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What next after the banking crisis and amnesty?

October 12, 2009

Nigeria’s banking crisis and the return of peace, however tenuous, to the Niger Delta is a teachable moment. Both present a chance for broad reforms. The plan to spend $2 billion from the Excess Crude Account (ECA) is cheery news. But it’s far from enough. Hitherto, the economy has been systemically mismanaged. Corruption in Nigeria is legendary. A clutch of kleptocrats, ethnocrats and businesspeople can drive any economy to the brink of disaster. Self-serving people are never in short supply, especially when there’s no rule of law and institutions. More so, as 2011 draws nigh, electoral reforms, to stem electoral banditry, need to be put in place.

Nigeria’s government: executive, legislative and regulatory, has its fair share of blame. Its action and inaction, in the management of the economy, partly caused the both crises. Yet, the present situation would be a terrible thing to waste. Take the issue of fiscal federalism.

Repeated calls for fiscal decentralisation are not new in Nigeria. Political pressures for devolution are, in the main, driven by multiple ethnicities and/or wide regional disparities in incomes or resource endowments says a report, Macro Policy Lessons for a Sound Design of Fiscal Decentralization, by the IMF. Beyond these, fiscal decentralisation illustrates “a desire for more participatory government and greater voice of local constituents in the allocation of budgetary resources.” The paper distils lessons from IMF member countries, including Nigeria.

It offers ideas on the design and implementation of intergovernmental fiscal arrangements. There isn’t a “right” model. Varied policy and institution-building issues; strong influence of history, politics, social and economic factors; coordination and sequencing make that difficult. In addition, macroeconomic conditions of different countries, balancing efficiency and distributional matters and reflecting the relevant institutional factors were considered.

Nonetheless, Nigeria can benefit from some of the lessons. Primarily, resources of subnational governments’ must be matched by their responsibilities. Therefore, the resource-responsibility sharing formula must bear in mind the capacity of local and state governments.

To promote accountability and responsibility among states and local governments, control over their own resources is necessary. A set of minimum conditions, say, public financial management (PFM) requirements, may have to be complied with. Also, it is important to recognise that the tax base and tax collection abilities of subnational governments differ.

As it is, Nigeria’s fiscal system gives little fiscal autonomy to subnational (state and local) governments. Mismatch of revenue and responsibilities is the cause. Take the inane delineation between federal and state roads. These in turn hardly lift a finger to generate revenues internally; they are overly dependent on federally generated revenues. This goes against the principle of subsidiarity. That is, the right for subnational governments and civil society (family, groups associations etc) to do what they can do on their own.

Rather, economic, institutional and juridical assistance from the central government fosters initiative and responsibility. The implications are overwhelmingly positive. State and local governments that generate funds from taxes are more likely to be responsive and accountable to civil society. The practise of democracy will in turn be more representative and participatory. Labour and capital, of citizens, will move elsewhere, if the state local governments are inefficient. Faced with competition from other states or local governments, there is an incentive to improve service delivery, be more accountable and less corrupt. In short, fiscal decentralisation encourages competition.

State and local governments play the most significant role in delivering basic services. Fiscal centralisation breeds over-dependent subnational governments. A declining trend in internally generate revenue (IGR), by states and local governments, over the years asserts to this. Unaccustomed to fending for themselves, and with weak institutions eg, Board of Internal Revenue (BIR), they are hard pressed to offer decent governance. Alternatively, a matching mechanism (ie, states and local governments IGR efforts are rewarded by federal allocations) may encourage looking inwards thus reducing dependence on the centre.

Fiscal decentralisation has its “dark side”: macroeconomic disruptions and debt crises. State governments and banks are swarming the bond market. The Debt Management Office’s (DMO) lid on borrowing and plans to have states ascertain their GDP are steps in the right direction. Nonetheless, “it is the design of intergovernmental fiscal relations, more than the degree of decentralisation, that affects efficiency and growth, as well as macrostabilisation.”

Sadly, ministries, departments and agencies (MDAs) responsible for formulating and implementing devolution policies are incompetent and corrupt at that. Public (and private) administrative skill is a scarce resource in Nigeria. Gravitation towards civil service reform (in all tiers of government) and public-private partnership (PPP), where appropriate, are options that have to be explored some more.

For instance, PPPs can form clusters to provide services such as health, waste management and road construction for geographically close states and local governments. Rather than disperse resources through proliferation of services. No less, an efficient judicial system, to check brazen rent-seeking and fiscal indiscipline, is necessary. However difficult and time-consuming overdue legal reform may take.

Infrastructure development and job creation

Financial Derivatives, a financial advisory firm, estimates Nigeria’s infrastructure deficit is $100 billion. The Infrastructure Concession Regulatory Commission (ICRC) puts it within a $60-$90 billion range.

Related ratios from the World Bank’s Little Data Book on Africa 2008 put things in perspective. The ratio of paved to total roads in Nigeria is 15 percent. 51 percent of Nigerians have access to electricity. (Access isn’t synonymous with uninterrupted supply). Of every 100 Nigerians, 24 are telephone subscribers; while there are 6 Internet users per 100 Nigerians.

Peter Drucker, in his 1992 book Managing in a time of great change, listed information and technology ie, the insatiable demand for telephone services in developing and emerging countries and the growing need to repair, replenish and upgrade physical infrastructure especially transport systems eg, roads, railways, bridges, harbours and airports as the other new markets. Drucker’s predictions are no less true today, as governments seek ways to outgrow the downturn.

Developing countries that jumped into the global competitive boat have sailed on adequate infrastructure. This has supported self-sustained economic growth and social wealth. Infrastructure (power supply, transportation, telecommunications, water supply etc) are a prerequisite for industries keen on effectively managing their costs while providing high quality service. Innovation and trade (industrialisation of developing countries) are the antidotes for returning the world economy to a new normal.

Thankfully, provision of infrastructure, once the exclusive domain of governments, is attracting a surge of private finance. Understandably, governments, due to financial crises, budget deficits and narrow tax bases, need alternative sources of finance. More so, loans from banks do not match the long-term nature of most infrastructure projects.

Some States in Nigeria, like Imo and Kwara, following the footsteps of Lagos, have tapped the capital market to raise funds. Since 2008, all three states have issued the first tranche of fixed coupon bonds. A good proportion of the borrowed money will be used to develop critical infrastructure.

Kwara State, gradually turning into an agriculture cluster, will spend 13 percent and 5 percent of the 18 billion naira on a mixed dam in Asa and an agriculture irrigation project respectively. More than half of Imo State’s 18.5 billion naira bond will be gulped by critical infrastructure. Lagos State, with its immense appetite for infrastructure, plans to fund a considerable part of the mega city project via subsequent bond issues (275 billion naira in total).  As an asset class these bonds offer a decent return. Their success is a sign of investor’s confidence; Lagos State’s 2008 issue was 15 percent oversubscribed.

Chances that more States will follow suit are uncertain. As the economy contracts so will allocations from the Federal account. Also, states with a broad and effective tax system are in the minority. If they do succeed, a higher coupon rate and, say, a higher percentage of monthly deductions paid into a sinking fund, may be required to lure investors. For instance, Niger state recently concluded plans to raise a 6 billion naira development bond. A 14 percent fixed rate redeemable bond that will be used for road reconstruction and rehabilitation.

All said, grossly inadequate electricity supply has lurched Nigeria into near permanent darkness. Trapped under a power spell, the country is waiting to hear the presidency declare a state of emergency.

The economy is shrinking as industries either cut down production shifts or wind down. Doughty businesses, weighed down by rising diesel and low pour fuel oil (LPFO) prices, are struggling to pass on the cost to consumers. Decline in capacity utilisation means that either layoffs or freezes on employment are the painful, but necessary means to remain in business. The economy is paying for it.

Fragile peace in the Niger Delta is offering an opportunity. A rethink, to quicken development particularly in the area and the country, is overdue. Nigeria can copy India’s liberalisation of its power sector. Prior to liberalisation, the central and state governments generated power in India. Reforms were introduced when the State Electricity Boards (SEBs) could not meet the country’s demand-supply power gap.

Specifically India’s reforms expanded the role of Independent Power Plants (IPPs) in transmission, generation and distribution; liberalised electricity sale and re-sale rules (Nigeria’s current Price Purchase Agreement (PPA) is investment unfriendly); removed restrictions on captive power; and permitted up to 100 percent foreign direct investment (FDI). As of 2007, 33 percent, 55 percent and 12 percent of electricity installations in India was owned by central government, state government and private investors respectively.

Nigeria, faced with prolonged darkness and limited socioeconomic growth, can adopt a similar framework; albeit with a few changes. Each of the 36 states or a cluster of regions should be constituted into State Electricity Companies (SECs) or Regional Electricity Companies (RECs).

Past experience of the inefficiency of State-owned enterprises (SOEs) suggests that these companies be run as Public-Private Partnerships (PPPs). Whether on build operate and transfer (BOT) basis or any of its variants. However, private electricity companies should be encouraged; healthy competition drives innovation and service quality. In addition, experts suggest the encouragement of off-the-grid power generation eg, private industrial and commercial clusters.

Also, it’s imperative that all arrangements diversify their energy sources: water, gas, wind, solar, biofuel etc.  Overall, a friendly investment climate, to attract foreign and local investors, is important. Power generation is a long-term investment. Broadening and deepening Nigeria’s financial market will provide alternative funding sources.

The uptick in corporate bonds issuance and sanitisation of the banking system should broaden funding alternatives. Money raised by the banks, complemented by FDI, can be used to fund Nigeria’s electricity-starved economy. Because, as a new world order ushers in a new normal, governance, innovation, industrialisation, infrastructure, agriculture and education are requisites for any prospective global player.

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2 Comments leave one →
  1. October 22, 2009 4:30 pm

    On Federalism and the banking industry in the US (obviously for comparative purposes here): I suspect that the latest compromise regarding state banking regulation points to the influence of large corporations on the Congress as a culprit in the on-going eclipse of federalism. I have just posted on this, in case you are interested.

    • tfagbule permalink*
      October 22, 2009 7:05 pm

      Interesting comparison. Big corporations do have a lot of influence. My worry is that the advantage of a point-man may make regulatory capture easier. Then again, could it be that the compromise was reached in order to get the big banks accept a consumer protection agency? Larry Summers recently alluded to their resistance (see http://www.economist.com/businessfinance/displayStory.cfm?story_id=14686298)

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