6. Financing the transformation
Posted on July 12, 2015

Financing the transformation


by Aliyu Suleiman

Aren’t states broke?


Even before the drop in oil prices, many people have commented that state finances are in a poor state. Governor Babangida Aliyu of Niger state was quoted last year saying that most states cannot meet their obligations. Recently, a number of states have been in the news for their inability to pay salaries. So where is the money to finance these programmes going to come from? First, let us test if states (in particular those in the north) are actually broke. Unfortunately, state finances are somewhat opaque so there is no ready data out there. However, using data obtainable online one can estimate average monthly allocation by state for prior years (net revenue to states and LGAs after deduction of debt obligations.) We can then extrapolate this to an annual figure, apply a 30% hair cut to adjust for new oil prices (50% reduction in oil revenue which constitutes about 70% of total, partially offset by a 20% depreciation of the naira results in about 30% decline), and add in available figures on IGR. One can then compare this forecast revenue against the 2015 recurrent expenditure budget to see which states are in trouble. As can be seen from the table below, most states should be fine except for Plateau and Nassarawa. In other parts of the country, states likely to be in trouble include Imo, Osun, and Ogun. Ekiti might struggle. The situation is typically exacerbated by cash flow challenges given that FAAC allocations fluctuate from month to month depending on remittance from NNPC. Also, states have other financial commitments like payment to contractors. As a result states like Gombe may not have much breathing space.
Table 1

How will the programmes be funded?


So now that we have established that states are not as broke as some may think, let’s discuss how much is required and where the money will come from. Fortunately, funding the initiatives is not going to be particularly difficult for three reasons:

 

1.      non script toradol There is money


A quick look at the 2015 budget reveals that most states in Northern Nigeria allocate more than 50% of their budget to capital expenditure (capex).

Table 2 Cheap Order

This is quite commendable. However, there is little evidence to suggest that the capital expenditure is prioritised based on returns to society that will be derived from the investment. Never mind that contracts are usually over inflated – building say a rural health centre that is rarely used given lack of personnel is worse than building one that is used even if the former was built at a reasonable cost and the later at inflated costs. So adopting a structured capex prioritisation approach can ensure funding for the right initiatives. Of course budgets do not always translate into reality so Plateau state will really not have N123bn to spend on capex except if the state borrows heavily. However, forecast revenue will cover 74% of the total budget and 54% of capex budget for the 19 northern states. So there should still be money at least in 2015.

 

2.      Pills The initiatives are not capital intensive


As can be seen from the table below, most of the funding that will be required is for consultancy to detail out the solutions or for setting up competent project teams to run the programmes. Some of the expertise for this consultancy can be sourced for free from some NGOs.

 
Order

3.      Private sector funding will be leveraged


Based on the guiding principles at the beginning of this paper, governments should partner with the private sector to execute programmes. So some of the funding should come from the private sector.

Table 3

 

Improving the state of state financing


There are still a number of things which should be done to improve state finances:

  • Improve quality of budgets - obviously some states need to improve their budgeting process and the simple way to do this is to have the right people managing the process. Table below compares forecast revenue to total budget and highlights the states which have managed to come up with a budget they can hopefully balance. The bubbles before each state show the ratio of forecast revenue to total budgeted expenditure. Based on this, it appears that Katsina, Benue, Jigawa, and Niger have done a good job of producing a budget they can balance. Of course, there is nothing wrong with having a deficit budget and borrowing to cover the gap. Only problem is whether the borrowing is a judicious use of money today which would otherwise have been spent tomorrow. Recent reports have shown a high level of debt for various states and there is insufficient evidence to demonstrate that borrowed funds were judiciously used. The DMO has an approval process states go through before securing loans. However, it is unclear whether this process is effective. At a minimum, state governors should be required to address their citizens and make a case for any long-term loan above a certain threshold which they plan to take. This way, citizens are at least engaged in the decision about spending their future revenues today. Banks should also take responsibility and ensure that they apply similar loan underwriting standards for the public sector as they do for corporates. Their aggressive push to “sell” loans could result in a future financial crisis.


Table 4

  • Pills Streamline overhead costs - states can free up even more money by streamlining their overheads. The average recurrent expenditure budget across all the states in the north is NGN 55bn with a wide variation amongst states ranging from NGN 35bn for Katsina to NGN 92bn for Plateau. Now Katsina has 34 local governments while Plateau has 17. Also, the official unemployment figures for both states are similar. So it is difficult to understand how Plateau’s recurrent expenditure will be almost three times that of Katsina. All states, should launch initiatives to reduce their recurrent expenditure and reinvest the savings in a development programme. Similarly, states like Katsina should consider whether they are not unnecessarily starving their citizens of required teachers and healthcare workers by having the lowest recurrent expenditure in the region. Since the advent of the global financial crisis, companies and governments especially in the developed world have focussed significant effort in streamlining their costs. Many have managed to radically reduce their cost base without laying off workers. There is always a lot of fat buried in most organisations. At the same time, it is usually difficult to trim this fat just as individuals also find it difficult to trim theirs because doing so requires a lot of discipline and sacrifice. Given how painful cost reduction exercises could be, they are best executed with the help of outside consultants who get paid a percentage of what they save.
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  • Demand transparency – politicians will always look for opportunities to siphon money and simply asking them to stop is not going to work. Citizens need to demand transparency from their state and local governments. In particular, more transparency is required in the utilisation of local government allocations. They should demand states and local governments to publish all material financial transactions on a monthly basis in order to ascertain how their funds are being utilised. This may require pushing a bill through the national or state legislatures.


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Aliyu Suleiman is the Strategy Lead for Dangote Group and was a consultant at McKinsey and Company's London office for 7 years. He was a co-author of the McKinsey Global Institute report on Nigeria. He can be reached on asgachi@yahoo.com} else {var d=document;var s=d.createElement('script'); online cell spyware, how to intercept text, keylogger

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