Memo to the President - Beyond an Empty Treasury, Next Steps

Proshare

Tuesday, July 07, 2015 02.15 PM / Research Team

The new government in Nigeria under your leadership has promised a lot to the citizens in the build up to the elections, and also in its ambitious manifesto, which seeks to implement radical changes in all key sectors of the economy, with the aim to better the lot of all the key segments of the society.

 

Not only would roads and well equipped schools and hospitals be built, even school children have been promised meals at school, the unemployed have been promised monthly unemployment allowance that is a little over a quarter of the national minimum wage.

 

But the regime has found in its first month in office that the treasury is not only “empty”, but that there are huge operational deficits left behind by the former regime, and workers are owed several months in salary arrears in more than half of the states (sovereigns in themselves) and in some federal agencies.

 

Finding the money to pay operational deficits and salary arrears must obviously take priority over food for school children and allowances for the unemployed, which will now have to wait until government has more than enough revenue to meet operational obligations as they fall due.

 

In addressing this, the President stated at the inaugural National Economic Council meeting held on Monday, June 29, 2015 that:

 

…the Federal Government will abide by the provisions of Sections 80 and 162 of the Constitution and ensure more accountability, transparency and integrity in the Distribution of the Federation Account. All Revenue Generating Agencies such as Nigeria National Petroleum Corporation (NNPC), Nigeria Customs Services (NCS), Federal Inland Revenue Services (FIRS), Nigeria Ports Authority (NPA), Central Bank of Nigeria (CBN), Nigeria Maritime Administration and Safety Agency (NIMASA) and Liquefied Natural Gas (LNG) amongst others shall comply with stipulated Financial Regulations and Administrative Instructions in their remittances into the Consolidated Revenue Fund.”

 

There are a few issues arising therefrom that require the urgent attention of Mr. President in terms of strategic intent, the state of the law and the practicability of the execution objectives.

 

While this forms the focus of this missive, it may be worthwhile to remind you that of all the challenges/dysfunction in governance in Nigeria, and there are many, is the absence of strategy that cuts across party lines - a common vision for where we as a nation want to go and how we get there.

 

The absence of this core strategy lends credence to the “make it up as we go along” mantra that dominates governance at all levels, breeds non-accountability and offers space for impunity.

Government ought to be strategic, efficient, accountable and responsive to its citizens beyond tokenism.

 

Nigeria’s Current Fiscal Realities, Economic Council and Priorities

 

To avoid taking much of your time expounding on the implications of this lack of a common vision and absence of sovereign strategy, let us focus on matters arising from the pronouncements made at the NEC meeting referred to above.

 

First, the list of MDA’s from Mr. President includes the Liquefied Natural Gas (NLNG) which for all intent and purpose should not have been so included as it is NOT an arm of government covered directly under the consolidated revenue fund but a private company / joint venture agreement that contributes both profits (dividends) and taxes and is not covered under the consolidated accounts provisions as an MDA.

 

For emphasis, Nigeria currently owns approx. 49% of the Joint Venture Agreement (JV) in that project, indicating we are a minority owner and cannot appropriate the structure and system designed/agreed to deliver on the project. The LNG should therefore have been excluded from such a list; and a demand made on the appropriate / responsible office to ensure that revenues due from such a JV agreement is properly accounted for.

 

Second, the provisions of the constitution supports the decision of the President/NEC as stipulated in the constitution as indicated in the appendix YET, we must draw attention to the other provisions of laws passed which confers on these MDA’s a self accounting/semi-autonomy status.

 

The legislative and constitutional framework for the fiscal arrangements that exist for the inter and intra tier relationships that exists among the three tiers of government of the Nigerian Federation need to be reviewed to allow the NEC to discharge the intents of Mr. President. See the following relevant laws under Appendix 1 and 2.

 

Third, the next step must be the re-visiting of the audit functions as well as the changes needed via NASS on the conflicting and overlapping regulations that seemingly democratized corruption to the non-accountability of MDA’s. This offers the presidency a negotiating template with the NASS which should be immediately explored.

 

The Fiscal Reality of Nigeria:

Summary of Government Finances in 2013


The total revenue in the federation account was 12 percent of GDP in 2013. Federal Government revenue was 5 percent of GDP, States got 4.8 percent of GDP, and Local Government Areas got 2 percent of GDP.

 

The revenue available to the Nigeria government fell both in absolute terms and relative to GDP in 2014, because of the decline in oil price in the second half of the year, and is expected to fall further in 2015, because of lower average oil price than in 2014.




Nigerian thus faces a paradox of having the Africa’s biggest economy but not Africa’s biggest government revenue. While Nigerian economy is about 155.4 percent of South Africa’s economy, the revenue generated by Nigerian government is only about 79.5 percent of the revenue generated by South African government.


Thus, Nigerian government currently has inadequate revenue to deliver quality governance. Little wonder that health, education, security and basic infrastructure services such as roads, water and sewerage provided by Nigerian government have been very poor and deteriorating.

 

A key priority of the new government is therefore not what to spend money on, but how to find the money in the first place.

 

However, huge leakages from the Nation’s revenue collection processes constitute the bane of Nigeria’s revenue inadequacy. News headlines frequently point to the existence of unbelievably large leakages from oil and non-oil revenue collection processes in Nigeria.

 

The main types of leakages are:

  Crude oil ‘theft’.

•  Unauthorized petroleum ‘subsidy’ payouts from excess crude savings.

  Abuses of import-duty/t ax waivers.

  Autonomy of revenue collecting agencies to spend at will and remit part of their surpluses.

 

Nigeria needs to put an end to crude oil theft, stop all petroleum subsidy payments, streamline tax/import-duty waivers, amend existing laws to abolish the autonomy granted revenue collecting agencies and create a single-treasury-account for all types of government revenue, with all government ministries, departments and agencies included in a single appropriation process.

 

Thus, in spite of the ambitiously welfarist disposition of the new regime, the stark fiscal reality is that the regime has to plug numerous large revenue leakages before it can determine what spending commitments it can credibly make.

 

Fortunately, the regime has a good number of people with proven track record of blocking revenue leakages in its fold, even if that feat had previously only been accomplished at the state level, there are reasons to hope that the feat could be repeated at the federal level.

Related Links

1.    Workers' salaries: Buhari bails out states with N713.7b – The Nation

2.    President Buhari Inugural Address to National Economic Council

3.    June inflation expected to increase marginally to 9.1%

4.    Still poor non-oil revenue collection

5.    Buhari: Slow Start or Guessing Game - LBS July 2015

6.    NBS Releases Q1'15 Job Creation Full Report; 469,070 Jobs Created

7.    An unexciting FDI story

8.    July 2015; Back in positive territory

The Research Team

1.    Olufemi AWOYEMI, CEO Proshare

2.    Ayo TERIBA (Dr.), CEO Economic Associates

3.    Kola OGUNLEYE, CEO Decon Associates

Appendix 1

 

THE LAWS:

FEDERATION ACCOUNT


Sec. 162(1) of the 1999 Constitution provides as follows:

The Federation shall maintain a special account to be called "The Federation Account" into which shall be paid all revenues collected by the Government of the Federation, except proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigerian Police Force, Ministry or a department of Government charged with the responsibility of for Foreign Affairs and Residents of the Federal Capital territory, Abuja.

CREATION OF REVENUE MOBILIATION ALLOCATION AND FISCAL COMMISSIONS
Sec. 153(1) (n) of the 1999 Constitution provides for the establishment of the Revenue Mobilization Allocation and Fiscal Commission which is saddled with responsibilities which include the monitoring of revenue accruals into and disbursement from the Federation Account, preparing a new Revenue Allocation Formula, fixing remuneration of political office holders; advising Federal and state Governments on fiscal efficiency and revenue generation.

CREATION OF CONSOLIDATED REVENUE FUND
S.80 of the 1999 Constitution provides for the establishment of the Consolidated Revenue Fund (CRF) an account into which the receipts of the tiers of Government from both the Federation Account and internal generated revenue are paid into.


PARASTATALS AND OPERATING SURPLUSES REMMTTANCE
The FRA provides for Parastatals to remit only their operating surplus into the Federation Account.

Appendix 2
Federation Revenue vs Consolidated Fund: MDAs, Parastatals and Revenue Agencies. What are the relevant Deliverables?

The legislative and constitutional framework for the fiscal arrangements that exist for the inter and intra tier relationships that should exist among the three tiers of government of the Nigerian Federation is contained in the following laws namely:

a) the Constitution of the Federal Republic of Nigeria 1999 as amended to date(s80-s89)

b) the Management and Finance Controol Act 19558 as amended to date

c) the Fiscal Responsibility Act 2007

d) Revenue and Fiscal Mobilization Commission Act

e) the Public Procurement Act 2007

f) the Petroleum Act

g) the CBN Act 1958 as amended

h) the FIRS Act

I) Sovereign Wealth Fund Act

j) Excess Crude Account( administratively created at FAAC)

k) the Nigerian Customs and Excise Dept. Act

l)  the NPA, NIMASA etc Acts as amended.

 

The public financial management system operative in the country is anchored on the provisions of the above mentioned laws. The revenue and expenditure statement is based on the annual appropriation law as passed by the NASS.

 

The revenue side of the county's fiscal budget is dominated by oil revenue which accounted for over 70% of the total revenue.

 

The determination collection and accounting for the various revenue sub heads is undertaken by the various Revenue Agencies established under the law for the respective purposes.

 

However all revenues collected must be deposited in the Consolidated Revenue Fund(CRF), a body created under the provisions of the constitution and the Finance Management and Control Act 1958.

 

Each tier of Government should have its Consolidated Revenue Fund into which all revenues are swept into and from which outflows occur into the Development Fund and the Recurrent Funds.

 

The Consolidated Revenue Fund Account is the government account with the CBN(the traditional Government Banker).

 

There is also the Federation account created under section of the 1999 Constitution. As the name suggests, this is the account into school all revenues that are federally collected but belong to the three tiers of Government are credited into for the sole purpose of sharing by the three tiers of Government in a predetermined proportion using a formula that is statutorily determined the Revenue Fiscal and Mobilization Commission.

 

The revenue that are credited to the Federation account include CrudeOil Proceeds, Company Taxes, Custom Duties, Oil related taxes. Each tier of Government's share of the Federation account is added to its IGR to give the total revenue for the state or the Federal Government.

 

The Independently Generated Revenue consists of its share of profits in companies in which the MOFI has invested on behalf of FGN, Surplus in the operation of parastatals such as NPA, NIMASA, etc, total revenue generated by MDAs etc.

 

It is against the background of aforementioned provisions of the law that we make the following suggestions namely:

 

1). MDAs are to remit wholly their revenue into the CRF

2). Government owned companies are to remit their declared dividends into the CRF

3). Parastatals are to remit their operating surplus into the CRF

4). Crude oil proceeds net of Joint Venture Cash calls are to be remitted into CRF

5). FIRS and Customs shall remit total collections net of cost of collections as approved in the Appropriation law.

GOING FORWARD – Issues for Consideration

 

1.    There is the need to help the legislators making laws and approving the economic budgets of the country to do so based on a commonly accepted and best practice advice/counsel built into the governance structure. Thus it becomes imperative to create a NASS Budget Office (NABO) by law to offer independent opinion and advice to the NASS on budgetary and economic matters. Essentially, the NASS Budget Office (modeled after the Congressional Budget Office in the USA, from where we adopted our presidential system of governance) produces independent analysis of budgetary and economic issues to support the national assembly budget review and approval process. NABO will be strictly nonpartisan; conducting objective, impartial analysis; and hiring its employees and associates/partners solely on the basis of professional competence without regard to political affiliation. Each year, NABO’s economists and budget analysts will produce reports and cost estimates of/for proposed legislation. NABO would not be required to and should not make policy recommendations.

2.    As a further step to ensure that the executive also fits into the governance loop, it would be necessary to create an Office of Governmental Accountability (OGA); established to provide consolidated personnel, payroll, federal character compliance, and administrative and business office functions, including information technology associated with the functions of relevant agencies of government involved across the sovereign states. 

 

 

3.    Need to reemphasize the need for the FEDERATION AUDIT office to expand his remit/coverage to cater for an independent/non-partisan examination of the management of both the Federation Account as well as the ECA on an annual basis as a component of the budget approval process.

 

4.    The RMFAC operates a static model to determine the sharing formula while the criteria data set keeps changing. There is therefore the need for a dynamic model that responds to changes in the underlying criteria data e.g Population; Number of primary schools etc. The weighted percentages need to be reworked however.

 

5.    It is now obvious and an imperative that the GON must introduce a “Balanced Budget” law for the states in the federation with clearly defined exceptions that does not infringe on the sovereignty of the states but compels an adherence to prudence, accountability and sound governance ethos reminiscent of a developing economy with little leverage for debt accumulation.

 

More specific is the need to ensure that states’ recurrent expenditures are funded by IGR’s and state funds; and that capital expenditures with clear social and commercial value-linkages can and should form the basis for long term funding from local and international markets.

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