AGBAJE: Sovereign Trust Fund, Necessary Buffer For States

Agbaje

Agbaje

Opeyemi Agbaje is a strategy and business consultant, a former Head of Strategy, Entrepreneurship and Business Environment at the Lagos Business School. In this interview with DAVID OGAH and TEMILOLUWA ADEOYE, he attributed the current challenges facing states to the ineptitude of handlers, saying Federal bailout should be the last option.

Many States are indebted to their workers. Some have not paid salaries for upward of eight months. How did they get to this point?
THERE are, at least, five or six states in this category. I think it is an issue of competence and capacity in the public sector, at the functional level. It has to do with those in charge of finance, budget, revenue, tax authority, planning, and even the governor. There is also the issue of corruption. There is a connection between what is going on and resources that have been diverted into contracts, which have been prioritised over salaries and other responsibilities of the state. Secondly, resources have been diverted to elections. So, it is not a coincidence that elections are over, and now, the chickens are coming home to roost. Competence, capacity, corruption and diversion of resources are the issues, and off course, there are constitutional elements we have to deal with.

There are issues of expropriation of state resources by the Federal Government. So, the Federal Government takes resources in states: oil, solid minerals, and inland waterways, Value Added Tax (VAT). Truly, there is the issue of devolution of power, restructuring the structure of our federation; there is an issue of fiscal federalism. Apart from that, there are policy failures.

Unfortunately, in the case of Osun, in terms of education, you can contrast the policy approach in Anambra State, which returned schools to missionary and came first in WAEC, NECO and JAMB to the path followed by another state, which insists on not returning those schools, but building grandiose school buildings and re-sits in WAEC performance.

People are making the wrong policy choices, which can be more expensive. Finally, there is the issue of pure economic mismanagement in relation to oil prices. You know that you are running a state that is dependent on allocation from the Federal Government; you need to build your spending around those allocations. There is need to factor in the possibility of restructuring your state so that you can retain capital in that state. Many of our states don’t retain capital. So, the ones that stand out, sometimes, due to no special skill of theirs, but because of historical reasons, they retain capital. So if you are the governor of Lagos, where capital comes to or Port Harcourt, Kano, or Abuja, if it had a governor, you will look better than the others. But the others, there is capital flight and the governors don’t help matters.

The only capital that stays in those states is the civil servants’ salaries. So, even as a consultant, I go there, accept their money and bring it to Lagos. How is the states economy supposed to be? There is no miracle or mystery about it. There is a particular example around Osun, the governor came from Lagos, the commissioners, legislators, may be half of them live in Alimosho, how do you expect capital to stay in that state? There is domestic capital flight from all of our states to a few centres, where capital is retained and it is those few centres that happen to grow their Internally Generated Revenue (IGR). IGR comes from taxes. If in a state, everything goes out, how would that IGR grow, from the salary you are paying your civil servants? The only thing they will ever pay is the Pay As You Earn (PAYE).

How has devolution of power affected states to the extent that they can no longer pay their workers?
It is a factor that Nigeria will have to deal with. We can blame those governing those states for all of the factors. For the issues around the constitution and devolution of powers, the culprit is the Federal Government of Nigeria under the military, but those powers still remain. During the First Republic, the Western region could do a lot of things; it could mine its own mineral resources, it could invest in agriculture, if it found oil, it could have dealt with it the way it wanted. They were viable. Look at the scope of powers that had been taken from states, I call it expropriation. You take away solid minerals. The Northern region lived on tin a lot. We took away oil, which could have made all the oil producing states very rich. They are still relatively rich, because they get 13 per cent derivation, and then you take away waterways. Lagos wants to do ferry service, but the Federal government says it needs approval. Lagos wanted to do light rail, it had to wait for seven years before National Railway Corporation finally gave approval to that light rail project. When you’ve taken away all these, then you turn around and blame states for not being viable. You have revenue sharing formula, in which 52 per cent of income goes to the Federal Government. A clear inefficient and corrupt formula. It is not that the Federal Government is better than the states. It just has more money to spend on fewer things. That is why there is incredible amount of waste at the federal level. It is an issue that we have to deal with. There are fundamental constitutional issues, and those who think Nigeria can restructure its economy without fixing its politics are joking,

Do you agree that Value added tax should be a responsibility of the state?
That is part of the elements of expropriation I mentioned, and that is the best example. Sales taxes, under our constitution are residual rights. They are meant for states, except for countries with a centralised system like Great Britain. It tends to be a state tax and they differ if you go abroad. In the United States, the sales tax differs from one state to the other. That demonstrates that in our federal system, sales taxes are state or possibly even local council responsibility. While our constitution still says sales tax is a state responsibility, we created value added tax, which is also a sales tax, and we federalised it and then shared it among everybody, which is another element of the constitutional problems that we are talking about.

This is not the first time we are having the crisis of this nature at the states, does it mean we are not learning?
In 1983, we had the oil glut, which made many states to go into bankruptcy. The difference is that at that time, what many people didn’t know is that the states had power to borrow money internationally, without Federal Government approval. That is why all our stats became indebted, because of the huge international borrowing. That is why we were in trouble with Paris and London clubs. That was why we were a bankrupt nation for two decades, until 1999 when oil prices began to rise again, and 2005 when the debts were written off. Now, the Federal Government doesn’t allow states to borrow without strict control, so they can’t go abroad. But they can go to the banks and stock exchange to borrow.

The excess crude fund had been shared between stats and Federal Government and now what can the states turn to?
Unfortunately, when you have lost your job is not a time to save, so we can’t save now. When they are telling you to save, that is when you have a job. Until we pray for a new boom in future, then hopefully, we will remember the lessons of this time and save. But for now, you have to act in a contrary manner. Policy has to be counter cyclical, we have to borrow. Already we are seeing a squeeze in markets. If you talk to Fast Moving Commodities Goods (FMCG) companies, breweries and telecoms, consumption is shrinking. If you see the Gross Domestic Product (GDP) growth figures in the first quarter, it is the worst we have had in about 10 years. It is about three percent. There is an actual shrinkage in the economy. It is possible that GDP growth this year will be around 4 or 4.5 percent, which is significantly below what we can do. It cannot be the time to say shrink everything. You can stimulate the economy, but you have to do it in a rational way. I discuss the issue of the states, whether government should bail them out or not.

Ordinarily, I would say no because it will create a bad trend, a whole line of indebtedness in our public finances. If there is no alternative and we have to go that way, my own advice is that it must be like the case of a man approaching his banks for restructuring of his debt. To show how long it will pay back, maximum of 18 to 24 months.

You must show what restructuring is going to do in that state, and what would be changed in terms of the structure of spending. How he is going to raise IGR, what is going to be done to retain capital in his state and a clear compelling plan against which the Federal Government will make him sign, monitor and execute. He should also agree on the amount to be paid back every month, which is then deducted, and then force him to comply, so we will not create a bigger problem for the future.

Once you remove the stress from these governors by giving them money to pay the salary, it would go back to square one and then the figures would just keep growing. But that will send the wrong message that if you mismanage your state and you become bankrupt, or insolvent, the Federal Government will bail you out. This is a wrong message in a public finance system.

So, I also do not support sacking people because, again, not in the time of crisis. I think the state government should be restructured, they need to restructure their civil service, but not in a time like this. You do it in a time of prosperity, because otherwise, you will be killing people. If you let civil servants go, at this time, they are going to die, so you have to wait until a period of growth, when you can train people, give people loan to go and set up farming, small and medium enterprises, otherwise you will create a bigger problem.

The Federal government too has financial problem, and that is why it is issuing bond to bail out itself, so how can it now bail out the states?
Absolutely. It is approaching the bond market. It is also funding itself with the bond market, but it has been a slightly better managed entity. Of course it has some rights as Federal Government to approach bond market without anybody controlling it. The truth is that the Federal debt has been more professionally managed. Therefore it has the capacity to borrow both locally and internationally. For me, it is a last resort; if we must do it, it is something ordinarily I would be opposed to. Listening to the governors, Benue did not paid people for the past 18 months, and teachers have not been paid for nine months. So, the new government is just saying Federal Government, come and bail us. There is nothing we can do. If we follow that part, it has to be on strict conditions. If you ask many of them how they intend to pay back, they won’t come again. They can’t even show how they are going to do it. They must show a clear path. If you ask that question, they would be forced to do the restructuring required in their states.

What lessons do you think the next generation of rulers can learn from this?
Unfortunately, I don’t think Nigerian politicians are learning from all these, because I don’t think there are lessons we have not learnt before. The other point is that the people that are observing this lessons are not the people who will get into power.

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