SOGUNLE: this is time to give fiscal federalism appropriate attention

 

Ogun State seems to be going through a period of insolvency despite the recent bailout, which other states are also experiencing. But could Ogun State have taken advantage of its fairly robust tax base (IGR) to remain afloat like Lagos manages to do? THE precarious financial situation of the state, like all states in that situation, is like a bomb waiting to be detonated. Most state governments have operated with the assumption that there is unlimited funding that will come from the centre to support their political and development objectives. This comes from a limited understanding of the prevailing economics and how finances can be generated to run government. It is unfortunate that during elections, the electorate are always carried away by sentiments and promises, and do not bother about how economically and financially feasible the government is going to be. This economic and financial reality struck me when I had the opportunity of shouldering the management of the state between in 2007/2008, during the then economic downturn.  I came to the conclusion that governments, particularly subnational governments should build robust strategies and mechanisms to ensure their economic and financial independence, as the fiscal structure of the country is not in favour of states. The clamour for effective fiscal federalism has not been given its appropriate attention and implementation as states are still configured as administrative outfits of the Federal Government despite being independently elected governments. Furthermore, irrespective of the price and performance of the mono product economy – oil, that is the major source of the allocations to states, some states do not receive allocations that could support their development challenges as the basis is usually skewed towards the resource endowments of the respective states. The case of Lagos State is clearly different because it inherited, because of its previous status as the nation’s capital, a commercially viable environment that is conducive to generating tax revenues, there are economic growth drivers that it possesses like the seaport, airport, headquarters of many commercial and financial establishments as well as seemingly organised market and residential clusters that just needed to be efficiently brought into the tax net to generate Internally Generated Revenue (IGR). Even then, there are still leakages and gaps and a lot of government revenue generating opportunities that have not been sufficiently exploited. States, like Ogun, with essentially a civil service, distributive and agrarian population need to do a lot more to stay afloat.  Initiatives that could have supported Ogun State in building a robust economic base, such as the proposed Olokola Free Trade Zone, Deep Sea Port and the LNG Plant, as well as the Agro Cargo Airport and the Sports and Educational Infrastructure which the previous governments sought to build a foundation around in the Ogun State Regional Master Plan have not operated with sufficient steam of continuity because of differences in political platforms. The current government is pursuing a different set of objectives and programmes, which has its own gestation period for translating into sufficient economic base for revenue generation.  Lagos State witnessed a successful succession of leadership of the same platform in the past 16 years has been able to build on a string of economic development programmes with the same orientation, focus and continuity with minor variations that largely supported their tax base.  Lagos State is also funding the expansion of its capital infrastructure base with borrowings in form of bonds, and this in turn contributes to the increased economic activity leading to improved revenue generation. Some of us, looking at the pressures on the finances of Ogun State, have anticipated this situation when we suggested the raising of a bond to finance economic development projects that could boost the economy and the revenue profile of the state. But the internal and external political environment at that time could not support the initiative with the occupants of the current government being major opposers with the famed “bond of bondage’ propaganda. It has thus not become politically justifiable to follow the same route hence the adoption of alternative borrowing routes, which have compounded the financial situation. Some say the expenditure profile of the state has been high since it embarked on a flurry of infrastructural development – building roads, bridges, schools and housing – which are capital intensive. Could the state government have cut down on expenditure to build its reserve?   As I mentioned earlier, the insufficient attention paid to the dynamics and economic realities of the state before engaging in ambitious infrastructure development to signpost performance in governance based on the assumption of consistent revenue flows has led to the current expenditure profile. States with glaring strategic development needs do not need to create reserves, as it cannot shrink itself to greatness. It, however, needs to efficiently match its revenue expectations or cash flows with the expenditure profile. The current financial strategies appear to be borrowing short and investing long. But we need to look at the quality of investments not only in the perceived aesthetics but also in the potential to stimulate significant economic activities and generatable revenue that the government needs for its continued development and effective governance. There also needs to be a delicate balancing act in governance between the timing and flow of economic and social costs on one hand and economic and social benefits on the other hand. Due to weak conceptual, economic and project planning, it is observed that the sequence and delivery of these projects that attracted significant expenditure with huge financial pressures did not achieve these. Only the Totoro – Ago oba road project was the one completed in the first term of the administration, most of the schools and the rest of the roads in the state capital and some schools were hurriedly prepared for commissioning to coincide with the Presidential visit on the occasion of the 40th anniversary of the state, most of the schools that were slated for completion in the first year of the administration, were only completed for inclusion in the 40th anniversary projects. Even at that, most of the roads particularly in the critical economic areas like Sango Ota, Akute, are still under construction whilst the schools have not even started operating. Rationale expectations would have been a phased completion and utilization such that the citizens could justify the utility of the expenditure. The financial position was saved at the inception of the second term by the bail out processes for states of which the state benefited. This has the impact of rescheduling the humongous debts into a form of long term financing. The expectation is that this arrangement would have been used to reorder the priorities of the state for effective governance such that whilst still continuing with the projects, the other essential responsibilities such as workers entitlements and other personal emoluments will be adequately addressed as this was used as justification for the bailout. Workers in Ogun State recently kicked against the conversion of pension and other deductions to state revenue and that resulted in a face-off. What do you think is responsible for this, is it poor financial judgment on the part of a government, hoping to recover only to keep adding to the debts of the state?   The reasons are quite glaring, the government has attracted short tenured debts to finance the seemingly non-economic projects, most of which had not been completed until recently. There are dwindling financial resource flows from the centre. The possibilities of attracting further financial leverage from financial institutions are dwindling. The financial resources available and freed through the restructuring and bailout could only be utilized to address the glaring priority, the road and bridges projects.   What would be left to suffer will be what can be regarded as non-pressure regular expenditure – emoluments. The excuse will usually be that the NetPays are being paid.  But the reality of Ogun State workers is that most of them are leveraging their responsibilities such as school fees, rents, trading and ceremonies through social lending – Cooperatives and Associations. This structure also significantly affects the financial flows within the economy, as deductions are recycled to other borrowers, which follows the cycle. When this cycle is dislocated at any point, there is bound to be financial and social pressure. Pupils and students are sent out of schools, commerce and trade is affected etc etc. this when compounded with the national economic challenge of falling exchange rates affects an environment that is largely driven by civil service. You can then imagine the reason for the hard stance on all sides. Furthermore, and to be fair to State Governments, the implementation of the new Pension Scheme has not sufficiently taken account of the financial capability of states.  Although the scheme, is beneficial in its design for the pooling of funds for macro investments and to ensure a sustainable source of funding, as against erstwhile practices, for meeting future pension liabilities. This is one of the financial pressures that Federal Government arrangements put on the sub national structures. A critical one is also the setting of wages and remuneration levels for public servants and political appointees, which are set with parameters that do not reflect the economic realities of the states. Meeting these responsibilities most times present huge challenges to State Governments who have to contend regularly with fulfilling programmes, which benefit the larger populace or electorates or meeting government personnel emoluments for those who constitute about at best 20% of the population.   A further reason is the perception that the government created that the state has, in this regime, increased significantly the internally generated revenue. This has also reinforced the expectations of a capability to meet important expenditure such as salaries, pensions and deductions, particularly with the glaring and elaborate arrangements made in the celebrations of the 40th anniversary of the State. Can we have a fair idea of Ogun State debts and how quick the state can be out of it?   I cannot hazard a guess on the quantum of Ogun State debts at present because I have not come across public documents indicating such. But I know that, last year, the state, among other states had a bailout of N20billion at an interest rate of 9% repayable over a period of 20 years. The Governor later stated that this would be repaid over a period of 10 years. Should this present situation continue till 2019, what are the likely economic implications for the state? I expect that somewhere along the line, there would be some resolution of the issues, particularly with the workers. I gathered that the strike has been suspended for some time. We hope that within that time some more facts will be put on the table, reason will prevail and the workers will go back fully to work. Government will have to continue to grapple with the challenges of fulfilling the promises they have made to the people and in this case, ensure that they complete the projects they are undertaking whilst ensuring that they fulfill the obligations to the workers that serve them. Whilst the workers and the people will have to seek alternative ways of dealing with issues that they know are not being effectively dealt with by the government. As it is becoming glaring, as with other climes, that governments with their recurring financial and budgetary challenges are gradually becoming incapable of dealing with both inherited and created challenges that they face. This is stimulating a solution ecosystem involving a cooperation of stakeholders, utilizing current pervasive technology to focus on solutions and outcomes rather than promises and projects.

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Ogun State seems to be going through a period of insolvency despite the recent bailout, which other states are also experiencing. But could Ogun State have taken advantage of its fairly robust tax base (IGR) to remain afloat like Lagos manages to do?

The precarious financial situation of the state, like all states in that situation, is like a bomb waiting to be detonated. Most state governments have operated with the assumption that there is unlimited funding that will come from the centre to support their political and development objectives. This comes from a limited understanding of the prevailing economics and how finances can be generated to run government.

It is unfortunate that during elections, the electorate are always carried away by sentiments and promises, and do not bother about how economically and financially feasible the government is going to be. This economic and financial reality struck me when I had the opportunity of shouldering the management of the state between in 2007/2008, during the then economic downturn.  I came to the conclusion that governments, particularly subnational governments should build robust strategies and mechanisms to ensure their economic and financial independence, as the fiscal structure of the country is not in favour of states. The clamour for effective fiscal federalism has not been given its appropriate attention and implementation as states are still configured as administrative outfits of the Federal Government despite being independently elected governments.

Furthermore, irrespective of the price and performance of the mono product economy – oil, that is the major source of the allocations to states, some states do not receive allocations that could support their development challenges as the basis is usually skewed towards the resource endowments of the respective states.

The case of Lagos State is clearly different because it inherited, because of its previous status as the nation’s capital, a commercially viable environment that is conducive to generating tax revenues, there are economic growth drivers that it possesses like the seaport, airport, headquarters of many commercial and financial establishments as well as seemingly organised market and residential clusters that just needed to be efficiently brought into the tax net to generate Internally Generated Revenue (IGR). Even then, there are still leakages and gaps and a lot of government revenue generating opportunities that have not been sufficiently exploited.

States, like Ogun, with essentially a civil service, distributive and agrarian population need to do a lot more to stay afloat.
Initiatives that could have supported Ogun State in building a robust economic base, such as the proposed Olokola Free Trade Zone, Deep Sea Port and the LNG Plant, as well as the Agro Cargo Airport and the Sports and Educational Infrastructure which the previous governments sought to build a foundation around in the Ogun State Regional Master Plan have not operated with sufficient steam of continuity because of differences in political platforms. The current government is pursuing a different set of objectives and programmes, which has its own gestation period for translating into sufficient economic base for revenue generation.

Lagos State witnessed a successful succession of leadership of the same platform in the past 16 years has been able to build on a string of economic development programmes with the same orientation, focus and continuity with minor variations that largely supported their tax base.  Lagos State is also funding the expansion of its capital infrastructure base with borrowings in form of bonds, and this in turn contributes to the increased economic activity leading to improved revenue generation.

Some of us, looking at the pressures on the finances of Ogun State, have anticipated this situation when we suggested the raising of a bond to finance economic development projects that could boost the economy and the revenue profile of the state. But the internal and external political environment at that time could not support the initiative with the occupants of the current government being major opposers with the famed “bond of bondage’ propaganda. It has thus not become politically justifiable to follow the same route hence the adoption of alternative borrowing routes, which have compounded the financial situation.

Some say the expenditure profile of the state has been high since it embarked on a flurry of infrastructural development – building roads, bridges, schools and housing – which are capital intensive. Could the state government have cut down on expenditure to build its reserve?

As I mentioned earlier, the insufficient attention paid to the dynamics and economic realities of the state before engaging in ambitious infrastructure development to signpost performance in governance based on the assumption of consistent revenue flows has led to the current expenditure profile. States with glaring strategic development needs do not need to create reserves, as it cannot shrink itself to greatness. It, however, needs to efficiently match its revenue expectations or cash flows with the expenditure profile.

The current financial strategies appear to be borrowing short and investing long. But we need to look at the quality of investments not only in the perceived aesthetics but also in the potential to stimulate significant economic activities and generatable revenue that the government needs for its continued development and effective governance. There also needs to be a delicate balancing act in governance between the timing and flow of economic and social costs on one hand and economic and social benefits on the other hand.

Due to weak conceptual, economic and project planning, it is observed that the sequence and delivery of these projects that attracted significant expenditure with huge financial pressures did not achieve these. Only the Totoro – Ago oba road project was the one completed in the first term of the administration, most of the schools and the rest of the roads in the state capital and some schools were hurriedly prepared for commissioning to coincide with the Presidential visit on the occasion of the 40th anniversary of the state, most of the schools that were slated for completion in the first year of the administration, were only completed for inclusion in the 40th anniversary projects. Even at that, most of the roads particularly in the critical economic areas like Sango Ota, Akute, are still under construction whilst the schools have not even started operating. Rationale expectations would have been a phased completion and utilization such that the citizens could justify the utility of the expenditure.

The financial position was saved at the inception of the second term by the bail out processes for states of which the state benefited. This has the impact of rescheduling the humongous debts into a form of long term financing. The expectation is that this arrangement would have been used to reorder the priorities of the state for effective governance such that whilst still continuing with the projects, the other essential responsibilities such as workers entitlements and other personal emoluments will be adequately addressed as this was used as justification for the bailout.

Workers in Ogun State recently kicked against the conversion of pension and other deductions to state revenue and that resulted in a face-off. What do you think is responsible for this, is it poor financial judgment on the part of a government, hoping to recover only to keep adding to the debts of the state?

The reasons are quite glaring, the government has attracted short tenured debts to finance the seemingly non-economic projects, most of which had not been completed until recently. There are dwindling financial resource flows from the centre. The possibilities of attracting further financial leverage from financial institutions are dwindling. The financial resources available and freed through the restructuring and bailout could only be utilized to address the glaring priority, the road and bridges projects.   What would be left to suffer will be what can be regarded as non-pressure regular expenditure – emoluments. The excuse will usually be that the NetPays are being paid.  But the reality of Ogun State workers is that most of them are leveraging their responsibilities such as school fees, rents, trading and ceremonies through social lending – Cooperatives and Associations. This structure also significantly affects the financial flows within the economy, as deductions are recycled to other borrowers, which follows the cycle. When this cycle is dislocated at any point, there is bound to be financial and social pressure. Pupils and students are sent out of schools, commerce and trade is affected etc etc. this when compounded with the national economic challenge of falling exchange rates affects an environment that is largely driven by civil service. You can then imagine the reason for the hard stance on all sides.

Furthermore, and to be fair to State Governments, the implementation of the new Pension Scheme has not sufficiently taken account of the financial capability of states.  Although the scheme, is beneficial in its design for the pooling of funds for macro investments and to ensure a sustainable source of funding, as against erstwhile practices, for meeting future pension liabilities. This is one of the financial pressures that Federal Government arrangements put on the sub national structures. A critical one is also the setting of wages and remuneration levels for public servants and political appointees, which are set with parameters that do not reflect the economic realities of the states. Meeting these responsibilities most times present huge challenges to State Governments who have to contend regularly with fulfilling programmes, which benefit the larger populace or electorates or meeting government personnel emoluments for those who constitute about at best 20% of the population.

A further reason is the perception that the government created that the state has, in this regime, increased significantly the internally generated revenue. This has also reinforced the expectations of a capability to meet important expenditure such as salaries, pensions and deductions, particularly with the glaring and elaborate arrangements made in the celebrations of the 40th anniversary of the State.

Can we have a fair idea of Ogun State debts and how quick the state can be out of it?

I cannot hazard a guess on the quantum of Ogun State debts at present because I have not come across public documents indicating such. But I know that, last year, the state, among other states had a bailout of N20billion at an interest rate of 9% repayable over a period of 20 years. The Governor later stated that this would be repaid over a period of 10 years.

Should this present situation continue till 2019, what are the likely economic implications for the state?

I expect that somewhere along the line, there would be some resolution of the issues, particularly with the workers. I gathered that the strike has been suspended for some time. We hope that within that time some more facts will be put on the table, reason will prevail and the workers will go back fully to work. Government will have to continue to grapple with the challenges of fulfilling the promises they have made to the people and in this case, ensure that they complete the projects they are undertaking whilst ensuring that they fulfill the obligations to the workers that serve them. Whilst the workers and the people will have to seek alternative ways of dealing with issues that they know are not being effectively dealt with by the government. As it is becoming glaring, as with other climes, that governments with their recurring financial and budgetary challenges are gradually becoming incapable of dealing with both inherited and created challenges that they face. This is stimulating a solution ecosystem involving a cooperation of stakeholders, utilizing current pervasive technology to focus on solutions and outcomes rather than promises and projects.

My concern is the implication of this on the generality of the people, on social services, schools, hospitals, government services etc etc.; but some lessons will have been learnt on all sides. On the part of Government, that governance is not a tea party, that there is need for a significant appreciation of the economic dynamics of a state and that promises, policies and programmes should be such that connect to the people’s economic realities. More importantly, they should recognize that governance is a continuum and that once elections are over, the responsibility for governance is for the generality of the people.



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