced without early discussion with states, a program to provide universal basic education for all Nigerian children o f school-going age. States are being asked to fund and implement this program. This implies in effect federal government setting some form o f minimum service standards inthis area, which takes away from states autonomy in deciding what they can and want to do within their budgets in the area o f basic education. Again this makes it easier for federal government to be weighed upon to intervene and bail states out ifthey runinto difficulties. Arrangements Regarding States'Borrowing 3.17 Current arrangements for borrowing-especially as regards domestic borrowing-- present a major area o f risk for state governments spending much more than i s sustainable or compatible with overall macroeconomic stability. There i s a precedent o f this during the oil boom years o f the late 1970s and early 1980s when several state governments in Nigeria rapidly expanded their expenditures, financed through enhanced oil revenues and an extemal and domestic borrowing spree. In 1988, as part o f painful adjustment to the earlier fiscal indiscipline, the federal government effectively placed an embargo on all extemal borrowing by states. Between 1986 and 1992, upon request, the federal government intermittently took on debt servicing obligations o f certain states under some arrangement that states would at some future date reimburse the federal government for this76.Since 1995, recognizing the severe strain debt service was putting on some sates, federal government begun the practice o f servicing all extemal debt obligations o f federal and state governments as a first line charge from federation account 74Currently though, states-with the exception of major oil producing states like Delta Bayelsa and Rivers have negotiatedto pay wages that are marginally lower than federallevels 75 In2000, Federalgovernment launchedaprogramfor universalbasic education 76 Iti s not clear the specific details o f the arrangements agreed between the federal government and states-for example over what period this reimbursement was to happenbut federal government i s now making deductions from the statutory allocations o f some states to cover this Niperia States Finances Study 66 April 2003 Nigeria States Finances Study revenues before distribution betweenthe three tiers77. This implied essentially a bail out o f states who had borrowed heavily, by other states and by local governments who are not allowed to borrow externally. Since a large part-an estimated 75 percent7'---of external debt are federal government obligations, states are also implicitly taking on some o f debt responsibilities o f federal government through this arrangement. As explained in Chapterl, following the April 2002 Supreme Court Ruling, arrangements for external debt servicing have been changed7' to allow federal government and individual states to take responsibility for their respective external debt service obligations. Nevertheless, as explained below, overall, the framework for borrowing by Nigerian states i s weak and may not provide adequateincentives for fiscally responsible behaviour. 3.18 External Borrowing. Only in the area o f external borrowing have some guidelines for state behaviour been put in place. In 2001, as part o f implementation o f Nigeria's Stand By Arrangement (SBA) with the IMF, the National Economic Council (NEC)so approved guidelines on external borrowing, including by states. The main provisions ares1: 0 States should seek federal government approval in principle ahead o f full-scale negotiations for such loans; 0 A minimum condition for such approval is evidence that state has not over- borrowed externally or domestically. This i s equated to evidence that the state's debt service obligation does not exceed 40 percent o f its federation account statutory allocations; 0 States should authorize Federal Ministry o f Finance to deduct at source from their statutory allocation, the amount neededfor debt service; 0 States' external loans must be supported by Federal Government guarantee before final approval; 0 Borrowing should be tied to specific investmentprojects whose feasibility studies should have beencleared by the National Planning Commission (NPC); 0 Borrowing must be on highly concessional terms, specifically not to exceed one percent per annum; 0 Borrowing should be limited to financing o f projects for "poverty eradication" and for infrastructure. 3.19 The Guidelines also included a national ceiling o f $500 million on additional external borrowing for all tiers o f government over the SBA period". This figure i s based on an identifiednational financing gap o f about $1billion over the period, o fwhich about 77Apparently this arrangement was put inplace after pressure from some military administrators who's states could not cope with their obligations 78Preliminary information from the Debt Management Office (DMO) 79As explained inChapterl, following the April 2002 Supreme Court Ruling, arrangements for external debt servicing have been changed to require FGNand states to take direct responsibility for their individual obligations. Made up o f all 36 state Governors and the Minister o f the FCT and chaired by the President and the Vice President. Federal Republic o fNigeria. 2001. External Borrowing Guidelines. 82This reflects the estimatednational financing gap after identifiedexternal support commitments Nigeria States Finances Study 67 April 2003 Nigeria States Finances Studv $500 million had already been identified in existing donor loan or grant commitment^^^. It appears that so far, these guidelines have been effective in keeping new external borrowing by states under wraps. Several requests have been made for federal government approval but the majority have been "shopping lists" without detailed project ideas and proposals behindthem. N o request has been approved yet. 3.20 These guidelines include elements o f internationally accepted good standards. For example, the "golden rule" o f tying borrowing to concrete and specific investment projects. The restriction to concessional borrowing i s also prudent. However, some elements could still give rise to excessive borrowing by states. NPC capacity to rigorously review project feasibility studies i s weak and using this as a yardstick on whether states' projects should go forward for external funding could mean that projects that are technically and financially weak are accepted. The practice o f federal government guarantee o f sub national debt and servicing states debt obligations through deductions at source by federal government from state' statutory allocations could prevent potential creditors from carrying out the needed due diligence in deciding whether or not to lend to states, increasing chances of excessive borrowing. In both South Africa and Mexico, the national government does not guarantee sub national debt84. 3.21 Attempting to tie states' ability to borrow to their debt carrying capacity i s also sound. Nevertheless defining this capacity in terms o f external debt service ratio o f not more than 40 percent o f their statutory allocations may not be strong enough to ensure fiscal discipline and prudent borrowing levels for individual states. With states highly dependent on statutory allocations, this implies a ceiling o f about 40 percent o f their total revenues which, given the large share o f inflexible expenditure obligations such as wages in state revenues, would leave them inadequate resources for other obligations. Furthermore, states would also be free to carry out additional borrowing from domestic banks as well as from the domestic capital market, which could lead to debt service ratios significantly higher than 40 percent o f their statutory allocations. As discussed below, some limits defined to include total debt service obligations aw well as total indebtedness would be preferable. 3.22 Domestic Bank Borrowing: There are no regulations or guidelines on domestic borrowing. States have a free hand to determine their borrowing needs and seek such financing from domestic banks o f their choice. Apart from the practice o f states allowing the federal government to deduct their debt obligations at source from their statutory allocations, one could say that this aspect o f states borrowing i s completely guidedby the market. But the evidence shows that fundamental conditions for market discipline to be effectively applied do not hold in the banking sector and indeed in the larger capital market inNigeria. 83As stated, these numbers were intended for the SBA period of, 200 - 2001 and will need to be revised. 84Weist D.2002 Framework for Local Borrowing, Ahmad J., 2001 Creating Incentives For Fiscal Discipline inthe New South Africa. Nigeria States Finances Study 68 April 2003 Nigeria States Finances Study 3.23 The key issue i s the lack o f information. As mentioned in Chapter 2, there is a severe lack o f data on states finances including debt outstanding, and capacity to service debt. Most states are only now going through the process o f putting together their fiscal accounts from as far back as the early and mid 1990s. Fiscal and financial data i s also o f questionable quality where available, evidenced in discrepancies in data from different sources within the same government. In addition, while accounting rules are uniform across states, actual practices vary so that comparability o f data across states i s not easy. 3.24 Information on debt obligations i s particularly hard to come by and most states are extremely hesitant to make such information and data public. In addition, states accounts often do not give a comprehensive picture o f all state financial obligations. For example, information on contingent liabilities such as on public enterprises loan guarantees are not captured. Under such information-constrained conditions, domestic banks cannot accurately assess risks inherent in lending to states, distinguish between relative risks presented by different states andprice these differently. 3.25 A second reason for concern is the Nigerian banking system's high exposure to the government sector, including states. Several banks depend heavily on state governments for deposits. There are 25 banks representing35 percent o f total assets, for which government deposits account for over 10 percent o f total deposits. For 10 o f them (representing 9 percent of total assets) the share of government deposits is over 25 percent. Overall, about 12.6 percent o f total deposits o f the banking system come from various levels o f government, and a further 9.2 percent from parastatals. Dependence on government loans increased sharply during2001, and i s quite substantial for some banks. At end-2001, while bank holdings of T-bills dropped sharply during the year, about 5 percent o f total loans of the banking systemwere given to the government, compared to only 2.5 percent a year earlier. Governments also own a 20 percent or higher share in 14 banks with a 13 percent share o f total assets. Most o f the government ownership is on account o f state and local governments. Inaddition banks also carry out several other very lucrative functions for governments and government parastatals-e.g. collection o f revenues, 3.26 These factors, and existing arrangements for most domestic debt servicing to be deducted at source from states' statutory allocations mean that banks lack adequate incentives to properly evaluate borrowing risks o f their lendingto states. This essentially guarantees states access to loan resources without adequate attention to its economic financial and technical merits and its sustainability. Provisional estimates from the CBN shows that borrowing from the domestic banking system by states increased from under N 4 billion in 2000 to over N19 billion in 2001. Relative to GDP, this figure i s not particularly large-0.4 percent. But the important issue here i s the recent rapid increase and the fact that mechanisms are not inplace to prevent this trend spiraling out o f control. Concerns about this led the CBN, despite opposition, to impose a 100 percent provisioning on banks' claims on all tiers o f government last year. This requirement was, however, weakened by the subsequent C B N ruling that holdings o f state bonds by underwriters will not require any provisioning for a year, thereby creating a loophole for circumventing the earlier tougher measure. The CBN has taken a number o f actions such Nigeria States Finances Study 69 April 2003 Nigeria States Finances Study as monitoring developments in this area however, its limited capacity and its focus on compliance may underminethe effectiveness o f these efforts. 3.27 Borrowing from the Domestic BonddSecurities Market. In the past, state governments in Nigeria accessed the capital market only indirectly through the Federal government. Between 1961 and 1986, the Federal government issued yearly development stocks to raise money for on lending to states. The Federal government exercised control over the use o f funds by states, which were tied to specific projects. Since 1987 however, states have been able to directly access the capital market and float bonds for their use. In the last two years, states activities in the capital market have increased noticeably. Since 1999, three states, Edo, Delta, Yobe and Lagos have raised funds on the capital market. Ekiti state has just recently launched a N 4 billion-bond issue. Several other states are preparing to enter the market, spurred on in part by aggressive efforts o fthe Nigeria Stock Exchange. 3.28 To access the capital market, states must meet a certain number o f legal and regulatory requirementsincluding requirements under the Investment and Securities Act (ISA) 1999, the Securities and Exchange Commission regulations and the listings requirements o f the Nigeria and the Abuja Stock Exchanges. Under the ISA, states can issue securities inthe form o f registeredbonds and or promissory notes. As with extemal borrowing, loans must be tied to specific projects. The total loan amount outstanding o f the state and the proposed loan should not exceed 50 percent o f the state's revenues inthe preceding year. A state's application to float bonds on the market should include audited accounts for the past five years. 3.29 As with other forms o f domestic borrowing, states are required to provide an irrevocable letter o f authority giving the Accountant General o f the Federation the authority to make deductions at source from the state's statutory allocation inthe event o f default by the state in meetings its payment obligation under the terms o f the loan. The state i s required to establish a sinking fund for each loan raised into which periodic contributions are made for meetingthe loan obligations. Any deductions from the state's statutory allocation by the Accountant General are to be paid into the sinking fund account. 3.30 States' activities on domestic securitieshond markets raise similar concerns to those discussed above. Inparticular, states are not requiredto continue to provide regular audited reports o f their financial operations. This, combined with the absence o f any private credit ratings agencies that would inform market participants o f states financial health i s a significant constraint to the full functioning o f market discipline in allocating capital market resources ina manner that fully accounts for risks 3.31 It is useful to set the Nigerian situation in the context o f global practice in this area. Global experience suggests two broad approaches to ensuring that sub national governments are fiscally disciplined in their borrowing: (i) through market mechanisms; and (ii) through hierarchical mechanisms i.e. controls from the center. In the first approach, discipline of states i s enforced primarily through the invisible hand of the Nigeria States FinancesStudy 70 April 2003 Nigeria States Finances Study market. There is no central government oversight of sub national governments fiscal and borrowing decisions. Inthe second approach, the central government is actively engaged inoversight of sub national fiscal andborrowingdecisions through a strong framework of rules and regulations. Such control mechanisms could be effected through cooperation between both center and sub national governments in the design and implementation, through rules-based controls, or through direct administrative controls requiring the center to approve each and every borrowing operation and prohibiting sub national governments from directly accessing capital markets85. 3.32 Clearly for countries to be able to effectively rely more on market mechanisms for discipline in borrowing by sub national governments, financial markets should be fairly well developed, open and market oriented. There should be adequate information on sub national government fiscal performance, their debt obligations, and no perceived chance o f bailout by the center. In addition, as explained above, the intergovernmental fiscal system should signal clearly that sub national governments should be able and are requiredto respond to any adverse fiscal shocks on their own. All these conditions are often not met, and especially not indeveloping countries such as Nigeria. 3.33 Given the preceding, its i s not surprising that in several federations, both developing and developed, central governments apply some forms hierarchical controls on sub national governments' borrowing activity (see table 3.1). The nature and coverage o f controls vary widely, reflecting the country's history, balance o f power among the different levels o f government, macroeconomic and fiscal conditions, and state o f development o f financial markets. Eachtype o f control has advantages as well as disadvantages, which determine their suitability for a particular country. Table 3.1. Local Borrowing Rules Type of Restriction Description Countries Affordability Formulae ' Ceilings on (i) serviceilocal debt Argentina, Brazil, Italy, Japan, revenues; (ii)debt serviceAoca1 Spain, Lithuania, Poland, current savings Colombia Indebtedness Formulae Limitontotal outstanding Brazil, Colombia, Italy debtinet revenues "Golden Rule" Provision Borrowing for capital Brazil, Canada, USA, South expenditures Africa, Switzerland, India Balanced Budget Local councils are requiredto Brazil, Canada, Germany, pass balanced budgets Netherlands, U S A Local Approval Local councils are requiredto Canada, Switzerland, U S A approve borrowing for individual projects 3.34 It is also likely that as individual country circumstances evolve, the preferable arrangement will change. Canada relies heavily on market discipline for controlling 85Guigale M and Webb S. eds 2000. Achievements and Challenges of Fiscal Decentralization Lessons FromMexico; Ter-Minassian T. (ed) 1996 Borrowing by Sub national Governments: Issues and Selected International Experiences, provide detailed discussions o fthese options. Nigeria States Finances Studv 71 Ami12003 Nigeria States Finances Studv provincial government indebtedness. But even in the case o f Canada with its well- developed financial markets, market discipline has not always been successful in checking excessive indebtedness o f provincial governments. Brazil and Argentina have had even more difficulties in trying to implement a market discipline approach to sub national borrowing and debt (see Box 3.1). Box 3.1. Market Discipline and Sub-national Borrowing In Canada, market discipline alone is relied on to control sub national government indebtedness, and private rating companies evaluate public sector creditworthiness in a competitive environment. However, even in Canada, with its well-developed financial market, market discipline has been unable to check the excessive indebtedness of sub national governments. In the mid-1990s sub national debt reached 23 percent of GDP, prompting Canadianprovinces to adopt fiscal adjustment programs to restrain themselves. Butthis only happened after the exclusion point hadpractically beenreached, entailing highsocial costs. Brazil, and to a certain extent Argentina, which do not have the necessary market conditions inplace, have also taken some sort of market discipline approach since the late 1980s, with disastrous consequences. In Brazil, sub national debt jumped from 1percent o f GDP inthe early 1970s to 20 percent inthe mid- 1990s, and in the past ten years the federal government intervened three times with large bailout operations to rescue the creditors o f states, and twice to rescue the creditors of municipalities. Source: Guigale M. and S. Webb (eds) 2000. Achievements and Challenges of Fiscal Decentralization Lessons From Mexico 3.35 Central government inBrazil now restricts both the demand for and supply o f sub national debt. In Columbia, two indicators+ne on sub national government liquidity and another on sustainability o f sub national debt--are used to assess and monitor sub national government payment capacity and hence their fiscal risks. This assessment and monitoring system allows differentiation in sub national governments' ability to borrow dependingon the level o f their assessedrisk (Box 3.3)s6. 3.36 Such monitoring systems can be important elements o f a framework o f hierarchical controls but need to be based on comprehensive indicators that capture off- budget activities and associated contingent liabilities o f sub national governments to be fully effective. In Colombia, the effectiveness o f the rating system was questionable at first since it allowed a fairly high degree o f leveraging o f revenues. Sub national governments could receive a "green" rating even while spending 40 percent o f operational savings on interest payments. Moreover, because some recurrent costs for human capital development are counted as investmentand saving, operational saving can be considerably larger than the current surplus, which is a more conventionalmeasure of public sector saving and creditworthiness. In addition to controls o f credit from the demand side, Colombia has also institutedsupply side controls. Inparticular, the debt o f any sub national government with a red rating in the traffic light system has to be fully provisioned, increasing the cost o f such lending to banks. This combination may make the traffic-light law more effectives7. 86 World Bank 2002. PREM Economic Policy Notes Number 64 87 Dillinger W., and Webb S., (1999). Decentralizationand FiscalManagement inColombia. World Bank Policy Research Working Paper.#2122 Nigeria States Finances Study 72 April 2003 Nigeria States Finances Studv Box 3.2 Brazil's limits on sub national borrowing Inthe 1990s, after three sub national debt crises, Brazilbegan tightening controls on sub national borrowing. The central government now restricts boththe demand for supply o f sub national debt. For example: Sub national governments are not pennitted to borrow from their own enterprises or suppliers, total debt cannot exceed the capital budget, new borrowing cannot exceed 18 percent o f net current revenue, debt service cannot exceed 13 percent o f net current revenue, the debt stock should be less than 200 percent o f net current revenue, indebtedgovernments shouldmaintaina primary surplus, defaulters should not borrow further, outstanding guarantees should not exceed 25 percent o f net current revenue, borrowing in anticipation o f fbture revenue should not exceed 8 percent o f net current revenue, new bond issues (other than rollovers) are prohibited, and at least 5 percent o f all bond issues should be retired at maturity. The central bank i s authorized to control the amount o f credit supplied to sub national governments by domestic banks and to advise the Senate on sub national borrowing practices. The senate, however, i s free to bypass legal restrictions on borrowing, which makes the control mechanismvulnerable to political pressures. Columbia's "traffic light"system During 1993-97 Colombia established a system that links each sub national government's debt to its payment capacity. Two indicators act as "traffic lights - alerting the central government to potentially excessive sub national debt The first indicator, the ratio o f interest payments to operational savings, suggests a sub national government's liquidity. The second, the ratio o f debt to current revenue, implies debt sustainability. Sub national governments facing a yellow or redlight are able to borrow only withpermission from the Ministry o f Finance and a performance agreement with the lender. The performance agreement sets binding targets for revenue increases, spending cuts, current surpluses, and the debt profile Indicator Green Light Yellow Light Red Light Operational Savings <40% 40%-60% >60% (liquidity) Debticurrent Revenue -40% 430% >80% (debt sustainability) Sub national governments facing a green light b [TOW with no restrictions; thes rated a yellow borrow only ith approval o f the Minister o f Finance after review o f debt service projections and where warranted a performance agreement with the lender. Governments facing a red light are able to borrow only if they agree to a performance agreement with the lender. The performance agreement sets binding targets for revenue increases, spending cuts, current surpluses and the debt profile. Source: Extractedfrom World Bank PREM Economic Policy Notes Number 64, March 2002. C. HardeningBudgetConstraintsfor NigerianStates 3.37 Instituting hard budget constraints for Nigerian states will require attention to the three broad challenges raised above: increasing states' revenue autonomy; (ii) increasing states expenditure autonomy; and (iii) putting in place a strong framework to ensure fiscally disciplined borrowing and debt behaviour o f states. A broad framework for improved fiscal coordination between federal state and local government i s also needed to underpin these efforts and provide an avenue for effective dialogue and cooperation between tiers. Actions are needed at both the national level--including modifications to current fiscal federalism arrangements-and at the level o f individual states. Nigeria States FinancesStudv 73 April 2003 Nigeria StatesFinances Study 3.38 Specific measures in each o f these areas are not difficult to define. The more difficult challenge i s crafting policy recommendations that are feasible and doable in Nigeria's current socio-political context. The results o f the recent national elections has given the ruling party at the national level, the People's Democratic Party (PDP), control in a larger number o f statess9. Its control over State Assemblies has also strengthened. This new political configuration, may present a significant opportunity for more effective cooperation and coordination between the federal level and state governments on several aspects o f intergovernmental fiscal relations, including achieving greater fiscal prudence. Party discipline could also be exploited but this cannot be taken for granted inNigeria's still nascent democracy, which by definition means the absence o f political parties with a tradition o f strong party discipline. In discussing the policy options provided below, some effort i s made, where relevant, to comment on political feasibility and offer some suggestions as to how some o f the political constraints could perhaps be addressed. 3.39 It is very clear that inNigeria's current context, any measures taken by the FGN, should also aim at building trust o f the centre by states and avoid perpetuating the undue dominance o f the states by the federal level that existedunder the military. The FGNwill need to signal clearly to states that it fully believes in the merits o f fiscal federalism in Nigeria and seeks to ensure its effective implementation. A heavily top down approach that allows little room for understanding and awareness amongst states o f the fundamental issues i s unlikely to build such trust and hence achieve much. Moreover, federal government lacks strong constitutional and legal cover for such an approach. This i s evident inthe failure o f federal government's recent efforts to unilaterally sterilize part o f recent oil revenue windfalls. A more consensual approach in which the Federal Government seeks to raise awareness and educate state governments on the importance o f fiscal prudence at all levels-including at state and local government levels i s perhaps a more realistic option. 3.40 A necessary condition for the federal government to be able to play an effective role in supporting fiscal discipline in states i s that it must first lead by example and subject itself to similar discipline. In the case of South Africa, faced with potential growing deficits, the central government designed and implemented a series o f hierarchical controls for sub national governments. These were successful in part because central government submitted itself to a fiscal stabilization plan which was successful and hence gave credibility to the controls it had put in place for provincial governments (Box 3.2)90. For federal government to be able to play an effective leadrule inthis area, itneeds to demonstrate clearly its own strong commitment to fiscal discipline and to hard budget constraints. For example, as discussed in earlier chapters, although federal government was forced by states to distribute to them their share o f oil revenue windfall accruing in 2000 and 2001, federal government could still have saved its share, demonstrating its commitment to prudence inmanagingthe oil revenue cycle. April 2003 8928 out of 36 90Ahmad 2001. Nigeria States Finances Study 74 ADril2003 Nigeria States Finances Study Box 3.3. South Africa. Instituting Credible Hierarchical Controls. Faced with the potential o f growing deficits, central government implemented a series o f hierarchical controls to manage the budgets o f provincial governments. The policy measures varied. These included first a commitment to multi-year budgeting at the central level-the MediumTerm Expenditure Framework (MTEF)- that determined the levels o f resources available for intergovernmental transfers over a three to five year period. In addition, central government implemented direct monitoring o f provincial budgets. The latter has included an indirect management o f expenditure patterns at the provincial level through budgetary institutions that bring together the central ministries and their counterparts at the provincial level. Ultimately, the effect o f these controls and measures were to establish a set o f rules that ensure an ex-post, balanced budget through top-down processes. But the case o f South Africa also suggests insights into why the hierarchical controls were binding and credible. With a relatively well-developed capital market and progressively open-macro economy, the threat o f financial flows imposed a major constraint on central government's fiscal behaviour. In 1996, a year after the first democratic elections and the appointment o f the first A N C finance minister, capital flight put the exchange rate into a free-fall. Within weeks the exchange rate had depreciated by 50 percent. Faced with this currency crisis, the new finance minister developed and announced a fiscal stabilization program - Growth, Employment and Redistribution (GEAR)-which publicly committed the Government to bringing down its budget deficit along a pre-announced path. Since then the ANC Government has been monitored by private markets on their commitment to this fiscal austerity plan. Indeed, one o f Government's key successes has been the reduction o f central government deficit to below ---% of GDP in the fiscal year 1999-00 from a height o f 8 percent inthe early nineties. Inface o f this market imposed and market monitored plan, hierarchical controls to manage the expenditures o f provincial government were perceived as credible andbinding. Source. Ahmad J., 2001. Promoting Fiscal Discipline in the New South Africa. 3.41 Strengthening the framework for $seal coordination between states. Existing laws and institutions for intergovernmental fiscal cooperation and coordination were established under the military and are not suited for or easily adaptable to popular democratic governance. New laws must be put inplace and the institutions reformed (or replaced) to cope with the new conditions. The obvious place to begin would appear to be to amend the constitution to establish basic principles and institutions for cooperation and coordination o f budgetary and fiscal policy among the three tiers of government. That remains the ultimate, necessary and decisive step in the reform process. Moreover, reaching agreement on such constitutional amendment will be a major indication o f serious intention that the country i s determinedt o reach accommodation on the issue and to beginto put its act together. 3.42 However, the process o f amending the Nigerian constitution will not be easy. In the interim and as a stopgap measure, it i s necessary to begin a political process for reaching consensus on the need for coordinated budgetary and fiscal policy within a mediumterm framework jointly worked out by the three tiers o f government, and on the central role o f the federal government in the process. Although such an agreement will be largely informal and not backed by law, the inclusion o f sub-national governments in the process o f setting national agenda should engender a sense o f ownership and instill discipline into the process. This forum could be used to discuss and agree appropriate incentives to promote commitment to prudent fiscal management at all levels o f government. Nigeria States Finances Study 75 ADril2003 Nigeria States Finances Study 3.43 The National Economic Council (NEC) i s properly positioned to assume important functions as fiscal policy coordinating institution, and should do so. The overall macroeconomic agenda, economic targets and the implications for the fiscal behaviour o f individual federating units should be discussed and agreed to and implemented through this mechanism. A technical and professional agency should be jointly set up by the three levels o f government to take responsibility for the technical work to inform and underpinrecommendations for the discussion and agreement by the NEC. This technical body should also regularly obtain and widelypublisheconomic and fiscal performance data and indicators from all the governments o f the federation to help improve accountability and transparency o f govemment at all levels o f government. 3-44. Increasing States' Revenue Autonomy: Greater reliance on states' own revenues will give them more fiscal policy levers to help them adjust to adverse shocks and hence reduce expectations o f bail out from federal level. In addition, it will help increase state governments' accountability to tax payers and will over time, make it more difficult for them to engage in unsustainable spending. The current assignment o f revenues i s largely consistent with practice in other federations. Moreover, given Nigeria's considerable dependence on oil, it can be expected that states will continue to rely significantly on resources from the center for the foreseeable future. Nevertheless some steps could help to enhance states' revenueautonomy and control: 3.45 Strengthen tax administration in states. Evidence shows that improved collection effort could yield significantly more on taxes currently administered by states. Most states recognize the importance o f strengthening tax administration to enhance their revenue autonomy. Several have in the past" contracted out revenue collection to tax consultants with overall poor results and without improvement incapacity o f government agencies. More recently, Lagos State has had considerable success with tax consultants performing a redefined role: providing support to government tax agencies in areas such as training, computerization, identification and enumeration o f revenue bases etc., and excluding direct involvement intax assessment and collection. This, coupled with Lagos State's tax computerization effort and enforcement o f penalties for tax cheating has contributed to significant increase in the state's internally generated revenues between from N15 billion in 2001, to N22 billion in 2002. Most states face identical areas o f difficulty and could focus their efforts inthese areas. 3.46 In some of Nigeria's newer states (Ebonyi, Zamfara for example), revenue agencies have evolved very slowly and are only recently being fully established. Manpower and capacity i s not surprisingly extremely weak. Training and building manpower will need to be a key element. In this regard, the federal govemment could play a useful role by promoting a coordinated approach to training and formal certification o f tax officials. To this end, legislation could be enacted to empower the Joint Tax Board to: (i) establish minimum standards o f qualification for tax officials at both the state and local government levels, working with the Chartered Institute for 91Duringthe militaryera Nigeria States Finances Studv 76 April 2003 Niperia States Finances Studv Taxation; (ii) up an institute for tax administration and training - the Nigerian .Tax set Training School- to enhance the training o f tax officials for all levels o f government, federal, state and local government; (iii)stipulate a time frame when the minimum standards, including the appointment for qualified professional and certified tax administrators, will take effect; and (iv) establish a uniform code o f conduct for public revenueofficials and mechanisms for their enforcement. 3.47 Give greater flexibility to states to control rates on taxes currently assigned to them. Currently uniform rates are applied on states taxes. States could be given greater flexibility in determining rates on the taxes they levy. But this will have to be done in a manner that minimizes the possibility for tax competition betweenstates. One suggestion that has beenmade i s to allow states to set rates within bands with a floor and a ceiling92. One option to devolve responsibility for taxes with minimum likelihood for chaotic tax competition i s to let states piggyback a rate, up to a certain level on an existing federal tax-like personal income or VAT. On the same VAT base as the federal tax, states could piggy back a V A T or a sales tax. Within the fiscal coordination mechanism proposed above, the federal government and states could discuss possible options and agree a feasible set o f changes that will provide this increased control to states while preservingother objectives. 3.48 Increasing States' Expenditure Autonomy and Control There are at least three important areas for action by both federal government and states that will help give states inNigeria greater control over their expenditures: 3.49 End practice of unified civil service pay and pension payments across the three tiers of government. This will not be easy to achieve and will call for considerable dialogue with labour unions. But the federal government could play a key role inmaking a strong case for this and signaling to labour unions and state governments alike, that it will not bail out states that adopt federal salary scales and run into fiscal difficulties. In recent announcement o f a 12.5 percent pay increase for federal civil servants; federal government has stated clearly publicly that this increase applies only to federal government civil servants. State governments can also facilitate this through frank dialogue with their civil service unions on their fiscal capacity. They can also initiate civil service pay reforms that place greater emphasis on performance and merit in determiningstaffpay levels. Reform pensions system to end complete reliance on current government resources alone. It i s fully evident that current practice o f complete reliance on current government resources alone to fund public pensions i s fiscally unsustainable. Federal government has already initiated reform o f pensions to move towards a contributory system. States also need to move in this direction and undertake analysis to arrive at details of programs in their own states that would be fiscally sustainable and meet other important objectives. Given weak capacity at state level, federal government could offer support to interested states indefiningdetails ofreforms that are appropriate for theirparticularcontext. 92IMF2001, Options for Reforming IntergovernmentalFiscalRelations Niperia States Finances Study 77 April 2003 Nigeria States Finances Study a End federally driven initiatives in areas that are the primary responsibility of states. The Federal government needs to allow states to lead more inthese areas inorder to ensure that states' control over their spendingpriorities andbudget size i s not compromised. The federal government could still play a role in achieving key goals in areas such as primary education and basic health by agreeing with states on some key national targets and promoting their achievement in states through conditional grants from federal government's own resources that are tied to states' performance in these areas. This would be preferable to the current practice o f federal government trying to implement its own programs in these areas alongside state activities. a Strengthening theframework for borrowing by states. The Federal Government could begin work with states to agree a framework for borrowing that provides effective rules to complement functioning o f market discipline in promoting prudent borrowing and debt management in states. But strict and detailed administrative controls by the federal government on sub national borrowing and debt, i s likely to be strongly resisted by states given the history o f mistrust o f the center. Given the large number o f states, this will probably also not be a feasible or efficient way to work, since it could expand the federal government bureaucracy and perhaps lead to increased corruption as states lobby to get their borrowing requests approved. A fully cooperative approach also has the downside o f potentially leading to protracted negotiations between the federal government and states, which could end up with "political solutions" far removed from objective economic criteria. Thus a rules-based approach defined with some degree o f cooperation with states will perhaps have greater chance o f success in Nigeria's current context. 3.50 A framework that seeks to build the foundations o f market discipline, complemented by strong rules for now, will require a few critical actions to ensure success: a An end to the practice o f servicing state govemment debts through deductions at source from their statutory allocations by the federal government, and a review o f the policy o f federal govemment guarantees for states' extemal borrowing. a Divestiture out o f commercial banks by states and strengthening o f CBN monitoring o f states' borrowing from domestic banking system. 3.51 Adoption o f rules and regulations on how fiscal crises in states will be handled. Public bankruptcy laws which signal clearly that states will not be bailed out i s important inthis regard. This should include option for fiscal pact between federal and the state that provides some fiscal relief-Le. debt rescheduling and work out--to states and ensure that critical social services continue to be delivered. The key thing will be to get adequate conditionality to allow states return to a sustainable fiscal path and ensure that the federal govemment retains leverage to keep states reforming. Nigeria States Finances Study 78 April 2003 Nigeria States Finances Study 3.52 Major effort by federal government and states to improve the quality and availability o f fiscal data. Inthis regard, the following steps are important: o Completion of ongoing work by DMO and by the Federal Ministry of Finance to determine the current domestic debt obligations o f individual states. D M O could assist interested states in carrying out analysis o f the sustainability o f their debt profiles. This information should be put inthe public domain and made available to all interested parties; o Completion o f all outstanding states' final fiscal accounts. Incentive should be provided for regular reporting o f such data in line with, constitutional requirements. One option could be to link the payment o f statutory allocations, to states' compliance with these constitutional provisions. This will work only if other tiers o f government are also subjected to this rule. But considerable effort will still be needed in the context o fthe fiscal coordinationmechanism to build support for this o To ensure comparability of fiscal data across states, the federal Budget Office needs to work with states to agree a common classification o f revenues and expenditures that would be adopted by all tiers. This should also include guidelines on budget coverage. Ongoing work by the Federal Accountant General and State Accountant Generals on adopting common accounting standards should also be concluded and implemented 3.53 Encouraging States to reform. As mentioned above, it i s important first that federal government set a good example for states by being fiscally disciplined itself. Federal government could explore other ways to encourage states to sign off onto and implement some o f the actions proposed here. One important area would be that o f technical assistance to states in defining and implementing their own reforms, and allowing states to closely observe and learn from ongoing reform efforts at the federal level. Federal Government could also help publicize and showcase good performing states should be widely and regularly showcased to encourage other states to seek to improve performance. Nigeria States Finances Study 79 April 2003 Nigeria States Finances Study Chapter4. State BudgetandFinancialManagementProcessesandInstitutions A. Introduction 4.01 Several o f the fiscal difficulties discussed in Chapters 2 and 3, stem from or are aggravated by weaknesses in states' financial management processes and institutions. During years of military rule, established budget and financial management processes were largely ignored and institutions were severely weakened at all levels o f government, and especially at state and local government levels. Processes also failed to evolve to keep up with international practice and the realities facing states. Efforts to promote fiscal discipline in states and ensure success o f Nigeria's move towards greater fiscal decentralization will require considerable effort to returnto "due process", to modernize processes and institutions and to rebuild capacity to manage budgets and finances in states. These process and institutional changes must complement reforms described in earlier chapters to provide the broad framework for fiscal prudence and effective use o f public resources in Nigerian states. This chapter reviews budget and financial management practices inNigerian states, identifies areas o f weaknesses and proposes key elements o f these process and institutional reforms. B. InstitutionalArrangementsfor BudgetandFinancialManagementinStates 4.02 Institutions o f budgeting and financial management at the state level in Nigeria closely mirror those at the federal level, by statutory design, because they have evolved from common roots, and are operated by officials belonging to a similar bureaucratic culture. All states operate dual budgets with separate current and capital estimates, in line item format. Once the accompanying appropriation bill i s approved by the legislature, the way i s clear statutorily for spending to begin, with funding approval (for current spending) lapsing at the end o f the year. The chart o f accounts i s common across states as are the instruments to control spending within legally authorized limits, such as finance warrants and authorities to incur expenditure. All states have a single consolidated fund into which all revenues are paid and out o f which spending occurs. The Development Fund, which supports capital budget spending, forms part o f the Consolidated Fund. As with the Federal Government, states are constitutionally required to produce annual appropriation accounts and financial statements within about six months o f the end o f the financial year, leaving a further three months for external auditing. As discussed inearlier chapters, this requirementi s usually not met. 4.03 This uniformity, which, in principle i s useful for the coordination o f policies and comparability, i s protected by the insertion o f similar clauses in the Constitution for the management o f federal and states' finances. Uniformity should also aid fiscal reporting by states to the Federal Government, so that aggregate spending can be tracked on a consolidated basis for macroeconomic management. Although states have separate organic finance laws, they are modeled along the same lines as the Federal Finance (Control and Management) Act of 1958 and all originate from colonial times. Most states have issued their own Financial Instructions modeled along the lines o f the Nigeria States FinancesStudy 80 April 2003 Nigeria States Finances Study Financial Regulations issued by the Federal Government. Budget preparation guidelines and circulars issued by the budget department and accounting instructions emanating fi-om the Accountant-General show a little more diversity, but essentially they are all variations around a common theme. There are informal mechanisms, such as periodic meetings o f states' and federal accountants-general, which reinforce commonality. Public procurement rules, likewise, are similar across states (though the commitment to implementthemto the letter may vary across states). Box: 4.1 DualBudgets The distinctive feature o f a dual budget, which can be found in single or separate volumes, i s that the rules for preparing and operating the capital (or investment or development) budget are different from the current budget. Typically guidelines are issued, with separate current and capital ceilings for departments, and the latter cannot trade current spending for more investment spending or vice-versa. Customarily capital budgets finance the building o f social or physical infrastructure, often inthe format o f projects, current budgets are about maintaining and operating them. Dual budgets date back to a time when the development paradigm envisaged the role o f the state expanding, and for this a budget system, which facilitated the creation o f public assets, was deemed appropriate. Increasingly it i s argued that dual budgets contain the seeds o f their own eventual collapse, since they systematically under fund maintenance o f assets andrunning o f services. 4.04 Not unexpectedly, the organizational machinery o f budgeting and financial management i s similar across states. A key player i s the finance ministry, headed in states by the Commissioner for Finance, which traditionally has had the responsibility o f preparing and monitoring budgets through a Budget Department, though in some states (e.g., Cross River) the Budget Department has been transferred to the Office o f the Governor93. Most stateshave an institutional counterpart o f the FGN's National Planning Commission, either aplanning unit or, more simply, a planningde~artment~~. 4.05 All states have an Accountant-General, a critical figure in the management of state finances, usually under the Commissioner for Finance, but in practice enjoying considerable independentauthority. And all states have an Auditor-General, responsible for conducting external audits, and protected by the Constitution from arbitrary removal from office. 4.06 With the returnto democracy, legislatures have once again become active, and a structure o f specialist committees has begunto form, for example, to examine the budget estimates prior to approval or after the financial year has ended, to scrutinize the accounts on the basis o fthe Auditor-General's report. 4.07 How regulations and instructions are interpreted and implemented by states varies, but in general terms, there i s the same gap between the formal and the informal 93 Some states such as Ondo and Lagos, have created a Ministry o f Budget and Planning, headed by a cabinet minister. 94 This may be called simply the State Planning Commission, or carry a title like Imo's State Planning and Economic Development Commission (ISPEDC) - the hnction i s the same - an apex-planning agency. Nigeria States FinancesStudy 81 April 2003 Nigeria States Finances Study rules across states and tiers o f government. Both states and the Federal Government are emerging from a period inwhich rules were flouted by military rulers, and, reportedly, by officials as well. As at the federal level, efforts are being made in states to reinstate "due process" and restore respect for long established rules for the proper conduct o f government business. But informal practices once ingrained are hard to eliminate and there i s still widespread incidence o f contravening bureaucratic process, particularly in areas such as public procurement. The existing legal framework for public financial management needs modernization, but a greater need i s for existing rules and processes, which are fundamentally sound, to be followed. 4.08 Notwithstanding this commonality, there are two areas where the institutional framework seems to operate in practice differently in state governments. The first i s the role o f the legislature in budgeting. In recent years a repeated feature o f the annual budget cycle at the Federal level has been the loggerheads between the executive and the legislature over the size o f the budget, and the composition o f the Capital Budget". This seems to be absent at the state level, where there has been much less conflict. While governors seem to have been willing to modify their proposed budgets to accommodate legislators' desires, the relationship has been more harmonious, and a cooperative spirit seems to prevail.96 4.09 The second distinctive feature o f budgeting and financial management at the state level i s the greater engagement o f governors inbudget preparation and implementation in a way not seen at the federal level. States' budgets bear a stronger imprint o f the chief executive's hand, the consequence o f more deliberate efforts to shape the budget to the political priorities o f the leadership. Possibly, this reflects the fact that states more than the Federal Government, deliver services o f more direct interest to voters. Governors are also more "hands on" during the implementation o f the annual budget, largely, it seems, because the necessity o f a cash budget requires daily decisions on who can and cannot be paid, which have implications that must be politically managed. 4.10 States face constraints in terms o f qualified technical and professional staff. Competent staff, over the years, has left because o f age, for better paying jobs in the private sector, or because they were arbitrarily dismissed under the military government. At the same time, promotion o f unqualified staff occurred in a similar way. Staff who 95Unlike inmost other presidential systems in Sub Saharan Africa, the legislature at both federal and state levels inNigeria has powers to change the proposed budget, unconstrainedby any requirement for fiscal neutrality. In2000 the National Assembly sought to increase the Capital Budget by over Naira 100billion, which was strongly resistedby the President. In2002, a dispute arose between the executive and the Legislature over a N250 billion overall increase o f the budget by the Legislature, which the President signedbut refused to implement fully; the dispute almost ledto the impeachment o fthe President. 96 The states studies undertaken as part o f this PER present a varied picture, though with little confrontation. InEbonyi there is. close cooperation between the executive and the legislature, which i s consulted on the budget. InCross River the state house o f assembly may increase or decrease the estimates, but never excessively, similarly inImo State. InAkwa Ibomthe assembly amends the budget, sometimes as a result o fbehind the scenes lobbying by spending departments. InKwara there i s no record o f the legislature changing the budget, perhaps because there is consultation with the executive during budget preparation. InOyo the assembly seeks to ensure that projects are spread evenly throughout the state. Nigeria States Finances Study 82 April 2003 Nigeria States Finances Study remained, lost skills through the failure o f governments to invest in training, the growth of moonlighting to supplement low civil service incomes, and general demoralization. Governors in progressive states have tried to fill the gap by bringing in former private sector associates under contract. Even so, the management level remains very shallow, and a major challenge lies ahead for rebuilding capacity to make and implement responsive budgets and control and account for expenditures. Box: 4.2 - Role of the Legislaturein Budgeting Recent Nigerian Constitutions allow the legislature to amend a bill submitted by the executive, without the provision once found which exempted "money bills" - such as the appropriation bill that secure money for the annual budget. In this way Nigeria switched from Commonwealth to U S practice, and eschewed the safeguard found in some other countries with presidential systems o f government o f allowing only budget neutral changes (any amendment proposing an increase in spending in one area must offer a matching reduction in another). Fortunately, state executives and legislatures have generally avoided the prolonged confrontation between the President and the National Assembly, which has made national budget so chaotic in the past three years. Nevertheless the potential for disruptive confrontation exists, and legislative leaders have a strategic trade-off to make. This is whether, given the limited technical capacity ofparliaments, legislators should focus their energies on changing the executive's budget or on ensuring that it i s executed efficiently and effectively. The more the budget i s changed by the legislature, the less it becomes the executive's budget, even though the latter must implement it. In a country where there are persistent difficulties in implementing the budget as passed, it i s obvious that the pay-off to a legislator's constituency from improving implementation o f the executive's budget will be greater than trying to change a budget that may never be implemented. Inthis way, legislators would be doing a greater service to their constituents. C. Budget Preparation 4.11 The timetable for annual budgeting at the states level is similar to that o f the Federal Government. Around the middle of the preceding financial year, state budget departments and planning agencies send out call circulars containing guidelines and formats to spending departments. Once bids have been received, they are reviewed, trimmed down, and the draft estimates are submitted to the Governor through the state executive council. They are .then sent to the State House of Assembly, as an accompaniment to the Appropriation Bill. How well do states' budget processes measure against the three features of a good budget system: (i) consistency between aggregate spending and available resources, (ii) consistence between allocations and government policy and program priorities, and, (iii) efficient and effective use o f resources? 4.12 Consistency between aggregate spending and available resources: The discussion in previous chapters suggests that increasingly states are embarking o n aggregate expenditure levels that are not consistent with their currently available and likely future resource envelopes, thus getting deeper into debt. This reflects both unrealistic revenue estimates as well as difficulties in staying within budgeted expenditure levels. Nigeria States Finances Study 83 April 2003 Nigeria States Finances Study 4.13 As a general rule, guidance used to be given to the states bythe National Planning Commission on the likely magnitude o f Federation Account transfers they may expect in the coming year. The NPC will also give its forecast on how the economy will grow, so that states may be able to estimate their internally generated revenues. Once they receive this guidance, states will use the information to determine the size o f next year's budget, and the division between current and capital components. For most states in the study expenditures increased 3-4 times between 1997 and 2000, initially by expanding the capital budget, and in 1999 and 2000 on a wage bill with much higher salaries and allowances. 4.14 Although the unpredictability o f revenue flows plays havoc with budget preparation and execution, there i s no attempt made to smooth spending over the oil price cycle. When national oil revenues are rising, spending increases, through annual and supplementary budgets, to absorb the available resources and often times even beyond. When a downturn occurs, states revert to cash budgeting-leaving the existing budget in place, but managing the release o f funds so that only the highest political priorities are hnded. But with budgets in place, commitments are not scaled back and arrears in the form o f unpaid salary and pension obligations and contractor debts accumulate in the system. Cash budgeting has been the dominant mode o f budgeting in the past two years, both at the federal and state levels in Nigeria.97 As explained in chapter two, several states have sought to cover shortfalls in expected revenues by borrowing from local banks. The current situation i s highly unsatisfactory, and states need to find a better mechanism for managing fluctuations inthe transfers from the Federation Account. 4.15 AllocatingResourcesAcross CompetingNeeds: This is the secondrequirement o f a well performing budget system. Ifbudgets are to be responsive to political priorities, they need to be able to fund the policies, programs and projects that are important to the elected government. There i s huge inertia in states' current budget, where the bulk o f money i s tied to the funding o f public servants' salaries and allowances and working in organizational structures that are highly resistant to change. Capital budgets typically consist o f a large number o f unscreened projects, appearing year after year, seldom funded sufficiently for completion, thereby denying room for new projects. 4.16 Ifcurrent budget processes seem ineluctablyincrementaland incapable of change other than slowly, this i s in part because both officials and the political leadership think primarily in project rather than program terms. Development, as it were, i s to be achieved through the implementation o f projects such as new schools, clinics, water supplies or agricultural schemes, rather than improvements in the delivery o f services through both existing and new public facilities. This results in a compartmentalization o f the budget, with the current budget allowed to repeat each year, with little demand for 97Cashbudgeting, widely seen inSub-Saharan Africa, is a legitimate tool for managing unexpected short term dips inrevenues within the budget year to keep within fiscal targets, but a very badpractice over the longer haul. With cash budgeting the budget as approved by the legislature simplybecomes the legal upper limit for spending, with the realbudget o fwhat gets spent determinedbythe executive. Ifthis persists, the estimates presented at the beginning o f the year become meaningless, and democratic accountability suffers. Properly, if shortfalls look like continuing, the executive should return to the legislature with a new budget for the rest o f the year, revised downwards. Nigeria States Finances Study 84 ADril2003 Nigeria States Finances Studv fundamental re-examination o f the mandates, organizational structures, staffing levels, and supporting expenditures o f departments and agencies, the latter heavily constrained so as to provide sufficient funds for as large a capitalbudget as possible. Needless to say, just as new projects do not get completed on time, existing services fail to improve, partly because o f deep seated incentive problems, but also because in most states non-salary operating expenses remain seriously under funded. 4.17 EfficiencyandEffectiveness: The third attribute o f a well performing budget system i s to use inputs efficiently and effectively in achieving desired outputs and outcomes. On the evidence available, this i s not achieved in many states. As noted already, this i s in large measure the result o f over committed budgets, insufficient allocations to non-salary running costs, and a consequent cash budgeting system which reduces predictability and further reduces running cost allocations. Most o f all it i s the consequence o f an excessive focus on the capital budget and consequent neglect o f the current budget and the efficient and effective provision o f existing services. Projects, which are slow to be completed, do not deliver timely benefits. Departments and agencies which are inadequately supplied with non-wage running costs funding cannot deliver services effectively, and reinforce the reputation o f the public service for poor performance. The surest road to improving the efficiency and effectiveness o f budgets lies with addressing the constraints outlined earlier, namely greater predictability in the resourcing o f budgets overall, and addressing the allocative inefficiency o f most states budgets. Until solutions are found to these problems, inputs will continue to be inefficiently used, on both the current and capital budget sides. D. BudgetImplementation 4.18 Since states are subject to similar rules o f budget implementation as the FGN, formal processes are common, with an Appropriation Act passed by the state house o f assembly, followed by the signature o f finance warrants and the release o f funds to spending departments. For the first year after transition, these processes were relatively straightfonvard with rapidly expanding revenues. More recently, some softening in world oil markets and wage increases have changed budget execution for the worse 4.19 The consequence in budget management terms was cash budgeting, in effect, the replacement o f the budget as passed by the state house o f assembly with the budget as hnded by cash releases. The impact, as can be expected, varied across states. Those with significant oil derivation account revenues were able to broadly keep their budgets on course. Others, especially those with large wage bills, were thrown into fiscal stress. 4.20 One result was an intensification o f the governor's involvement, with his key lieutenants, in budget implementation, meeting with the Commissioner for Finance, the Accountant-General and the Budget Director almost daily to consider the state's cash position and determine how cash should be allocated, whether to debt service, public service wages or contractors' payments. Thus the cash budget became the real budget, and the statutorily approved budget i s simply the framework within which budget decisions are made and remade. Nigeria States FinancesStudy 85 April 2003 Nigeria States Finances Study Box. 4.3: Changing the Role of the Finance Ministry Finance ministries are critical components o f the inner core o f government. Inaddition to economic policy and regulating financial institutions, they have a vital task ensuring a state's resources are efficiently generated and effectively spent. Since the bulk o f states' revenues are transfers from the Federation Account, supervising spending will always be the dominant concern o f finance ministries. Inmost statesinNigeria, the finance ministryhasbecome excessively engagedinmicro-management. This shows up inthe detailed scrutiny o fbudget submissions, inthe fielding o f requests for additional budget provision through the year, and the day to day decisions on which the release o f funds that have to be made under a cashbudgeting system. It is a life o f constant adversity with spending departments, juggling available resources with competing demands for payments. Commissioners for Finance and their senior officials (including the Accountant-General) have little opportunity to stand back and take a more strategic view o f their duties. States need to move to a positioninwhich the finance ministrydisengages from the minutiae o f spending approvals and focuses its energies on the following larger tasks: Developing and operating a MTEFwithin which annual budgets are made and ensuring that the latter are sustainable and funding predictable. Allocating sector envelopes to spending departments and agencies inkeeping with the strategic priorities o f the government. Ensuringthat any newpolicies, programs or projects are consistent with the sector envelope, and if their costs exceed them, a collective decision i s taken on the reallocation o fresources. 0 Setting the rules for the proper management of public revenues and expenditures, making certain that standards are maintained, and that accounting officers are sanctioned ifthere i s slippage, and ensuring overall that public assets and maintained, liabilities managed, and the public's interest in good financial management is served. Such a transition means a major cultural change on all sides. A good illustration o f this was given by Kuben Naidoo o f the National Treasury o f South Africa at the NPCiWBI workshop on public expenditure management inKaduna, inApril 2002. Under the old regime the SouthAfrican Police (SAP) was accustomed to having its requests for additional funds favorably treated by the finance ministry (something it could confidently expect under apartheid). With the inaugurationo fthat country's MTEF, the rules changed, but the SAP still came to the National Treasury seeking additional funding. It did so o n the grounds that after acquiring a large fleet o f new vehicles to fight crime, their allocation for fuel had runout after the first quarter o f the financial year. That, said the National Treasury, is a management, not a budget problem. Go back and re-order your spending priorities so that existing budget resources are deployed to fight crime ina more effective way. The National Treasury was able to say this because the Treasury had delegated sector budgets to departments and agencies, consistent with government strategic priorities, within the hardbudget constraint o fthe MTEF. Nigeria States Finances Study 86 April 2003 Nigeria States Finances Study 4.21 Internal Controls. As already mentioned, states operate a similar system of expenditure control to the Federal Government. The basic mechanisms o f control are sound, the main problem i s observance, lack o f respect and deliberate subversion o f control systembecame all too common under the military regime, and the challenge i s to restore respect for the formal rules and processes o f expenditure control. In each state, the Ministry o f Finance has overall responsibility for maintaining adequate intemal control in government. The Accountant-General who establishes the procedures for government financial transactions, prepares and issues financial instructions and memos, and posts accountants and intemal auditors to various spendingdepartments and agencies largely performs this responsibility. The Accountant-General also maintains procedures for ensuringthe completeness and accuracy o f government records. Within each ministry, the permanent secretary who is the accounting officer has responsibility for ensuring adequate internal control arrangements. The day-to-day performance o fthis responsibility i s often delegated to the Director o f Administration and Finance in the ministry. Many o f these directors do not have finance or accounting backgrounds. Consequently, they are unable to offer proper guidance in the conduct o f the financial affairs o f government in the ministries, and their abilities to enforce adherence to rules and regulations are often impaired. In addition, most state internal auditors are used not to verify that control systems are operating, but on the much more mundane task o f prepayment vouching and verification o f supply and delivery. 4.22 Procurement. An undoubtedly key tool for ensuring efficient and economic use o f resources i s the procurement process. Nigeria's procurement rules and institutions pre-date independence although there have been periodic supplementation and amendments inthe Financial Instructions. Its major problem i s not with the rulesper se, but with the way in which they are implemented. Inthe states, the public procurement process i s guidedby rules enshrined inthe Financial Regulations supplementedwith and updated by occasional circulars or memos. As noted earlier, the basic rules set out inthe Regulations are the same throughout the country but practices sometimes vary. The regulations define the tendering process and tender board level for different levels o f expenditures. Normally, all contracts have to be formally tendered for - the exceptions are procurement o f office consumables below the minimumtender threshold. 4.23 The formal procurement framework i s reasonably robust, but there are several weaknesses in practices. For example, there i s often no system o f competitive bidding through open tenders in the award o f contracts. This i s coupled with a high incidence o f political/personal considerations in the award o f contracts. Inmany cases the tendering process i s somehow selective contrary to the rules. For example, often tenders are considered from only one or a few selected contractors. Rarely are officials specifically designated as procurement officers, thereby preventing professionalization o f public procurement. Inmany states, the governor i s highlyinvolved inthe procurement process, 4.24 One issue to face i s whether govemors are prepared to give up detailed control over the actual tendering process, and have this carried out neutrally by well-trained officials operating through a ministerial tender board system. The picture gained so far i s Nigeria States FinancesStudv 87 April 2003 Nigeria States Finances Study that governors take a direct interest inprocurement and are reluctant to surrender control inview of the risk that competent firms may not be chosen that way. A large share of the tendering states have undertaken since independence has been selective tendering, based on bids from a small handful o f firms, a systemwhich all too easily opens itself to abuse. 4.25 Accountingand FinancialReporting. Ineach state, the Accountant-General is responsible for maintaining appropriate accounting records for all financial transactions o f the government and preparing annual financial statements. To perform these functions effectively, appropriate accounting records, including cashbooks and vote ledgers, are maintained in various government departments and agencies, and regular returns are made to the Accountant-General. However, in some government departments and agencies, these records are poorly kept and returns are made irregularly to the Accountant-General. Coupled with weak capacity in many Accountant-General Offices and the neglect o f financial accountability during decades o f military rule, the result (as noted in previous chapters) i s several years o f arrears in annual financial reporting in many states. The arrears o f annual financial statements have grave implications for the important accountability roles o f the Auditor-General and the Legislative arm o f government. 4.26 States accounts have always been operated based on a common chart o f accounts, shared also with the FGN, since this facilitates fiscal reporting and avoids the proliferation o f multiple system designs. Whilst a degree o f refinementmay be inorder, the main constraint to better performance i s not the system itself, but insufficient investment in systems modernization, which over the years, has eroded accounting skills and the current dearth o f qualified accounting staff inthe government. 4.27 ExternalAudit. Most states auditors ingeneral have a limitedimpact, and do not normally publishtheir reports untilmuch time has passed since the ending o f the year production o f appropriation accounts and financial statement^^^. Moreover, a lot o f audit they are scrutinizing, as muchbecausethe Accountant-General i s inturn late inthe worthy spendingtakes place unnoticed, and what work i s performed tends to focus inthe minutiae o fpublic spending. The vouching audit approach usedby the auditors-general i s generally inefficient and ineffective. Inreality the auditor-general authority has been considerably eroded over the years and many offices have lost experienced staff to the private sector, where they can earn much more money. At the federal level, the law governing the powers and functions o fthe auditor-general inNigeria i s separate from the organic finance act. However, while the constitution provides for an independentauditor general, inpractice states do not have a separate audit act99. 98 InEbonyi the Accountant-General i s three years late producing accounts. Imohas no accounts for the period 1997 to 2000. InAkwa Ibomthe final accounts for 1996were completed only in2001, and inOyo the latest audit reports are for the years 1997 and 1998. 99 The Audit Act of 1958 applies across tiers o f government, but most o f its provisions have beenre- enactedunder the 1999 Constitution Nieeria States FinancesStudy 88 A d 2003 Nigeria States Finances Study 4.28 Monitoring and Evaluation. In a well functioning public expenditure management system, due attention i s paid to monitoring and evaluation. This can be done by a special institution or made part o f the normal routines of a planningagency or related body. InNigeria at both federal and states levels, monitoring and evaluation i s principally the responsibility of the planning commission. In most states planning commissions or departments try to do this, but are hampered by lack of resources, principally vehicles and travel allowances, to visit projects. Furthermore, to the extent that any monitoring takes place, the focus i s invariably on the capital budget and not the current. As a result monitoring data, such that exists, i s much more concemed with projects, with little attention paid to the totality o f service provision. Box 4.3: Developinga MediumTerm ExpenditureFramework(MTEF) There are many reasons why progressive states inNigeria should develop a mediumterm expenditure framework (MTEF) to guide annualbudget making and policy decisions generally. An annualtime frame is too short to guide the process o ffunctional reviews that states need ifthey are to focus scarce resources on policy priorities. Functional reviews which lead to redundancies and separation payments have large fiscal implications, which must be analyzed and assessed as to their affordability. Escape from the annual cash budget crisis and make the funding o f the budget more predictable. Better management o f the variability o f FederationAccount transfers arising from fluctuations innational oil revenues. As a guide to sustainable debt management. More disciplined policy making by confronting the full costs o f implementation within a hardbudget constraint. Closer integration o f current and capital budgets and encouragement o f departments to routinely consider the trade-offs between these types o f spending. Inits simplestformaMTEFentails a top-downprocess o fdetermining a sustainable pathfor aggregate revenues and expenditures over a mediumterm period (such as 1 + 3years), and its division into sector spending envelopes for the maindepartments and agencies. Bottom-up, the latter make trade-offs, assisted by functional reviews, on the policies, programs and projects that can be fittedinto the MTEF. K e y operational rules are that the sector envelopes combine current and capital spending, that the framework has the full backing o f the governor and his commissioners, that departments take responsibility for implementing their programs within available resources, and that any new spendingproposals must be considered against the headroom for additional spending infuture years. The MTEF is rolled over each year, and forms the basis for annual budget preparation. Any unexpected increase inrevenues does not automatically lead to higher spending, but is sterilized by the Accountant-General, and available for financing future revenue shortfalls. E. ReformingStateBudget and FinancialManagement Processes. 4.29 Process and institutional strengthening i s often a long-term endeavour, requiring sustained and committed effort. But states need to beginnow, first by defining a strategy and related action plan that addresses the particular weaknesses that they face. While Niceria States Finances Study 89 April 2003 Nigeria States Finances Study some o f the details o f strategies are likely to differ across states, there are clearly some core elements that will be similar, giventhe common themes described above. 4.30. A fundamental first step is to beginto returnto "due process" and observance of the rule o f law inbudget and financial management. State authorities (both executive and legislature) must begin to observe and enforce existing constitutional requirements for budget and financial management and reporting. Federal Government can lead by example and also explore incentives to promote regard for due process at state level including through helping to publicize good budget and financial management practices amongst states as proposed in chapter three. While a start can be made now, given the ingrained tradition o f flagrant disregard for rules and regulations, appreciable improvements can only be expected over time, as other elements o f the democratic processes strengthen: in particular as stakeholders outside o f government exert greater pressure for better budget and financial management. A related fundamental step as discussed in chapter 2, i s to begin to build government credibility in fiscal management and lay the foundations for fiscal discipline though adoption o f a fiscal rule that commits states governments to certain standards in the conduct o f their fiscal policy. Buildinga strong tradition o f observance o f rules and regulations i s important but rules regulations and processes themselves will also needto evolve overtime. Key elements could include the following. Move TowardsA Medium TermApproach to Budget and Fiscal Management 4.31 Over the long term, states need to evolve budget systems and processes that are set in a medium term framework. A medium term expenditure framework (MTEF), would address states' increasing vulnerability to oil price fluctuations by setting a middle course for spending within which annual budgets could be framed and implemented without recourse to cash budgeting. In years o f revenue buoyancy, cash reserves would be built up in the Consolidated Fund(or a specially created sub-division of it, managed by the Accountant-General) - or debt repaid, and drawn down in years o f revenue shortfall. This approach will be central to addressing weaknesses on the three criteria for good functioning budget systems. In terms o f determining the size o f the budget, the most critical part o f the MTEF would be the medium term fiscal framework (MTFF), which would be established by taking a view on the sustainable level of revenue flows from all sources, and also the absorptive capacity o f departments to spend wisely and well.''' In support of this, as explained in Chapter 2, states would need to develop a clearer policy on borrowing. conducted as part o f a well worked out cash planning and management system, in support o f budgets, which are constructed within a MTEF. The first step for this to happen is better information on existing debt, and greater looThe country in Sub Saharan Africa, which has most successfully managed the ups and downs o f mineral revenues, i s Botswana, which over a period o f three decades has successfully converted diamond royalties into social capital and physical infrastructure, thereby laying the basis for an increasingly diversified economy. Although stabilization funds were created soon after mineral revenues began to flow, the existence from the beginning of a MTEF was much more decisive in ensuring that spending was not revenue driven, but followed a pre-determined path consistent with fiscal targets and sector spending priorities. Nigeria States FinancesStudy 90 April 2003 Nigeria States Finances Study transparency in budgets and annual financial statements on financing items and contractual liabilities respectively"'. 4.32 An MTEF will also help improve the allocative efficiency o fbudgetsby allowing states to get behind the annual confrontation between spending departments and the finance ministry on what new spending can be admitted into current and capital budgets, to review in a more fundamental way the functions, organizational structures and staffing o f departments and agencies. Only ifthis i s done can a more integrated view on budgets be taken, thereby creating headroom over the mediumterm for more responsive budgets. And if staff reductions are needed (many state governments are grossly over staffed relative to both needs and payroll affordability), the retrenchment costs can be estimated and better planned for within a MTEF.lo2 The greater predictability provided by the MTEF and the potential for improved allocative efficiency will also be critical for achieving efficiency and effectiveness objectives. Enhance Accountability and Transparency through Modern Finance and Procurement Laws 4.33. One area that especially needs sharpening is the accountability and responsibility o f heads o f departments and agencies, as "accounting officers" for the proper stewardship o f the budget funds at their disposal. This will be important for achieving needed strengthening o f internal controls. In turn, finance commissioners need to give greater importance to the overall stewardship role that they have in respect o f public finances across the entiretyo f government. At the federal level, efforts are underway, to revise the country's organic finance act. If best practice from other countries i s used as a guide, there i s considerable scope for better defining these accountabilities, and inparticular the roles o f ministedcommissioners and senior officials, respe~tively.'~~Just as the federal level i s reviewing the law, states should use the opportunity to put in place for the first time an organic finance law inrespect o f their own governments. There is little point in 36 states each developing their own laws; rather a group could be formed to adapt both federal level drafts together with laws passed inrecent years inother advanced countries. lo' The PER state studies which were undertaken as part o fthis report, note that debt management inKebbi i s weak, internal debt sharply increased inBauchi, and that the debt position inImo seems to be worsening, but there are insufficient figures to confirm this, and pensions and gratuities are in arrears. Indeed the evidence i s that wage arrears are a big issue in many states. Workers have been on strike in Anambara states for several months over unpaid wages. Enugu State consistently owes three and five months salaries to civil servants and teachers respectively. The costs o f equitably separating redundant staff are governed by the Pensions Act, 1979, which allows governments to terminate public officials, though with compensation payments which inthe short term may raise rather than reduce the wage bill, inthat retrenched staff are entitledto a month's pay for every year o f eligible service, together with immediate payment o f pension if the staff i s over the age o f 55. Thus if hnctional reviews result in downsizing, governments will find it difficult to implement them unless they have in place some sort of medium term budget framework, within which the fiscal implications o f alternative restructuring options can be assessed. One country, which has recently revised its organic finance law, i s SouthAfrica, which passed a Public FinancialManagement Act in 2000, which has many features worth emulating. Another country, this time on the point o passing such a law, i s Malawi. NiPeria States FinancesStudy 91 April 2003 Nigeria StatesFinances Study 4.34 Similarly, the main recommendations o f a Country Procurement Assessment Review (CPAR) conducted with the World Bank, have been accepted by the federal level, and are in the process o f being implemented. These entail the creation o f a professional procurement cadre, skills training, the re-issue and modernization o f current procurement practices, and the creation o f a regulatory body within the government to oversight adherence. There i s a need for similar measuresto be created as appropriate, at the state level, so that public procurement is consistently conducted on the basis of open competitive tendering with award to the lowest evaluated tender. In addition, Financial Instructions, which contain the rules for procurement, will benefit from a similar revision that was recent made to the federal financial regulations. As these critical regulations are revised, states also need to review the roles of internal auditors as well as the workings o f their supreme audit systems to ensure that these play an effective role in ensuring transparency and accountability. Modernize Systems and Build Budget and Financial Management Skills 4.35. One important aspect o f reforms will needto be the upgrading and modernization o f budget and financial management systems, taking advantage o f the power o f computers and the availability o f more integrated accounting packages. Lagos state has also recently movedto computerize its entire financial management system and inSokoto state, the Accountant-General has developed an integrated system capturing commitments and payments o f departments, through the treasury system. There i s also merit in the joint development o f a common system instead o f each state proceeding down this path alone. The Accountant-General o f the Federation has acted upon such a proposal and has formed a small working committee o f states' accountants-general to develop the technical specifications o f such a system. Once installed, such a system should ensure that a backlog o f annual accounts does not continue, and that managers have available to them comprehensive information on their unit's financial position. It would also assist state governments intimely reporting o f fiscal aggregates to the center. 4.36. Training and building o f staff skills i s also needed in practically every aspect o f budget and financial management and will also need to be tailored towards meeting human resource needs in the new budget and financial system that i s being evolved. States could approach this collaboratively and working with key national training institutions in the country to outline and implement a cost effective training program for staff. State training institutions will also needto bebeefed up as part o fthis process. Nigeria States Finances Study 92 April 2003 Nigeria States Finances Study STATISTICAL ANNEX NigeriaStates FinancesStudy 93 April 2003 Nigeria States Finances Study Table A-I: States RevenuePerformance1997 2OOO - (1995ConstantMillionNaira) 1997 1998 1999 2000 2001 Average Akwa It" Total Revenues 2533.3 3011.0 2877.8 14347.9 FedemllyCdlededRevenue 1623.3 2331.0 2357.8 12537.9 15216.5 6813.3 FederationAmount Revenues 1453.4 1899.6 2059.1 12172.6 14728.9 6462.7 GrossStatutoryAllocation 1453.4 1899.6 2019.3 10340.2 11358.5 5414.2 Deductions 90.4 1404.6 813.3 461.7 NetStatutoryAllocation 1929.0 8935.6 10.5 2175.0 others 39.7 1832.4 3370.4 1048.5 ValueAddedTax 169.9 431.4 298.7 365.4 487.6 350.6 lntemallyGeneratedRevenue(IGR) 910.0 680.0 520.0 1810.0 "onems Jdal Revenueper &pita (naira) 74.7 813.8 831.7 3985.5 lGRper capita(naim) 278.3 183.8 150.3 502.8 FederallycdlectedRevenueas shareof total % 64.I 77.4 . 81.9 87.4 lGRas ashareof TotalRevenues% 35.9 22.6 18.1 12.6 Bauchi Total Revenues 1440.0 1507.0 2160.5 4848.8 FederallyCollectedRevenue 1280.0 1427.0 2070.5 4658.8 5259.8 2939.2 FederationAmount Revenues 1280.0 1427.0 1751.6 4265.5 4734.3 2691.7 GrossStatutoryAllocation 1280.0 1427.0 1720.3 3742.4 3761.0 23862 Deductions 224.0 839.6 250.2 262.8 NetStatutoryAllocation 1496.3 2902.8 3510.9 1582.0 others 31.3 523.0 973.3 305.5 ValueAddedTax 318.9 393.4 525.5 247.6 lntemallyGeneratedRevenue(IGR) 160.0 80.0 90.0 190.0 "o" Jdal Revenueper Gpta(naira) 423.5 430.6 600.2 1276.0 lGRp?r wpta(naim) 47.1 22.9 25.0 50.0 FederallycdlectedRevenueas shareof total % 88.9 94.7 95.8 96.1 lGRas a shareof TotalRevenues% 11.1 5.3 4.2 3.9 CrossRiver Total Revenues 1407.8 2409.7 2197.8 4665.0 FederallyCollectedRevenue 1167.8 2129.7 1887.8 4315.0 4602.9 2820.7 FederationAmount Revenues 1167.8 2129.7 1622.3 3971.7 4156.1 2609.5 GrossStatutoryAllocation 1167.8 2129.7 1595.2 3484.6 3274.3 2330.3 Deductions 113.9 1175.2 900.4 437.9 NetStatutoryAllocation 1376.1 2309.4 2373.9 1211.9 others 27.2 487.0 881.8 279.2 ValueAddedTax 265.5 343.3 446.8 211.1 lntemallyGeneratedRevenue(IGR) 240.0 280.0 310.0 350.0 "om TdalRevenueper Capta(naim) 612.1 1038.6 915.8 1866.0 IGRper capita(naira) 104.3 120.7 129.2 140.0 FederalllycdlectedRevenueas shareof total % 83.0 88.4 85.9 92.5 lGRas a shareof TotalRevenues% 17.0 11.6 14.1 7.5 Nigeria States FinancesStudv 94 April 2003 Nigeria StatesFinances Study Delta Total Revenues 2766.9 4095.0 4726.1 18724.8 21671.1 10396.8 FederallyCdlectdRevenue 1146.9 2145.0 2626.1 15714.8 19501.1 8226.8 FederationAccountRevenues 1146.9 1825.2 2230.1 15168.9 18732.9 7820.8 Gross %tutory Allocation 1146.9 1323.4 2186.3 12846.4 14441.5 6388.9 Deductions 0.9 2250.9 507.4 551.8 Net StatutoryAllocation 1323.4 2099.6 10595.5 13947.5 5593.2 Others 501.8 43.8 2322.5 4291.3 1431.9 ValueAddedTax 319.8 396.0 545.9 768.3 406.0 InternallyGeneratedRevenue(IGR) 1620.0 1950.0 2100.0 3010.0 2170.0 2170.0 MemoItems TotalRevenueper Capita(naira) 1543.5 2349.1 2634.4 10142.2 11405.9 5615.0 lGRper capita(naira) 903.7 1118.6 1170.6 1630.3 1142.1 1193.1 Federallycollected Revenueas shareof total % 41.5 52.4 55.6 83.9 90.0 64.7 IGRas a shareof TotalRevenues% 58.5 47.6 44.4 16.1 10.0 20.9 Ebonyi Total Revenues 1034.0 2405.8 1603.5 3519.8 4331.6 2578.9 FederallyCdlectedRevenue 954.0 2335.8 1533.5 3439.8 4246.8 2502.0 FederationAccount Revenues 759.6 2103.4 1279.5 3128.0 3831.0 2220.3 GrossStatutoryAllocation 759.6 1390.5 1256.6 2744.5 3082.4 18467 Deductions 127.6 142.7 937.8 301.2 301.9 NetStatutoryAllocation 1262.9 1113.9 1806.7 2781.2 1392.9 Others 712.9 22.9 383.5 748.6 373.6 ValueAddedTax 194.4 232.4 253.9 311.7 415.8 281.6 InternallyGeneratedRevenue(IGR) 80.0 70.0 70.0 80.0 84.8 77.0 MemoItems TotalRevenueper Capita(naira) 232.6 525.9 340.6 726.5 868.8 538.9 lGRper capita(naira) 18.0 15.3 14.9 16.5 17.0 16.3 Federa/ly&l/ected Revenue as shareof total % 92.3 97.1 95.6 97.7 98.0 96.2 IGRasa shareof TotalRevenues% 7.7 2.9 4.4 2.3 2.0 3.0 ImO TotalRevenues 1699.0 1753.5 2032.4 5518.7 FederallyCdlectedRevenue 1499.0 1643.5 1882.4 5048.7 5904.2 3195.6 FederationAccount Revenues 1261.O 1400.0 1577.1 4671.9 5405.5 2863.1 GrossStatutoryAllocation 1261.O 1400.0 1548.6 4060.2 4263.8 2506.7 Deductions 80.6 73.3 90.5 1538.7 627.9 482.2 NetStatutoryAllocation 1180.4 1326.7 1458.1 2521.6 3635.9 2024.5 Others 28.6 611.7 1141.7 356.4 ValueAddedTax 238.0 243.5 305.3 376.8 498.8 332.5 InternallyGeneratel Revenue(IGR) 200.0 110.0 150.0 470.0 MemoItems TotalRevenueper Capita(naira) 566.3 578.7 651.4 1719.2 /GRper capita (naira) 66.7 36.3 48.1 146.4 Federal/ycollected Revenueas share of total % 88.2 93.7 92.6 91.5 IGRas a share of TotalRevenues% 11.8 6.3 7.4 8.5 Nigeria States Finances Studv 95 April 2003 Nigeria States Finances Study Kam Total Revenues 4310.0 4364.0 3547.9 7283.0 FederallyCollectedRevenue 3279.0 3422.0 2925.9 6521.0 7376.0 4704.8 FederationAccount Revenues 2881.4 2993.5 2414.5 5903.0 6546.1 4147.7 GrossStatutoryAllocation 1850.8 2051.1 2371.3 5179.2 5199.7 330.4 DedUCtiOnS 138.6 380.0 204.2 1567.2 433.4 544.7 NetStatutoryAllocation 1712.3 1671.0 2167.1 3611.9 4766.3 2785.7 Others 1030.6 942.4 43.2 723.8 1346.4 817.3 ValueAdded Tax 397.6 428.6 511.3 618.0 829.9 557.1 InternallyGeneratedRevenue(IGR) 1031.O 942.0 622.0 762.0 lMemoltens TotalRevenueper Capita(naira) 632.9 622.7 491.9 981.2 IGRper capita (naira) 151.4 134.4 86.2 102.7 Federally CollededRevenueas shareof total % 76.I 78.4 82.5 89.5 IGRasa shareof TotalRevenues % 23.9 21.6 17.5 10.5 Kebbi Total Revenues 2436.4 3040.3 2897.2 6075.0 FederallyCdlected Revenue 1556.4 20003 1857.2 4205.0 4695.0 2862.8 FederationAccount Revenues 1266.0 1635.4 1578.8 3859.9 4237.0 2515.4 GrossStatutoryAllocation 1266.0 1635.4 1550.6 3386.6 3360.8 2239.9 Deductions 44.1 82.8 62.5 882.7 644.9 343.4 NetStatutoryAllocation 1221.9 1552.6 1488.1 2503.9 2716.5 1896.6 others 28.3 473.3 876.2 275.5 ValueAddedTax 290.4 364.9 278.4 345.1 458.0 347.4 InternallyGeneratedRevenue(IGR) 880.0 1040.0 1040.0 1870.0 lMem0 Items TotalRevenueper Capita(naim) 916.2 1175.7 1088.6 2218.1 IGRper capita (naim) 330.9 402.2 390.8 682.8 FederallyCo/IecfedRevenueasshareof total % 63.9 658 64.1 69.2 IGRasa shareof TotalRevenues% 36.1 34.2 35.9 30.8 KWam Total Revenues 1719.4 3019.6 2173.5 5249.4 5065.9 3445.6 FederallyCdlected Revenue 1349.4 2089.6 1813.5 4109.4 4365.9 2745.6 FederationAccount Revenues 1149.4 1869.6 1547.8 3784.0 3925.1 2455.2 GrossStatutoryAllocation 1149.4 1869.6 1520.1 3320.0 3087.1 2189.2 Deductions 126.0 1251.2 511.O 377.6 NetStatutoryAllocation 1394.1 2068.8 2589.0 1210.4 OVlers 27.7 464.0 838.0 265.9 ValueAdded Tax 200.0 220.0 265.7 325.4 440.7 290.4 lntemallyGeneratedRevenue(IGR) 370.0 930.0 360.0 1140.0 700.0 702.0 lMemoltems TotalRevenueper Capita(naira) 949.9 1623.4 1132.1 2664.7 2560.7 1774.2 IGRper capita(naira) 204.4 560.0 187.5 578.7 345.6 363.2 FederallyCo/l&ed Revenueas shmof total % 78.5 69.2 83.4 78.3 86.2 79.1 IGRasa shareof TotalRevenues % 21.5 30.8 16.6 21.7 13.8 20.3 Nigeria States Finances Study 96 April 2003 Nigeria StatesFinances Study Lagos Total Revenues 13429.9 7933.7 13179.5 13773.4 9044.7 11472.2 FederallyCollectedRevenue 6059.9 3003.7 4269.5 7983.4 9044.7 6072.2 FederationAccount Revenues 5219.6 1615.7 2405.1 5879.9 6152.9 4254.7 Gross StatutoryAllocation 5219.6 1615.7 2362.0 5158.9 4847.5 3840.8 Deductions 194.0 1982.6 489.6 533.3 NetStatutoryAllocation 2168.1 3176.3 4362.0 1941.3 Others 43.1 721.O 1305.4 413.9 ValueAdded Tax 840.3 1388.0 1864.4 2103.5 2891.8 1817.6 lntemallyGeneratedRevenue(IGR) 7370.0 4930.0 8910.0 5790.0 Memolfems TotalRevenueper capita (najra) 1946.4 1120.6 1807.9 1886.8 lGRper capi?a(naira) 1 m .I 696.3 1222.2 793.2 FederallycdlededRevenueasshareof total % 45.I 37.9 32.4 58.0 IGRasa shareof TotalRevenues% 54.9 62.1 67.6 42.0 Ondo Total Revenues 1807.0 2292.3 2896.9 7994.2 FederallyCollectedRevenue 1057.0 1452.3 1946.9 6686.2 490.0 2326.5 FederationAccountRevenues 837.0 1213.4 1652.3 6324.0 7.5 2006.8 GrossStatutoryAllocation 787.0 1021.7 1621.8 5439.9 5.8 1775.2 Deductions 74.3 155.4 89.6 1477.0 316.9 422.6 NetStatutoryAllocation 712.7 866.4 1532.2 3962.9 5517.9 2518.4 Others 50.0 191.7 30.5 884.2 1.6 231.6 ValueAddedTax 220.0 238.8 294.6 362.1 482.5 319.6 lntemallyGeneratedRevenue(IGR) 750.0 840.0 950.0 1308.0 MemoItems TotdRevenueper Capita(naim) 715.8 882.3 1083.5 2905.4 IGRper capita(naira) 297.I 323.3 355.3 475.4 FederallycollededRevenueasshareof total % 58.5 63.4 67.2 83.6 IGRasashareof TotalRevenues% 41.5 36.6 32.8 16.4 qro Total Revenues 2250.0 2680.0 2957.5 5897.9 FederallyCdlectedRevenue 1560.0 2290.0 2387.5 5307.9 5786.1 3466.3 FederationAccount Revenues 1220.0 1940.0 1966.1 4806.5 5129.9 3012.5 Gross StatutoryAllocation 1170.0 1320.0 1930.8 4217.2 4053.1 2538.2 Deductions 268.1 2581.7 506.3 671.2 NetStatutoryAllocation 1662.8 1635.5 3546.8 1369.0 Others 50.0 620.0 35.2 589.4 1076.9 474.3 ValueAddedTax 340.0 350.0 421.5 501.4 656.2 453.8 InternallyGeneratedRevenue(IGR) 690.0 390.0 570.0 590.0 Memoltems TotalRevenueper Capita(najra) 557.I 644.8 691.4 1339.8 IGRper capita(naira) 170.8 93.8 133.3 134.0 FederallyW&ed Revenueasshareof total % 69.3 85.4 80.7 90.0 IGRasashareof TotalRevenues% 30.7 14.6 19.3 10.0 Nigeria States Finances Studv 97 April 2003 Nigeria States Finances Study Rivers Total Revenues 3651.8 4174.2 5228.1 14629.4 Federally Collected Revenue 1655.5 2052.0 2629.8 11623.9 3850.7 4362.4 Federation Account Revenues 1356.0 1606.9 2062.1 10933.0 3001.2 3791.8 Gross Statutory Allocation 1137.7 1363.8 2022.8 9312.0 10.2 2769.3 Deductions 165.7 93.2 178.5 2844.3 3831.1 1422.6 Net Statutory Allocation 972.0 1270.7 1844.3 6467.7 6389.9 3388.9 Others 218.3 243.0 39.3 1621.0 2991.0 1022.5 Value Added Tax 299.6 445.2 567.7 690.9 849.5 570.6 Internally Generated Revenue (IGR) 1996.3 2122.1 2598.3 3005.5 Memo Items Total Revenue per Capita (naira) 979.3 1087.7 1323.8 3599.4 IGR per capita (naira) 535.3 553.0 657.9 739.5 Federally Collected Revenue as share of total % 45.3 49.2 50.3 79.5 IGR as a share of Total Revenues % 54.7 50.8 49.7 20.5 Sokoto Total Revenues 1271.4 2177.2 2146.1 4813.1 5256.4 3132.8 Federally Collected Revenue 1164.2 2008.7 1945.3 4392.6 4782.4 2858.6 Federation Account Revenues 935.9 1734.3 1641.4 4012.8 4280.9 2521.0 Gross Statutory Allocation 935.9 1734.3 1612.0 3520.7 3382.0 2237.0 Deductions 80.0 648.1 364.9 218.6 Net Statutory Allocation 1532.0 2872.7 3017.2 1484.4 Others 29.4 492.0 898.8 284.I Value Added Tax 228.3 274.4 304.0 379.9 501.5 337.6 Internally Generated Revenue (IGR) 107.2 168.5 200.7 420.5 474.0 274.2 Memo Items Total Revenue per Capita (naira) 718.3 1196.3 1147.6 2493.8 2648.6 1640.9 IGR per capita (naira) 60.6 92.6 107.3 217.9 236.8 143.4 Federally Collected Revenue as share of total % 91.6 92.3 90.6 91.3 91.0 91.3 IGR as a share of Total Revenues % 8.4 7.7 9.4 8.7 9.0 8.8 Nigeria States Finances Study 98 April 2003 Nigeria States Finances Study Table A-2: States Internal Revenue Performance, 1997 2000 - 1995 Constant Million Naira 1997 1998 1999 2000 Average Akwa lbom 911.8 676.7 519.1 1336.2 860.9 Taxes 735.6 517.1 426.9 0.5 420.0 Fines and Fees 73.6 85.2 64.5 80.7 76.0 Others 102.5 74.4 27.6 1255.1 364.9 Bauchi 147.6 87.0 104.5 187.4 131.6 Taxes 57.0 52.0 64.0 139.0 78.0 Fines and Fees 16.6 9.3 7.7 15.0 12.2 Others 74.0 25.7 32.8 33.4 41.5 Cross River 234.9 280.6 309.2 352.7 294.3 Taxes 156.0 74.3 80.0 162.6 118.3 Fines and Fees 16.4 41.8 177.6 61 .O 74.2 Others 62.4 164.5 51.5 129.0 101.9 Delta 1615.4 1799.7 1688.3 2046.3 1787.4 Taxes 1508.2 1497.1 1394.8 1570.5 1492.6 Fines and Fees 44.3 28.1 33.9 70.9 44.3 Others 62.9 274.5 259.7 404.9 250.5 Ebonyi 75.1 65.6 69.1 78.3 72.0 Taxes 27.4 24.6 25.3 31.O 27.1 Fines and Fees 35.0 31 .O 0.8 14.2 20.3 Others 12.7 10.0 43.0 33.1 24.7 Imo 170.7 105.2 153.2 467.1 224.0 Taxes 97.2 57.8 99.3 183.0 109.3 Fines and Fees 29.0 28.0 34.0 31.O 30.5 Others 44.5 19.4 19.9 253.1 84.2 Kebbi 5.4 103.8 103.6 186.8 99.9 Taxes 24.8 27.8 77 .O 32.4 Fines and Fees 6.1 9.2 20.9 9.o Others 5.4 72.8 66.7 88.9 58.5 Kwara 208.1 184.1 144.7 41 1.O 237.0 Taxes 63.8 65.6 77.1 169.3 93.9 Fines and Fees 34.6 29.5 4.2 2.0 17.6 Others 109.7 89.0 63.5 239.7 125.5 Lagos 7371.3 5117.6 8908.0 5789.3 6796.6 Taxes 7019.3 3758.9 6520.7 4034.1 5333.2 Fines and Fees 153.3 541.2 1806.6 681.8 795.7 Others 198.7 817.6 580.8 1073.4 667.6 OYO 624.3 402.8 571.6 0.6 399.8 Taxes 214.0 142.0 241 .O Fines and Fees 166.0 69.5 142.0 Others 244.3 191.3 188.6 Rivers 2.0 2.1 2.6 3.0 2.4 Taxes 1650.0 1740.0 2340.0 2600.0 2082.5 Fines and Fees 140.0 70.0 140.0 130.0 120.0 Others 210.0 310.0 120.0 280.0 220.0 Sokoto 151.9 261.I 327.3 847.5 397.0 Taxes 82.9 83.2 93.2 244.0 125.8 Fines and Fees 12.2 0.6 0.1 120.0 33.2 Others 56.8 177.3 234.0 483.5 237.9 Source: World Bank Estimatesfrom Field Reports of Consultants Nigeria States Finances Study 99 April 2003 Nigeria States Finances Study TableA43-AllocationofFederationFae\Rrmes AllocationIiumFedemtionkcountsfor dlStatesintheYea 1999(Nbra) 33 SoKCrro 2650,079,686.53 131,529,135.18 2518,560,551.35 493,734,52258 48,332,181.41 3,066,617,256.34 34 TPRCW 2,564,435,686.90 173,456,910.67 2,380,978,7762 415,727,390.48 46,587,806.5 2,843,293,973.27 35 YOBE 2,461,984,639.12 131,354,764.50 2,330,629,874.62 413,121,327.77 44,901,64299 2,788,652845.38 36 zPM=m 2,358,277,633.58 100,904,681.95 2,258,372,951.64 451,377,202.85 43,028,518.31 2,752778,67280 37 F C T - W A 4,045,302,683.70 138,608,797.48 3,906,693,8%.22 218,323,107.32 73,815,975.87 4,198,=%9.41 Nigeria States FinancesStudy 100 April 2003 Nigeria States Finances Studv NiPeriaStates FinancesStudv 101 April 2003 Nigeria States Finances Study Table A 4 States Expenditure Perfromance,1997 2000 - 1995 ConstantNaira (Billion) 1997 1998 1999 2000 Average A h a lbom Total Expenditures 1.60 2.05 3.37 11.51 4.63 Recurrent 1.38 1.50 2.27 7.30 3.11 Personnel 1.01 1.I8 1.78 4.36 2.08 Others 0.37 0.32 0.49 2.94 1.03 Capital 0.23 0.55 1.11 4.20 1.52 Memo Items Recurrentas share of total 0.86 0.73 0.67 0.63 0.67 Personnelas share of recurrent 0.73 0.79 0.79 0.60 0.67 Capital as share of total 0.14 0.27 0.33 0.37 0.33 ExpendituresPer Capita (Naira) 489.73 608.06 973.78 3227.30 1355.72 Bauchi Total Expenditures 1.36 2.15 3.12 8.23 3.71 Recurrent 0.95 1.36 2.31 5.33 2.48 Personnel 0.40 0.53 1.05 2.05 1.01 Others 0.55 0.83 1.26 3.28 1.48 Capital 0.41 0.79 0.81 2.90 1.23 Memo Items Recurrentas share of total 0.70 0.63 0.74 0.65 0.67 Personnelas share of recurrent 0.42 0.39 0.46 0.38 0.41 Capital as share od total 0.30 0.37 0.26 0.35 0.33 Expendituresper Capita 400.00 613.71 866.1I 2193.87 1042.32 Cross River Total Expenditures 0.95 1.71 4.25 9.50 4.10 Recurrent 0.70 0.89 2.11 5.06 2.19 Personnel 0.61 0.71 1.59 3.13 1.51 Others 0.09 0.18 0.52 1.93 0.68 Capital 0.25 0.82 2.14 4.44 1.91 Memo items Recurrentas share of total 0.74 0.52 0.50 0.53 0.53 Personnelas share of recurrent 0.87 0.80 0.75 0.62 0.69 Capital as share od total 0.26 0.48 0.50 0.47 0.47 Expendituresper Capita 421.76 737.59 1777.01 3862.77 7740.60 Delta Total Expenditures 2.64 3.57 4.95 20.06 7.81 Recurrent 1.51 1.87 3.51 10.68 4.39 Personnel 1.50 1. I O 2.10 5.00 2.43 Others 0.01 0.77 1.41 5.68 1.96 Capital I.14 1.71 1.44 9.39 3.42 Memo items Recurrentas share of total 0.57 0.52 0.71 0.53 0.56 Personnelas share of recurrent 1.oo 0.59 0.60 0.47 0.55 Capitalas share od total 0.43 0.48 0.29 0.47 0.44 Expendituresper Capita 871.16 1145.73 1543.43 6073.29 2466.48 Nigeria States Finances Study 102 April 2003 Nigeria StatesFinances Study Ebonyi Total Expenditures 1.01 2.03 1.83 4.44 2.33 Recurrent 0.46 0.81 1.05 2.84 1.29 Personnel 0.20 0.27 0.49 0.90 0.47 Others 0.26 0.54 0.56 1.94 0.82 Capital 0.55 1.22 0.78 1.60 1.04 Memo Items Recurrenf as share of fotal 0.45 0.40 0.57 0.64 0.55 Personnel as share of recurrent 0.44 0.33 0.47 0.32 0.36 Capital as share od total 0.55 0.60 0.43 0.36 0.45 Expenditures per Capita 561.67 1065.79 965.65 2219.40 1224.94 Imo Total Expenditures 1.48 2.11 2.22 6.00 2.95 Recurrenf 1.17 1.37 1.97 5.11 2.4I Personnel 0.70 0.59 1.27 2.35 1.23 Others 0.47 0.78 0.70 2.76 1.I8 Capital 0.30 0.74 0.25 0.89 0.55 Memo items Recurrentas share of total 0.79 0.65 0.89 0.85 0.81 Personnelas share of recurrent 0.60 0.43 0.65 0.46 0.51 Capital as share od total 0.21 0.35 0.11 0.15 0.19 Expendituresper Capita 501.02 696.37 712.33 1868.74 959.31 Kano Total Expenditures 3.29 3.20 3.32 8.68 4.63 Recurrenf 1.81 2.13 2.53 6.51 3.25 Personnel 0.76 0.65 1.34 2.78 1.38 Others 1.05 1.48 1.I9 3.73 1.86 Capital 1.48 1.07 0.79 2.18 1.38 Memo items Recurrentas share of total 0.55 0.67 0.76 0.75 0.70 Personnelas share of recurrent 0.42 0.30 0.53 0.43 0.43 Capital as share od total 0.45 0.33 0.24 0.25 0.30 Expendituresper Capita 484.71 458.04 461.30 1172.35 651.59 Kwara TotaI Expenditures 1.12 1.76 2.12 3.79 2.20 Recurrenf 0.83 1.13 1.49 3.08 1.63 Personnel 0.47 0.83 0.64 0.96 0.73 Others 0.36 0.30 0.85 2.12 0.90 Capifal 0.29 0.63 0.63 0.71 0.57 Memo items Recurrentas share of total 0.74 0.64 0.70 0.81 0.74 Personnelas share of recurrent 0.57 0.74 0.43 0.31 0.44 Capital as share od total 0.26 0.36 0.30 0.19 0.26 Expendituresper Capita 615.90 945.06 1106.53 1920.26 1161.60 Nigeria States FinancesStudy 103 April 2003 Nigeria States Finances Study ~~ Lagos Total Expenditures 12.94 9.12 12.06 18.28 13.10 Recurrent 8.70 5.43 8.81 11.87 8.70 Personnel 1.87 1.4 3.56 4.82 2.91 Others 6.83 4.03 5.25 7.05 5.79 Capital 4.23 3.69 3.25 6.41 4.40 Memo items Recurrentas share of total 0.67 0.60 0.73 0.65 0.66 Personnelas share of recurrent 0.21 0.26 0.40 0.41 0.33 Capitalas share od total 0.33 0.40 0.27 0.35 0.34 Expendituresper Capita 1880.28 1288.59 1654.74 2503.64 1835.35 Ondo Total Expenditures 1.13 1.25 2.29 7.30 2.99 Recurrent 0.70 0.90 1.90 5.72 2.30 Personnel 0.34 0.5 1.41 2.61 1.22 Others 0.36 0.40 0.49 3.11 1.09 Capital 0.43 0.35 0.39 1.58 0.83 Memo items Recurrentas share of total 0.62 0.72 0.83 0.78 0.77 Personnelas share of recurrent 0.49 0.56 0.74 0.46 0.53 Capital as share od total 0.38 0.28 0.17 0.22 0.28 Expendituresper Capita 470.48 501.52 879.77 2704.24 1173.71 OYO Total Expenditures 3.51 3.99 4.68 6.55 4.69 Recurrent 1.74 1.63 2.73 5.67 2.94 Personnel 1.11 0.99 1.95 4.04 2.02 Others 0.63 0.64 0.78 1.63 0.92 Capital 1.78 2.36 1.96 0.89 1.75 Memo items Recurrentas share of total 0.49 0.41 0.58 0.86 0.63 Personnelas share of recurrent 0.64 0.61 0.72 0.71 0.69 Capitalas share od total 0.51 0.59 0.42 0.14 0.37 Expendituresper Capita 857.27 951.01 1089.32 1489.13 1102.66 Sokoto Total Expenditures 1.27 1.81 2.63 5.54 2.81 Recurrenf 1.00 1.12 1.51 3.29 1.73 Personnel 0.87 0.99 1.12 1.2 1.05 Others 0.13 0.13 0.39 2.09 0.69 Capital 0.27 0.69 1.12 2.25 1.08 Memo items Recurrentas share of total 0.79 0.62 0.57 0.59 0.61 Personnelas share of recurrent 0.87 0.88 0.74 0.36 0.60 Capitalas share od total 0.21 0.38 0.43 0.41 0.39 Expendituresper Capita 716.73 995.97 1405.78 2875.68 1523.37 Nigeria States Finances Studv 104 April 2003 Nigeria States FinancesStudy Table A-5: States' Spending in Selected Sectors. 1997 - 2000 1995 Constant Million Naira 1997 1998 1999 2000 Average Amount Amount Amount Amount Amount A k w a lbom Education, of which 108.2 122.2 682.3 2065.2 744.5 Recurrent 40.8 24 .O 652.3 1650.5 591.9 Capita I 67.4 98.3 30.0 414.7 152.6 Health, of which 54.5 73.2 301.7 1081.8 377.8 Recurrent 47.0 41 .2 244.7 648.8 245.4 Cap itaI 7.5 31 .9 57 .O 433.0 132.4 Agriculture, of which 43.9 43.8 90.7 243.1 105.4 Recurrent 38.9 40.5 80.5 141.1 75.2 Capita I 5 .O 3.3 10.2 102.0 30.1 M e m o Items (share of total) E d ucation 0.1 0.1 0 . 2 0.2 0.2 Health 0 . 0 0 . 0 0 . 0 0 . 3 0.1 Agriculture 0 .o 0 . 0 0 . 0 0.0 0 . 0 M e m o Items (per capita spending) E d u ca ti0n 33.1 36.3 197.2 579.3 248.2 Health 16.7 21.7 87.2 303.5 125.9 Agriculture 13.4 13.0 26.2 68.2 35.1 Bauchi Education, of which 237.6 558.4 446.5 833.4 519.0 Recurrent 171.6 501.2 396.4 566.0 408.8 Cap ita1 66.0 57.2 50.1 267.4 110.2 Health, of which 94.9 135.4 241.9 477.4 237.4 Recurrent 37.2 41 .5 207.9 285.1 142.9 Ca pital 57.7 93.9 34.1 192.3 94.5 Agriculture, of which 93.7 23.3 119.9 0.3 59.3 Recurrent 32.2 23.2 119.8 0.2 43.9 Capita I 61 .4 0.1 0.1 0.1 15.4 M e m o Items (share of total) E d uca tion 0.2 0.3 0.2 0.1 0.2 Health 0 .o 0.0 0.0 0.1 0.1 A gricu lture 0.1 0 . 0 0 . 0 0.0 0.0 M e m o Items (per capita spending) Education 69.9 159.5 124.0 222.2 144.2 Health 69.9 38.7 67.2 127.3 65.9 A griculture 27.6 6.6 33.3 0.1 16.5 Imo Education, of which 203.6 9.7 565.3 1024.4 450.8 Recurrent 202.7 555.7 1004.6 440.8 Ca pital 0.9 9.7 9.6 19.8 10.0 Health, of which 112.1 173.0 181.5 359.6 206.5 Recurrent 75.7 175.1 275.5 131.6 Capita I 36.4 173.0 6.4 84.1 75.0 Agriculture, of which 97.8 8.2 110.9 190.8 101.9 Recurrent 47.8 97.7 137.8 70.8 Capita I 50.0 8.2 13.2 53.0 31 .I M e m o Items (share of total) Education 0.1 0.0 0 . 3 0.2 0.2 Health 0.1 0.1 0 .o 0.1 0.1 A gric u/ture 0.1 0 . 0 0.1 0 .o 0.0 M e m o Items (per capita spending) E d uca ti0n 69.0 3.2 181.2 319.1 146.3 Health 38.0 57.1 58.2 112.0 67.1 A griculture 33.2 2.7 35.5 59.4 33.1 Nigeria States Finances Study 105 April 2003 Nigeria States Finances Studv Kwara Education, of which 33.2 16.2 116.4 69.7 58.9 Recurrent 7.3 7.8 16.4 32.5 16.0 Capital 25.8 8.4 99.9 37.3 42.9 Health, of which 103.7 7.9 240.0 61.I 103.2 Recurrent 80.1 7.9 240.0 4.4 83.1 Capita1 23.6 56.7 20.1 Agriculture, of which 50.7 31.6 40.8 82.9 51.5 Recurrent 22.7 21 .I 39.5 79.1 40.6 Capital 28.0 10.5 1.3 3.8 10.9 Memo Items (share of total) Educati0n 0.0 0.0 0.1 0.0 0.0 Health 0.1 0.0 0.1 0.0 0.1 A gric u/ture 0.0 0 .o 0.0 0.0 0.0 Memo Items (per capita spending) Education 18.3 8.7 60.6 35.4 31.1 Health 57.3 4.2 125.0 31.0 54.6 A gricu/ture 28.0 17.0 21.3 42.1 27.3 Lagos Education, of which 985.0 1316.5 2472.3 1036.2 1452.5 Recurrent 852.8 152.6 2260.3 484.9 937.7 Capita1 132.2 1164.0 212.0 551.3 514.8 Health, of which 493.7 660.2 899.2 227.5 570.2 Recurrent 335.2 441 .O 681.5 0.9 364.6 Capita I 201.o 158.5 219.2 217.7 226.6 205.5 Agriculture, of which 180.0 145.0 408.6 233.7 Recurrent 43.1 92.8 96.5 171.O 100.9 Capital 157.9 87.2 48.5 237.6 132.8 Memo Items (share of total) Education 0.1 0.1 0.2 0.1 0.1 Health 0.1 0.1 0.1 0.0 0.0 A gric u/ture 0.0 0.0 0.0 0 .o 0.0 Memo Items (per capita spending) Educa tion 143.2 186.0 339. I 141.9 203.4 Health 71.8 93.2 123.3 31.2 79.9 Agriculture 29.2 25.4 19.9 56.0 32.7 Sokoto Education, of which 276.5 378.3 548.8 855.3 514.7 Recurrent 208.0 248.3 380.9 542.5 344.9 Capital 68.5 130.0 167.9 312.8 169.8 Health, of which 113.0 243.1 251.5 426.6 258.5 Recurrent 87.9 116.7 144.5 220.5 142.4 Capita I 25.1 126.5 107.0 206.1 116.2 Agriculture, of which 97.9 141.9 128.0 430.5 199.6 Recurrent 31.2 99.1 44.1 188.6 90.8 Capital 66.7 42.8 83.9 241.8 108.8 Memo Items (share of total) E ducation 0.2 0.2 0.2 1.8 0.2 Health 0.1 0.1 0.5 0.2 0.1 Agriculture 0.1 0.1 0.1 0.9 0.1 Memo Items (per capita spending) E ducation 156.2 207.8 293.5 443.2 278.2 Health 63.8 133.6 134.5 221.0 139.8 A gricu/ture 55.3 78.0 68.5 223.0 107.9 Source: WorldBank Estimatesfrom Field Reports of Consultants Nigeria States Finances Studv 106 April 2003 Nigeria States Finances Study T a b l e A - 6 : S t a t e s ' F i s c a l B a l a n c e P o s i t i o n , 1 9 9 7- 2 0 0 0 1 9 9 5 C o n s t a n t Millions (Naira) 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 A v e r a g e A k w a l b o m T o t a l R e v e n u e s 2421.6 2 9 4 9 . 5 2 8 7 6 . 6 1 4 4 8 5 . 6 5 6 8 3 . 3 G r o s s F A R e v e n u e s 1453.4 1 8 9 9 . 6 2 0 1 9 . 5 10340.3 3 9 2 8 . 2 V a l u e A d d e d T a x 169.9 431.4 2 9 8 . 7 365.3 316.3 0 the rs 39.5 1 8 3 2 . 4 4 6 8 . 0 O w n R e v e n u e s G r a n t s - E c o l o g i c a l F u n d s 798.3 61 8.5 5 1 9 . 0 1 8 13.1 9 3 7 . 2 1 3 4 . 4 3 3 . 6 T o tal E x p e n d itu res 1 6 0 2 . 0 2 0 4 7 . 0 3 3 7 3 . 6 1 1 506.5 4 6 3 2 . 3 T o t a l R e c u r r e n t 1 3 7 7 . 0 1 4 9 8 . 0 2 2 6 6 . 6 7 3 0 3 . 5 3 7 7 7 . 3 R e c u r r e n t ( a s p e r R e p o r t ) 1 1 85.0 1403.0 2 1 1 5 . 0 5 7 2 7 . 0 2 6 0 7 . 5 D e d u c t i o n A t S o u r c e 90.6 1404.5 373.8 0 the rs 192.0 95 .O 6 1 .O 172.0 130.0 C a p i t a l 2 2 5 . 0 5 4 9 . 0 1 1 0 7 . 0 4 2 0 3 . 0 1 5 2 1 . 0 O v e r a l l B a l a n c e , 8 1 9 . 6 9 0 2 . 5 -497.0 2 9 7 9 . 0 1 0 5 1 .O O f which, C u r r e n t B a l a n c e 1044.6 1451.5 61 0.0 7182.0 2572.0 M e m o I t e m s 0 verall 6 alance/R e venue (% ) 3 3 . 8 30.6 -1 7.3 20.6 18.5 C u r r e n t B ala n c e / R e ve n u e (% ) 43.1 4 9 . 2 21.2 49.6 4 5 . 3 B a u c h i T o t a l R e v e n u e s 1 4 4 1 . 0 1 5 0 2 . 0 2 3 8 3 . 2 5 0 7 0 . 9 2 5 9 9 . 3 G r o s s F A R e v e n u e 1280.0 1427.0 1720.2 3742.6 2 0 4 2 . 5 V a l u e A d d e d T a x 5 2 4 .O 393.4 229.3 O t h e r s 5 1 .O 523.0 1 4 3 . 5 G r a n t s - E c o l o g i c a l F u n d s O w n R e v e n u e s 1 6 1 .O 75 .O 88.0 1 8 6 . 0 127.5 225.9 5 6 . 5 T o tal E x p e n d itu r e s 1 3 6 0 . 0 2 1 4 8 . 0 3 1 18.0 8 2 2 7 . 0 3 7 1 3.3 T o t a l R e c u r r e n t 9 4 7 . 0 1 3 5 6 . 0 2 3 0 7 . 0 5 3 2 6 . 0 2 4 8 4 . 0 R e c u r r e n t (as p e r R e p o r t ) 947 .O 1356.0 1 9 3 9 . 0 3848.0 2 0 2 2 . 5 D e d u c t i o n s a t S o u r c e 368.0 1 4 7 8 . 0 4 6 1 . 5 0 the rs 0 .o C a p ita l 4 1 3 . 0 7 9 2 . 0 8 1 1 . 0 2 9 0 1 . 0 1 2 2 9 . 3 O v e r a l l B a l a n c e , 8 1 .O - 6 4 6 . 0 - 7 3 4 . 8 - 3 1 5 6 . 1 -1 1 14.0 O f which, C u r r e n t B a l a n c e 494.0 1 4 6 . 0 76.2 -255.1 115.3 M e m o Items 0 vera/I B alan ce/R e ven ue (% ) 5.6 -43.0 -30.8 - 6 2 . 2 - 4 2 . 9 C u r r e n t B a l a n c e / R e v e n u e (%) 3 4 . 3 9.7 3.2 -5 .O 4 . 4 C r o s s R i v e r T o t a l R e v e n u e s 1 4 0 2 . 7 2 3 5 2 . 7 2 0 5 7 . 7 4 8 2 7 . 1 2 6 6 0 . 0 G r o s s F A R e v e n u e 1 1 6 7 . 8 2 1 29.7 1 5 9 5 . 2 3 4 8 4 . 6 2094.3 V a l u e A d d e d T a x 284.2 343.3 1 5 6 . 9 O t h e r s 29.1 487.0 129.0 O w n R e v e n u e s 2 3 4 . 9 223.0 G r a n t s - E c o l o g i c a l F u n d s 149.2 3 5 2 . 7 240.0 159.4 39.8 T o ta I E x p e n d itu r e s 953.2 1 3 0 4 . 0 4 2 4 7 . 1 5 0 6 4 . 3 2 8 9 2 . 1 T o t a l R e c u r r e n t 7 0 4 . 6 8 8 8 . 7 2 1 0 8 . 1 5 0 5 9 . 9 2 1 9 0 . 3 R e c u r r e n t ( a s p e r R e p o r t ) 7 0 4 . 6 888.7 1986.1 3884.7 1866.0 D e d u c t i o n s a t s o u r c e 1 2 2 .o 1 175.2 3 2 4 . 3 O t h e r s 0 .o C a p i t a l 2 4 8 . 5 4 1 5 . 3 2 1 3 9 . 0 4.4 7 0 1 . 8 0 verall Balance, 449.5 1 0 4 8 . 6 - 2 1 8 9 . 4 -237.3 - 2 3 2 . 1 O f which, C u r r e n t B a l a n c e 698.1 1 4 6 4 . 0 -5 0.4 - 2 3 2 . 8 4 6 9 . 7 M e m o Items OveralI B a l a n c e / R e v e n u e (%) 3 2 . 0 4 4 . 6 -1 0 6 . 4 -4.9 -8.7 C u r r e n t B a l a n c e / R e v e n u e (%) 49.8 6 2 . 2 -2.4 -4.8 17.7 Nigeria States Finances Study 107 April 2003 Nigeria States Finances Study Delta Total Revenues 3078.6 4017.5 4795.8 18808.0 7675.0 Gross FA Revenue 1488.2 2285.8 2292.7 12850.7 4729.4 Value Added Tax 396.0 545.9 235.5 Others 43.8 2322.5 591.6 O w n Revenues 1590.4 1731.7 2063.3 2952.3 2084.4 Grants - Ecological Funds 136.7 34.2 Tota I Expenditures 2641 .I 3573.7 4949.2 20064.8 7807.2 Total Recurrent 1505.1 1866.7 3509.2 10677.8 4389.7 Recurrent (as per Report) 1505.1 1866.7 3422.5 8426.9 3805.3 Deductions at source 86.7 2250.9 584.4 Others 0 .o CapitaI 1136.0 1707.0 1440.0 9387.0 3417.5 Overall Balance, 437.5 443.8 -153.4 -1256.8 -132.2 O f which, Current Balance 1573.5 2150.8 1286.6 8130.2 3285.3 M e m o Items 0 vera//Balance/Revenue (% ) 14.2 11 .o -3.2 -6.7 -1.7 Current Balance/Revenue (%) 51 .I 53.5 26.8 43.2 4 2 . 8 Ebonyi Total Revenues 1029.0 2400.8 1602.5 3752.7 2196.2 Gross FA Revenue 759.6 1390.5 1256.6 2848.9 1563.9 Value Added Tax 194.4 232.4 253.9 31 1.7 248.1 Others 712.9 22.9 383.5 279.8 O w n Revenues 75.0 65.0 69.0 77.0 71 .5 Grants - Ecological Funds 131.6 32.9 Tota I Expenditures 1011.0 2025.0 1834.7 4438.8 2327.4 Total Recurrent 457.0 807.0 1050.7 2836.8 1287.9 Recurrent (as per Report) 457.0 807.0 908.0 1899.0 1017.8 Deductions at source 142.7 937.8 Others Capital 554.0 1218.0 784.0 1602.0 1039.5 0 verall BaIance, 18.0 375.8 -232.3 -686.1 -131 .I O f which, Currenf Balance 5 72 .O 1593.8 551.7 915.9 908.4 M e m o Items Overall Balance/Revenue (%) 1.7 15.7 -14.5 -I8.3 -6 .O Current B alan ce/R e ven ue (% ) 5 5 . 6 66.4 34.4 24.4 41 .4 Im o Total Revenues 1699.0 1748.5 2035.4 5627.7 2777.7 Gross FA Revenue 1261.O 1400.0 1548.6 4060.2 2067.4 Value Added Tax 238.0 243.5 305.3 376.8 290.9 Others 28.6 61 1.7 160.1 O w n Revenues 200.0 105.0 153.0 427.0 221.3 Grants -Ecological Funds 152.0 38.0 Total Expenditures 1478.0 2110.0 2222.5 5998.7 2952.3 Total Recurrent I 174.0 1369.0 1968.5 5111.7 2405.8 Recurrent (as per Report) 1174.0 1369.0 1878.0 3573.0 1998.5 Deductions at source 90.5 1538.7 407.3 Others 0 .o CapitaI 304.0 741.0 254.0 887.0 546.5 0vera II BaIance, 221 .o -361.5 -187.0 -371 .O -174.6 O f which, Current Balance 525.0 379.5 67.0 516.0 371.9 M e m o Items Overall Balance/Revenue (%) 13.0 -20.7 -9.2 -6.6 -6.3 Current Balance/Revenue (%) 30.9 21.7 3.3 9.2 13.4 NiPeria States Finances Study 108 April 2003 Nigeria States Finances Study Kano Total Revenues 3423.5 3977.6 3548.0 7506.1 4613.8 Gross FA Revenue 1860.7 2450.9 2371.3 5179.2 2965.5 Value Added T a x 397.6 428.6 51 1.3 6.18.0 488.9 Others 134.7 155.8 43.2 723.8 264.4 O w n Revenues 1030.6 942.4 622.1 762.0 839.3 Grants - Ecological Funds 223.1 55.8 Total Expenditures 3294.5 3203.8 3319.8 8684.8 4625.7 Total Recurrent 181 1.3 2132.5 2531.7 6507.6 3245.8 Recurrent (as p e r Report) 1811.3 2132.5 2327.4 4940.3 2802.9 Deductions at source 204.2 1567.2 442.9 Others 0 .o Capital 1483.2 1071.3 788.I 2177.3 1380.0 Overall Ba Iance, 129.0 773.8 228.2 -1 178.8 -11.9 O f which, Current Balance 1612.2 1845.1 1016.3 998.5 1368.0 M e m o Items 0 vera//E alance/Revenue (% ) 3.8 19.5 6.4 -15.7 -0.3 Current B a/ance/Reven u e (% ) 47.1 46.4 28.6 13.3 29.7 Kw ara Total Revenues 1753.8 3632.6 2285.6 5387.9 3265.0 Gross FA Revenue 1149.4 1869.6 1520.1 3320.0 1964.8 Value Added T a x 200.0 220.0 265.7 325.4 252.8 Others 33.0 490.0 27.7 464.0 253.7 O w n Revenues 371.4 923.0 352.1 1153.7 700 .O Grants - Ecological Funds 130.0 120.0 124.8 93.7 Total Expenditures 1043.6 1640.6 2077.7 3790.9 2138.2 Total Recurrent 824.6 1006.3 1442.9 3077.9 1587.9 Recurrent (as p e r Report) 824.6 1006.3 1316.9 1826.7 1243.6 Deductions at source 126.0 1251.2 344.3 Others 0 .o CapitaI 219.0 634.3 634.8 713.0 550.3 Overa II Balance, 710.2 1991.9 207.9 1597.0 1126.8 O f which, Current Balance 929.3 2626.3 842.7 2310.0 1677.1 M e m o Items 0 vera//Ba/ance/Revenue (% ) 40.5 54.8 9.1 29.6 34.5 Current B a/ance/Reven u e (% ) 53.0 72.3 36.9 42.9 51 .4 Lagos Total Revenues 11127.2 8377.9 13171.8 13949.3 1 1656.5 Gross FA Revenue 5219.6 1615.7 2362.0 5158.9 3589.1 Value Added T a x 840.3 1388.0 1864.4 2103.5 1549.0 Others 43.1 721 .O 191.0 O w n Revenues 5067.3 5374.2 8902.3 5771.9 6278.9 Grants - Ecological Funds 193.9 48.5 Total Expenditures 12936.3 9123.2 12063.1 18276.6 13099.8 Total Recurrent 8701.9 5433. I 8809.5 11867.5 8703.0 Recurrent (as p e r Report) 8701.9 5433.1 8615.6 9884.8 8158.8 Deductions at source 194.0 1982.6 544.2 Others 0 .o Capital 4234.5 3 6 9 0 .I 3253.5 6409.1 4396.8 Overall Ba Iance, -1809.1 -745.3 1108.8 -4327.3 -1443.2 O f which, Current Balance 2425.3 2944.9 4362.3 2081.8 2953.6 M e m o Items 0vera//E alance/Revenue (% ) -16.3 -8.9 8.4 -31 .O -12.4 Current Ba/ance/Revenue (%) 21.8 35.2 33.1 14.9 25.3 Nigeria States Finances Study 109 April 2003 Nigeria States Finances Study O n d o T o t a l R e v e n u e s 1 8 1 7 . 4 2 2 9 2 . 2 2 8 9 2 . 4 8 1 9 6 . 1 G r o s s F A R e v e n u e 7 8 7 . 0 1 4 5 2 . 3 1 6 2 1 . 8 5 4 3 9 . 9 V a l u e A d d e d T a x 2 2 1 . 6 2 9 4 . 6 3 6 2 . 1 O t h e r s 5 4 . 9 3 0 . 5 8 8 4 . 2 O w n R e v e n u e s 7 5 3 . 9 8 4 0 . 0 9 4 5 . 5 1 3 8 6 . 8 G r a n t s - E c o l o g i c a l F u n d s 1 2 3 .I T o ta I E x p e n d itu r e s 1 1 2 9 . 2 1 2 5 3 . 8 2 2 8 7 . 4 7 3 0 1 . 5 T o t a l R e c u r r e n t 7 0 0 . 8 9 0 0 . 2 1 8 9 6 . 1 5 7 2 0 . 4 R e c u r r e n t ( a s p e r R e p o r t ) 7 0 0 . 8 9 0 0 . 2 1 8 0 6 . 5 4 2 4 3 . 4 D e d u c t i o n s a t s o u r c e 8 9 . 6 1 4 7 7 . 0 0 the rs C a p ita I 4 2 8 . 4 3 5 3 . 6 3 9 1 . 3 1 5 8 1 . 1 0 v e r a II B a Ian c e , 6 8 8 . 3 1 0 3 8 . 4 6 0 5 . 0 8 9 4 . 6 O f w h i c h , C u r r e n t B a l a n c e 1 1 1 6 . 6 1 3 9 2 . 0 9 9 6 . 3 2 4 7 5 . 7 M e m o I t e m s O v e r a l l B a / a n c e / R e v e n u e ( % ) 3 7 . 9 4 5 . 3 2 0 . 9 1 0 . 9 C u r r e n t 6 a l a n c e I R e v e n u e (% ) 6 1 .4 6 0 . 7 3 4 . 4 3 0 . 2 O Y O T o t a l R e v e n u e s 2 2 5 4 . 6 2 6 8 0 . 1 2 9 5 8 . 5 6 0 5 8 . 4 G r o s s F A R e v e n u e 1 1 7 3 . 3 1 3 2 0 . 2 1 9 3 0 . 8 4 2 1 7.2 V a l u e A d d e d T a x 3 4 2 . 8 3 4 8 . 3 4 2 1 . 5 5 0 1 . 4 O t h e r s 5 1 .5 6 1 8 . 6 3 5 . 2 5 8 9 . 4 O w n R e v e n u e s 6 8 7 . 0 3 9 3 . 0 5 7 1 .O 5 9 2 . 0 G r a n t s - E c o l o g i c a l F u n d s 1 5 8 . 5 T o ta I E x p e n d itu r e s 3 5 1 4 . 8 3 9 9 4 . 2 4 6 8 4 . 1 6 5 5 2 . 2 T o t a l R e c u r r e n t 1 7 3 6 . 8 1 6 3 2 . 2 2 7 2 6 . 1 5 6 6 6 . 2 R e c u r r e n t ( a s p e r R e p o r t ) 1 6 0 6 . 0 1 4 7 8 . 0 2 4 5 8 . 0 5 4 0 8 . 0 D e d u c t i o n s a t s o u r c e 1 3 0 . 8 1 5 4 . 2 2 6 8 . 1 2 5 8 . 2 O t h e r s C a p ita I 1 7 7 8 . 0 2 3 6 2 . 0 1 9 5 8 . 0 8 8 6 . 0 O v e r a l l B a l a n c e , -1 2 6 0 . 2 -1 3 1 4 . 1 -1 7 2 5 . 5 - 4 9 3 . 7 O f w h i c h , C u r r e n t B a l a n c e 5 1 7 . 8 1 0 4 7 . 9 2 3 2 . 5 ,392.3 M e m o I t e m s O v e r a l l B a / a n c e / R e v e n u e ( % ) 4 4 . 1 7 9 . 4 1 2 . 0 9 . 3 C u rre n t 6 a la n c e / R e v e n u e (% ) 2 3 . 0 3 9 . 1 7 . 9 6 . 5 S o k o t o T o t a l R e v e n u e s 1 2 7 2 . 7 2 1 7 7 . 7 2 4 0 8 . 4 4 9 4 9 . 2 G r o s s F A R e v e n u e 9 3 5 . 9 1 7 3 4 . 3 1 6 1 2 . 0 3 5 2 0 . 7 V a l u e A d d e d T a x 2 2 8 . 3 2 7 4 . 4 3 0 4 . 0 3 7 9 . 9 0 thers 2 9 4 . 0 4 9 2 . 0 O w n R e v e n u e s 1 0 8 . 5 1 6 9 . 0 1 9 8 . 4 4 2 0 . 7 G r a n t s - E c o l o g i c a l F u n d s 1 3 5 . 9 T o ta I E x p e n d itu r e s 1 2 6 7 . 8 1 8 1 3 . 0 2 6 3 3 . 6 5 5 4 4 .I T o t a l R e c u r r e n t 9 9 5 . 7 1 1 2 3 . 9 1 5 1 3 . 5 3 2 8 9 . 5 R e c u r r e n t ( a s p e r R e p o r t ) 9 9 5 . 7 1 1 2 3 . 9 1 4 3 3 . 5 2 6 4 1 . 4 D e d u c t i o n s a t s o u r c e 8 0 .O 6 4 8 . 1 0 the rs C a p i t a l 2 7 2 . 1 6 8 9 . 1 1 1 2 0 . 0 2 2 5 4 . 7 O v e r a l l B a l a n c e , 4 . 9 3 6 4 . 7 - 2 2 5 . 2 - 5 9 4 . 9 O f w h i c h , C u r r e n t B a l a n c e 2 7 7 . 0 1 0 5 3 . 8 8 9 4 . 8 1 6 5 9 . 7 M e m o I t e m s O v e r a I l B a l a n c e / R e v e n u e ( % ) 2 9 . 6 6 0 . 8 5 5 . 5 4 7 . 1 C u r r e n t 6 a /a n c e / R e v e n u e (% ) 2 1 .8 4 8 . 4 3 7 . 2 3 3 . 5 Source: WorldBank Estimatesfrom Field Reports of Consultants Nigeria States FinancesStudy 110 April 2003 Nigeria States Finances Study Table A-7: External Debt Obligations as at 31 December, 2001 (US $m) Debt % of Total Debt Per Capita Abia 608.89 2.15 $242.6 Adamawa 258.23 0.91 $93.6 A. lbom 138.71 0.49 $43.9 Anambra 120.40 0.42 $32.8 Bauchi 88.42 0.31 $23.5 Bayelsa 144.81 0.51 $98.5 Benue 255.83 0.90 $71. I Borno 139.85 0.49 $42.0 C. River 70.19 0.25 $28.0 Delta 133.18 0.47 $39.2 Ebonyi 165.84 0.59 $86.8 Edo 293.49 1.04 $103.0 Ekiti 162.34 0.57 $80.4 Enugu 293.10 1.03 $105.1 Gombe 99.64 0.35 $51.I Imo 408.62 1.44 $125.3 Jigawa 69.01 0.24 $18.3 Kaduna 62.14 0.22 $12.0 Kano 92.69 0.33 $12.2 Katsina 60.80 0.21 $12.4 Kebbi 33.34 0.12 $12.3 Kogi 341.37 1.20 $121.1 Kwara 333.51 1.I8 $164.3 Lagos 421.92 1.49 $56.2 Nassarawa 94.34 0.33 $61.7 Niger 443.93 1.57 $139.6 Ogun 221.08 0.78 $72.2 Ondo 120.00 0.42 $40.7 Osun 366.18 1.29 $129.4 OYO 147.08 0.52 $32.5 Plateau 504.95 1.78 $183.0 Rivers 171.85 0.61 $41.I Sokoto 189.63 0.67 $60.2 Taraba 142.14 0.50 $71.8 Yobe 42.57 0.15 $23.1 Zamfara 24.89 0.09 $9.2 Fed. Gov. 21081.73 74.37 Total 28346.69 100.00 Source: Compiledfrom Data Obtainedfrom the Debt Management Office of the Federation Nigeria States Finances Study 111 April 2003 Nigeria States Finances Study Table A-8: Summary of State Governments ISPOs as at September 30,2002 (naira million) State Amount Outstanding 1 Abia 922.9 2 Ak lbom 255.3 3 Anambra 2326.3 4 Bauchi 240.O 5 Bayelsa 6218.7 6 Benue 2262.3 7 Borno 1900.0 8 Cr River 3804.2 9 Delta 8796.2 10 Ebonyi 190.2 11 Edo 2610.8 12 Ekiti 5343.0 13 Enugu 648.5 14 Gombe 742.2 15 Imo 737.0 16 Jigawa 3581.9 17 Kebbi 209.0 18 Kogi 2212.2 19 Lagos 31024.4 20 Nassarawc 838.3 21 Plateau 2888.1 22 Rivers 1200.0 23 Taraba 511.O 24 Yobe 2841.O Total 82303.5 Nigeria States Finances Studv 112 April 2003 Nigeria States Finances Study Table A-8: Summary of State Governments ISPOs as at September 30, 2002 (naira million) State Amount Outstanding 1 Abia 922.9 2 Ak lbom 255.3 3 Anambra 2326.3 4 Bauchi 240.0 5 Bayelsa 6218.7 6 Benue 2262.3 7 Borno 1900.0 8 Cr River 3804.2 9 Delta 8796.2 10 Ebonyi 190.2 11 Edo 2610.8 12 Ekiti 5343.0 13 Enugu 648.5 14 Gombe 742.2 15 Imo 737.0 16 Jigawa 3581.9 17 Kebbi 209.0 18 Kogi 2212.2 19 Lagos 31024.4 20 NassarawE 838.3 21 Plateau 2888.1 22 Rivers 1200.0 23 Taraba 511.O 24 Yobe 2841.O Total 82303.5 "ISPO -Irrevocable StandingPayment Order Source: Office of theAccountant General of the Federation Nigeria States FinancesStudy 113 April 2003 Nigeria States Finances Study BIBLIOGRAPHY Abubakar I. 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