Why states are running bankrupt - Abia Among Healthy States

Are states and local governments in the country agents of development or mere conduit pipes for channeling proceeds of federation account allocations?  That is the question that stares everyone in the face in view of recent revelations about the finances of most of the 36 states of the federation. While the 1999 Constitution as amended designs the state as vehicle for the actualization of the fundamental objective and directive  principles of state policy as enunciated in chapter two of the Constitution, the operation of the component units of the federation as captured in the ground norm has maintained a continuous slide from the ideal since 1999.  Coming from a state of abyss under the military, it was permissible however that the finances of the states were at the most unstructured level at the start of the current Republic.

But overtime, it has continued to emerge that the states are doing more of rent seeking than actual management. Fewer states are turning in anything tangible in terms of Internally Generated Revenue (IGR), while many have completely left the collection of such to touts and political hangers on, as evidence of political patronage.

Many of the states resorted to the bond market, which in actual fact means spending much of your future earnings today.

The effect of the growing rush for the bond market too will not take eternity to show. From the second term of the Fourth Republic, starting from 2003, some signs of distress were beginning to surface in the management of state finances. The coming into force of the Debt Management Office (DMO) in 2000 created the much needed statistics that provided insights into the financial health of the states. Much attention could,  however, not be directed at that because of the battle to free Nigeria itself from the shackles of debt it got entangled in on the platforms of Paris and London Club of Creditors. With Nigeria practically out of the huge debt profile in 2006, concerns shifted to domestic debts and the growing state indebtedness. Right now, the situation is not only worrisome to managers of the economy; it has been described as critical. Chairman of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC), Mr. Elias Mbam said at a senate public hearing held to look into the state of indebtedness of the states that states have become rent seekers, solely living on proceeds of federation account, which are also further tied to bank debts, foreign debts and bonds.

The public hearing was sequel to a motion on the growing bankruptcy in the states moved by Senator Olubunmi Adetumbi on October 27, 2011. The Senator had called the attention of the Senate to the growing concern for the finances of the states and the danger of insolvency facing the 36 states of the federation.  Quoting a study of the Nigerian Governors’ Forum (NGF), the Senator noted that 20 of the 36 states are faced with prospects of unstable and unfavourable financial standing, based on the high percentage of their wage bills in relation to the total revenue accruable. The motion was unanimously accepted by the Senate, which immediately assigned a Joint Committee including Committees on National Planning, Finance, States and Local Governments and Appropriation to conduct a public hearing and report its findings to the plenary.

According to the scary statistics submitted by Senator Adetumbi, only four states of the federation can be said to have healthy state of accounts. They are Abia, Akwa-Ibom, Anambra, and Jigawa. While records show that Abia spends 14 percent of its revenue on personnel cost, Akwa-Ibom and Anambra spend 12 per cent on the same, while Jigawa spends six percent on personnel costs. Imo (19 per cent), Kwara (18 per cent); Lagos (18 per cent); Kebbi (16 per cent); Delta (15 per cent) are regarded as operating within the tolerable status, while six states are regarded as completely distressed.

On that list include Kano; Sokoto; Niger; Zamfara; Katsina and Osun.

The statistics presented from the Governors Forum Labour Policy Report for 2011 further indicates that Kano expends 126 percent of its revenue on personnel costs, Sokoto, 62 percent and Niger 56 percent. Zamfara spends 54 percent of its revenue on personnel costs, while Katsina and Osun spend 50 percent each of their earnings on personnel costs to stand rooted on the distressed cadre. States that spend between 48 and 30 percent of their total revenue on personnel  costs are regarded as being in critical state and they include  Ekiti(48 per cent); Plateau(44 per cent ; Benue(42 per cent); Edo(42 per cent ); Borno(41 per cent); Adamawa(40 per cent ); Cross Rivers(39 per cent ); Enugu(39 per cent); Taraba (38 per cent); Ogun(37 per cent ); Kogi(32 per cent); Yobe (32 per cent); Ebonyi(31 per cent); Ondo(31 per cent) and Kaduna(30 per cent), while states which spend from  27 and  20 percent of their earnings on personnel costs are regarded as unhealthy. They are Oyo (27 per cent); Bauchi (26 per cent); Bayelsa (24 per cent); Nasarawa (24 per cent); Gombe (23 per cent) and Rivers (20 per cent).   

Senator Adetumbi further submitted that states have now become social employers of labour with unsustainable high work force which makes service delivery almost impossible. With a weak private sector, he projects that the economy would be in further danger even as states become financially insolvent and increasingly handicapped to finance the real sector and drive growth.

He also presented statistics to further trouble the discerning minds. States have encumbered themselves with bonds from the capital market, much of them long term. The records on ground show that Lagos alone had participated in the financial bonds on three occasions, with a N15 billion bond in 2002 and two other series including N50 billion as the first series and another N57 billion bond in the second series. Other states on the bond market list include  Imo(N18.5 billion)Kwara(17 billion); Bayelsa(N50 billion); Ogun N50 billion);Niger(N6 billion); Kaduna (N8.5 billion); Ebonyi(N16.5 billion); Delta(N5 billion); Kebbi(N3.5 billion); and Yobe (N2.5 billion). Osun has disclosed that it will take N50 billion to finance its 2012 budget. With such huge financial burden, it is apparent that the states are not only living from hand to mouth, but are mere appendages of the government at the centre. The Senator submitted that the infrastructural deficits in the states has continued to put pressure on the major urban centres with attendant migration and worsening crime rate. But to the Senator, the fear is not in borrowing but the absence of proper procedures which further exposes the borrowed funds to misuse.

In an interview with The Friday Edition, Senator Adetumbi insisted that states are really enjoying the bad patch of the economy and that there is the need to urgently revise the trend.

He said of the motion: “That motion has brought to the fore the fiscal challenges that most states of the federation are facing. A situation where some states are spending as high as 126 percent of their internally generated revenue on wages meaning that they have to borrow to meet up. Others spend between 60 and 80 per cent of their total revenue as personnel cost, leaving less than 20 per cent for capital expenditure, that is not acceptable in a developing country where the running of the bureaucracy is costing more than what is required to open up the economy.

“Because you open up the economy through education, service delivery, infrastructure and the enabling environment for businesses to run. l am not, however, surprised that most states are now going to the capital market to raise funds but why do you need to borrow even at a very high percent if your internally generated revenue and the money coming from the federation account are enough for you to do what you want to do. They are raising bonds to finance infrastructure projects because there is a gap in their revenue that is not enabling them to do as much capital projects as the development of their states is calling for.”

The Senate reasoned along with Adetumbi and committed the motion to further scrutiny by the Joint Committee. On March 14, the committee gathered stakeholders at the Hearing Room One of the Senate main building to discuss the unfolding scenario of bankruptcy in the states.

RMAFC Chairman and the Debt Management Office did not deviate from the submissions presented by the Senator from Ekiti North on the Senate floor last October. Chairman of RMAFC, Elias Mbam corroborated the findings of the Senator when he declared that the states had so far been living on funds they did not generate.

He stated that most states had mortgaged the monthly allocations from the federation account, due to heavy loans and bonds burden. According to Mbam, besides the local debts, most states have also exposed themselves to foreign debts and bonds, which have practically mortgaged the monthly allocations they receive from the Federation Account.

RMAFC said that as at the end of last year, the 36 states and the Federal Capital Territory (FCT), Abuja were owing about N339.9 billion (about $2.165billion), which it said was making it difficult for them to finance developmental projects and grow the economy of the states. That is besides the states’ indebtedness to local banks in short term borrowings and the exposure to the capital market.

The RMAFC submitted at the hearing: “Records available to the commission from the Debt Management Office (DMO) showed that as at December, 2011 the total external debt stock of all the states (multilateral) stood at $2.165billion, while that of the Federal Government stood at $3.5billion and a domestic stock of N5.622trillion for the Federal Government alone. The commission considers this profile as high.”

Mbam also said that as a result of the huge debt profile, there have been consistent deductions from the allocations of most of the states of the federation for settling external and domestic debts and the bonds. He said that the development was an indication that most of the state governments had collaterised their share of the monthly Federation Account receipts to service debts.

Another trend which is worrisome to managers of the nation’s economy is the fact that most of the debts owed banks by states were tied to Irrevocable Standing Payment Orders (ISPOs) issued to the Accountant General of the Federation to deduct directly from their monthly statutory allocations.

Mbam said: “The implication is that these debt overhangs weigh heavily on the monthly allocations due to the states thereby preventing them from meeting their minimum basic obligations to the citizens.”

According to him, deficit budgeting has become a serious challenge for most states, noting that even though deficit budgeting is tolerable within an acceptable limit, its endless application has endangered and forced the state governments to resort to excessive borrowing in order to meet their basic expenditure demands.

He said these excessive borrowings continued even when where the states had obviously no capacity to pay back.

The chairman of RMAFC stated that the consistent demand by the states for their share of the Excess crude revenue account is an indication of the desperate financial position of the state governments to get funds in order to meet costs of governance.

He said: “For instance, the sum of $1.5billion was shared in three equal installments from the excess crude account in 2011 alone out of which states received the sum of $400.8million.”

He told the joint committee that between 2009 and 2011 all the states had a gross statutory allocation of N2.66trillion out of which N266.89billion was deducted as total foreign and other loans within the period with varying degrees of effect on the allocations.

Mbam noted that noticeable indicators of financial distress in states include the cries by states that they could not pay the new national minimum wage in the face of the task to provide minimum services to the citizenry.

“This is a critical sign that the finances of most states and local governments were unhealthy. Today, most states have not been able to implement the new minimum wage. This challenge has made state executives to call for the review of the Revenue Allocation Formula in favour of states.

“Equally, they have also called for the removal of fuel subsidy which they also believe would enhance the revenue accruing into the Federation Account and invariably the statutory allocations to their respective states and local governments,” he said.

Mbam, however, recommended that the National and State Assemblies should consider appropriate legislations limiting the total exposure of states to external and domestic borrowing to not more than 20 per cent of their monthly allocations from the Federation Account.

“In addition, such borrowing should be for economic projects. Furthermore, there should be strict compliance to the relevant provisions of the Borrowing by Public Bodies Act,” he said.

As a way of redressing the obviously parlous state of finances of the states, the Revenue Mobilisation Chairman said that governments at all levels should diversify their economic base in order to enhance internally generated revenue, just as he called for a review of exclusive and concurrent legislative lists in the constitution with respect to the responsibilities of the Federal, States and Local Governments for appropriate revenue allocation.

“The cost of governance should be reduced drastically by cutting down recurrent expenditure, particularly, the number of aides, ministries, departments, agencies, wastages, etc. There should therefore be more emphasis on capital projects,” 

Mbam said, adding that allocations from the excess crude account should be targeted at economic projects that have direct impact on the people while relevant government institutions should be strengthened to effectively monitor and ensure full compliance with the extant laws in the use of public funds.

As the Senate is currently awaiting the verdict of the Joint Committee on the way out of the near certain insolvency by the states in the aftermath of the public hearing, some stakeholders are further expanding the frontiers of the argument.

Last month, Senator Nurudeen Abatemi-Usman, Vice Chairman, Senate Committee on Niger Delta Affairs also extended the barricades of the argument on the indebtedness of the states when he presented a bill before the Senate seeking to ensure autonomy for local governments in country in view of the grinding poverty staring the states in the face.

Senator Abatemi-Usman said that financial autonomy for local government areas in the country would give room for rapid growth and development at the grass-roots level. Though the bill is a variant of the Constitution amendment bills being put together by the Senate committee on constitution review, Abatemi believed that the urgency of the matter, as a result of the insolvency ravaging the states and the certain determination of the states to drag the local governments into the pit mandated him to present it immediately. What the Senator appeared to be saying was that if the states go down with the local governments tied to their aprons, the fate of national economy itself is in doubt.

The senator representing Kogi Central said in the lead debate that the autonomy granted local governments through the 1976 Local Government Reform had been whittled down considerably over the years and that most states of the federation had misinterpret section 7 of the 1999 Constitution to suit their whims. According to him, local governments had been prevented from functioning the way they should due to financial strangulation by the states.

He submitted: “Local governments have, over the years, suffered from the continued whittling down of their powers, and state governments had continued to encroach upon what would normally have been the exclusive preserves of local governments and consequently there has been a divorce between the people and government at their most basic levels.

“There is no gainsaying that the critical roles of local governments have indeed been impaired, in fact, out-rightly subverted because of corruption in some instances by states. In other cases, the process of disbursement of the accruable funds, as allocated from the Federation Account to the respect beneficiary local councils often get grossly abused; while some states deduct certain percentages before the release of the balance, in the name of servicing social amenities and infrastructure, which are non-existent, in most cases, others simply hold on, at will.”

He declared that the termination of the joint state and local governments’ accounts will help to substantially eradicate the anomaly. The senator stated further that the delay in release of council funds and deductions by the states had become tools in suppressing the efficiency and service delivery by local governments across the country.

But all stakeholders know that yanking the local governments off the apron strings of the states would not come as an easy task. The Senate and, indeed, all stakeholders must be on the alert if the idea is to be achieved in that direction.

Source: Nigerian Tribune