Two men on the tube...

They're both greying
Asian, clearly
Exchanging banter
After a hard day's work
An occasional smile
A responding twinkle
The youth of their hearts
Belied by the lines on their faces
Their hands are rough
(they're labourers, you see)
But their eyes are soft
Just like their hearts
One complains about his rough hands
Bruised after a day of carrying bricks
The other shows his own cuts
And then reaches in his bag
To bring out a tube of hand lotion
The message seems clear
I lost myself in our chat
And forgot about my hands
Till you showed me yours
Two men on the tube
Oblivious to the world around them
Only they know where they're going
And that's okay, very okay
Because they're together, neither is alone

What's in my head?

You can't see it
Whatever it is
You can't tell what I know
Where I've been
Just by looking at me
Am I smart? Well read?
Am I "slow"? Can you tell?
Let's say I'm a book
What does my cover tell you?
Is my cover my skin?
Is it my clothes? My physique?
Have I read that book?
The one you hold so high
For all to see?
Have I met the author?
Read all his books?
You'll never know
Just by looking at me
And I'll never know
If all I've suggested is true
Just by looking at you
We're even then...

The case of The Speaker's 10 billion (part 4)

Yesterday’s post marked the halfway point in this series, so I think it makes sense to briefly summarise the main points I made in prior posts, before going on to the topic for today, namely Nigeria’s challenges in, and potential for, economic development and job creation. 

I hope by now I have been able to convince you of two points: the amounts usually involved in government corruption scandals in Nigeria are inordinate, even by global standards; and the spread and magnitude of corruption is largely due to an implicit agreement between Nigerians and their government, that allows the latter to run its own oil-based “parallel universe”, fuelled by private oil companies (couldn’t resist the pun). Based on the latter point, I propose that Nigeria has three sub-economies, as follows:

a. Sub-economy #1 - oil-based, and part of documented GDP. Revenue largely from oil companies. Expenditure determined by government.

b. Sub-economy #2 - non-oil based, and also part of documented GDP. Revenue and expenditure determined by hard working Nigerians. 

c. Sub-economy #3 - non-oil based, but undocumented. Similar to sub-economy #2 in terms of revenue and expenditure.

Sub-economy #1 gets the most attention in public discourse, yet at best accounts for only 15% of documented and undocumented GDP. As a nation we have become so fixated on the distribution of government revenue (read, oil revenue), to the extent that we have let it take on an importance that it may not deserve; we seem to be more interested in how this particular cake is divided, than in making all cakes bigger. And in so doing, we have also given our government a lot more credit than they deserve for our development. The truth is, our government, even if it were about to do away with corruption today, cannot finance the public goods and services we need on its own. According to the CBN, in 2009, all three tiers of government earned NGN 6,263 billion, and their aggregate expenditure was NGN 7,258 billion (the government financed the deficit largely from domestic borrowing). If you divide total government expenditure by 140 million (the figure for Nigeria's population), you get a figure of about NGN 52,000. This figure represents what each Nigerian could have gotten in 2009, had the private oil companies by-passed the three tiers of government, and shared the oil revenue due to the nation amongst all of us. It doesn't amount to much, though, does it? And your personal experience probably tells you it costs much more than NGN 4,300 a month to run one's own "local government" in Nigeria (diesel for the generator alone used to set me back about 5 times that amount).

So what do we do? Or better yet, what would I do, if I had the ability to change things? My over-arching approach would be to strengthen sub-economies 2 and 3, on a state by state basis. I would also seek to reform sub-economy 1, to enable it provide essential, foundational public goods and services (electricity, security, education and water, for example) at national and state levels. Should such a reform prove unsuccessful (wouldn't hold my breath on that one), I would bring in private businesses to provide the essential public goods and services to Nigerians for a fee, and levy a tax on sub-economy 1 (an at-source tax on oil companies) to generate revenue to subsidize payments made by Nigerians. That last bit will likely never happen!

But strengthening the truly productive sub-economies is feasible, and it makes good sense. We have a large population that needs food, clothes, fuel, housing, entertainment, etc. It is a shame that we rely on imports to satisfy some of our most basic needs (the importation of toothpicks and pencils come to mind, despite the abundance of wood in the country). Our businesses also have access to other West African markets, which have similar needs, and are likely having these needs being met more by Chinese companies, than Nigerian ones. Take Ghana, for example. China accounts for the highest percentage of imports at 17% of total, while Nigeria comes second with 12% (though I suspect some of the goods from Nigerian-based businesses are imported from China, and other countries, for onward delivery to Ghana). In Benin and Togo, China accounts for 36% of imports, while Nigeria’s imports are less than 4% of total in each (figures for Nigeria don't even register on the data source I checked - the CIA Factbook). 

For Nigerian businesses to be strengthened to meet domestic and foreign needs, they require an enabling business environment which provides adequate infrastructure, access to capital, an educated workforce, and a functional legal system, to name a few critical requirements. The lack of these has contributed to Nigeria being ranked as number 137 (of 183 countries) in IFC’s Ease of Doing Business national rankings. These ranking are only for businesses in the formal sector, so one can imagine how much tougher it is for businesses in the grey economy (sub-economy 3), who have peculiar challenges of their own, because they are on the fringes of the formal economy. Hence they tend to be limited in their ability to raise capital, obtain insurance services, and secure other inputs that formal businesses can gain access to. The micro-finance banks were set up to address the capital needs of this sub-economy, but only time will tell what their impact has been.

A strong business sector would also help with another problem Nigeria is facing—high unemployment. According to the World Bank, 25% of Nigeria’s working age population (people between 15 and 65 years of age) are unemployed. Of the 75% that are employed, 65% are self-employed, and 10 percent are in wage employment. Of the 10% in wage employment, about half are in the public sector (recall the point made in yesterday’s post about the fact that the Federal Government alone employs over one million people). Hence even the population statistics show the relative imbalance in the sub-economies, as sub-economy #1 is unlikely to account for more than 6% of employment (including employment in the public sector, as well as direct and in-direct employment in the oil industry), while it accounts for about 15% of GDP. But I digress. Having an environment that enables private enterprise will allow businesses in the formal and informal sectors to create jobs, which will go some way in reducing the likelihood that one out of every four adults you and I meet in Nigeria will be unemployed, or worse, unemployable (more on that tomorrow). 

In closing let me share the story of Foxconn, a story I love to tell to anyone who will listen. You may have never heard of the company before, but you have surely heard about the goods it produces – iPods and iPhones, to name just two. The Taiwan-based company was founded in 1974 with US$7,500. Its mission was to provide low-cost electronic components to what was then an emerging electronic products market – imagine what the computer industry looked like back then (more info here). Thirty-five years later, Foxconn now ranks 112th on Fortune's Global 500 list, coming out ahead of Deutsche Bank and Microsoft (you can see the 2010 rankings here). Bloomberg estimates are that the company has 1.3 million employees across all its businesses (see for yourself here). This company employs almost 5% of Ghana's population, and 1% of Nigeria's. Talk about impact! How did Foxconn do it? It saw an opportunity long before others did (this shows the importance of research, which I will discuss tomorrow), and it was within an enabling environment that allowed it to exploit said opportunity. 

For Nigeria to develop, stories like Foxconn's have to become the norm, and not the exception (as is the case with the likes of Dangote, Glo and Oando, today). The only way our economy can grow and create jobs for our labour force of over 45 million people (11th largest in the world, by the way) is if more businesses succeed in adding value domestically, regionally and globally. And these businesses need an enabling environment to succeed. But don't look to the likes of Mr. Speaker to help with that; they are too busy building their retirement nest eggs, so their great-grand children's great-grand children will still be living off the interest on the capital they are stashing away today.

The case of The Speaker's 10 billion (part 3)

In yesterday’s post, I shared my understanding, based on publicly available information, of how the three tiers of the Nigerian government make money. The summation was that government revenue is largely derived from oil, and taxes make up a minor portion of the revenue base. I argued that this situation contributes to the unresponsiveness of our “leaders” to the clamour by the proverbial common man for a better quality of life. I want to take a similar approach of working with publicly available information for today’s topic, namely how government spends money, but I admit upfront that it will be much tougher, as thieves typically do not issue receipts.

Most of us understand that what we spend is largely determined by what we earn. However we also know that we can borrow if we need to buy something, and don’t have enough money tucked away. The same applies to governments. Most of us also know from personal experience that costs are fairly certain, but income is not always guaranteed. Things happen—for example, salaries may be delayed, and bonuses may not materialise—but the landlord (or bank, if one has a mortgage) has to be paid, groceries have to be purchased, and school fees catered for, amongst several other financial obligations. The same applies to governments, especially those that rely on revenue from the sale of a commodity whose price and production they do not control, and whose costs are almost set in stone and seem to rise, year on year. When government revenue from crude oil and gas sales cannot cover budgeted costs (as is often the case), they do what any good capitalist does—borrow! (They can also print extra money, but don’t let’s complicate things by adding that.) The government can borrow locally (from you and I, as well as from banks and other businesses), and it can also borrow internationally. Hence the government is able to spend more than it earns, but of course, this comes at a price, i.e. interest payments.

I know your parents likely warned you of the dangers of borrowing, but l will let you in on a secret—it is not such a bad thing. Most governments borrow, and I believe many of us, if we are honest, would like to have access to affordable, long-term credit, so we can improve our standards of living (whether it’s to invest in stocks, move to a nicer place, buy a better car, or just take a dream vacation). So borrowing by itself is not a problem. The problem comes when one uses borrowed funds on “white elephant projects”, or worse, when such funds go directly into pockets like Mr. Speaker’s (which is technically what happened, prompting this series of posts). But I am getting ahead of myself here. Let’s get back to the issue at hand, i.e. how the Nigerian government spends what it earns and borrows.

I will begin the discussion with Big Daddy, i.e. the FG, as I did in yesterday’s post. The FG spends the money it borrows and earns (from FACC, VAT and IGR, as described yesterday), in three main ways: 

1. transfers it is required to make by law (funding of the judiciary and the Niger Delta Development Commission, and contributions to Universal Basic Education); 

2. payments of interest and capital on outstanding debt obligations; 

3. disbursements to MDAs (acronym stands for ministries, departments and agencies, and includes entities like FERMA, FRSC, Ministry of Finance, and the National Assembly), for the provision of FG funded public goods and services. 

Transfers and debt service payments have historically made up about 5% and 25% of FG expenditure, respectively, and MDA funding has made up the balance of 70%. Let’s focus on MDA funding, shall we. MDA funding is used to finance capital expenditure (investments in federally maintained roads, schools, the police, the army, etc), as well as recurrent expenditure (which covers employees’ salaries, pension contributions, and operating overheads). MDA recurrent expenditure accounts for about 60% of total, so for the FG, 42% (60% of 70%) of its total expenditure goes to recurrent expenditure within MDAs alone! Does this make sense? What would you think of a friend who spends close to 70% of his monthly income on running expenses and debt obligations, especially if he has children? Think about that for a minute. 

Then think about this – you may have heard about the problem of “ghost workers” in government establishments, people that are on the books of the government as deserving of monthly emoluments, but who do not exist. The Okonjo-Iweala document I referred to in my last post, stated that over one million people worked for the Federal Government at the time of its publication. You can begin to put two and two together, and come up with four, i.e. that recurrent expenditure must surely be a very BANKable source of income for those that have the means. You may also have heard about how our “public servants” grossly inflate estimates and allocations for overhead expenses, and may recall that in 2010, a group accused some senior officials of the Lagos State government of spending “N290million to send text messages and make phone calls within six months” (follow this link to the full set of allegations). So clearly, recurrent expenditure is one way to chop, for both FG and state governments.

Before shifting focus fully to state and local governments, let’s quickly touch on MDA capital expenditure, which makes up 28% (40% of 70%) of total FG spending. MDA capital expenditure funds the federally maintained infrastructure that we “enjoy”, and its lower position in the pecking order partly explains the poor quality of most, if not all, federally funded public goods and services— federally maintained roads, federal government colleges, federal universities, national service providers like PHCN, etc. The money may not be enough to do what it is meant to do (more on that tomorrow), but that doesn't stop our government officials from chopping as much of it as they can! Inflated road contracts, machines that are bought but never arrive (or worse, were bought twice!), repairs on equipment that are paid for but never carried, the list goes on, and on. Reading this, one may think chopping only occurs at the MDAs, and that there are few opportunities for such when it comes to transfers. Nothing could be further from the truth. It’s simply different slices of the national cake for different folks, you see. Those that receive transfers get their own opportunities to chop. It’s like that saying—a hose that is used to move water cannot but get wet. In our case, the hose gets so wet that very little water comes out at the other end.

The states and local governments are no better. According to the CBN, in 2009, recurrent expenditure accounted for 51.4% of total expenditure by all state governments. States allegedly spent most of their total expenditure (recurrent and capital) on the following areas: education (8.4%), health (5.4%), agriculture (5.7%), water supply (3.6%) and housing (2.3%). Have you felt the impact of this expenditure? Would you send your children to public schools or use public health facilities? Has your state contributed to providing you a home? Has it even provided water to the home you are in now, whether it contributed to providing the home or not? We deceive ourselves, honestly. For local governments, recurrent expenditure made up 66% of total. Your guess is as good as mine on how the money was really spent.

I have just outlined how the three tiers of government spend money. On a good day (as Nigerians say), if there was no stealing, this is how the money would have been spent to provide public goods and services for our benefit. You could say it represents a ceiling. But we all know what actually gets to us all is a lot lower, don’t we, as there have been numerous stories of diversions by our “public servants”, the latest of which is that of a top government official who used diverted funds to buy a palatial house and fund a lover’s political ambitions. You know of whom I Speak. 

So this is the fact of the matter—our government has created a parallel universe, in which it generates and “spends” money on itself and selected people, totally separate from the rest of us. And records on expenditure are not readily available, just to ensure this parallel universe is maintained. No wonder so many are so willing to do whatever it takes to enter the clique.

Tomorrow I shall begin touching on the effect of this sorry state of affairs on the nation’s prospects for development. I will specifically discuss the impact on two areas that I believe are essential for Nigeria’s growth–business and education. Stay tuned.

PS. I would appreciate feedback on this series of posts. Are my explanations clear? Do you have data or other information that refutes some of my assertions? It would be nice to know. Thank you.

The case of The Speaker's 10 billion (part 2)

Yesterday, I suggested that Nigerians have reached an implicit agreement with their government not to “disturb” each other, and it is this agreement that allows “leaders” and “public servants”, to help themselves to the government’s revenue, which is largely oil based. Today I present an overview, which is based on publicly available information, of how the Nigerian government makes the money the likes of Mr. Speaker readily help themselves to. 

Like other national governments, the Nigerian government makes money primarily off the sweat of its corporate and individual citizens. Hence we begin with an overview of how Nigerians and Nigerian businesses make money. The CBN suggests it is largely from the agricultural sector, which accounts for about 40% of all goods and services produced in the country each year (what economists call Gross Domestic Product, or GDP). Next is a sector defined as “Industry and Crude Oil”, which has historically accounted for between about 20% and 30% of GDP, depending on several variables (price of crude oil, disturbances in the Niger-Delta, and OPEC quotas, to name a few). The “Services” sector (consisting of communications, financial services and transportation) accounts for about 17% of GDP, as does a sector called “Wholesale and Retail Trade”. The balance is made up by a sector called “Building and Construction”. In essence, most of the money made in Nigeria comes from agriculture, industry (made up largely of oil), services and trade. Most of the money comes from sales within Nigeria, but a small proportion comes from sales to citizens of other countries, of which the sale of crude oil and gas accounts for about 95% of total. 

Now some argue that a lot of the business activity in Nigeria is not captured by our statisticians, and that a sizeable grey economy exists in the country. This line of argument makes sense – we all know unregistered businesses that operate out of sight of government and the people at the National Bureau of Statistics. And one need not look further than the swarm of okada riders on Lagos roads. Who records the money they generate? Given these very valid points, some researchers set out to determine the size of Nigeria’s informal economy. One such research, conducted by the World Bank, estimates that Nigeria’s grey economy accounts for about 77% of documented GDP. Factoring that into the calculations of per capita GDP increases Nigeria’s 2009 figure from $1,118 to $1,978; an improvement, but still some way from documented per capita GDP for developing countries like Brazil ($8,230), Mexico ($8,143), and Botswana ($6,064). If it makes you feel better though, we are ahead of Ghana ($1,098), Benin ($745), and Togo ($431). 

Now we come to the Nigerian government itself. As mentioned earlier, like other national governments, it makes money primarily off the sweat of others’ labour—specifically the private oil companies (POCs), in its case. The Federal Ministry of Finance published an interesting document during Okonjo-Iweala’s tenure. It was called the “Guide to understanding the federal budget”. I believe that document should be mandatory reading for all Nigerians. Why? Because it shows how “our government” makes the bulk of its money. In a nutshell, inflows into the notorious Federation Account (which the three tiers of government depend on for their existence, and more importantly, their “chopping”), are made up primarily of the following oil-based revenue sources: sale of the country’s own share of crude oil and gas produced by joint-venture operations with POCs; Petroleum Profit Tax levied on the profits declared by POCs (85% of declared profit!); royalties on every barrel of oil produced, whether produced by a joint-venture operation or not (20% of value!). 

The balance of the inflows into the Federation Account come mainly from Corporate Income Tax on non-oil companies (30% of profits) and duty fees charged on imported goods (between 0 and 50% of value). A committee (the Federation Account Allocation Committee, or FAAC) meets monthly to share the spoils between the three tiers of government, using the following ratio: Federal Government, 52.68%; 36 state governments, 26.72%; and 774 local governments, 20.6%. I won’t even begin with a discussion of the absurdity of this ratio.

There is another important source of revenue for the three tiers of government, namely revenue from Value Added Tax on goods and services (5% of value). This revenue is paid into another account (called the VAT pool), and is shared in a way that favours the state governments over the Federal Government (FG): states get 50%, local governments get 35% and the FG gets 15%.

These aforementioned revenue sources have historically accounted for the FG’s allocation from the FAAC account as follows: crude oil sales (44%); petroleum profit tax (20%); oil royalties and rents (10%); Corporate Income Tax (5%), custom duties (9%), and Value Added Tax (6%). Independently Generated Revenue (IGR), which represents revenue from others sources besides FAAC and VAT receipts, has historically accounted for about 4% of total. As you can see, even Big Daddy is hugely dependent on oil revenue, as it accounts for about 74% of total.

These figures are only for the FG. Let us turn our attention to the state and local governments. The CBN’s annual report for 2009, the most recent full year report, shows the way these tiers of governments make money. In 2009, only three states (Lagos, Sokoto and Ogun) achieved figures above 29% for IGR as a percentage of total revenue. The average percentage across all states was 17.8%, and states ranged between 1.2% (Ondo) and 62.2% (Lagos). The rest of the revenue for the average state came largely from FAAC allocations (64.9%) and VAT receipts (8.9%). The corresponding figures for the average local government was less impressive—IGR as a percentage of all revenue was 0.6%, with the balance coming largely from FAAC allocations (64.3%), state government allocations (1.9%) and VAT receipts (15%). Once again, we see a major dependence on oil, which is why I described the NNPC as the government’s private business in yesterday’s post.

So with the bulk of revenue coming from the oil companies, is it any wonder why “our leaders” hardly pay attention to us? It seems to me that we only “supplement” their revenue with the taxes we pay, and hence, are limited in our ability to influence them. But would we be able to influence them even if we paid higher taxes? Put in another way, would the fact that citizens pay higher taxes make the government more accountable to them? As was mentioned earlier, Lagos State generates most of its revenue from taxes, yet the jury is still out on the responsiveness of the state government to its citizens.

In light of these questions, tomorrow we will take a look at how the three tiers of government “spend” the money they make, and will explore how that is related to the dismal state of public services and infrastructure in the country.

The case of The Speaker's 10 billion (part 1)

Ten billion naira is a lot of money. At the current exchange rate, it comes to about GBP 40 million. Let's put that figure in perspective - according to the latest edition of the Sunday Times Rich List, Princes William and Harry share a combined wealth of GBP 28 million, of which twelve million came from a trust Princess Diana left them. So our dear speaker has "chopped" more wealth in one go, than it has taken two generations of British royalty to build. Only in Nigeria! (In case you are reading about this for the first time, see this page for some background info.)

Let's use a local perspective to drive home the point, shall we. Last year the Federal Government, through the Universal Basic Education Commission, allocated 2% of its consolidated revenue to support state and local governments in funding public education. There are about 25 million children supported by UBEC, nationwide, and the government provided 23 billion naira for their education. In one swoop, Mr. Speaker "chopped" half of what the FG provided for all those children for an entire year. Only in Nigeria!

The actions of our "leaders" never cease to amaze me, and the latest transgression has lead me to believe that public power in Nigeria corrupts publicly, yet leaves no sense of shame. How else can one explain the level of greed displayed - individually, and collectively - by so many "public servants"? How can one explain the recent actions of Mr. Speaker, who many hoped would be an agent of change?

Let's put ourselves in their shoes for a second - technically they are not stealing money, as it can be argued that the money is "just sitting there", and they simply help themselves to it. Big Daddy (the FG) allocates funds, and the recipients are hardly held accountable for how they spend the it (even Big Daddy is not held accountable!). It seems to me like Nigerians have encouraged such behaviour, given our implicit agreement with those who "govern" us. It is as if we have said, "we will let you enjoy the proceeds from your private business (NNPC), but leave us alone and don't try and tax us; do whatever you want with 'your' oil money." And they have, and will continue to do so, for as long as this "agreement" exists.

So while 10 billion naira can do a lot for Nigerians, and while Nigerians have every right to be angry with Mr. Speaker, the reality is the money is not being stolen from them, as it did not come from them in the first place, but originated from the oil companies. According to the CBN, oil revenue funds most of government expenditure at all three levels, which accounts for about 25% of GDP. Government expenditure in developed countries like the UK and France accounts for about 45% of total expenditure (see the Heritage Foundation's latest Index of Economic Freedom), but these governments don't get their money from oil - they get most of it taxes. The Nigerian government, when it does decide to finance public goods and services, does it from the crumbs left from oil revenue. This is part of the reason France and UK have electricity, good roads, and good public schools, and Nigeria does not (more on that in part 3).

In part 2 tomorrow, I will break down the oil revenue that accrues to the different tiers of government. Stay tuned...