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Report No. XXX
NIGERIA State Level Public Expenditure Management and Financial Accountability Review: A synthesis report Anambra, Bayelsa, Ekiti, Kogi, Niger, Ondo, and Plateau
January 2011 Poverty Reduction and Economic Management, AFTP3 AFCW2 Africa Region
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CURRENCY EQUIVALENTS (Exchange Rate Effective January 31, 2011)
Currency Unit = Nigerian Naira (NG)
NG1 = US$0.00653 US$1 = N151.28
FISCAL YEAR
January 1 to December 31
Abbreviations and Acronyms
BOF Budget Office of the Federation CBN Central Bank of Nigeria COFOG Classification of the Functions of Government DFID Department for International Development DMO Debt Management Office DSA Debt Sustainability Analysis ECA Excess Crude Account ERGP Economic Reform and Governance Project FAAC Federal Account Allocation Committee FG Federal Government FMF Federal Ministry of Finance FRL Fiscal Responsibility Law FSP Fiscal Strategy Paper GSDP Gross State Domestic Product IFMIS Integrated Financial Management Information System IGR Internally Generated Revenues ISA Investment and Securities Act IT Information Technology LGA Local Government Area MDA Ministries, Departments and Agencies M&E Monitoring and Evaluation MOF Ministry of Finance MOU Memorandum of Understanding MTEF Medium Term Expenditure Framework MTSS Medium Term Sector Strategy NPC National Planning Commission OAG Office of the Accountant-General OAGF Office of the Accountant-General of the Federation OAuG Office of the Auditor-General OSOPADEC Ondo State Oil Producing Areas Development Commission PAC Public Accounts Commission PEFA Public Expenditure and Financial Accountability
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PEMFAR Public Financial Management and Accountability Review PAYE Pay as You Earn PIM Public Investment Management PIT Personal Income Tax PITA Personal Income Tax Act PFM Public Financial Management PPL Public Procurement Law SBIR State Boards of Internal Revenue SEEDS States Economic Empowerment and Development Strategy SG State Government SHA State House of Assembly SNG Sub-National Government TCC Tax Clearance Certificate UNDP United Nations Development Program VAT Value Added Tax
Vice President: Obiageli K. EzekwesiliCountry Director: Onno RuhlSector Manager: Jan Walliser
Task Team Leader: Khwima NtharaTeam Members: Hawa Wague-Cisse, Lev Freinkman,
Winston Cole, Bayo Awosemusi, George Larbi, Rita Itoro-Godfrey
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TABLE OF CONTENTS LIST OF TABLES .......................................................................................................................... V LIST OF FIGURES .......................................................................................................................VI LIST OF BOXES ...........................................................................................................................VI ACKNOWLEDGEMENTS ..........................................................................................................VII EXECUTIVE SUMMARY ......................................................................................................... VIII
1...................................................................................................................................................CHAPTER 1: STATE CONTEXT .......................................................................................... 1
A.............................................................................................................................................. INTRODUCTION ..................................................................................................................... 1
B. ............................................................................................................................................. FRAMEWORK FOR STATE PUBLIC FINANCIAL MANAGEMENT .......................................................... 1
C. ............................................................................................................................................. SOCIO-ECONOMIC CHARACTERISTICS OF STATES COVERED IN THE REVIEW ...................................... 9
D.............................................................................................................................................. CONCLUSION ....................................................................................................................... 10
2...................................................................................................................................................CHAPTER 2: FISCAL PERFORMANCE ........................................................................... 11
A.............................................................................................................................................. INTRODUCTION ................................................................................................................... 11
B. ............................................................................................................................................. REVENUE STRUCTURE AND TRENDS........................................................................................ 11
C. ............................................................................................................................................. EXPENDITURE STRUCTURE AND TRENDS.................................................................................. 13
D.............................................................................................................................................. FISCAL BALANCE AND INDEBTEDNESS ..................................................................................... 18
E. ............................................................................................................................................. CONCLUSION ....................................................................................................................... 19
3...................................................................................................................................................CHAPTER 3: PERFORMANCE OF STATE PFM SYSTEMS ........................................... 20
A.............................................................................................................................................. INTRODUCTION ................................................................................................................... 20
B. ............................................................................................................................................. OVERALL PERFORMANCE ON PEFA INDICATORS ACROSS STATES ................................................ 20
C. ............................................................................................................................................. PLANNING AND BUDGET PREPARATION ..................................................................................... 22
D.............................................................................................................................................. BUDGET EXECUTION ............................................................................................................. 25
E. ............................................................................................................................................. ACCOUNTING, AUDIT, AND EXTERNAL OVERSIGHT ...................................................................... 32
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F............................................................................................................................................... EFFICIENCY OF THE PUBLIC INVESTMENT SYSTEM ..................................................................... 37
G.............................................................................................................................................. CONCLUSION ....................................................................................................................... 37
4...................................................................................................................................................CHAPTER 4: IMPLICATIONS FOR PFM REFORM.......................................................... 39
A.............................................................................................................................................. INTRODUCTION ................................................................................................................... 39
B. ............................................................................................................................................. RECOMMENDED CHANGES TO PFM PRACTICES ......................................................................... 39
C. ............................................................................................................................................. BROAD STRATEGIES FOR IMPLEMENTING THE PROPOSED PFM REFORMS ...................................... 44
D. ..........................................................................................................................................................CONCLUSION ....................................................................................................................... 53
ANNEX.......................................................................................................................................................54
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List of Tables Table 1: Areas of Responsibility for the three tiers of Government ....................................................4 Table 2: Tax Collection Responsibilities .................................................................................................6 Table 3: Socio-economic characteristics of states covered: at a glance ...........................................9 Table 4: Percentage Share of IGR in Total Revenues .......................................................................12 Table 5: Percentage Share of Different IGR Sources.........................................................................12 Table 6: Trend in overall fiscal balance (as a percentage of total revenues)..................................18 Table 7: Trend in primary fiscal balance ( as per percentages of total revenues) .........................19 Table 8: PEFA indicators with traces of good performance...............................................................22 Table 9: Status of submission of annual accounts and respective audit reports............................34 Table 10: Top ten indicators from a sample of 13 PEFA assessments ...........................................52 Table 11: Stock of debt in selected states (2005-2007) .....................................................................54 Table 12: Debt stock and debt service ratios in selected states (2005-2007) ................................54 Table 13: Scores on high level PEFA performance indicators ..........................................................56 Table 14: PEFA assessment findings on comprehensiveness of budget information across all states ..........................................................................................................................................................58 Table 15: PEFA assessment findings on accessibility of fiscal information across all states ......59 Table 16: PEFA scores from a sample of states and countries outside Nigeria (2008-2010).....60
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List of Figures Figure 1: Share of recurrent and capital expenditures in total expenditures..............................14 Figure 2:Trend in shares of recurrent and capital expenditures across states (20001-2008) .14 Figure 3: Structure of recurrent expenditures .................................................................................15 Figure 4: Trend in shares of personnel and overhead expenditures across states (2001-2008)15Figure 5: Average percentage share of total expenditures by broad functional categories.....16 Figure 6: Average percentage share of total expenditure by dis-aggregated functional categories................................................................................................................................................................17 Figure 7: Frequency of PEFA scores in six states .........................................................................21 Figure 8: Average percentage deviation between actual total out-turns and approved expenditures .........................................................................................................................................26 Figure 9: Trend in share of selected expenditures by functional classification..........................55 Figure 10: Aggregated frequency of PEFA scores for each state ...............................................57
List of Boxes Box 1: Borrowing guidelines for Nigeria’s Sub-national Governments .......................................... 8
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ACKNOWLEDGEMENTS This report would not have been possible without the support of the various Government Officials from the seven states covered: Anambra, Bayelsa, Ekiti, Kogi, Niger, Ondo, and Plateau. The report was put together by a team composed of World Bank Staff, led by Khwima Nthara. Other team members included Hawa Cisse-Wague, Lev Frienkman, Winston Cole, Chief Bayo Awosemusi, George Larbi, and Rita Itoro-Godfrey. Hawa Cisse-Wague deserves special mention for her role in leading the team at concept stage and when the reviews were carried out in Anambra, Bayelsa, Ekiti, Niger, and Plateau. Thanks are also due to the consultants who carried out the reviews in each of the states and prepared the individual State-level reports as follows: Chinedum Nwoko and Hyacinth Ichoku (Anambra); Chinedum Nwoko (Bayelsa); Israel Taiwo, Elijah Udoh, and Sikiru Adedokun (Ekiti); Israel Taiwo, Louis Chete, and Sikiru Adedokun (Kogi); Halidu Abubakar and Mohammed Yaru (Niger); Israel Taiwo, Elijah Udoh, Ben Aigbokhan, Modupe Adelabu, Lekan Olubajo, Jadesola Bello, and Abimbola Ogunseitan (Ondo); Chinedum Nwoko (Plateau). Peer reviewers were Carlos Cavalcanti (AFTP4), Lili Liu (PRMED), and Theo Thomas (EASPR).
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EXECUTIVE SUMMARY 1. This report synthesizes the findings of public expenditure management and financial accountability reviews (PEMFARs) that were conducted in seven states between 2008 and 2009. The states covered were Anambra, Bayelsa, Ekiti, Kogi, Niger, Ondo, and Plateau. The report seeks to analyse and summarize the key findings of the reviews from these states in order to ensure that the key messages from the otherwise voluminous reports are presented in a single, smaller report. State context
2. The states have different socio-economic characteristics but all operate in a federal system that offers some reasonable operational autonomy in the context of a federal constitution. Under the federal system of government, states have been allocated significant responsibilities for service delivery. The constitution defines the expenditure and revenue collection responsibilities that are under their purview. To carry out their responsibilities, the PFM institutional framework is modeled after that of the federal government. All three branches of government are in place with the executive governor as head of state administration. Given the relative autonomy that states enjoy, each state prepares and implements its own budget. Like the federal government, the framework for state PFM system is therefore defined by the budget process. Summary of main findings
Fiscal performance 3. The reviews found that states were heavily reliant on Federal Transfers, with IGR accounting for less than 10 percent on average in all of them. For the years for which data was available, the highest share of IGR in total revenues reached amongst the states covered was 25 percent by Anambra State in 2005. Otherwise, for most of them, IGR was a very small proportion of their total revenues. The trend over time was also variable: some of the states saw the share of IGR in total revenue increase during the period covered while others experienced a decline. Taxes were the dominant component of IGR, ranging between 46.1 percent in Ekiti to 74.7 percent in Kogi State. Within taxes, Pay as You Earn (PAYE) as a single most dominant source of revenue, accounting for around 80 percent of tax revenues in Niger state. 4. In general, recurrent expenditures accounted for a higher share vis-à-vis capital expenditures while in terms of functional classification, general administration was high up there alongside works and education. With the exception of Bayelsa and Ondo, the bulk of expenditures were on recurrent activities in most states. Within recurrent expenditures, there were variations in the shares of personnel costs vis-à-vis overhead and other recurrent expenditures. When analyzed by functional classification, the average expenditure shares were shared amongst three main areas: works (28.2 percent), general administration (28.0 percent), and education (21.6 percent).
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5. Overall, most states performed well with regard to fiscal discipline and indebtedness. With the exception of Anambra and Bayelsa in some years, most states registered primary fiscal surpluses during the review period. It is also not surprising that their debt levels were generally low.
Performance of the PFM system 6. In spite of demonstrating sound fiscal discipline, the performance of the PFM systems across all the states was generally poor. The assessment was done using the standard Public Expenditure and Financial Accountability (PEFA) assessment methodology which was done in all the seven states. The PEFA assessment looked at the performance of each state’s budgeting system against 28 indicators across 6 pillars: budget credibility; comprehensiveness and transparency; policy based budgeting; predictability and control in budget execution; accounting, recording, and reporting; and external scrutiny and audit. Under the PEFA assessment methodology, performance against the 28 indicators was scored between A and D, with A representing the best performance and D the worst. Although a PEFA assessment was conducted in Ekiti, the scoring was not done. Overall, it was found that most states performed poorly. The frequency of A and B scores (out of a total of 28 per state) across all the six states was very low: 6 in Anambra (21.4 percent); 0 in Bayelsa (0 percent); 8 in Kogi (28.6percent); 7 in Niger (25 percent); 14 in Ondo (50 percent); and 2 in Plateau (7.1 percent). 7. Budget planning and preparation was generally weak in most states. Budget planning did not have a multi-year perspective and budgets did not reflect the announced state policy priorities. While most states had clearly articulated budget calendars, compliance with the agreed timelines was generally poor. Information presented in the budget package submitted to state legislatures was not comprehensive enough and there were significant gaps in budget coverage. In particular, most budget documents did not contain information on macroeconomic assumptions used for budget preparation nor analysis of existing debt stock, including data on budget arrears, and financial assets of the state. In terms of coverage, most state budgets did not include expenditures on account of donor-funded projects, expenditure funded from revenues raised by MDAs and parastatals, and withholdings made by the federal government from federal transfers due to the state. However, some states, such as Bayelsa and Ekiti performed relatively better than others in this respect.
8. States also faced many challenges in executing their budgets. In general, there was low credibility of the budget as manifested in wide disparities between expenditure out-turns and approved figures. With the exception of Ondo, states spent less than they budgeted, usually on account of low execution rates on their capital budgets. In most states the procurement process was highly centralized, with the Governor personally being responsible for making decisions on most large and medium size contracts. Competition amongst contractors was on a selective basis. Availability of funding to MDAs was generally variable, mainly due to poor cash management. Most states had so many bank accounts some of which would be holding idle cash balances when other government agencies were in dire need of funds. Given the strict borrowing guidelines under which states operate, implementation of the budget was usually hampered. On a positive note, most states had made some strides towards improving their payroll management through the introduction of stricter control procedures over payroll data maintenance and
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updates. However, the fact that payroll and personnel databases were still separate meant that the payroll management system was still vulnerable to fraud. Expenditure control was also at risk from weak management of fiscal risks emanating from poor management of debt, arrears, and parastatals. 9. At the tail end of the budget process, many states performed relatively better in terms of timeliness in the preparation of accounts and audit reports. However, the quality of these reports and follow-up on audit recommendation were a challenge. Most states had cleared the backlog they had in the submission of financial statements and audit reports. However, the quality of these reports could be improved. Further, after going through legislative scrutiny, there was no evidence of corrective actions in response to audit recommendations.
10. Assessments of the efficiency of the public investment system carried out in Bayelsa, Ondo, and Plateau showed that management of the capital budget was still poor in these states. In general there was no evidence in Bayelsa and Plateau that the development strategies informed the identification of projects. Due to capacity problems, selection of specific projects was generally not based on formal appraisals of projects. Although state Governments considered various options before settling on a particular project, such options were usually not subjected to formal cost-benefit analysis. Nevertheless, the Governments would sometimes engage consultants to advise on the viability of certain large capital commercial projects. Otherwise political considerations tended to override selection and location of most public capital projects. Once admitted into the budget, implementation of projects was generally slow and although adjustments could be made to projects, there were no specific guidelines. As in the case of general budget implementation, the selection of contractors for capital projects was not subject to very transparent procurement processes. Finally, there was no formal ex-post evaluation of projects, and no central registry to keep a record of all assets. Implications for PFM reforms
11. In light of the general weaknesses found in the states’ PFM systems, specific changes in practices are recommended. A comprehensive list of recommended changes is provided under each of the three main stages in the budgeting cycle: budget preparation; budget execution and monitoring; and accounting, audit, and external oversight. Within budget preparation, the recommended practices focus on alignment of budget to policy priorities, orderliness in the annual budget preparation process, estimation of revenues and expenditures, and comprehensiveness in budget coverage. Under budget execution and monitoring, the proposed changes focus on revenue mobilization and tax administration, procurement, availability of funding and cash management, capital budget execution, and expenditure control. Finally, on accounting, audit, and external oversight, the focus is on practices for improving accounting and reporting, internal audit and control, and external audit and oversight. 12. However, for PFM reform efforts at state level to succeed, there is need for a carefully designed implementation strategy. In particular, a reform program for implementing these changes needs to be anchored on a strong institutional platform constituting of a political champion for reforms, state-level coordinating arrangement, modern and comprehensive legal and regulatory framework, human and organizational capacity, and a modern information
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technology infrastructure. The required institutional platform also needs to include a new role for the federal government and development partners where both should work in collaboration with the Governors’ Forum to provide coordinated support to all the states. Finally, there is a greater chance of succeeding with a PFM reform program if the proposed changes are carefully prioritized and sequenced.
13. Based on the experiences of states and countries outside Nigeria, areas where states can make quick progress in the short-term are identified. A look at PEFA assessment results of selected states in India and Pakistan, and a number of countries in Asia, Latin America, and Africa shows that progress can easily be made in areas that involve compilation and dissemination of information and reports. The advantage of such areas is that they tend to be less capacity intensive, and do not require significant coordination across institutions since they fall under the remit of central ministries. Therefore, from a comprehensive list of recommendations, potential quick wins are in the following areas: improvements in budget classification, improvement in the comprehensiveness of the budget, development of procurement manuals and standard bidding documents, regular publication of information on procurement contract awards, improvements in recording of debt and arrears, adoption of a procedure for disclosure of all public debts including budget arrears and guarantees, improved reflection of costs of public borrowing in annual budgets and other documents of fiscal policy, improved public access to PFM related information such as budget documents, budget execution reports, debt information, contract awards, audit reports, tax payer liabilities and obligations, and publication of annual audit reports. As an illustration of how possible it is to make progress on these quick wins, all the five sub-national governments in Pakistan and India in the sample had A scores on the budget classification indicator of the PEFA assessment; three out of five had A scores on the comprehensiveness of the budget while two had B scores.
14. In terms of criticality of reforms, there is need for states to focus on a few key areas. These include ensuring that the budget is aligned to the state’s policy priorities; improving procurement particularly through the introduction of more competitive and transparent methods of procurement in order to reduce the cost of contracts; improving the execution rate of the budget, particularly of capital projects; improving the quality and timeliness of audit reports; and putting in place mechanisms for ensuring that audit recommendations lead to corrective measures.
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CHAPTER 1: STATE CONTEXT
INTRODUCTION
1. This chapter provides a state context in which the public expenditure management and financial accountability reviews (PEMFARs) were undertaken. First it presents the framework in which public financial management (PFM) is conducted in states. It outlines the institutional framework for PFM in the states, their expenditure responsibilities and sources of revenues for undertaking those service delivery responsibilities. Second, the chapter also provides an overview of the socioeconomic characteristics of the seven states covered by the review.
FRAMEWORK FOR STATE PUBLIC FINANCIAL MANAGEMENT
2. Under the federal system of government, states in Nigeria play a critical role in socio-economic development. The seven states are amongst the 36 states that form the federal republic of Nigeria. Below the 36 states is the third tier of government, consisting of 774 local Governments. Like the other two tiers of government, state governments have the responsibility of managing public finances in order to deliver services required for meeting the development needs of the state. Management of public finances is done within an institutional framework that involves the allocation of resources from various revenue sources to areas for which the state has statutory responsibility.
Institutional framework
3. The State PFM system is cradled in a governance system that largely replicates the structures at federal government level. In particular, the state governments consist of three branches: the executive branch, legislature, and the judiciary. The head of administration is an executive governor elected during governorship elections that are contested by various political parties. The governor presides over an executive council (the cabinet) which consists of commissioners (state level ministers). Also supporting the Governor are special advisors and assistants. Unlike at the federal government level, the state legislature (State House of Assembly) is unicameral. It consists of representatives elected on the platform of various political parties. Finally, the federal constitution provides for a state court system that is charged with the responsibility of interpreting and applying laws in the state. 4. The budget is the main instrument that the executive uses for public financial management. At an operational level, the budget is prepared and implemented by ministries, departments, and agencies (MDAs) created for purposes of delivering the states’ mandates. Once prepared, the budget is presented by the State Governor to the State House of Assembly (SHA) for approval. The SHA also approves other legislation required for the management of public finances and provides general oversight over the usage of public resources.
5. The Nigerian Constitution grants the Federal Government (FG) very limited and indirect influence over the fiscal and financial affairs of SNGs. Nigerian states enjoy considerable independence with respect to their economic policies. The states’ development
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plans, budgets, accounts, procurement practices, etc., are not subject to federal control and scrutiny. This arrangement creates difficulties in the coordination and management of macroeconomic, fiscal, and structural policies in the country. On the positive side, however, the existing arrangement potentially provides reform-minded states with the needed policy space to proceed independently with PFM reforms in line with their own policy priorities and capabilities and without waiting for either instructions or permissions from the centre. In other words, the Constitution provides for individual governments, federal and state, with an opportunity to proceed, if they wish, alone with their reform efforts.
6. While there is no common legal and institutional platform for state PFM systems in Nigeria due to the federative nature of the state, the de facto legal PFM frameworks in states are quite similar to each other and to the federal arrangements, although they remain legally independent. In any case, state governments have a tendency to model changes in their legal and institutional frameworks for PFM after the adopted federal solutions.
7. Each government, federal and state, has a complete, if outdated, set of finance regulatory instruments. At the federal level, there are an organic Finance (Management and Control) Act,1 enacted in 1958 and a set of detailed operational rules and guidelines for the day-to-day management of financial activities, called Financial Regulations derived from them. The regulations cover accounting, internal auditing and stores procedures and routines. Some state governments extract and issue parts of these regulations as separate regulations. In 2000-01, the Federal Government and several state governments, including Anambra, revised their financial regulations. Still all these legal instruments require further modernization to bring them in line with current political developments and evolutionary trends in public financial management. There is also a need for the Finance Act to reflect more adequately the fact that the Nigeria has moved from the Westminster Parliamentary mode of government to the presidential republic. Further, the existing legal framework, backed by the provisions of the 1999 Constitution, does not allow for multi-year budgeting and clearly refers to budgeting one year at a time. Consequently, this potentially limits the pace for effective adoption of the Medium Term Expenditure Framework (MTEF) approach to budgeting. 8. Over the last decade the FG has taken several steps to modernize the legal framework for PFM as part of its reform process. In particular, the FG enacted a Fiscal Responsibility Act and a Public Procurement Act in 2007. Moreover, with the active assistance of donors, the FG has been currently encouraging states to draft and pass similar laws in their domains. However, actual progress in this area has varied across the states. Ondo was among the first states to adopt both these laws (in August of 2009), which among other things institutionalize the MTEF as a tool of fiscal planning and introduce much stricter requirements for accountability and transparency in public procurement.
9. On the institutional side, the arrangements for public financial management at the federal and state levels are also largely similar. But over the last decade the FG made more progress towards modernization of its PFM institutions relative to the states. For instance, since 2004 the Federal Ministry of Finance has the responsibility for the entire budgeting (capital and recurrent), treasury and monitoring functions. The consolidation of functions in the Budget
1 State versions, which differ only in the slightest details, are mostly called Finance Acts or Laws.
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Office of the Federation (BOF) within the FMoF helped to improve coordination in the course of budget preparation and eventually provided for consolidation of capital and recurrent budgets into a unified, single budget. However, many state governments still keep their budgeting of capital spending separated from the Ministry of Finance under the control of a different agency (either Ministry of Planning or Planning Commission)2. At the same time, several states (including Bayelsa, Plateau, and Anambra) managed to move towards strengthening the role of the Ministry of Finance3 and consolidation of respective PFM functions. Anambra has advanced further than the rest: it provided its MOF also with a function of budget monitoring, while in Plateau the State Planning Commission remains in charge of monitoring. The state Ministries of Finance are also commonly in charge of the State Treasury Office, headed by the Accountant General, and control state Boards of Internal Revenue. 10. Offices of the Accountant-General (OAGs), at both the federal and state levels, perform the actual treasury functions of government, including accounting and internal audit. OAGs are creations of the relevant Finance Acts and are powerful semi-autonomous institutions under the general supervision of respective Ministries of Finance. OAGs post accounts officers to all MDAs with self-accounting status to carry out government treasury and accounting functions. Accountants at the MDAs are expected to make monthly, quarterly, and annual returns to the respective accountants-general. OAGs also post internal auditors to each MDA. Treasurers of local governments perform similar functions at the local level.
11. The Office of the Auditor-General (OAuGs) completes the list of institutions with formal responsibility for PFM at both the federal and state levels. The Office is a constitutional creation with responsibility for auditing all the accounts and offices of government. The federal and state governments maintain separate and distinct OAuGs, and the scope of their authorities is limited to the government that set them up. The functions of auditors-general do not overlap across federal and state government jurisdictions. However, the Constitution does not make provision for the auditors-general for local governments. Thus, local governments do not set up such offices; instead, each host state government has established an Office of the Auditor-General for Local governments, appointing one Auditor-General to audit all local government accounts and offices in the state.
12. The Constitution also grants powers to the States’ Houses of Assembly (SHA) to conduct investigations into the states’ public accounts. These provisions empower the Public Accounts Committees (PACs) to preside over the audit reports, hold hearings on them, and direct restitution and recovery of lost public funds.
Main expenditure responsibilities
13. The expenditure responsibilities of states derive from the functions and responsibilities that the 1999 Federal Constitution assigned to the respective tiers of government. Table 1 provides a summary of these roles and responsibilities for all the three tiers
2 At the same time, in most cases Ministries of Finance remain in control of actual disbursements for the entire budget (both recurrent and capital), i.e. keep the treasury function. 3 The typical name for the new, consolidated Ministry is Ministry of Finance and Economic Planning or Ministry of Budget and Economic Development.
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of government. First there is a list of roles and responsibilities that are exclusive to the Federal Government. These include areas that are of national concern such as defense, police, prisons, and immigration; mines and minerals, including oil and gas fields; the financial system; telecommunication, aviation, maritime shipping and railways; and international relations and trade. Second, there is a concurrent list of responsibilities that is shared between the Federal and the State Government. These include education, health, infrastructure, agriculture and industry.Third, there is another list of responsibilities for local governments that includes registration of births, deaths and marriages; control and regulation of outdoor advertising, establishment and maintenance of markets, slaughter houses, and public conveniences. Finally, there is also a concurrent list of responsibilities for which states are responsible but in which local governments can participate as prescribed by the state government. These include provision and maintenance of primary, adult and vocational education; development of agriculture and natural resources, other than the exploitation of materials; provision and maintenance of health services; construction and maintenance of roads, streets, and street lighting, drains, and/ or such public facilities as may be prescribed from time to time by the House of Assembly of a state.
Table 1: Areas of Responsibility for the three tiers of Government
Federal Government State Government Local Government Defense and National security Higher Education Sewage disposal Police Secondary Education Environmental sanitation Foreign Affairs
Primary Education Maintenance of Fed. earth roads
Inter-state roads Vocational Education Primary Education Mines, minerals, including oil and gas
Maintenance of Standards Adult Education
International Roads Urban and rural waters Vocational Education Railways Transportation Payment of salaries Airports Housing Market stalls Aviation Facilities
Health Craft and small scale industries.
Energy and power Lighter industries Health services
Telecommunication Agriculture Management of Territorial Tourism and Town Waters Planning Higher education Energy and power Secondary Education Statistics Tertiary education Agriculture Trade, commerce, and Tourism Labour Statistics Source: The 1999 Constitution of the Federal Republic of Nigeria
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Revenue sources
14. There are three sources of state revenues, all of which are subject to a framework provided by the federal government: federal transfers, internally generated revenues, and loans. Federal transfers are revenues that states receive from a common pool of funds that the federal government collects. Just as the constitution confers different service delivery responsibilities to the three tiers of government as outlined above, the three tiers of government are also given different revenue collection responsibilities. Table 2 below outlines the different taxes and levies for which each of the three tiers of government has collection responsibility. As can be seen from the Table, the federal government is responsible for the collection of major taxes such as corporate income tax, petroleum profit tax, mining rents and royalties; customs and excise duties, education tax on companies and value added tax. Apart from taxes and levies, the federal government also has responsibility for the collection of proceeds from the sale of crude oil. State governments on the other hand collect personal income taxes within their domain and capital gains tax payable by individuals, for instance. Local governments can collect a variety of taxes, including tenement rates; market and motor park fees; and marriage, birth and death registration fees. 15. Federal transfers come from three types of accounts maintained by the federal government: a Federation Account, a VAT pool account, and an Excess Crude Account. Revenue from sale of crude oil and gas, mining rents and royalties, petroleum profits tax, companies’ income tax, and customs and excise duties are paid into the Federation Account. A Federation Account Allocation Committee (FAAC) shares accruals to the Federation Account on a monthly basis using a formula periodically determined by the Revenue Mobilization and Fiscal Allocation Commission and approved by the National Assembly. The nine oil-producing states are entitled to 13 percent of the amount due for sharing.4 The FAAC shares the remaining amount to the three tiers of government as follows: 52.68 percent for the federal government, 26.72 percent for states and 20.6 percent for local governments. The FAAC shares the amount standing to the credit of state governments to them based on the following criteria: equality of states (40 percent), population (30 percent), landmass and terrain (10 percent), social development factor (10 percent), and internal revenue generation effort (10 percent). States with low population, a small landmass, low social development factor such as primary school enrolment and low IGR effort receive less transfer. 16. The VAT Pool Account is one into which the proceeds of value-added taxes are paid. Unlike other tax revenues collected by the federal government, proceeds from VAT are deposited into a separate VAT pool account. The FAAC shares funds amongst the three tiers of government in accordance with a predetermined formula. The prevailing formula is 15 percent for the federal government, 55 percent for states and 30 percent for local governments. The horizontal allocation of VAT proceeds to states is based on three criteria: equality of states, population and derivation with weights of 50, 30 and 20 percent, respectively. States such as Ekiti and Bayelsa with low population and low level of commercial and industrial activities receive less allocation.
4 The states are Abia, Akwa Ibom, Bayelsa, Cross River, Delta, Edo, Imo, Ondo and Rivers.
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Table 2: Tax Collection Responsibilities
Federal Government State Government Local Government Personal income tax (Armed forces personnel; Police personnel; Residents of Abuja FCT; External Affairs officers; and Non-residents)
Personal income tax: (Pay-As-You-Earn (PAYE);Direct (self and government) assessment;
Withholding tax (individuals only);
Shops and kiosks rates
Companies income tax Capital gains tax Tenement rates Withholding tax on companies Stamp duties (instruments
executed by individuals) On and off liquor licence
Petroleum Profit Tax Pools betting, lotteries, gaming and casino taxes
Slaughter slab fees
Value-added tax (VAT) Road taxes Marriage, birth and death registration fees
Education tax Business premises registration and renewal levy
Naming of street registration fee (excluding state capitals
Capital gains tax - Abuja residents and corporate bodies
Development levy (individuals only) not more than N100 per annum on all taxable individuals
Right of occupancy fees (excluding state capitals)
Stamp duties involving a corporate entity
Naming of street registration fee in state capitals
Market/motor park fees (excluding market where state finance are involved)
Right of occupancy fees in state capitals
Domestic animal licence
Rates in markets where state finances are involved
Bicycle, truck, canoe, wheelbarrow and cart fees Cattle tax Merriment and road closure fees Radio/television (other than radio/tv transmitter) licences and vehicle radio licence (to be imposed by the local government in which the car is registered) Wrong parking charges Public convenience, sewage and refuse disposal fees Customary, burial ground and religious places permits Signboard/advertisement permit
Source: The 1999 Constitution of the Federal Republic of Nigeria
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17. The Excess Crude Account (ECA) is used to save oil revenues above a base amount derived from a defined benchmark price. It was established in 2004, and its objective is primarily to protect planned budgets against shortfalls due to volatile crude oil prices. Revenue streams from petroleum profit taxes, royalties, and crude sales depend on the price of oil on the international market. Therefore when the price of oil is above a benchmark price used in the federal budget that is approved by the National Assembly, the excess revenues are saved into the ECA. Funds kept in the ECA are shared amongst all the three tiers of government when certain conditions exist. At the time of conception, withdrawals from the ECA were meant to be done only when either oil prices or production levels fail below budgeted levels by a certain margin. However in practice, withdrawals have been made on an ad hoc basis, under the direction of the National Economic Council which comprises of the President, the Vice-President, and State Governors. 18. Internally generated revenues for states are mobilized by the states themselves. The sources of IGR include the revenues that states can raise as prescribed by the republican constitution and other revenue initiatives that states undertake, provided these do not contravene with any provisions of the constitution. For example, apart from taxes and levies, states sometimes do make equity or direct investments from which they earn interest income and dividends. In order to encourage states to maximize their efforts in generating IGR instead of sitting back and relying on federal transfers, the formula for the allocation of federal transfers has a component for rewarding states efforts at raising IGR.
19. Apart from federal transfers and IGR, states are also permitted to borrow funds, whether domestically orexternally, provided they are in compliance with the federal government borrowing guidelines for states. The sub-national borrowing framework provides for federal oversight of sub-national fiscal and borrowing decisions through a combination of rule-based controls, and direct administrative controls requiring disclosure of all borrowing operations and prohibiting sub-national governments from directly accessing external finance. Thus, Nigerian sub-nationals can freely borrow in Naira, within the established debt limits, while Federal approval and guarantee is required for loans or bonds in foreign currencies and markets. Details of state borrowing guidelines are outlined in Box 1. It must however be noted that these guidelines are currently being reviewed.
8
Box 1: Borrowing guidelines for Nigeria’s Sub-national Governments
Historical context of the review
In 2007, the FDMO issued new external borrowing guidelines, as well as sub-national borrowing guidelines covering the period 2008-2012. The main provisions are:
• States should seek federal government approval in principle ahead of full-scale negotiations for such loans;
• A minimum condition for such approval is evidence that the state has not over-borrowed externally or domestically. This is equated to evidence that the state’s debt service obligation does not exceed 40 percent of its federation account statutory allocations;
• States should authorize Federal Ministry of Finance to deduct at source from their statutory allocation, the amount needed for debt service;
• States’ external loans must be supported by Federal Government guarantee before final approval;
• Borrowing should be tied to specific investment projects whose feasibility studies should have been cleared by the National Planning Commission (NPC);
• Borrowing must be on highly concessional terms, specifically not to exceed one percent per annum;
• Borrowing should be limited to financing of projects for “poverty eradication” and for infrastructure.
States have, within the established debt limits, a free hand to determine their domestic borrowing needs and seek such financing from domestic banks of their choice. The sub-national borrowing guidelines state that any borrowing by a sub-national shall be the obligation solely of that particular sub-national unless explicitly guaranteed by the sovereign. For all FGN-guaranteed loans sub-national governments are required to issue an irrevocable standing payment order tied to the state’s FAAC allocations. Federal disclosure requirements in place with respect to state borrowing from commercial banks require sub-nationals to immediately upon contracting a commercial bank loan, furnish the DMO with details of the loan. Also, the lending bank should furnish the DMO and the borrowing sub-national's Debt Management Department (where in existence), with reports on various stages of draw-down and utilization by the borrower, on a periodic basis. States are required to establish a sinking fund for each loan raised into which periodic contributions are made for meeting the loan obligations. To access the capital market, states must meet a certain number of legal and regulatory requirements including requirements under the Investment and Securities Act (ISA) 1999, the Securities and Exchange Commission regulations and the listings requirements of the Nigeria and the Abuja Stock Exchanges. Under the ISA, states can issue securities in the form of registered bonds and or promissory notes. As with external borrowing, loans must be tied to specific projects. The total debt amount outstanding of the state and the proposed loan should not exceed 50 percent of the state’s total revenues in the preceding year. A state’s application to float bonds on the market should include audited accounts for the past five years. The guidelines stipulate a FGN guarantee as being compulsory for the states’ borrowings from the capital market. States are required to provide an irrevocable letter of authority giving the Accountant General of the Federation the authority to make deductions at source from the state’s statutory allocation in the event of default by the state in meeting its payment obligation under the terms of the loan. The state is required to establish a sinking fund for each loan raised into which periodic contributions are made for meeting the loan obligations. Any deductions from the state’s statutory allocation by the Accountant General are to be paid into the sinking fund account.
9
SOCIO-ECONOMIC CHARACTERISTICS OF STATES COVERED IN THE REVIEW
20. The states covered have different socio-economic characteristics, although some have similarities. Table 3 below contains some important socio-economic information for each of the states. As can be seen, Niger, Ondo, and Plateau are the oldest states amongst the group, established in 1976 while Bayelsa and Ekiti are amongst the newest states in Nigeria, having been carved out of Rivers and Ondo states, respectively, in 1996. Bayelsa and Ondo are oil producing states. It is therefore not surprising that they are the richest amongst the states covered. In terms of poverty levels, Kogi is the poorest, with an estimated population of 88.6 percent living below the poverty line of 1US$ a day, which is well above the national poverty rate of 54.4 percent (UNDP, 2010). Other states with high poverty rates are Niger (63.9 percent) and Plateau (60.4 percent). Bayelsa and Anambra have the lowest poverty rates in the group, with only 20 percent of the population living in poverty. In spite of having high estimated Gross State Domestic Product (GSDP) and low poverty rates, some of the socio-economic indicators for Bayelsa are poor. For instance, only 36.6 percent of the population was estimated to have access to an improved source of drinking water while adult literacy rate was only 64.3 percent, compared to over 70 percent in Anambra, Ekiti, and Ondo. Niger’s adult literacy rate is the lowest in the group, at only 41.7 percent.
Table 3: Socio-economic characteristics of states covered: at a glance
Anambra Bayelsa Ekiti Kogi Niger Ondo Plateau Year of state establishment 1991 1996 1996 1991 1976 1976 1976 Population (Million) 4.46 1.79 2.45 3.42 3.86 3.59 3.17 Location South
SouthSouth South
South West
North Central
North Central
South West
North Central
Land size (Sq Kilometers) 4,865 9,059 5,435 27,747 68,925 15,820 27,147 Estimated Gross State Domestic Product, Million US$ (2007)
727 9,639 775 503 6,518 6,057 653
Estimated income per capita, US$ (2007)
163 5,388 317 147 1,687 1,688 195
Poverty head count 20.1 20.0 42.3 88.6 63.9 42.1 60.4 Population with access to improved source of drinking water
57.4 36.6 67.4 36.2 61.1 57.2 31.3
Adult Literacy rate 77.0 64.3 74.4 63.5 41.7 75.8 60.6 Source: UNDP 2010
10
CONCLUSION
21. The main context in which the PEMFARs were conducted is a federal system of government that provides states with operational autonomy but with some limitations in scope. The institutional framework for PFM is broadly similar to what is in place at the federal government. The federal constitution allocates specific service delivery responsibilities and revenue raising powers to states. Some of the resources states need to implement their development programs come from the federal government in the form of federal transfers. The significance of these transfers in the states’ fiscal programs will be discussed in the next chapter. The federal government also regulates the borrowing activities of states. Finally, there were variations and similarities in some of the socio-economic characteristics across the states under review.
11
CHAPTER 2: FISCAL PERFORMANCE
INTRODUCTION
22. This chapter provides a picture of the fiscal performance of the states covered during the review period. It looks at the structure and trends in revenue and expenditure across the seven states. The analysis on revenues focuses on the relative importance of federal transfers and internally generated revenues (IGR) to total state revenues. Within IGR, the analysis also looks at the relative importance of various sources of revenues. With regard to expenditure trends, the focus is on the structure and trend of state expenditures by economic as well as functional classifications. Finally, the chapter also looks at fiscal balances and indebtedness across the states covered during the review period. 23. In spite of data limitations, the observed patterns across states and trends over time offer useful insights for a discussion on the institutional framework for public financial management. Although it may not be possible to explain all the observed patterns and trends, the analysis provides a useful context in which to discuss the institutional framework governing public financial management in the selected states, which is the subject of the next chapter. Given the observed fiscal performance of states and an assessment of their PFM system using the PEFA assessment methodology, the critical question to answer is what more needs to be done for PFM systems in Nigerian states to be effective, efficient, and transparent in the delivery of services.
REVENUE STRUCTURE AND TRENDS
24. States have been heavily reliant on Federal Transfers. For most states covered in the study, IGR accounted for less than 10 percent of total revenues during the review period (See Table 4 below). For the years for which data was available, the highest share of IGR in total revenues reached amongst the states covered was 25 percent by Anambra State in 2005.
25. Some of the states saw the share of IGR in total revenue increase during the period covered while others experienced a decline. For instance, in Niger, the share of IGR increased from 2.4 percent in 2001 to 6.4 percent in 2006. In Kogi, the share increased from 7.9 percent in 2001 to 10.5 percent in 2006 while Bayelsa experienced a slight increase from 2.4 percent in 2004 to 3.3 percent in 2006. On the other hand, Ekiti saw a decline in IGR from 7.9 percent in 2001 to 2.9 percent in 2006 while Ondo’s share decreased from 7.9 percent in 2005 to 4.7 percent in 2008.
12
Table 4: Percentage Share of IGR in Total Revenues
2001 2002 2003 2004 2005 2006 2007 2008Bayelsa 2.4 1.6 1.5 1.5 1.9 3.3 - -Ekiti 7.9 14.1 10.3 8.4 7.2 2.9 - -Kogi 7.9 8.5 7.1 4.9 7.2 10.5 - -Niger 2.3 3.1 1.5 5.9 5.2 6.4 - -Ondo - - - - 7.9 5.2 4.1 4.7Plateau - 8.5 9.1 7.6 - - - -Anambra - - - 16.6 25.4 15.1 - -
26. Taxes were the dominant component of IGR. As Table 5 shows, the bulk of IGR came from taxes across all states. On average, the share of taxes in IGR ranged between 46.1 percent in Ekiti to 74.7 percent in Kogi State. The second most important source of IGR in most states was interest repayments and dividends in most states. There were also variations across states, with Ekiti having a relatively high proportion of fines and fees (24.6 percent) but very low proportion of interest repayments and dividends (3.3 percent). At an average of 12 percent, Ondo had also by far the highest proportion of revenue from earnings and sales amongst the five states. The relatively high proportion of 26.3 percent of revenues from miscellaneous sources in Bayelsa is due to a high proportion of the Bayelsa State Infrastructure Tax which was introduced in 2005. The tax is a 3% levy on contracts awarded to the private sector. Between 2005 and 2008, it accounted for an average of 34 percent of IGR.
Table 5: Percentage Share of Different IGR Sources
Bayelsa Ekiti Kogi Niger Ondo (2001-2008) (2001-2006) (2001-2007) (2001-2007) (2005-2008)
Taxes 51.6 46.1 74.7 64.1 47.8Fines and Fees 3.2 24.6 2.9 8.2 13.1Licences 0.7 2.9 1.3 4.6 5.6Earnings and Sales 1.7 7.1 1.8 2.1 12.1Rent on Government Property 0.4 4.7 0 2.9 6.3Interest Repayments & Dividends 16 3.3 16.7 12.3 13Miscellaneous 26.3 11.2 2.5 5.8 2.1Total IGR 100 100 100 100 100
27. Within taxes, Pay as You Earn (PAYE) was the single most dominant source of revenue. Based on quantitative evidence from Niger State, this type of tax accounted for an average of 81.9 percent of all tax revenues between 2001 and 2007. Others included Taxes on Contract, which accounted for an average of 9.6 percent, and Tax on Interest, which accounted for 1.4 percent. Tax on Dividend accounted for 0.9 percent, while all the others made no significant contribution. There was no detailed data on the breakdown of revenues from different taxes in other states, but anecdotal evidence suggests a similar structure, with PAYE being the dominant source of tax revenues.
13
28. In general, states were still operating below their maximum potential for IGR. As noted in the previous chapter, the framework of fiscal federalism assigns different revenue raising powers to different tiers of Government. This inevitably limits the extent to which states can raise IGR. But even within their jurisdiction, some of the states are also still limited by a narrow tax base, usually because they are economically underdeveloped. Nevertheless, the reviews found that most states were still well below their maximum potential for IGR. Most state tax administrations lacked comprehensive databases on taxpayers, and did not have the capacity to enforce collection of some taxes. Due to a combination of these factors, most states are therefore still far off from emulating Lagos State’s achievement where IGR and not federal transfers is the dominant source of state revenues.
EXPENDITURE STRUCTURE AND TRENDS
29. In general, real total expenditures were increasing in most states, although there were periods in some states when total expenditures declined from one year to the other. Thus, states never really faced flat budgets. Taking into account inflation, they had more resources to spend from one year to the other as observed from an increasing trend in total budgeted and actual expenditures during the study period. It must also be noted though that in spite of the general upward trend in total expenditures, there is evidence indicating that there were also times when states would budget for lower levels of spending in some years even if the actual level of expenditure would be higher than the preceding year. For example, in 2003, the State of Bayelsa had budgeted for N34.5 Billion, down from a budgeted amount of N43.4 Billion in 2002. The factors behind the observed reduction in budgeted expenditures are however not clear although one possible reason is that Governments were only being realistic about their budget execution capabilities. For instance, in the Bayelsa case, it is likely that the reduction in the budgeted amount in 2003 was due to the fact that execution rate of the budget in 2002 was only 38 percent. 30. There was also wide variation amongst states in the allocation of resources between recurrent and capital expenditure. In five of the seven states covered, recurrent expenditures accounted for a higher proportion of total expenditure than capital expenditure (see Figure 1 below). The widest gap was in Niger state, where between 2001 and 2007, recurrent expenditures on average accounted for 81.5 percent of total expenditures compared to 19.5 percent being capital expenditures. Ekiti and Kogi also had relatively wide gaps between recurrent and capital expenditures, with 67 percent and 60 percent of total expenditures going to recurrent activities in the two states, respectively. In Bayelsa and Ondo, the shares of capital expenditures were higher than recurrent expenditures, at 56.5 percent and 54.3 percent, respectively.
14
Figure 1: Share of recurrent and capital expenditures in total expenditures
55.6
43.5
67.160.1
81.5
45.752.1
44.456.5
32.939.9
18.5
54.3 47.9
0.0
10.0
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Anambra (2004-2006)
Bayelsa (2001-2008)
Ekiti (2001-2006)
Kogi (2001-2007)
Niger (2001-2007)
Ondo (2005-2008)
Plateau (2002-2004)
%Sh
are
ofT
otal
Exp
endi
ture
Recurrent Capital
31. Over time, the share of recurrent expenditures vis-à-vis capital expenditures has been variable over the years, but with the share of recurrent expenditure rising towards the end of the study period in the states covered except Ondo. Figure 2 shows that for all states, there was no sustained upward or downward trend in the shares of recurrent or capital expenditures. However, there seems to be some common patterns amongst the states over certain periods. For example, between 2001 and 2003, the graphs show that there was an increase in the share of recurrent expenditure in most states, followed by a decline between 2003 and 2005, and then another rising trend between 2006 and 2007. It is not clear if there are common factors that affect the states allocation of resources between recurrent and capital expenditures. One possible common factor is nation-wide wage and salary increases which could affect personnel costs in all states.
Figure 2: Trend in shares of recurrent and capital expenditures across states (20001-2008)
0
10
20
30
40
50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008
%Share
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Trend in recurrent expenditure
Anambra
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Ekiti
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Niger
Ondo
Plateau0
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2001 2002 2003 2004 2005 2006 2007 2008
%ShareofTotalExpenditure
Trend incapital expenditure
Anambra
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Ondo
Plateau
15
32. There were also variations across states in the structure of recurrent expenditure, with personnel expenditures dominating in some states while other recurrent expenditures (mainly transfers) dominating in others. In Anambra, Ekiti, and Ondo, the dominant recurrent expenditure was on personnel costs. In Anambra, personnel expenditures accounted for 60.2 percent of recurrent expenditures while the shares in Ekiti and Ondo were 53.9 percent and 38.3 percent, respectively. In Kogi and Niger, other recurrent expenditures were the dominant component of recurrent expenditures, accounting for 54.2 percent and 53.2 percent, respectively. A closer look at other expenditures reveals that these are mostly transfers with the most dominant being subventions to parastatal organizations, public debt charges, and pensions and gratuities. In Kogi for example, subventions to parastatal organizations accounted for 82.8 percent of transfers, while public debt charges and pensions and gratuities accounted for 8 percent and 9 percent, respectively. In Niger State, subventions to parastatals accounted for 50.1 percent of transfers, public debt charges accounted for 26.9 percent, while pensions and gratuities accounted for only 4 percent.
Figure 3: Structure of recurrent expenditures
60.253.9
20.223.3
38.3
24.716.0
25.7 23.5 28.315.2
30.2
54.2 53.2
33.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Anambra (2004-2006)
Ekiti (2001-2006)
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Niger (2001-2007)
Ondo (2005-2008)
%of
Tot
alR
ecur
rent
Exp
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Personnel costs Overhead costs Other recurrent costs
33. In terms of trend overtime, there was a general decrease in the share of personnel costs in the early 2000s but the share started increasing around 2006. On the other hand, there has been a general increase in the share of overhead costs for the most part of the decade. As Figure 4 shows, the share of personnel costs decreased from 70.7 percent in 2002 to 46.7 percent in 2006 in Ekiti. In Niger State, the share declined from 34.9 percent in 2003 to 17.2 percent. However, as the graph also shows, the share of personnel costs appear to have started increasing as from 2006. For instance, it increased from 16.2 percent to 18.8 percent in Kogi; in Niger it increased from 17.2 percent in 2006 to 23.0 percent, while in Ondo, it increased from 27.6 percent in 2006 to 33.7 percent in 2007. With regard to overhead costs, the trend is more noticeable. In particular, as Figure 4 shows, there was a general increase in the share of overhead costs in most states.
Figure 4: Trend in shares of personnel and overhead expenditures across states (2001-2008)
16
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2001 2002 2003 2004 2005 2006 2007 2008
%Share
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2001 2002 2003 2004 2005 2006 2007 2008
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Ondo
34. When expenditures are categorized by functional classification, they are almost evenly spread across the major categories of economic services, social services, and general administration. A caveat here is in order. The functional classification did not follow the standard Classification of the Functions of Government (COFOG). The data is analyzed on the basis of how the states categorized the expenditures themselves. Six functional expenditure categories have been commonly used by states: (i) economic services, (ii) social services, (iii) general administration, (iv) security, law, and order, (v) public debt charges, and (vi) others. Economic services cover works, transport, energy, housing, commerce and industry, agriculture, culture and tourism, and solid minerals. Social services cover education, health, water resources, women and youth affairs, and emergency and disaster relief. General administration consists of the cost of maintaining the structure and systems of government and includes the cost of political appointments, cabinet office, offices of the governor, deputy governor, secretary to the state government, head of service, ministry of finance, and similar common administrative costs. Figure 5 below shows that economic services accounted for 31.3 percent of total expenditures, followed by social services at 30.2 percent, and general administration at 26.4 percent.
Figure 5: Average percentage share of total expenditures by broad functional categories for all states
17
E S
S S
G A
O
P D C S L O
35. A further breakdown of the categories by functional classification shows the prominence of expenditures on works, education, and general administration. As Figure 6 below shows, more than two thirds of total expenditures were allocated to these areas. Education was on average the single largest sector, accounting for 21.6 percent of total expenditures. However, there were some variations across the states with Ekiti spending an average of 28.4 percent of its budget on education while Bayelsa spent an average of only 12.3 percent during the review period. Health accounted for 6.4 percent, agriculture, 3.6 percent while water accounted for only 2.2 percent. By most standards, the share of total expenditure that went to general administration is relatively high. 36. Over time, the trend in expenditure shares for the main functional areas of works, education, and general administration has been variable across states. Figure 9 in the Annex shows that the share of expenditure going to education was declining between 2001 and 2006 for Kogi and Bayelsa and then started to increase in 2007 when the share for Kogi increased from 17.1 percent to 22.8 percent while that of Bayelsa increased from 9.4 percent to 10.1 percent. The graph also shows a sustained increase in the share of total expenditure going to education in Ondo between 2006 and 2008. The share of education increased from 18.5 percent in 2006 to 23.8 percent in 2008. As for works, there is no noticeable trend during the study period. With regard to general administration, Figure 9 shows that there was a general upward trend in Bayelsa and Ekiti, but a downward trend in Kogi during the review period. For example, the share of expenditure going to general administration in Bayelsa increased from 23.6 percent in 2001 to 41.7 percent in 2008. In Ekiti, the share increased from 22.5 percent in 2001 to 29.3 percent in 2006.
Figure 6: Average percentage share of total expenditure by dis-aggregated functional categories for all states
18
28.2% 28.0%
21.6%
6.4%
3.6%2.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Works, Transport, Lands & Housing
General Administration
Education Health Agriculture Water
Ave
rage
%sh
are
ofto
tale
xpen
ditu
re
FISCAL BALANCE AND INDEBTEDNESS
37. The performance of states with fiscal discipline measured by overall balances was mixed but strong with regard to primary balances. As Table 6 shows, there were years when states registered overall fiscal deficits and years when they registered overall fiscal surpluses. Coincidentally, all states except Kogi registered overall deficits in 2006. It is also worth noting that Ekiti and Niger States had poor spells during 2004-2006 and 2006-2007, respectively. In three consecutive years, Ekiti registered overall fiscal deficits ranging from 26.6 percent of total revenue to 41.7 percent. Similarly, Niger’s overall fiscal deficit in 2006 was 20.5 percent of total revenues, and then rose to 56 percent in 2007. But when it came to primary surpluses, all states except Anambra and Bayelsa performed well, registering primary surpluses in all the years for which data was available. This shows that most state governments were generally committed to fiscal discipline.
Table 6: Trend in overall fiscal balance (as a percentage of total revenues)
2001 2002 2003 2004 2005 2006 2007 2008Anambra - - - 31.0 6.1 -1.6 - -Bayelsa 6.7 39.3 17.0 21.6 11.2 -15.5 -15.0 22.9Ekiti -54.9 15.5 4.8 -38.3 -41.7 -26.6 - -Kogi -14.5 -29.9 9.7 1.7 12.7 1.4 12.8 -Niger -54.2 10 -6.4 35.9 2.5 -20.5 -56 -Ondo - - - - -5 -0.4 13.6 7.4Plateau - -1.2 -64.3 7.1 - - - -
19
Table 7: Trend in primary fiscal balance ( as per percentages of total revenues)
2001 2002 2003 2004 2005 2006 2007 2008Anambra - - -52.4 -68.5 -86.6 - -Bayelsa 6.7 39.3 17.0 21.6 11.2 -15.5 -15.0 22.9Ekiti 17.8 47.4 38.5 23.6 34.2 38 - -Kogi 40.3 15.0 33.0 40.0 52.9 47.1 48.1 -Niger 37.7 57.8 45 41.3 54.8 45.6 20.8 -
38. Available data show a bias towards external debt and generally relatively low levels of indebtedness. In general, state debt data has not been readily available because of poor debt recording capacity at the state level. However, as Table 11 in the Annex shows, with the exception of Bayelsa, state debt was predominantly owed to external creditors. In 2007, the states of Ekiti, Kogi, and Niger had no record of formal domestic debt data. It is however, important to also note that although these states did not have formal domestic debt in 2007, Ekiti and Kogi had what is sometimes referred to as informal debt, mostly in the form of arrears for contracts executed but not yet paid, and arrears for pensions and gratuities. Table 12 in the Annex presents level of indebtedness in terms of debt stock as a share of total revenues and debt service also as a share of total revenues. It can be seen that the ratio of total debt stock to total revenues was very high for Niger in 2005 and 2006, at 249.5 percent and 223.2 percent, respectively. However, the ratio declined to 10.9 percent in 2007. In that year, the state exited from both the Paris and London Clubs of Creditors as part of a debt reduction deal negotiated by the Federal Government. In terms of debt service, Table 12 in the Annex also shows that the ratio of debt service to total revenue was generally very low for all the states (Ekiti, Kogi, and Niger) for the years that data was available.
CONCLUSION
39. The analyses of this chapter have showed that fiscal performance across all the states was variable, although some common trends were also observed. In general, all the states were heavily dependent on federal transfers, with IGR accounting for less than 10 percent in most cases. In terms of expenditure composition, the majority of states allocated the bulk of their resources to recurrent expenditures. Only Bayelsa and Ondo spent more than half of their resources on capital activities during their respective periods of review. Within recurrent expenditures, there were also variations across states in terms of the share of personnel expenditures, overhead expenditures, and other recurrent expenditures (mostly transfers). When analysed in terms of functional classification, the review found that although economic and social sectors were dominant recipient of state resources, the share that went to general administration was also very high across all states, raising a concern over the optimality of resource allocation to priority areas. When disaggregated further, works and education were the prominent areas. Finally, the performance of most states was generally strong with regard to fiscal discipline and indebtedness, although data on the latter was very scanty. With the exception of Anambra and Bayelsa in some years, most states registered primary fiscal surpluses. It is not surprising that their debt levels were generally low.
20
CHAPTER 3: PERFORMANCE OF STATE PFM SYSTEMS
INTRODUCTION
40. This chapter focuses on the performance of state PFM systems. The previous chapter looked at how PFM systems in each state manifested themselves in fiscal program outcomes. This chapter dwells on the workings of the PFM systems themselves. It summarizes the findings of PFM assessments carried out in the seven states covered. Two types of PFM related assessments were undertaken. The first type was a Public Expenditure and Financial Accountability (PEFA) assessment which was done in all the seven states. The PEFA assessment looked at the performance of each state’s budgeting system against 28 indicators and across 6 pillars: budget credibility; comprehensiveness and transparency; policy based budgeting; predictability and control in budget execution; accounting, recording, and reporting; and external scrutiny and audit. The second type of PFM assessment focused on public investment management (PIM) and was done in Bayelsa, Ondo, and Plateau. The PIM assessments focused on the efficiency of the state in managing the capital budget process. In particular, they looked at the extent to which selected projects derive from the State’s strategic development polices and priorities, appraisal of individual projects, procurement process, efficiency in implementation, monitoring, evaluation, and asset maintenance.
OVERALL PERFORMANCE ON PEFA INDICATORS ACROSS STATES
41. In general, performance of the PFM system in most states appears to have been poor. Table 12 in the Annex provides a summary of the scores across all the 28 indicators in all the states. Note that although a PEFA assessment was conducted in Ekiti State, there was no scoring. The scores range between A and D, with A representing the best performance and D the worst. Figure 7 plots the frequency of each of the scores in the six states. From the graph, it can be seen that most states generally performed poorly. The frequency of A and B scores (out of a total of 28 per state) across all the six states was very low: 6 in Anambra (21.4 percent); 0 in Bayelsa (0 percent); 8 in Kogi (28.6percent); 7 in Niger (25 percent); 14 in Ondo (50 percent); and 2 in Plateau (7.1 percent). In all the three states, there were only three A scores: two A scores in Ondo – one on aggregate revenue out-turns compared to original approved budget and another on orderliness and participation in the annual budget process; and one A score in Plateau on aggregate revenue out-turns compared to original approved budget.
21
Figure 7: Frequency of PEFA scores in six states
0
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Anambra Bayelsa Kogi Niger Ondo Plateau
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EFA
score
42. Although performance was in general poor, there were traces of good performance in some of the indicators across the states covered. Table 8 below provides a summary of these indicators and a brief description of the achievements registered. Looking at the additional information describing the actual achievement under each indicator, it can be observed that most of the areas in which states had good performance had to do with compilation, recording, or availability of information and timeliness. This finding is important for two reasons. First, it can help identify where the quick wins are in a reform program. Those states which are lagging behind in some areas should find it easier to compile, record, and publish information. Second, the finding also highlights the challenges that still remain in most states to have a PFM system that can ensure effective and efficient use of public resources. While availability of information is important, it does not amount to a significant change in the way of doing things. 43. The poor performance in the high level indicators also masked strong performance in some sub-indicators. The picture above is with respect to the 28 PEFA indicators which are referred to as high-level indicators. Beneath most of these indicators are a number of sub-indicators. Therefore, although the overall score on a high level indicator may have been a C or a D, the state could still have performed well on one or more of the sub-indicators. For example, although the state of Bayelsa scored a D on effectiveness of collection of tax payments, it scored an A on one of the three sub-indicators that deals with the effectiveness of transfer of collections to the Treasury by the revenue administration, where beginning April 2009, taxpayers in Bayelsa started paying directly into State Treasury accounts at Banks. However, the state performed poorly on two other sub-indicators: Collection ratio for gross tax arrears, and frequency of complete accounts reconciliation between tax assessments, collection, arrears records, and receipt by Treasury.
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Table 8: PEFA indicators with traces of good performance
No Stage in budget process and indicator Summary of achievement States Budget Preparation
1 Comprehensiveness of information included in the budget
At least 4 out of 9 required types of information were being provided during budget presentation
All
2 Orderliness and [political] participation [guidance] in the annual budget process
Recent budgets were initiated by the political leadership, presented to the SHA in good time, & approved before the new fiscal year
Ondo, Niger
Budget Execution 3 Transparency of taxpayer obligations and
liabilities Information on taxpayers’ obligations and liabilities were widely disseminated
Ondo, Anambra, Niger
4 Aggregate revenue out-turn compared to original approved budget
Revenue projections were conservative. Out-turns were below 10% of the approved budget
Ondo, Plateau
Recording and management of cash balances, debt, and guarantees
Debt data were well recorded and there was a robust system for contracting new loans
Ondo, Anambra, Niger
5 Effectiveness of payroll controls Personnel & payroll records were updated regularly and regular payroll audits were carried out
Ondo, Anambra, Niger, Plateau
6 Availability of information on resources received by service delivery units
Financial statements contained information on resources received by service delivery units
Ondo, Kogi
7 Accounting, audit, & external oversight 8 Legislative scrutiny of annual budget law The SHA was given adequate time to scrutinize the
budget Ondo, Kogi, Niger
9 Public access to key fiscal information Respectively, 4 & 5 out of 7 types of fiscal information was accessible to the public
Ondo, Ekiti
10 Quality and timeliness of annual financial statements
The State Accountant General submitted annual financial statements to the Auditor General within the prescribed timeline. However, quality was found to be a challenge
Ondo, Anambra, Bayelsa, Kogi, Niger
11 Scope, nature, and follow-up of external audit
Audit reports were submitted to the SHA in a timely manner and the Public Accounts Committee of the SHA was active in discussing the reports. However, follow-up on recommendations was still in existent
Ondo, Kogi, Niger
44. Below is a more comprehensive and detailed summary of findings across the various components of the PFM system in all the states covered. The findings are grouped into four main sections on the basis of the main stages in the budget cycle: Planning and budget preparation; budget execution and monitoring; accounting and reporting; and auditing and external oversight.
PLANNING AND BUDGET PREPARATION
45. This section presents findings with regard to the performance of states in the area of planning and budget preparation. In particular, the section looks at use of multi-year frameworks in budget planning, alignment of budgets to state policy priorities, orderliness in the annual budget preparation process, and comprehensiveness of budget information and coverage.
Multi-year perspective to budget planning
46. Although there was evidence of some states having some medium-term strategy documents, in practice, a multi-year perspective to budget planning was not fully entrenched. Ondo’s SEEDS contained a multi-year forecast for the state capital expenditure program on whose basis the state was able to produce a multi-year capital budget for 2003-07, covering 12 MDAs. Bayelsa had adopted 11 pilot sector strategies, drafted by the external
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consultants, in December 2008. Similarly, the Anambra SEEDS also included references to sector strategies and provided some costs in relation to capital expenditures. Kogi also incorporated several elements of multi-year budgeting into its SEEDS, including projected sector allocations for 2005-07, and developed a Rolling Plan for capital spending that complements the SEEDS. In spite of all these initiatives, there was no evidence that these multi-year perspectives informed the preparation of annual budgets. 47. A key weakness in state sector strategies developed so far relates to the fact that they have covered only capital costs, thus failing to strengthen the link between capital and recurrent parts of the state budgets.5 This greatly undermines potential effectiveness of this new instrument for sector budgeting because considerable gains in service delivery in Nigeria as elsewhere could be realized through better balancing and complementarity of capital and recurrent spending.
48. Similarly, there was no evidence that states were utilizing medium-term fiscal frameworks provided by the Federal Government. Since 2004, the FG has regularly been sharing the federal Fiscal Strategy Paper (FSP) in advance with states and other stakeholders. The FSP lays out in detail the major macroeconomic assumptions that underline its fiscal planning. It contains considerable information on policies, projections and assumptions with respect to federal revenues and expenditures, inflation, exchange and interest rates, etc. However, most states were not utilizing such information in the preparing their budgets.
49. In general, there was no evidence of a medium-term expenditure framework (MTEF) guiding the preparation of budgets. In all the states covered, budgets were being prepared within a one year perspective. In all the states, there were usually no adequate estimates of recurrent cost implications associated with the approved capital budget program. In some states, including Bayelsa, there was a formal requirement in the annual Call Circular for MDAs to ensure adequate budgetary provision for financing the current needs of previously undertaken capital projects. However, this requirement was poorly enforced.
Alignment of budget to policy priorities
50. The structure of the state budgets did not reflect the state policy declarations. For example, in several states such as Niger and Plateau, expenditure priorities as reflected in the approved budgets were inconsistent with the priorities as spelled out in the State Economic Empowerment Development Strategy (SEEDS). A possible explanation is that this is due to the fact that the SEEDS were developed with heavy inputs from external consultants, with minimal contribution from the senior local office holders. As pointed out above, some states, such as Bayelsa went further to develop medium-term sector strategies for selected MDAs. However, these too did not seem to have adequately informed the preparation of annual budgets.
Orderliness in the annual budget preparation process
51. Most states have clearly articulated budget calendars but show poor compliance with the agreed timelines. Although the governments did issue an annual budget circular,
5 This weakness applies to the MTSS at the federal level.
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whose timetable allowed MDAs a reasonable time to prepare and submit their estimates, they did not always adhere to it in practice. Budgets were often submitted to state assemblies only in December. This contributed to significant delays (in some cases up to three months after commencement of the year) in approving the budget. Meanwhile, several states, such as Bayelsa and Plateau, did not have an established fixed budget calendar then. In this group of states, the Call Circular referred only to timing for bilateral budget discussions between the Ministry of Finance and MDAs, but did not address the issue of full timetable for the entire process of budget preparation and approval.
Comprehensiveness in budget information and coverage
52. Information typically presented in the budget package submitted to state legislatures was not comprehensive enough. As can be seen from Table 14 in the Annex, it usually included an analysis of the state’s fiscal performance in the outgoing year, summarized budget data for both revenue and expenditure according to the main heads, and some explanation of budget implications of particular new policy initiatives. However, there was usually no information on macroeconomic assumptions used for budget preparation nor analysis of existing debt stock, including data on budget arrears, and financial assets of the state. 53. In addition, there were significant gaps in budget coverage. State budgets generally underestimated the total amount of public resources which government controlled. The main examples of under-reported government activities included: (i) donor-funded projects, (ii) expenditure funded from revenues raised by MDAs and parastatals, which were held at the point of collection and not transferred to the state Treasury, and (iii) withholdings made by the federal government from federal transfers due to the state – in their budgets states usually reported the obtained transfers on the net basis, i.e. excluding all withholdings made in lieu of their debt service obligations.
54. However, some states performed relatively better than others in their coverage. For example, Bayelsa state presents receipts of federal transfers on a gross rather than on a net basis. In this respect, this state’s records (revenue side) were more complete than those in other states. However, even in the case of Bayelsa, the process of incorporating federal deductions into state’s fiscal books remains incomplete: on the expenditure side such deductions are not reflected yet. And in this sense, the state’s level of expenditure remains under-reported. Ekiti also included a considerable portion of donor funding it obtained in its annual accounts.
55. At the same time, reforms undertaken in other states shows that budget consolidation is possible. For example, prior to 2008, Ondo state’s Development Commission (OSOPADEC) presented its budget to the SHA independently of the regular state budget. This commission is entitled to 40 percent of the total state revenues from mineral derivation and has the mandate to promote regional development in the two oil producing areas of the state. During 2006-08, OSOPADEC’s budget accounted for about 20% of state aggregate spending. In 2008, the state government for the first time integrated OSOPADEC’s budget with its regular budget. Further, in 2009, the Ondo state government set up a steering committee to monitor the execution of donor-funded projects. The committee was expected to compile all donor-funded projects and publish the report on its findings. This represents another example of information that was outside the state budget, but which can easily be consolidated into the budget.
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56. Weaknesses in budget classification partly contributed to the problem of less comprehensive budgets. The classification systems, used by all the states were outdated and much different from the accepted international standard. Most states showed significant inconsistencies between the codes used to track capital and recurrent spending. In many states (including Ekiti, Niger, and Ondo) this deficiency created a major barrier for accurate monitoring of total funding allocated to individual MDAs and particular government functions, including education and health. Various governments have been trying to address this problem through introduction of their own, locally designed classification solutions. Some of them, including Anambra, as it seems, have been able to move slowly in the right direction, but still are far away from the system that would be consistent with best international practice. There have also been some plans to improve budget classification in Plateau state.
BUDGET EXECUTION
57. This section summarizes findings with respect to the various components of budget execution. There include revenue mobilization and tax administration, procurement, availability and predictability of funding and cash management, expenditure control, and monitoring. But before presenting these findings, it was important to assess the overall credibility of the budget, by comparing the actual budget out-turns with approved expenditures. Credibility of the budget 58. In general, the budget had little credibility across states. Figure 8 presents the average deviations of actual budget expenditure out-turns from the approved total budget. As can be seen, the average percentage deviation was generally large in all the states, with the exception of Ondo, where the average deviation was 7.1 percent. At an average deviation of -42 percent, Niger state’s budget was the least credible. It must also be observed that in general, the tendency amongst states is to under-spend rather than over-spend. As can be seen from the graph, the percentage deviations of all the states except Ondo were negative, showing that actual total out-turns were less than approved budget totals. Disaggregated data on capital and recurrent expenditures were available for Ekiti, Kogi, Niger, and Ondo. These showed that in general, low execution rates of the budget were a bigger problem on the capital budget than on the recurrent budget. In the case of Niger, while there was under-expenditure on the capital budget by 80.7 percent during the period 2005 and 2007, there was over-expenditure on the recurrent account to the tune of 16.9 percent.
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Figure 8: Average percentage deviation between actual total out-turns and approved expenditures
-14%
-18% -18%
-31%
-42%
7%
-24%
-50%
-40%
-30%
-20%
-10%
0%
10%
Anambra (2004-2006)
Bayelsa (2006-2008)
Ekiti (2004-2006)
Kogi (2005-2007)
Niger (2005-2007)
Ondo (2006-2008)
Plateau (2002-2004)
Ave
rage
%de
viat
ion
Note: Negative percentage deviations represent under-expenditure while positive percentage deviation represents over-expenditure
Revenue mobilization and tax administration
59. As observed in the previous chapter, IGR represented a small share of state government revenues. State dependence on federal transfers increased recently due to higher oil revenues that were shared across the three government levels. Several states have since announced their intension to raise the effectiveness of their tax administration arrangements, but actual implementation remains at the early stage. 60. Legislative and regulatory framework on the major local taxes (including PIT and property taxes) was generally clear and stable, and taxpayers usually had adequate access to taxpayer information. However, the states did not use internet to improve availability of tax information. The existing tax appeal systems require substantial redesign to become fair, transparent, and effective. Kogi is the only state where there was evidence of regular monthly reconciliation of tax assessments, actual collections, arrears, and transfers to the treasury.
61. The state capacity to enforce tax legislation was inadequate, and most data and information systems were outdated. Most states did not have comprehensive computerized databases of taxpayers6, while the taxpayer registration procedures were not subject to effective controls. Although, penalties for non-compliance with tax registration requirements generally existed, they did not have much of a practical impact. Tax audits and fraud investigations were rare and usually undertaken by external consultants; the State Boards of Internal Revenue (SBIRs) did not have capacity to carry out such functions on their own. The states did not
6 Bayelsa did announce its plans to construct a comprehensive computer-based taxpayer database within the reform program managed by its e-Governance Bureau. Several states, including Kogi, made an effort to update their taxpayer database.
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compile information on outstanding tax arrears, which greatly undermined effectiveness of their collection efforts and generally weakened taxpayers’ incentives to comply. Moreover, state tax agencies did not have legal power to prosecute tax debtors directly, while general courts were not effective in punishing tax offenders. In contrast to other states, the Niger state had a specialized Revenue Court, which was regularly used by the SBIR to follow on cases of tax evasion.
62. One single tax area where considerable progress has been made recently relates to improvements in the payment systems. In Anambra (in 2007), Ondo (in 2007), and Bayelsa (in 2009) the arrangements were introduced for direct payments of all taxes to the state treasury through local banks, phasing out cash payment and considerably reducing the leakage. And there was a move in these states towards a more regular, usually daily, transfer of collected taxes from CBIRs to the Treasury.
63. Bayelsa was also drafting an integrated Internal Revenue law that aims to streamline various issues related to tax administration, including revenue collection (direct payment system) and the appeal process. The Plateau State Board of Internal Revenue recently produced two public guides for taxpayers, which aim to educate the public and also to clear some ambiguities in the area of tax administration. In particular, the state PAYE guide provided a comprehensive set of information on tax rates, allowances, procedures for obtaining tax clearance certificates (TCC), and on the tax appeal process. However, the state appeal procedure remained limited to the existing Assessment Authority, which was inconsistent with the existing Personal Income Tax Act (PITA).
Procurement
64. In most states the procurement process was highly centralized, with the Governor personally being responsible for making decisions on most large and medium size contracts. Changes in the established procurement practices have been slow. The reality of many states is that the Governor personally selected the contractors under main projects, monitored their performance and authorized their payments. Fully competitive bidding was uncommon, while the majority of contracts were awarded on the basis of selective tendering (with just few companies being invited to participate in the tenders). Major contracts, such as those in the area of road construction, were commonly not opened for fully competitive bidding. At the same time, many states already had clearly established guidelines and procedures to support open tendering in public procurement, but compliance was inadequate. This further reduces the efficiency of existing spending programs and increases the budget cost. A procurement complaints procedure sometimes existed, but the rules were neither clear nor backed by legislation. 65. Recently there has been an increased interest in public procurement reform among reform-minded states. Several governments, including Anambra and Ekiti, set up a procurement due process office to focus on cost estimates of public sector projects. In Bayelsa and Ondo the regulations established open competitive bidding as the default procurement method, but in practice the remaining regulatory loopholes greatly reduced the actual level of competition in public tenders. The available statistics suggests that in 2008-09 about 65% of total contracts in Ondo were awarded through non-competitive tendering. Some of these contracts were rather large (up to US$0.25 bn). In Ekiti a special administrative manual (a Tender
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Procedure Manual) has been in place since 2003, and the state Office of Accountant General maintained a register of awarded contracts but which was not accessible to the public. On the opposite end of the spectrum, in Plateau the analysis failed to identify any formal guidelines and procedures the state government used in its procurement process in the recent past. Only in 2008 did the new administration officially revive the state tendering process. Similarly in 2008, the new state administration in Niger State launched a move towards a more open and competitive tendering process. 66. Many states also claimed that they were in the process of drafting a modern public procurement law, which was expected to introduce international standards of transparency into the process and be consistent with the Federal procurement legislation adopted in 2007. Bayelsa was among the states most advanced in this direction. The State Government had presented a draft public procurement law to the House of Assembly for approval in 2008 which was subsequently passed in 2009, after the PEFA assessment. The law aims to establish a procurement regulatory agency to oversee public procurement throughout the State, establish thresholds, prepare and enforce procurement guidelines and rules, and develop capacity for public procurement in MDAs.
Availability and predictability of funding and cash management
67. Cash management was generally weak and fragmented, and was exercised through cash rationing. Most states did not have a formal system of cash flow forecasting. Ekiti had a relatively more formalized system for cash management than other states: the Cash Allocation Committee would meet monthly to decide on actual disbursement of public funds. The committee would review the ongoing expenditure trends and allocate funds across budget lines and MDAs based on the Appropriation Act and available cash. No state as yet had introduced a single Treasury Account. The all kept their balances spread over numerous bank accounts (e.g. in both Anambra and Bayelsa state Treasuries had over 100 bank accounts each, Ondo had 34 accounts in 14 different banks). 68. There was insufficient transparency in fiscal relations between state and local governments, though there has been some emerging variation in PFM practices. In most cases, state governments followed the policy of significant withholdings (deductions) of funds due to LGAs and their utilization in a centralized manner for common projects and programs, and also for direct payments to civil servants and teachers employed by local governments. Such a high level of retention is inconsistent with the existing federal and state legislation on local governments and greatly undermines local autonomy. The prevailing policies gave LGAs little predictability of incoming resource flows. Further, there was little accountability for utilization of funds, which legally belong to LGAs but de facto are used by state governments through centralization of federal transfers while not reflecting them in state-level budgets. Also, most state governments, despite being in full administrative control over LGAs’ finances, did not produce a consolidated report on local budgets, which further complicated monitoring and analysis of inter-governmental arrangements.
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69. State dealings with their own local governments need to be brought in compliance with the existing legislation7. For instance, in Plateau and several other states, in violation of law, the stage governments did not transfer to LGAs 10% of state revenues. Lack of transparency in fiscal relations with the LGAs is aggravated by a common perception shared by senior state officials that the provision of key services in primary health and education is local (but not state’s) responsibility. This hampers improvements in delivery of key services due to their under-funding. At the policy level, this supports a biased expenditure structure with a strong emphasis on infrastructure (especially roads) at the cost of under-financing of education and health. 70. The arrangements for budget execution did not allow MDAs to predict availability of funds for commitment expenditures. Due to centralization of most spending decisions at the Governor’s office, the role and responsibility of MDAs for effective project preparation and execution was compromised. As a rule, the Governor personally approved all major payments to contractors to be done in the course of the month, and, in the absence of reliable cash planning, at the MDA level there were limited opportunities to predict these decisions. Thus, service delivery units had restricted opportunities for meaningful planning of their resource use. There was a common practice for frequent significant in-year budget adjustments, which were often inconsistent with the approved budgets and made without formal justification and/or legal budget amendment8. The existing rules on budget amendments were frequently not observed. Projects not originally selected would commonly get into the budget during the approval and implementation stages; this included constituency projects for legislators that were usually added in the course of legislative approval.
Expenditure control
71. Most states commonly used supplementary budgets to legitimize instances of overspending against the original budgets rather than to improve project implementation. MDAs were not usually involved in the process of such in-year budget adjustments. In Plateau, there had been frequent over-spending in excess of 200% on individual budget lines against the approved budget allocations. This was in part related to inadequate commitment controls: while Financial Regulations contained clear rules for such control, they were not properly enforced.
Payroll management
72. Payroll controls were strengthened in a number of states, but not everywhere. This resulted in drastically reduced incidence of salary arrears, improved reconciliation between personnel and payroll data, and introduction of stricter control procedures over payroll data maintenance and updates. In Ondo, there was a high level of integration of the personnel database with the payroll for the civil service (e-PASS system introduced in 2006) but the integration scheme did not cover parastatals9. Several states, including Anambra and Ekiti, had been doing regular audits of payroll records. Even in Plateau state, which generally showed a
7 Kogi state is noted as a positive example in this respect, i.e. it is seen as the state with a higher level of compliance with the existing rules for vertical and horizontal inter-governmental allocation of budget revenues. 8 The 2008 budget in Anambra introduced a clause to outlaw all virement made without explicit approval by legislature, but it remained to be seen how effective such a requirement could be in the prevailing political economy context. 9 But the government had been working to expand the e-PASS to cover teachers.
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lower PFM capacity, external consultants were employed in 2002-04 (whose remuneration was linked to payroll savings) to tighten payroll controls by undertaking regular audits and establishing a nominal role database. These arrangements were not sustained after the consultants left in 2005, and the situation with payroll control had since deteriorated.
73. In Bayelsa, the process of cleaning the payroll data and establishment of an integrated personnel database had started in 2009. This reform effort included a service-wide staff audit and verification that captures biometric details, issuing identity cards with unique staff numbers, and linking the personnel and payroll databases to control changes to personnel records. The pre-reform situation in Bayelsa, which had been rather typical, included a centralized payroll database, but lacked a single central personnel database. Instead each MDA maintained personnel records of its staff, and the system did not provide for reliable regular reconciliation between personnel and pay data. Such arrangements are exposed to manipulation and criminal collusion, and the cases of sanctioning/prosecuting government officials in relation to the ghost worker syndrome have been rather common. The Niger state government also undertook some tightening of payroll control in 2007 and the payroll system was computerized, but there was no integration between personnel and pay data hence weak control over MDA’s payroll expenditures. As a result, there were at the time reports of a number of cases of payroll fraud in Niger. Debt management
74. Many states (including Anambra, Ekiti, Ondo, and Plateau) had established Debt Management Departments/Committees and expanded their cooperation with the federal government on debt data reconciliation. Generally, the quality of debt data improved, including through better cooperation and information sharing with the federal DMO, while control over new borrowing was further centralized and became stricter. However, the capacity of state debt management units was limited, hence incapable of undertaking a thorough debt sustainability analysis (DSA). Apart from the statutory debt limits, States did not have any explicit debt limits or fiscal rules10 of their own that would guide strategic decisions on their borrowing policies. 75. Most states lacked comprehensive data on their debt stocks due primarily to the fact that they did not undertake a systematic recording and auditing of budget arrears. The main data weaknesses related to information on non-contractual debts such as payment arrears to contractors and utility providers as well as wage and pension arrears. Niger’s system of debt recording was particularly weak: the state failed to provide the official record of domestic debts for years after 2005. In some states, which had data on arrears easily available, the actual level of payment arrears was quite modest. For instance, the stock of arrears in Bayelsa in late 2008 amounted to N 4.8 bn, which was about 3% of the state’s annual expenditures11. In Ondo there was no evidence of systemic consolidation of outstanding contractual debts, but local stakeholders were in agreement that such arrears were insignificant (within 1-2% of state annual expenditures).
10 However, Bayelsa has introduced a rule that limits (to 13%) an interest rate to be paid on any state borrowing. 11 It is worth noting, however, that it is likely that the situation with non-payments may be much worse in the states that do not have capacity for regular monitoring and reporting on their consolidated stock of payment arrears.
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76. Meanwhile, in several states the actual debt management practices have improved recently. There is considerable evidence that state governments as a rule did not accumulate any significant fresh wage and pension arrears in recent years, and those arrears that are still on the books tend to be “legacy debts”, inherited from previous administrations, which the current leadership is reluctant to repay for political reasons. Also, the amount of new domestic bank borrowing has reduced considerably. The later was driven by a strong growth in state revenues (driven primarily by high oil prices) but also by tighter CBN regulation of bank lending. Several states, including Anambra, Kogi, and Ekiti, did not contract any new domestic bank loans in recent years. In most cases, individual MDAs and parastatals cannot borrow from banks on their own.
77. But in a number of states with weaker PFM arrangements the debt situation is likely to be of a bigger concern. In Plateau just pension debts alone exceeded N 1.5 bn at the end of 2004 (9% of total annual spending). Plateau state, despite having an established Debt management department, was unable to produce comprehensive reports on its stocks of commercial domestic debt. In Ekiti, contractual debts in late 2007 amounted to N 6.3 bn (about 40% of the annual budget), and the stock of these debts had been declining rather slowly. Contingent liabilities
78. The combination of obsolete budget classification, lack of comprehensiveness in budget presentation and coverage undermine the ability of policy makers to quantify and monitor the level of fiscal risks associated with government public policy. Two particular sources of such a risk derived from (i) inadequate control over fiscal performance of parastatals, and lack of consolidation of parastatals’ financial position; and (ii) weaknesses in commitment control and related inadequate reporting on budget arrears. While various control procedures were established, they were incapable of managing the existing risks adequately. This was due to both weak capacity and disregard and manipulation of the existing rules and regulations. Monitoring 79. In a number of states there was no established practice of in-year budget reports. In Ondo in-year reports did exist, but they were usually issued with considerable delay and were therefore not very useful for remedial actions. This lack of current information on budget execution constrains governments’ ability to monitor and control their budget details, and undermines their ability to allocate resources effectively. Kogi showed the best performance in this area with regular quarterly preparation of budget performance reports issued within eight weeks to the end of quarter. There had also been some improvement with in-year reporting in Ekiti as well. 80. State project monitoring systems were largely fragmented and insufficiently pro-active, while primary focus of their operations was on comparing cash disbursements with budget provisions. Budget monitoring and evaluation was in most states the collective responsibility of several government agencies, and their responsibilities were not clearly delineated. For instance in Ekiti, the principal monitoring agencies were the State Planning
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Commission, the Budget Monitoring and Price Intelligence Unit (Due Process) and the Ministry of Finance and Economic Development, including its Budget Monitoring Committee. There was also a unit in the Auditor-General’s Office responsible for project monitoring. The Ekiti State Planning Commission had a mandate to certify project completion before actual payment could be made, and indeed the Commission did produce regular project monitoring reports. However, as in the other states, the focus of evaluation in Ekiti had been on expenditure performance rather than service delivery: project monitoring did not include an analysis of results/outcomes related to undertaken investments and as such it could not serve as a feedback mechanism to trigger effective corrective measures. 81. In Ondo, the Project and Price Monitoring Unit (PPMU) played key role in controlling capital spending and monitoring project implementation. The PPMU was a unit in the Governor’s Office which acted as both an implementing as well as a regulatory authority. These two functions combined could allow it to override controls and undermine transparency. PPMU was expected to benchmark pricing of contracts, provide Bills of Quantity for all contracts for inclusion in the estimates, monitor project implementation; carry out impact assessment of projects, give certificates for payments and report to the governor. The PPMU was supposed to issue physical monitoring reports on specific projects, but no such reports had been issued since 2003.
ACCOUNTING, AUDIT, AND EXTERNAL OVERSIGHT
82. This section presents findings on practices with respect to the downstream stage of the budget process: accounting, audit, and external oversight. Specifically, the findings relate to the timeliness and quality of financial statements and audit reports, internal controls, and the extent to which legislative oversight was effective.
Accounting and reporting
83. There was considerable cross-state variation in the quality of budget reporting and availability of budget information. Some states, as it appears, had made very little changes to their budget disclosure practices inherited from the military pre-1999 era, when most information on actual budget spending was treated as state secret. However, other states had been moving towards a much more transparent fiscal regime, with a special emphasis on quality and timeliness of their annual accounts. In particular, Bayelsa stood out by the quality, organization and completeness of its available budget data. The strong positive feature of the published financial data in Bayelsa was inclusion of accounts codes in their budget report, including those on capital expenditure. This made it easier to reclassify the budget data, match spending by functional and administrative units, and undertake in-depth analysis of expenditure patterns. 84. On the opposite end of the spectrum were the arrangements for budget reporting in Plateau state, where the consultants concluded that the state government “did not prepare annual accounts for 2005 and 2006”12, and their analysis faced “severe data problems, while it was impossible to obtain any reliable information on breakdown of actual spending from the Office of Accountant general”. However, the new administration in Plateau (took office in 2007)
12 From 2007 on Plateau re-started the production of annual accounts that are similar to those in other states.
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did announce its plans to initiate publication of regular reports on state budget performance and improve budget accounting, including cost accounting of capital projects. The state did produce annual budget performance report for 2007, but did not start publishing yet more regular in-year implementation reports. The basic constraint for preparation of in-year reports in a number of states derived from the failure of MDAs to render regular monthly returns, i.e. the Treasury did not have raw information for regular and timely in-year reporting.
85. However, even in more progressive states, there were considerable gaps in reporting. A telling example comes from the states, which reported considerable annual budget surpluses (up to 30% of annual revenues in Anambra in 2004-05 and in Ekiti in 2005-0613), without any discussion on how these savings had been utilized. The likely explanation for this phenomenon is that such surpluses are just a reflection of poor accounting, which fails to reflect the full amount of actual spending in annual accounts. In several states, the auditors’ reports were very critical of the quality of both annual reporting and accounting practices. In Kogi state there had been a noticeable improvement in the quality of budget reporting since 2004, but still the annual accounts produced by OAGF there were much less detailed compared to the structure of the approved budgets.
86. In general, regular reconciliation of bank accounts was uncommon. In Plateau the 2004 annual audit report observed that “bank reconciliation statements were not prepared by most of the organizations”. In Ondo, bank reconciliation was in arrears in most MDAs, with staff advance retirement accounts, vote books, and contract ledgers being among the main weakness of the system. But in both Bayelsa and Ekiti monthly reconciliation of Treasury accounts (but not MDA accounts) became a standard.
87. In most states, it was difficult to obtain regular information on resources received by service delivery units, e.g. in primary education and health. When such information was available, it was incomplete and was obtained through a specially undertaken exercise, but not generated within the mainstream reporting arrangements. For instance, in Anambra a special report by the State Universal Basic Education Board could show actual spending on basic education in the state provided by the federal and state governments, but was unable to reflect on the contribution made by local authorities. Kogi showed the best quality of reporting: its annual accounts contained consolidated (and highly aggregated) information on financial resources made available to primary schools and primary health services.
88. The timeliness of annual financial statements varied considerably across the states. Some states continued to be in arrears, while others demonstrated a noticeable improvement (See the table below). Anambra cleared the backlog of annual accounts in 2004 and since then its annual accounts had been prepared within six months after the year end. Progress on Plateau was much slower and less impressive: annual accounts for 2002-04 were submitted for audit all together in September of 2006, but the subsequent audit (completed by June 2007) revealed numerous mistakes and accounting problems in these accounts. By late 2008, the Office of Accountant General in Ekiti had published the annual financial statements up to 2006, but audits were completed only up to 2004. In Ondo accounts for 2006-08 were submitted on time.
13 Kogi reported smaller, while still considerable, surpluses of about 15% of revenues in 2005-07.
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89. State accounts were usually in compliance with the national accounting standards, which however do not conform to internationally accepted standards. In all states, accounting was on a cash basis. As a result, annual accounts did not disclose any information on expenditure payment arrears even in situations when such information was readily available. Exclusion of budget arrears potentially may result in a distorted picture of the states’ fiscal position. 90. The quality of state accounting and data recording needs improvement through larger investments in skill acquisition and computerization (IFMIS). So far only a limited number of wealthier states (Lagos, Delta) moved towards implementation of comprehensive IT-based accounting systems, but even there, such systems have only been partially utilized. Ondo acquired the Oracle Financing system in 2007. Most states did not have sufficient number of qualified accountants on their payroll, and thus their reporting was affected by accounting mistakes and discrepancies. For example, in 2005 and 2006, annual audits in Bayelsa pointed to about 30 significant discrepancies between Treasury reports and MDA returns of the same expenditures. In Ekiti, the Office of Auditor General had raised concerns about accuracy of data in annual statement: the figures from the OAG were generally not in agreement with those of the Expenditure Department in the Ministry of Finance.
Table 9: Status of submission of annual accounts and respective audit reports
Status of submission of Annual Accounts Status of submission of Audit reports Anambra Delays were observed before 2004,
currently on time (2004-06) Minor delays in 2004, on time for 2005-06
Bayelsa On time (2006-08) Reports for 2005-07 were submitted with the delays of more than 6 months
Ekiti Delays in the past, but catching up; Accounts up to 2006 were published
Delays. As of April 2008, the reports up to 2004 were published, the report for 2005 was in the draft form
Kogi On time (2005-07) On time (2005-07) Niger On time (2005-07) Delays. As of October 2008, the reports up
to 2006 were published Ondo On time (2006-08) On time (2006-08) Plateau No annual reports for 2005-06
91. The observed problems of accounting and internal control were caused by a number of inter-related factors that include shortage of personnel; inadequate training; political interference; low level of computerization; and weak implementation discipline (non-compliance with regulatory requirements). For instance, executive officers rather than professional auditors headed many of the internal audit units.
Internal audit and control
92. Internal audit was very weak as were other internal controls. Financial Regulations require the Accountant General to post internal auditors to all self-accounting departments of the government. In addition to pre-payment audit, internal auditors have to prepare regular reports to highlight systemic weaknesses and recommend solutions. The system, however, had not been working as designed. The internal auditors posted to MDAs were relatively junior officials, who
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were not able to stand up to their superiors or prepare reports critical of them. And in many states they just did not produce any reports that were accessible by anyone outside of their own MDAs. State auditors general did complain on such a situation, but without much change so far.
93. The rules of financial control were generally in place but compliance with them needed considerable strengthening. In most states audit reports pointed to clear cases of violation of existing rules without adequate explanation and sanctioning. One positive development in this area, worth mentioning, happened in Bayelsa, where the SG approved (2008) two manuals that sought to streamline and strengthen controls over payment procedures with respect to both capital and overhead expenditures. At the same time, there was no evidence that states rigorously pursued a policy of tightening budget discipline.
External audit
94. The key problem in the area of audit concerns the lack of follow-up on audit reports, which generally represents a binding constraint for strengthening budget accountability. While there were various problems with the existing auditing arrangements (including insufficient independence of the Office of Auditor General), there was strong evidence that most OAuGs took a pro-active and very professional stand in auditing annual reports and pointing to major weaknesses in the existing systems for budget execution, accounting and reporting. In several states (including Anambra, Ekiti, Plateau) regular reports produced by state OAuGs identified major issues with budget execution and disclosure, including over-spending against voted budget allocations without proper legislative authorization, incorrect recording of budget spending, non-compliance by parastatals with audit requirements, non-complete transfer by MDAs of collected revenues, etc. In Kogi recent reports by the state OAuG pointed to continuous deterioration in the quality of accounting records. In Niger, the Auditor General raised about 200 audit queries and observations, in the 2005 report, covering a variety of areas and activities of several MDAs. Even in Plateau the annual audit reports had regularly revealed weaknesses in accounting and reporting and called for corrective actions. But there was no evidence that such reports had triggered either any corrective measures from the government or follow-up from the legislature. 95. Some states have capacity for timely production of annual audit reports (within 90 days of receiving them from the Treasury), while others experienced considerable delays. It took more than a year to complete the report and submit it to legislature.
External oversight
96. The legislative scrutiny of budget execution was weak and this represented a major driver of poor budget accountability in general. State Houses of Assembly commonly undertook an intensive budget review at the budget approval stage, but the scrutiny of budget execution, was practically non-existent. As mentioned above, the OAuG’s reports in several states regularly pointed to the cases of misuse of public funds that governments did not address, but without any follow-up from the state legislatures. 97. There was a major imbalance in legislative budget practices: disproportionally more attention was paid to budget approval, while little effort went into the review of budget
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outcomes, including into analysis of systemic discrepancies between approved and actually executed budgets. For instance, in Plateau state, the SHA followed elaborated procedures for budget discussion and on average it took two to four months for the House to approve the budget. However, little effort was made by the SHA to analyze actual budget performance. There was no evidence that the House made any demands to improve preparation of the accounts. As of October, 2008, the PAC in Niger was working only on the 2004 Auditor General’s report, which made such delayed scrutiny largely ineffective. The situation was somewhat better in Ondo, where the Public Accounts Committee (PAC) undertook extensive public hearing on audit reports in a rather timely manner (the reports up to 2007 were discussed). In the past, the PAC had been recommending sanctions against erring officials, but the institutional arrangements for follow-up activities were weak. 98. Weak legislative oversight lies at the heart of budget accountability problem in Nigerian states. It greatly undermines domestic demand for stricter fiscal discipline and for acceleration of PFM reforms in general, making it fundamentally difficult to hold governments accountable for use of public resources. But the prevailing political economy does not create many opportunities for rapid change in the status quo. Legislators seemed to be fully incorporated into the current PFM arrangements through the system of constituency projects. Such projects were viewed as personal entitlements of legislators, remained outside of the regular budget process and were generally subject to even fewer accountability requirements than the rest of state budget spending.
99. While the existing regulations contained sufficient instruments to sanction civil servants for violations of budget discipline, such sanctions were rarely used. One well-known example of direct disregard for accountability arrangements relates to control over fiscal performance of state parastatals. According to the existing legislature, parastatals have to produce regular reports on their utilization of received budget resources as well as on the use of their own revenues, and such reports are subject to annual external audit. However, more often than not these requirements were ignored by parastatals’ management. In Anambra state in 2004–06 only 5 out of 34 listed parastatals prepared and submitted their annual accounts to the Government as required by law. In Plateau, where transfers to parastatals amounted to 15-20% of the total state budget spending, there had been a major delay in audit of parastatals’ accounts: as of late 2008 such audits were completed only up to 2003. However, in Ondo the Auditor General followed a more proactive approach towards controlling parastatals’ performance, including through issuing a consolidated report on them and sharing this report with the SHA. Another example of common disregard for established PFM rules relates to the practice of within-the-year budget amendments, which are usually done without legislative approval. 100. Members of the public did not have as much access to key fiscal information as they could and should have (See Table 15 in the Annex for a summary). This was true even in states such as Anambra, which generally produced timely annual accounts of fair quality. In some other states little seems to have changed since the military era and there is an environment of excessive secrecy about any data on budget policies and outcomes. In Niger state, none out of seven major types of fiscal information, considered with the PEFA framework, could be classified as “being accessible to the public”. In Niger the old mentality seemed to dominate: as reported by the consultants, “government fiscal documents are for government consumption
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alone”. In Kogi the only widely disseminated document was the annual state budget, including the Governor’s address. 101. Other states have been moving to a much more open budget regime. For example, in Anambra, the government publisher produced copies of budgets, annual accounts and audit reports that could be purchased by the public. However, even in the states with stronger disclosure policies there was no regular use of internet for publishing budget information. There was also no tradition of disseminating information on procurement awards.
102. Lack of information and transparency within the budget process undermines its efficiency in a number of ways. First, it affects strategic allocation of resources by limiting fair competition among alternative claims on resource use during budget preparation. Second, it reduces chances of detecting waste in the use of resources. Finally, it undermines ability of the general public to provide their inputs and spell out their preferences with respect to desirable budget outcomes.
EFFICIENCY OF THE PUBLIC INVESTMENT SYSTEM
103. The reviews found that in all the three states covered (Bayelsa, Ondo, and Plateau), the capital budget system is still underdeveloped. With the exception of Ondo State, there was no evidence in Bayelsa and Plateau that the development strategies informed the identification of projects. But even in Ondo, the State’s policy document provided strategic guidance only at sector level. It could not provide comprehensive strategic guidance on priority areas within sectors. Another weakness of the public investment system identified is that there was no capacity in place for conducting formal appraisals of projects. Although state Governments considered various options before settling on a particular project, such options were usually not subjected to formal cost-benefit analysis. Nevertheless, the Governments would sometimes engage consultants to advise on the viability of certain large capital commercial projects. Otherwise political considerations tended to override selection and location of most public capital projects. Once admitted into the budget, competition amongst bidders during procurement was limited, implementation of projects was generally slow, and although adjustments could be made to projects, there were no specific guidelines. Finally, there was no formal ex-post evaluation of projects, and no central registry to keep a record of all assets.
CONCLUSION
104. In spite of pockets of good performance and reform efforts in some states, most PFM systems were very weak across the states reviewed. The reviews found that in all states, budgets were still not reflecting the announced state policy priorities. Budget planning did not have a multi-year perspective. When it came to budget execution, there were also a number of weaknesses. The first was low credibility of the budget, largely due to overly optimistic revenue projections and low execution rates on the capital budget. The other weakness was that procurement methods did not promote strong competition that would be necessary to deliver efficiency and value for money. With regard to availability of funding, many implementing agencies also suffered from unavailability and unpredictability of funds, with cash management not yet centralized. In terms of expenditure control, while some progress was made in payroll management in some states, there were still deficiencies in the management of other potential
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sources of fiscal risks such as debt and contingent liabilities. At the tail end of the budget process, many states seemed to perform relatively better in terms of timeliness in the preparation of accounts and audit reports. However, the quality of these reports and follow-up on audit recommendations was a challenge.
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CHAPTER 4: IMPLICATIONS FOR PFM REFORM
INTRODUCTION
105. This chapter discusses the policy implications of the findings of the PFM assessments. Two sets of recommendations are made. The first relate to changes in practices that states need to undertake in order to improve their PFM systems. In particular, these changes pertain to the way budgets are prepared, executed, and accounted for. The second set of recommendations provides states with suggestions on a broad strategic approach to implementing the recommended reforms. It highlights some factors that would be critical to the successful implementation of the proposed PFM reforms, mainly the need for a strong institutional platform as well as the need to prioritize and sequence reforms. It must be mentioned on the outset that both sets of recommendations are not disaggregated by state. It is up to each state to identify those recommendations that are applicable, especially with regard to the first set. This is especially important given that some time has elapsed since the reviews were undertaken. In the intervening period, some states may have made progress in some areas.
RECOMMENDED CHANGES TO PFM PRACTICES
106. As mentioned above, this first type of recommendations pertains to changes that states need to undertake in order to improve the budget process. In particular, these changes are to be made to their current practices of budget preparation, execution, and accountability.
Budget preparation
107. The recommendations under budget preparation are of four types. The first relates to ways in which states can improve the alignment of their budgets to the state’s development policy priorities. The second pertains to the orderliness in the annual budget process itself. In particular, the aim here is to ensure that enough time is allowed for budget preparation so that the budget is approved in time for the beginning of the new fiscal year. Third, states also need to undertake some changes in the way they approach the estimation of revenues and expenditures for the budget. Finally, there are also recommendations relating to the comprehensiveness of the budget itself.
Alignment of budget to policy priorities
• Put in place a clear and detailed state development strategy that outlines the state’s development policy priorities.
• Introduce medium-term sector strategies (MTSS) that will provide frameworks by which high level state development policy priorities are operationalized and broken down into tangible initiatives (projects and programmes) for systematic implementation through the budget.
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• Develop clear guidelines that MDAs are expected to follow in translating the state’s development policy priorities into the annual budget.
• Reduce and rationalize expenditures on general administration in order to create fiscal space for key priority sectors.
• Introduce a consultative approach to the identification of priority projects to be included in the budget.
• Introduce program-based budgeting which provides a framework for making it easier to link budgets to policy priorities.
Orderliness in the annual budget preparation process
• Introduce a budget preparation calendar with explicit targets and that allows enough time for budget approval before year-end.
• Ensure that MDAs are furnished with clear guidelines and templates for the preparation of budget proposals.
• Ensure that MDAs are provided with budget ceilings in good time.
Estimation of revenues and expenditures
• Strengthen the state’s capacity to undertake revenue projections.
• Prepare annual budgets within a medium-term expenditure framework (MTEF) in order to ensure medium-term fiscal sustainability of expenditure programs.
• Utilize a program-based budgeting approach for improved expenditure estimation. Apart from making it easier to link budgets to policy priorities as mentioned above, program-based budgeting also has the advantage of providing a framework where budgets are prepared on the basis of activities, thereby ensuring that recurrent and capital budgets are integrated.
Comprehensiveness in budget coverage
• Improve budget coverage to reflect all public resources controlled by the state government, including donor support and full amount of revenues collected by MDAs.
• Expand the scope of information provided in the budget documents to include the following: macroeconomic assumptions underpinning the budget, planned fiscal deficit and its sources of financing, debt stock and financial assets, and prior year’s budget out-turn.
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Budget execution and monitoring
108. The recommendations under budget execution and monitoring are of six types. The first relates to ways in which states can improve revenue mobilization, particularly through improved tax administration. The second focuses on procurement, which is a process by which revenues are translated into expenditures during budget execution. The aim of the proposed reforms is to ensure that high quality goods and services are procured at reasonable cost in order to deliver value for money. The third type of reforms under budget execution relates to availability of funding and optimal management of cash. The recommendations under this category aim at ensuring that there is predictability and availability of funding for budgeted programs in order to avoid delays in the execution of the budget. The recommendations also aim at ensuring that cash is managed in such a way that the Government does not end up borrowing to solve a cash flow problem in some agencies when other government agencies have idle cash balances in their bank accounts. Fourth, the recommendations also focus on how to improve the execution of capital projects, which was found to be a major area of weakness in many states. Fifth, the recommendations focus on measures for controlling expenditures given the complexity of managing payroll, overhead expenditures, and other types of fiscal risks, particularly from contingent liabilities and debt. Finally, there are also recommendations focusing on how the budget can best be monitored during the execution process.
Revenue mobilization and tax administration
• Establish a consolidated taxpayer database.
• Introduce arrangements for direct (non-cash) tax payments to the Treasury through commercial banks.
• Require MDAs to make regular transfers of collected revenues to the Treasury and sanction them for non-compliance.
• Set up a system for accounting and monitoring of outstanding tax arrears.
Procurement
• Develop procurement manuals and standard bidding documents.
• Publish regularly information on procurement contract awards.
Availability of funding and cash management
• Improve funding arrangements for local governments. In particular, ensure that once local government funds are received from the federal government, they are fully remitted to local governments as required by the constitution.
• Introduce a system of cash planning.
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• Undertake regular reconciliation of treasury accounts.
• Set up a program for gradual introduction of the single Treasury account.
Capital budget execution
• Ensure that MDAs are realistic when allocating funds to projects planned for implementation within a particular year. Funds allocated to a particular project in an MDA’s annual budget should be commensurate with the proportion of the project that can be implemented within a year.
• Put in place measures to ensure that no project is admitted to the budget unless it is ready for implementation. In this context, a checklist should be developed for assessing whether or not a project is “budget-ready”. Such a checklist could for example include bills of quantities, environmental assessment reports e.t.c.
• Develop and implement a framework for the participation of other stakeholders such as civil society organizations, state house of assembly, media, and the private sector in the monitoring of project implementation.
Expenditure control
¾ Payroll management
• Establish a centralized payroll system linked to the HR database.
• Introduce a biometrics system of capturing personnel records that feed into the payroll.
• Undertake regular personnel audits.
¾ Overhead costs.
• Establish comprehensive and clear procedures for undertaking overhead expenditures.
• Strengthen the system for commitment control.
• Tighten compliance with financial regulations, ensure effectiveness of sanctioning for their violation, including disciplinary actions against those responsible for excess expenditures against approved budgets.
¾ Capital costs
• Undertake a decomposition analysis of unit costs for major capital projects in order to explore options for cost reduction.
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¾ Contingent liabilities
• Develop detailed guidelines on fiscal reporting and monitoring of Parastatals, Local Governments, and contingent liabilities and institute mechanisms for their enforcement.
¾ Debt management
• Develop a robust borrowing strategy, which includes limits to annual borrowing and overall debt stocks, as well as limits on budget guarantees.
• Undertake a periodic debt sustainability analysis.
• Adopt a procedure for disclosure of all public debts, including budget arrears and guarantees.
• Ensure adequate reflection of costs of public borrowing in annual budgets and other documents of fiscal policy.
¾ Monitoring
• Undertake regular reconciliation between Treasury and MDAs’ expenditure records.
• As above, develop a framework for the participation of other stakeholders such as civil society organizations, state house of assembly, media, and the private sector in the monitoring of project implementation.
• Prepare and publish quarterly budget performance reports.
• Develop a framework for measuring improved service delivery in key sectors.
Accounting, audit, and external oversight
109. The recommendations under accounting, audit, and external oversight are of three types. The first relates to ways in which states can improve their accounting and reporting practices. The aim is to improve the quality and timeliness of financial statements. The second type relates to improvements in internal audit and control in order to ensure that problems of improper management of resources are detected and corrective measures undertaken early enough. The third set of recommendations relates to external audit and oversight, which provides a basis for external accountability.
Accounting and reporting
• Introduce and enforce sanctions against MDAs that do not make timely expenditure returns and budget execution reports to the Treasury.
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Internal audit and control
• Introduce a system of sharing internal audit reports with the Office of the Auditor General.
External audit and oversight
• Institute a system of follow-up on audit queries and recommendations that would establish a link between audit findings and corrective actions by MDAs.
• Publish annual Audit reports.
• Establish clear disclosure rules to ensure that all main fiscal documents are placed at the official state website.
• Disseminate to local communities information on the budgets approved for service providers in core services (education, health).
BROAD STRATEGIES FOR IMPLEMENTING THE PROPOSED PFM REFORMS
110. The successful implementation of the proposed PFM reforms requires a broad strategy that pays attention to some critical factors. The changes proposed above are clearly many and have different characteristics. In order to increase chances of success, a broad strategy is proposed which takes cognizance of some critical factors. These include the need for a strong institutional platform, prioritization, and sequencing of reforms.
The Need for a Strong Institutional Platform
111. For PFM reforms to be implemented successfully, they need to be anchored on a strong institutional platform. Such an institutional platform has many dimensions. These include the need for strong political will and coordination of PFM reforms at the state level; the need for reforms to be anchored in modern and comprehensive legal and regulatory frameworks; the need for human and organizational capacity strengthening; the need to improve the information technology of states; and finally there is need to enlist the support of the Federal Government and coordinated development partner funding in state level PFM reforms using the Governors Forum as an interface between the federal government, development partners, and the state governments.
Strong political champion and coordination at the state level
112. For PFM reforms to be undertaken at a reasonable pace and in order to surmount hurdles that PFM reforms are usually confronted with, there is need for strong political will. Some of the PFM reforms are likely to impact negatively on certain members of the civil service, some of who stand to lose out financially as loopholes are closed. Such parties are likely to lobby against reforms or slow down the pace of implementation. In this context, there is need
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for a strong and high-level political champion in Government to spearhead PFM reforms. A strong political champion will ensure that vested interests do not frustrate change. 113. Given that PFM reforms cut across many institutions within Government, a coordinated approach is also critical to their success. As highlighted in Chapter 1 under the state context, and as can be seen from the recommendations above, PFM reforms involve many institutions within Government. Therefore, apart from having a political champion, there is need for states to put in place PFM reform coordination mechanisms. In this context, some countries have established a PFM Reform Steering Committee that is chaired by the proposed political champion for PFM reforms. The Steering Committee is composed of heads of key PFM ministries, departments and agencies, and usually includes representatives from the house of assembly and civil society. The Steering Committee is technically supported by a secretariat in the form of a dedicated PFM Reform Unit hosted in one of the central ministries, such as Finance or Budget and Planning. The main role of the steering committee is to develop a prioritized and costed PFM reform action plan, and guide its implementation.
Modern and comprehensive legal and regulatory framework
114. A modern and comprehensive legal and regulatory framework is central to PFM reforms because it defines the standards that a state will need to adhere to in the management of public finances. Unless these standards are clearly defined and entrenched in law, PFM reforms may also be frustrated by those who are opposed to them. PFM laws ensure that those who are entrusted with the task of implementing the reforms have legal backing for their actions.
115. Like the Federal Government, the legal and regulatory framework for PFM in the States is outdated. The Finance (Control and Management) Act, 1958, the Audit Act 1956 and the Financial Regulations (Revised to January 2009) are the current applicable legal and regulatory frameworks. Taking a cue from the Federal Government, states are in the process of putting in place Fiscal Responsibility Law and Public Procurement Law.
116. In addition to Fiscal Responsibility and Procurement Law, most states need to enact a modern PFM Law (Finance Control and Management Law) and subsequently update the enabling regulations. The PFM Law will provide legal basis for accounting and reporting for all revenue, expenditure, assets and liabilities of the States, ensure that public funds are managed efficiently and effectively, and to provide for the roles and responsibilities of persons entrusted with financial management and other matters connected therewith. Additionally, the law would specify in greater detail the transparency requirements, such as timing and information to be provided in budget documents and financial statements to the public, inter-governmental fiscal relationship, internal audit and oversight arrangements by the State Auditor General and Legislature and monitoring and evaluation mechanisms. As States embark on wide ranging technological initiatives, it is also imperative for the PFM law to recognize the new approach to doing business, for example admissibility of electronic documents and signature as evidence in a court of law.
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Human and organizational capacity strengthening
117. The actual implementation of most changes in practices hinges on there being a cadre of capable experts in the various PFM areas. These include budget officers and planners, accountants, procurement specialists, M&E specialists, and IT specialists. The development of such a cadre is likely to take time, but it is nevertheless critical that any PFM reform action plan should include a strategy for developing the capacity of civil servants that will actually implement the reforms. Capacity development in this context may be in the form of recruitment as well as training of the already existing specialists. 118. Apart from developing human capacity and having a PFM reform coordination unit, states may need to undertake organizational restructuring in some cases. In order to make certain changes, states will need to face up to the fact that sometimes there is need to make changes to the way a ministry, department, or agency is structured for it to be better placed to perform its expected role in public financial management. This may involve the establishment of new units or directorates in some ministries and departments. For instance, many states do not have planning functions in their MDAs. As a result, budgets are prepared by directors of finance and administration instead of specialized budget officers and planners. Dealing with this deficiency would necessitate the establishment of planning units or departments in every ministry.
The role of modern information technology
119. A number of PFM reforms are likely to be easier to implement if government processes are carried out on a modern information technology platform. For example, improvements in payroll control are easier to undertake if personnel and payroll records are maintained electronically. As experienced in Anambra, payroll control is even easier if the IT system integrates personnel and payroll records. In this context, the introduction of an integrated financial management and information system (IFMIS) has become a necessity in most PFM reform programs. Such a program is usually costly and takes time to implement, so states need to properly budget for it and have a carefully designed roll-out plan. It would also be helpful for states contemplating the introduction of IFMIS to enlist the support of development partners as well as learn from the experiences of other states who have already introduced it.
Role of Federal Government, the Governors Forum, and development partners
120. The Federal government could play an active and critical role in supporting the states in designing and implementing their PFM reforms. The experience of other federal states, including Brazil and Russia, suggests that the Federal government could become an important player in facilitating state level PFM reforms through (i) its participation in setting-up a common reform agenda, (ii) providing various support and incentives in the course of implementation, and (iii) setting-up independent and transparent arrangements for reform monitoring and disclosure. 121. At the moment, many states have been struggling with advancing their reform programs due to insufficient capacity and lack of knowledge on how similar problems were addressed by other states and worldwide. Sometimes states deal with this issue by hiring
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consultants who offer to develop state-specific solutions without proper reflection on experiences accumulated in these areas by other states. At best, such a decentralized approach to the reform design results in duplication of efforts, slow learning from other people’s mistakes, additional costs, and delayed reform progress. Specific examples of costs associated with insufficient reform coordination and lack of proper federal leadership include various state efforts to reform the budget classification14 and absence of clear federal guidelines on efficient state-level arrangements for budget monitoring. In the area of budget classification, there is a particularly strong need to have a single national format for budget presentation and reporting that would allow for easy consolidation of budgets at various government levels and provide for effective comparison of spending on specific government functions across the states. This is a very specific example, where the leadership by FMF could bring relatively quick wins in terms of budget transparency within the entire fiscal system.
122. The Federal government has several essential advantages that would allow the FG to make a critical contribution to the state reform process. Such advantages include:
• Knowledge advantage: the FG has more qualified staff with better exposure to
international best practices; and the FG is in a better position to mobilize additional international expertise as necessary, including through support from development partners.
• Information advantage: the FG is well positioned to set-up effective monitoring mechanisms to identify the best local solutions and practices and encourage their dissemination across the states; through federal monitoring/communication arrangements it would be easier to identify common problems the states are struggling with in their reform efforts and look for effective solutions through the process of collective learning.
• Economy of scale advantage: the FG could greatly reduce the costs of reforms for individual states by developing some model (typical) solutions for particular reform problems and then help the states to apply those to their own particular circumstances. Such model solutions could include model pieces of state legislation (e.g. a model Public Procurement Law), state regulations (e.g. a model budget classification), state Manuals (e.g. a model Budget Monitoring Manual), and state IT solutions (e.g. a model IFMIS package).
123. The Federal government could also help the states to advance their PFM reforms through provision of more comparative information on public sector performance across the states. Nigerian states would greatly benefit if there is more available state-level information on quality of public services, on level and effectiveness of public spending, and on the pace of progress with key public sector reforms against the agreed targets. Both state policy makers and general public may find especially useful to have access to some basic comparative information on actual spending patterns, such as e.g. actual budget spending per primary school student and average costs of construction of 1 km of rural road. This kind of information would provide necessary justification for particular shifts in state expenditure policies, help to identify spending
14 For instance, Anambra state introduced new budget classification in 2009 on the basis of some local solutions.
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inefficiencies in the budgets of individual states, and set up a baseline, against which future reform progress would be monitored. Thus, availability of comparable information on spending efficiency could become an important driver for stronger budget accountability and strengthening local demand for reforms. The Federal government may consider as a priority to expand its support for various national surveys in the area of public service delivery. Expansion in such traditional statistical surveys could be further complemented by regular state-level institutional surveys, which would look into state progress with various key reforms. The existing PEFA framework may be seen as a useful example of how various state-level PFM reforms could be monitored on a regular basis. The FG also had a successful experience of its own institutional survey back in 2005 when it undertook a massive comparative assessment of SEEDS and related state reform efforts. 124. The Nigerian Federal government has already accumulated some successful experiences of advancing specific state-level PFM reforms, but this practice needs to be mainstreamed through broader application. One prominent example of this relates to debt management reforms through the establishment of a modern Debt Management Office at the federal level backed by legislative changes and support from the core federal agencies. In this particular area, the FG not just led the reform by example encouraging many states to establish their own designated debt management units and pay more attention to quality and transparency of debt data, but also managed to provide (through the federal DMO) various states with technical support in upgrading capacity of these units. Public procurement represents another area where there is a similar ongoing process of constructive government-to-government dialogue that encourages gradual state adoption of federal reforms, including the establishment of Due process units and drafting of state Public Procurement Laws.
125. The experience of other federal countries also suggests that it is important to consolidate all functions related to federal support for state PFM reports with a special department in the Federal Ministry of Finance. The key functions of such a department for state PFM reforms would be related to (i) building, through the dialogue with states, a national consensus with respect to short- and medium-term priorities for PFM reforms, (ii) establishing a system of federal support for states that take a lead in reform implementation, including possibly through a system of small budget grants to such states to co-finance their reform efforts, (iii) preparing model solutions for state PFM reforms as discussed above, and (iv) monitoring the pace of PFM reform efforts across the country, including through the annual publication of the special monitoring report that would identify leaders and best local practices in key reform dimensions.
126. To become successful, federal government support to state-level reforms has to be based on an agreement with all the State governments through the Governors’ Forum. The Governors’ Forum is a coalition of all the executive Governors of the 36 states of the Federal Republic of Nigeria. It provides a common platform for synergy, collaboration amongst governors and the federating units whilst impacting positively on issues of public policy and common interests. The Forum is supported by a Secretariat headed by a Director General. It is therefore well placed to be an interface between the Federal Government and the states. In order to ensure a structured approach to the provision of support to PFM reforms by the FG, it would be necessary to have in place a formal agreement. Precedence for such an agreement exists, in
49
the form of a memorandum of understanding (MOU) signed in 2010 by the Federal Ministry of Finance, the Governors’ Forum, and development partners on a program of support for the promotion, adoption, passage and implementation of fiscal responsibility and public procurement legislations and regulations (FRL and PPL) at the State level. The proposed agreement would therefore have an expanded scope, covering support to a full PFM program. 127. There is also need to explore the possibility of a joint program of support for state-level PFM reforms by development partners across all the states. Currently, coordination amongst donors in the provision of support to PFM reforms to the Federal Government and states exists but is still fragmented. The case presented above is with respect only to fiscal responsibility and procurement legislation. DFID and the World Bank have also been collaborating in the provision of targeted support to some Federal Government agencies under the Economic Reform and Governance Project (ERGP) and are also collaborating in the provision of support to a few states to carry out PEMFARs and review procurement laws. However, each development partner still maintains other separate programs supporting PFM reforms in a number of states. It may be worthwhile to explore the feasibility and value of putting in place a multi-donor trust fund for the support of PFM reforms across all the 36 states and the Federal Government. At the federal level, development partners may consider to work with the FMF on the establishment of the proposed department for coordinating state PFM reforms. Support to the FMF could be further augmented by assisting the Federal government with the setting up of a new think-tank on PFM, which would become an institutional home for local advocacy and expertise in PFM reforms at federal as well as state level. The staff of the think-tank would then accumulate technical knowledge on best PFM practices and could work as local consultants on reform implementation with various state governments.
Prioritization and Sequencing of Reforms
128. Given the myriad number of reforms that need to be undertaken and their complexity, it will be imperative for states to properly prioritize and sequence implementation. The prioritization and sequencing of reform implementation will need to be guided by two principles: identification of reforms that can easily be implemented (low hanging fruits) and reforms that are critical to ensuring that improvements on PFM translate into improved service delivery.
Low hanging fruits (quick wins)
129. States need to prioritize reforms that can easily be implemented. It is important to prioritize such quick wins for two reasons. First, it helps to build momentum for reforms. Noticeable progress within a short period of time can help build morale in the team implementing the reforms as well as galvanize wider support for reforms. Second, any quick progress made becomes a basis on which states can build to move to another level of reforms. 130. A look at PEFA assessment results of selected sub-national governments as well as central governments outside Nigeria provides some useful information on potential low hanging fruits. Table 16 in the Annex shows the PEFA assessment results for one state in India, four states in Pakistan, and eight central governments. The frequency of A and B scores was taken for each indicator across the 13 PEFA assessment results. For each indicator, frequencies
50
of A and B scores were added and then the indicators were ranked in descending order. Table 10 below provides the top ten indicators. These represent areas where most states and countries in the sample performed well. A closer look at the characteristics of these indicators helps in coming up with criteria for identification of quick wins. The top ten indicators appear to be less capacity-intensive and would require fewer government institutions to be implemented since they seem to fall mostly under the remit of central ministries. In terms of substance, the areas involve the compilation and dissemination of information and reports. Therefore, based on the experiences of other states and countries outside Nigeria, and applying the above criteria for identifying quick wins to the comprehensive list of recommendations presented above, Nigerian states could easily make progress in the following areas:
• Budget classification.
• Improvement in the comprehensiveness of the budget. • Development of procurement manuals and standard bidding documents. • Regular publication of information on procurement contract awards. • Improved recording of debt and arrears. • Adoption of a procedure for disclosure of all public debts, including budget arrears
and guarantees. • Ensuring adequate reflection of costs of public borrowing in annual budgets and other
documents of fiscal policy. • Improved public access to PFM related information such as budget documents,
budget execution reports, debt information, contract awards, audit reports, tax payer liabilities and obligations.
• Publication of annual Audit reports. • Establishment of clear disclosure rules to ensure that all main fiscal documents are
placed at the official state website. • Dissemination to local communities of information on the budgets approved for
service providers in core services (education, health).
51
52
Table 10: Top ten indicators from a sample of 13 PEFA assessments
Rank PEFA Indicator Total of A
and B Scores
1 Comprehensiveness of information included in the budget 13
2 Aggregate revenue out-turn compared to original approved budget 12
3 Classification of the budget 10
4 Orderliness and participation in the annual budget process 10
5 Availability of information on resources received by service delivery units
9
6 Public access to key fiscal information 9
7 Recording and management of cash balances, debt, and guarantees 9
8 Transparency of inter-governmental fiscal relations 9
9 Timeliness and regularity of accounts reconciliation 8
10 Transparency of taxpayer obligations and liabilities 7
Criticality of reform areas
131. State Governments also need to prioritize reforms that are likely to be critical to improved service delivery. Ultimately, the aim of improving PFM is to ensure that the management of public finances is effective in achieving the development objectives of the state, and that this is done efficiently and transparently. In order for PFM reform to deliver tangible results in terms of improved service delivery and value for money, some reforms are more critical than others. In this regard, the following reforms are likely to be critical for achieving the ultimate objectives of a good PFM system:
• Ensuring that the budget is aligned to the state’s development objectives.
• Improving procurement particularly through the introduction of more competitive and transparent methods of procurement in order to reduce the cost of contracts.
• Improving the execution rate of the budget, particularly of capital projects.
• Improving the quality and timeliness of audit reports.
• Putting in place mechanisms for ensuring that audit recommendations lead to corrective measures.
53
132. Second, criticality of reforms and how they can be sequenced will also need to be decided on the basis of their relationship to other reforms. Some changes need to be in place first for others to be possible. For instance, in order to improve alignment of the budget to the state’s development objectives, it is important to improve budget classification. Similarly, in order to improve the timeliness with which audit reports can be prepared, there is need to improve the timeliness with which financial statements are prepared.
CONCLUSION
133. For PFM reform efforts at state level to succeed, there is need for a carefully designed implementation strategy. Given that most states still have many weaknesses in their PFM systems, states need to implement changes in the way things are done across all the stages of the budget cycle: budget planning and preparation, execution, accounting and reporting, and audit and external oversight. However, it is critical that in implementing these changes, attention is paid to a proposed broad implementation strategy. In particular, a reform program for implementing these changes needs to be anchored on a strong institutional platform constituting of a political champion for reforms, state-level coordinating arrangement, modern and comprehensive legal and regulatory framework, human and organizational capacity, and a modern information technology infrastructure. The required institutional platform also needs to include a new role for the federal government and development partners where both should work in collaboration with the Governors’ Forum to provide coordinated support to all the states. Finally, there is a greater chance of succeeding with a PFM reform program if the proposed changes are carefully prioritized and sequenced.
54
ANNEX
Table 11: Stock of debt in selected states (2005-2007)
Debt in Millions of Naira
2005 2006 2007 Domestic External Total Domestic External Total Domestic External Total
Bayelsa - - - 27,283.33 1,966.19 29,249.52 83,513.68 2,897.99 86,411.67
Ekiti 903.04 11,536.11 12,439.15 262.65 10,485.53 10,748.18 - 4,711.51 4,711.51
Kogi - 8,871.17 8,871.17 - 8,331.17 8,331.17 - 7,910.38 7,910.38
Niger 950.00 61,475.00 62,425.00 - 61,475.00 61,475.00 - 3,433.80 3,433.80
Percentage share of total debt 2005 2006 2007
Domestic External Total Domestic External Total Domestic External Total
Bayelsa - - 100.0 93.3 6.7 100.0 96.6 3.4 100.0
Ekiti 7.3 92.7 100.0 2.4 97.6 100.0 - 100.0 100.0
Kogi 0.0 100.0 100.0 - 100.0 100.0 - 100.0 100.0
Niger 1.5 98.5 100.0 - 100.0 100.0 - 100.0 100.0
Table 12: Debt stock and debt service ratios in selected states (2005-2007)
Total debt stock as a percentage of total revenues
Total debt service as a percentage of total revenues
2005 2006 2007 2005 2006 2007
Bayelsa Not
available 67.0 77.5 Not
availableNot
availableNot
available
Ekiti 63.5 46.3 Not
available 0.1 0.1 Not
available
Kogi 42.4 29.4 25.5 0.2 5.5 1.4
Niger 249.5 223.2 10.9 8.2 11.1 7.0
55
Figure 9: Trend in share of selected expenditures by functional classification
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
2001 2002 2003 2004 2005 2006 2007 2008
%Share
ofT
otalE
xpendit
ure
Trend in Share of General Administration
Bayelsa
Kogi
Ekiti
Ondo
Plateau
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
2001 2002 2003 2004 2005 2006 2007 2008
%ShareofTotalExpenditure
Trend inShare of Education Expenditure
Bayelsa
Kogi
Ekiti
Ondo
Plateau
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
2001 2002 2003 2004 2005 2006 2007 2008
%Share
ofT
otalE
xpendit
ure
Trend in Share of Expenditure on Works, Transport, Lands, and Housing
Bayelsa
Kogi
Ekiti
Ondo
Plateau
56
Table 13: Scores on high level PEFA performance indicators
PI Indicator Anambra Bayelsa Ekiti Kogi Niger Ondo Plateau 1 Aggregate expenditure out-turn
compared to original approved budget C D NA D D C D
2 Composition of expenditure out-turn compared to original approved budget
D D NA D D D D
3 Aggregate revenue out-turn compared to original approved budget
D C NA D D A A
4 Stock and monitoring of expenditure payment arrears
NR NS NA C+ D D+ NR
5 Classification of the budget D D NA D D D D 6 Comprehensiveness of information
included in the budget B C NA B C C C
7 Extent of unreported government operations
NR NS NA D+ NR B D
8 Transparency of inter-governmental fiscal relations
D+ D NA B D B NR
9 Oversight of aggregate fiscal risk from other public sector entities
D D NA D C C+ NR
10 Public access to key fiscal information C D NA C D B C 11 Orderliness and participation in the
annual budget process D+ D+ NA D+ B A D
12 Multi-year perspective in fiscal planning, expenditure policy, and budgeting
D D NA C+ D D+ D
13 Transparency of taxpayer obligations and liabilities
B D NA C+ B B D+
14 Effectiveness of measures for taxpayer registration and tax assessment
D+ D+ NA D NR C+ D
15 Effectiveness in collection of tax payments
D D+ NA C+ C C+ NR
16 Predictability in the availability of funds commitment of expenditures
D D NA D+ C B+ D
17 Recording and management of cash balances, debt, and guarantees
B D+ NA C+ B B D+
18 Effectiveness of payroll controls B D+ NA D+ B B+ B+ 19 Competition, value for money, and
controls in procurement C D+ NA C+ D C D+
20 Effectiveness in internal controls for non-salary expenditure
D D+ NA C C B D
21 Effectiveness of internal audit D NS NA D+ D C+ D 22 Timeliness and regularity of accounts
reconciliation D C+ NA B D B+ NR
23 Availability of information on resources received by service delivery units
C NS NA B C B D
24 Quality and timeliness of in-year budget reports
D D NA C D D+ D
25 Quality and timeliness of annual financial statements
B D+ NA B+ B+ C+ D+
26 Scope, nature, and follow-up of external audit
B D+ NA B B B+ D+
27 Legislative scrutiny of annual budget law D D+ NA B+ B B+ D+ 28 Legislative scrutiny of external audit
reports D D NA B C C+ D
NA: Not available because state was not scored using the PEFA Indicators NS: The assessors were unable to score this indicator in that state NR: Not reported
57
Figure 10: Aggregated frequency of PEFA scores for each state
0
2
4
6
8
10
12
14
16
Ondo Kogi Niger Anambra Plateau Bayelsa
Frequency
of
C&
DP
EF
Ascores
Frequency of As & Bs
0
5
10
15
20
25
30
Bayelsa Plateau Anambra Kogi Niger Ondo
Frequency
of
C&
DP
EF
Ascores
Frequencyof Cs & Ds
58
Table 14: PEFA assessment findings on comprehensiveness of budget information across all states
Whether or not information is provided No Information Anambra Bayelsa Ekiti Kogi Niger Ondo Plateau
1. Macro economic assumptions, including state level estimates of economic growth in the SNG jurisdiction,, etc.
Not provided Not provided
Not provided
Provided Not Provided Provided Not provided
2. Fiscal deficits (where relevant) Not relevant; no deficit budgets during the period
Not provided
Not provided
Provided but based on questionable definition
Provided but not usually explicitly explained.
Not provided
Not provided
3. Deficit financing, describing anticipated composition (where relevant)
Not relevant Not provided
Not provided
Not relevant Not Provided Not provided
Not provided
4. Debt stock, including details, at least for the beginning of the current year (where relevant)
Not provided Not provided
Not provided
Not provided Not provided Not provided
Provided
5. Financial assets, including details, at least for the beginning of the current year
Not provided Not provided
Not provided
Not provided Not provided
Not provided
Not provided
6. Prior year’s budget out-turn, presented in the same format as budget proposal
Not provided Not provided
Provided Provided for 9-10 months of the year
Provided for Jan-June but not reflected in many MDA’s submissions
Provided Not provided
7. Current year’s budget (either the revised budget or the estimated out-turn), presented in the same format as the current budget
Provided Provided Provided Provided Provided Provided Provided
8. Summarized budget data for both revenue and expenditure according to main heads of classification, including data for the current and previous year
Provided Provided Provided Provided, but actual data are for 9-10 months of the year
Provided Provided Provided
9. Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programme
Provided in budget speech
Provided in budget speech
Provided Provided through the Governor’s budget speech and Budget Call Circular.
Provided at times in budget speech but usually not detailed
Not provided
Provided in budget speech
59
Table 15: PEFA assessment findings on accessibility of fiscal information across all states
Whether or not information is accessible No Information Anambra Bayelsa Ekiti Kogi Niger Ondo Plateau
1. Annual budget documentation: the public can obtain a complete set of documents (including the items listed under PI-6)through appropriate means when it is submitted to the State House of Assembly (SHA)
Not accessible
Not accessible
Accessible Accessible Available but not easily accessible
Accessible Not accessible
2. In-year budget execution reports: routinely made available to the public through appropriate means within one month of their completion
Not accessible
Not accessible
Not accessible
Limited access
Hardly were produced and when produced they are not accessible to the public in any way
Limited Access
Not accessible
3. Year-end financial statements: available to the public through appropriate means within six months of completed audit
Not accessible
Not accessible
Accessible Limited access
Not exactly available because they are not published separately
Accessible Not accessible
4. External audit reports: all reports on consolidated central government operations made available to the public through appropriate means within six months if completed audit
Accessible Not accessible
Accessible Limited access
Available but not accessible
Accessible Not accessible
5. Contract awards: that the SG publishes award of all contracts with value above US $ 100,000 equivalent (N120 million naira) at least quarterly through appropriate means
Not accessible
No evidence of accessibility
Not accessible
Limited access
Records available in contract register but not accessible
Limited Access
Not accessible
6. Resources available to primary service units: the SG publicizes information through appropriate means at least annually, or available on request, for primary service units, e.g., hospitals
Not accessible
Not accessible
Accessible Fair access Records not available
Accessible Not accessible
7. Fees and charges for major service organizations are posted at the service delivery site and in other appropriate locations/media
Accessible Not accessible
Not Accessible
Limited access
Available but not sufficiently publicized
Accessible Accessible
60
Table 16: PEFA scores from a sample of states and countries outside Nigeria (2008-2010)
PEFA Indicator
India-Himashal Pradesh
Pakistan-North West
Pakistan-Balochistan
Pakistan-Punjab
Pakistan-Sindh Brazil India Indonesia
South Africa Kenya Botswana Ghana Malawi
Budget CredibilityAggregate expenditure out-turn compared to original approved budget C D B B C B C D A B C C AComposition of expenditure out-turn compared to original approved budget B C C C D A C C A B C C DAggregate revenue out-turn compared to original approved budget A D B B/D B A A A A A A B A
Stock and monitoring of expenditure payment arrears D+ D D D D+ A D B+ A B NS D D+
Comprehensiveness and Transparency
Classification of the budget A A A A A A A A A C C C B
Comprehensiveness of information included in the budget A B B A A A A A A B A B B
Extent of unreported government operations B+ D+ D D+ D+ A A NS A D A A A
Transparency of inter-governmental fiscal relations C B B+ A B A B+ C+ A B C+ D+ B+Oversight of aggregate fiscal risk from other public sector entities D+ C D C D+ C+ C D B+ C- D+ D+ C+
Public access to key fiscal information B C C B C A A B A B B A C
Policy Based Budgeting
Orderliness and participation in the annual budget process B A B+ A/B B+ A C+ A B C+ B A C+
Multi-year perspective in fiscal planning, expenditure policy, and budgeting D+ B D B C C+ D D+ B C+ C+ C+ B
Predictability and Control in Budget Execution
Transparency of taxpayer obligations and liabilities B C+ C+ C+ C A C+ B A B+ B C+ BEffectiveness of measures for taxpayer registration and tax assessment C C D+ C+ D+ B+ B+ C A B B C C+
Effectiveness in collection of tax payments D+ D+ D+ B C+ B+ D+ D+ D+ D+ D+ C+ C+Predictability in the availability of funds commitment of expenditures C+ C+ B+ A B+ C+ C+ C+ A B+ D+ D+ BRecording and management of cash balances, debt, and guarantees C+ B+ B A B A A D+ A B C C+ A
Effectiveness of payroll controls C+ B+ C+ C+ C+ B+ C+ D+ A C+ B+ C+ C+
Competition, value for money, and controls in procurement D+ C D+ C C B+ NS C D+ B D+ B+ B
Effectiveness in internal controls for non-salary expenditure C C+ C C+ C A D+ D+ C+ C C+ D+ C+
Effectiveness of internal audit D+ D D D D A D+ D+ A C+ C+ D+ C+
Accounting, Recording, and Reporting
Timeliness and regularity of accounts reconciliation C+ B D B C+ A B B B+ C+ B C BAvailability of information on resources received by service delivery units A B D B B A A D A D A B D
Quality and timeliness of in-year budget reports D+ C+ D+ C+ C+ A C+ C+ C+ C+ C+ C+ C+
Quality and timeliness of annual financial statements D+ B C+ B B C+ C+ C+ A D+ C+ C+ B+
External Scrutiny and Audit
Scope, nature, and follow-up of external audit C+ D+ D+ D+ D+ C+ D+ C+ B C+ D+ C+ D+
Legislative scrutiny of annual budget law D+ C+ D+ D+/D D+ A A C+ A D+ B+ D+ B+
Legislative scrutiny of external audit reports D+ D+ D D+/D D+ D D+ C+ B+ D+ C+ D+ D+
Table 17: Summary of recommendations
Recommendation Timeline and priority status
61
Budget preparation
Alignment of budget to policy priorities
Put in place a clear and detailed state development strategy that outlines the state’s development policy priorities.
Medium-term
Introduce medium-term sector strategies (MTSS) that will provide frameworks by which high level state development policy priorities are operationalized and broken down into tangible initiatives (projects and programmes) for systematic implementation through the budget.
Medium-term
Develop clear guidelines that MDAs are expected to follow in translating the state’s development policy priorities into the annual budget.
Medium-term
Reduce and rationalize expenditures on general administration in order to create fiscal space for key priority sectors.
Medium-term
Introduce a consultative approach to the identification of priority projects to be included in the budget. Short to medium-term
Introduce program-based budgeting which makes it easier to link budgets to policy priorities. Medium-term
Orderliness in the annual budget preparation process
Introduce a budget preparation calendar with explicit targets and that allows enough time for budget approval before year-end.
Short-term
Ensure that MDAs are furnished with clear guidelines and templates for the preparation of budget proposals.
Short-term
Ensure that MDAs are provided with budget ceilings in good time. Short-term
Estimation of revenues and expenditures
Prepare annual budgets within a medium-term expenditure framework (MTEF) in order to ensure medium-term fiscal sustainability of expenditure programs.
Medium-term
Introduce program-based budgeting which ensures that budgets are based on outputs rather than inputs, and that recurrent and capital budgets are integrated.
Medium-term
Comprehensiveness in budget coverage
Improve budget coverage to reflect all public resources controlled by the state government, including donor support and full amount of revenues collected by MDAs.
Quick win
Expand the scope of information provided in the budget documents to include the following: macroeconomic assumptions underpinning the budget, planned fiscal deficit and its sources of financing, debt stock and financial assets, and prior year’s budget out-turn.
Quick win
Budget execution and monitoring
Revenue mobilization and tax administration
Establish a consolidated taxpayer database. Medium-term
Introduce arrangements for direct (non-cash) tax payments to the Treasury through commercial banks. Medium-term
Require MDAs to make regular transfers of collected revenues to the Treasury and sanction them for non-compliance.
Medium-term
Set up a system for accounting and monitoring of outstanding tax arrears. Medium-term
Procurement
Publish regularly information on procurement contract awards. Quick win
Introduce competitive procurement approaches Short to medium-term
Availability of funding and cash management
Improve funding arrangements for local governments. Medium-term
Introduce a system of cash planning. Medium-term
Undertake regular reconciliation of treasury accounts. Short to medium-term
Set up a program for gradual introduction of the single Treasury account. Medium-term
Capital budget execution
Ensure that MDAs are realistic when allocating funds to projects planned for implementation within a particular year. Funds allocated to a particular project in an MDA’s annual budget should be
Short to medium-term
62
commensurate with the proportion of the project that can be implemented within a year.
Put in place measures to ensure that no project is admitted to the budget unless it is ready for implementation. In this context, a checklist should be developed for assessing whether or not a project is “budget-ready”. Such a checklist could for example include bills of quantities, environmental assessment reports e.t.c.
Short-term
Develop and implement a framework for the participation of other stakeholders such as civil society organizations, state house of assembly, media, and the private sector in the monitoring of project implementation.
Short to medium-term
Expenditure control
Payroll management
Establish a centralized payroll system linked to the HR database. Medium-term
Introduce a biometrics system of capturing personnel records that feed into the payroll. Medium-term
Undertake regular personnel audits. Medium-term
Overhead costs
Establish comprehensive and clear procedures for undertaking overhead expenditures. Short-term
Strengthen the system for commitment control. Short to medium-term
Tighten compliance with financial regulations, ensure effectiveness of sanctioning for their violation, including disciplinary actions against those responsible for excess expenditures against approved budgets.
Short to medium-term
Capital costs
Undertake a decomposition analysis of unit costs for major capital projects in order to explore options for cost reduction.
Medium-term
Contingent liabilities
Develop detailed guidelines on fiscal reporting and monitoring of Parastatals, Local Governments, and contingent liabilities and institute mechanisms for their enforcement.
Short to medium-term
Debt management
Develop a robust borrowing strategy, which includes limits to annual borrowing and overall debt stocks, as well as limits on budget guarantees.
Medium-term
Undertake a periodic debt sustainability analysis. Medium-term
Adopt a procedure for disclosure of all public debts, including budget arrears and guarantees. Quick win
Ensure adequate reflection of costs of public borrowing in annual budgets and other documents of fiscal policy.
Quick win
Monitoring
Undertake regular reconciliation between Treasury and MDAs’ expenditure records. Short to medium-term
As above, develop a framework for the participation of other stakeholders such as civil society organizations, state house of assembly, media, and the private sector in the monitoring of project implementation
Short-term
Prepare and publish quarterly budget performance reports. Short-term
Develop a framework for measuring improved service delivery in key sectors. Medium-term
Accounting, audit, and external oversight
Accounting and reporting
Introduce and enforce sanctions against MDAs that do not make timely expenditure returns and budget execution reports to the Treasury.
Short to medium-term
Internal audit and control
Introduce a system of sharing internal audit reports with the Office of the Auditor General. Short-term
External audit and oversight
Institute a system of follow-up on audit queries and recommendations that would establish a link between audit findings and corrective actions by MDAs.
Short to medium-term
63
Publish annual Audit reports. Quick win
Establish clear disclosure rules to ensure that all main fiscal documents are placed at the official state website.
Quick win
Disseminate to local communities information on the budgets approved for service providers in core services (education, health).
Short-term
Institutional platform for PFM reforms (cutting across the whole budget cycle)
Strong political champion and coordination at state level
Establish a designated political champion for PFM reforms Short-term
Establish an inter-agency PFM Reform Steering Committee Short-term
Establish a PFM reform unit to provide technical support to the steering committee and all MDAs Short-term
Modern and comprehensive legal and regulatory framework
Enact all the relevant PFM laws (Fiscal responsibility law, public procurement law, public audit law, Finance (Management and control) law)
Short to medium-term
Based on the Public Procurement Law, establish a Public Procurement Regulatory Agency (Due process). Short to medium-term
Develop procurement manuals and standard bidding documents Quick win (if law is in place)
Establish an effective complaints mechanism for public procurement Medium-term
Introduce a specialized Revenue Court to improve compliance with tax legislation. Medium-term
Human and organizational capacity strengthening
Develop a cadre of PFM specialists (budget officers, planners, accountants, procurement specialists, M&E specialists, and IT specialists) through recruitment and training
Short to medium-term
Undertake necessary organizational restructuring to ensure clarity in roles, responsibilities and job descriptions in line with ongoing PFM reforms
Short to medium-term
Strengthen the state’s capacity to undertake revenue projections.
Strengthen the BIR through increased autonomy and improved incentives for government revenue staff. Medium-term
Establish a state Debt Management Office if not yet in place. Short to medium-term
Build capacity for the SHA (PAC) on its oversight function. Short to medium-term
Modern information technology and software
Introduce an integrated financial management and information system (IFMIS) Medium-term
Acquire and install specialized debt management software and other infrastructure for the state Debt Management Office.
Medium-term
Role of Federal Government, the Governors Forum, and development partners
Implement a coordinated approach to PFM reforms through collaboration with the Federal Government and development partners through the Governor’s Forum
Short to medium-term
![The Impact of Deforestation on Soil Conditions in Anambra ...article.affjournal.org/pdf/10.11648.j.aff.s.2015040301.21.pdfand vegetation maps modified from [6]. Anambra is a state](https://img.dokumen.tips/doc/110x75/5e6f874af41f360d451fb669/the-impact-of-deforestation-on-soil-conditions-in-anambra-and-vegetation-maps.jpg)
