Corruption-attribute

Debt and corruption in Tanzania

On 30 November 2015, a landmark judgment saw Standard Bank fined US$25.2 million and ordered to pay the government of Tanzania US$7 million in compensation for allegedly failing to prevent bribery. Nick Branson considers whether this level of reparations is appropriate, and how those implicated might be held to account for their actions.

Many Tanzanians welcomed the deferred prosecution agreement (DPA) between the UK’s Serious Fraud Office (SFO) and Standard Bank as it appeared to add weight to the crusade against corruption launched by the newly-elected president, John Magufuli. Only three days earlier, Magufuli had suspended Rished Bade, the commissioner general of the Tanzania Revenue Authority (TRA), and ordered investigations into tax evasion at Dar es Salaam port.

Others, however, dug into the statement of facts, unearthing a mountain of information on hitherto low-profile financiers and civil servants, and provoking questions over the country’s US$600 million sovereign note private placement, a debt issue managed by Standard Bank, now ICBC Standard Bank Plc. Suspicions have been raised at a time when Tanzania is thought to be planning a US$700 million Eurobond, and neighbouring Kenya grapples with persistent allegations regarding its own US$2 billion bond.

The allegations

The DPA suspended an indictment against Standard Bank for its alleged failure to prevent bribery, citing section 7 of the Bribery Act 2010. The Bank was fined US$25.2 million, in addition to US$7 million in compensation, payable to the Government of Tanzania.

The case relates to a US$6 million payment made by Stanbic Bank Tanzania on 1 March 2013 to a “local agent” in Tanzania, Enterprise Growth Market Advisors (EGMA). Stanbic entered into an agreement with EGMA in August 2012. At the time, Stanbic was a sister company of Standard Bank, and worked with the latter to access the debt capital markets.

Lord Justice Leveson concluded that “although the potential for corrupt practices to affect this type of business were well known, Standard Bank, which did not have adequate measures in place to guard against such risks, relied on Stanbic to conduct appropriate due diligence in relation to EGMA; Standard Bank made no enquiry about EGMA or its role.”

According to the statement of facts agreed as part of the DPA, among other oversights, the bank “failed to identify and therefore deal adequately with the presence in this transaction of a politically exposed person”. One of EGMA’s directors was Harry Kitilya, then commissioner general of the TRA. A clear potential conflict of interest exists if a man responsible for raising revenue moonlights by offering to “facilitate” borrowing by the Tanzanian government. Kitilya retired in December 2013, five months before the bond was issued.

Although there was “no evidence that EGMA provided any services in relation to the transaction”, the company was paid US$6 million. This was raised by increasing the cost of the transaction from 1.4% (US$8.4 million) to 2.4% (US$14.4 million).

Tanzanians have been quick to question the extent of this practice. In conversation with the author, Professor Ibrahim Lipumba, former national chairman of the opposition Civic United Front (CUF), argued that “if a 1% kickback was involved in this US$600m loan, what about comparable borrowing in recent years? Over the past four fiscal years Tanzania has borrowed over US$2.5 billion.”

On 1 February 2016, Zitto Kabwe MP, a former chair of the public accounts committee (PAC) and leader of the opposition Alliance for Change and Transparency (ACT-Wazalendo), raised this issue in parliament. Kabwe called for the Controller and Auditor General (CAG) to audit bond sales amounting to 6.8 trillion Tanzanian Shillings between 2011/12 and 2015/16.

A new legal instrument

By contrast, the international media focused on the ground-breaking nature of the case and quoted the SFO’s director, David Green QC, who hailed the “landmark DPA” as “a template for future agreements.” Ben Morgan, joint head of bribery and corruption at the SFO, commended “the decision of the bank in question to participate in DPA negotiations”.

Under a DPA, a corporation is charged with a criminal offence, but criminal proceedings are suspended provided the accused company meets certain conditions. The SFO may resume prosecution within three years, should Standard Bank fail to comply with the terms of the agreement. After that period, the SFO will discontinue proceedings.

DPAs have enjoyed significant growth in the US, primarily as a punitive instrument, whereas the UK variant includes a degree of compensation. Another difference is that British DPAs must be confirmed by a judge in open court, who must deem them to be in the interests of justice with terms that are fair, reasonable and proportionate.

Given the costs involved in mounting legal proceedings against corporations based in London, DPAs may be deemed appropriate where the public interest is not best served by the SFO mounting an uncertain and lengthy prosecution. This is particularly pertinent for accusations relating to Bribery Act, where there is little case law, and where the alleged infraction did not take place on UK soil. DPAs are, however, not without risk.

Marking your own homework

The DPA in question was the result of Standard Bank reporting an incident to the UK authorities. Four members of Stanbic reported concerns when almost US$6 million in cash was withdrawn from EGMA’s account over the course of nine days in March 2013. On 18 April 2013, Standard Bank’s solicitors, Jones Day, reported a potential breach to the UK’s Serious and Organised Crime Agency (SOCA) – now the National Crime Agency – and on 24 April 2013 to the SFO. Standard Bank instructed Jones Day to investigate and disclose its findings to SFO, which it did on 21 July 2014.

The DPA rests primarily on that internal investigation, supplemented by interviews conducted by the SFO. This evidence was determined to be sufficiently robust to be presented in a criminal court. Yet, without further examination, it remains impossible to know whether what occurred was an isolated incident or routine practice in investment banking.

When a law firm, held on retainer by a bank to limit its potential exposure to legal proceedings, is also reliant on the same bank that provide documentation to support an investigation, questions will inevitably be raised over whether that investigation can be as credible as one undertaken by the SFO. This, in turn, provokes debate over whether a criminal investigation conducted by the SFO might have unearthed additional evidence of use to British or Tanzanian authorities looking to “follow the money” or prosecute individuals involved.

Questions abound about what triggered the decision by Standard Bank to self-report, with speculation as to whether it jumped or was pushed. In a video interview, Tanzania’s chief secretary, Ombeni Sefue, stated that “the Bank of Tanzania in its usual inspection responsibilities identified that something was wrong in Stanbic in Dar es Salaam. And when this was taken up to the Board of Standard Bank, they realised that something was wrong and they reported it to the Serious Fraud Office.”

On 20 January 2016, Zitto Kabwe expressed the view that Standard Bank “falsified information voluntarily given to [the] SFO in order to get a small fine.” Under the DPA, Standard Bank was required to state that it had not provided the SFO with misleading or incomplete information and that it would notify the SFO if it becomes aware of further relevant material.

Brian Cooksey, who monitors governance trends in Tanzania, thought the basic lessons from this case were being missed. According to Cooksey, if Standard Bank’s “plausible deniability” strategy ensures that senior bank officials are let off extremely lightly for their involvement in the deal, then we may have to brace ourselves for more of the same. Cooksey told ARI:

“In the BAE Systems radar scam, BAE eventually repaid the total value of the project to the Tanzanian government in a plea-bargain not dissimilar to this deferred prosecution agreement.”

London calling

At a recent meeting with the SFO, officials there confirmed that the DPA does not preclude the Tanzanian authorities from taking legal action against the individuals named in the statement of facts. Although some of these figures have died and others have left the country, those implicated can nevertheless be pursued in Tanzanian courts.[1]

Financial crime cannot be properly investigated without international cooperation, and the SFO emphasised that it stands ready to assist should the Tanzanian authorities demand it. This request could be initiated by one of two channels: the director of public prosecutions (DPP), Biswalo Mganga, or the Prevention and Combating of Corruption Bureau (PCCB).

In the meantime, the UK’s investigating authorities could have their own leads to pursue. On 11 December 2015, Andrew Feinstein, executive director of Corruption Watch UK, and a former chair of South Africa’s parliamentary accounts committee, wrote to the Financial Conduct Authority (FCA) requesting an investigation into UK-based individuals named in the statement of facts.

The SFO may yet discover further evidence of criminality, including evidence that the proceeds of crime were invested in the UK. A previous SFO investigation into the aforementioned BAE Systems deal prompted the resignation of the then attorney general, Andrew Chenge, over allegations about the provenance of money held in the offshore tax haven of Jersey. Chenge denied any wrongdoing. Despite having also been accused of involvement in subsequent scandals, Chenge was elected as presiding chairman of Tanzania’s parliament in January 2016.

Looking to Kenya?

Prosecuting those suspected of embezzlement was a prominent theme of the October 2015 elections. On the campaign trail, presidential candidate Magufuli promised to establish special anti-corruption courts, if elected. He has reiterated this pledge since taking office, and a team of experts is reportedly working on the issue.

A recent visit by Kenya’s chief justice, Dr Willy Mutunga, suggests that Tanzania may be looking to emulate its neighbour. Mutunga recently established a new Anti-Corruption and Economic Crimes (ACEC) Division of the High Court in Nairobi, and appointed ten additional magistrates to hear such cases. Kenya has yet to make much progress in eliminating graft despite anti-corruption courts having been set up over a decade ago.[2]

Semkae Kilonzo, the co-ordinator of Policy Forum, a network of over 70 Tanzanian non-governmental organisations, told ARI that, for Magufuli’s proposal to prove feasible, the new tribunals must be integrated with existing policy:

“Tanzania has a comprehensive National Anti-Corruption Strategy and Action Plan (NACSAP). These courts must be established under that framework, following elaborate stakeholder consultations, if they are to be successful.”

Further concerns relate to the risk of duplicating existing structures, reducing the resources available for the everyday administration of justice and potentially creating a two-tier legal system. Kilonzo maintains that “the creation of a parallel structure will only increase the burden on an already overwhelmed judiciary”.

Indeed, Magufuli’s rush to establish a new means of trying those accused of graft may risk missing the bigger picture. Tanzania’s oversight bodies are still struggling to assert their independence. For Kilonzo:

“As long as the president remains responsible for appointing the judiciary, the DPP, and members of the PCCB, those committed to combating graft will be constrained by reporting hierarchies and the threat of political interference. Changes in this domain, coupled with the effective implementation of a new whistleblower law, would do far more to address corruption than specialised anti-graft courts.”

On 26 January 2016, Valentino Mlowola, the new PCCB director general, told journalists that investigations into the Standard Bank case had reached “the final stages”. He promised that “anytime soon you will see grand corruption suspects taken to court.” Separately, Stanbic may face a fine of 3 billion Tanzanian Shillings (approximately US$1.4 million).

Grounds for caution

Regardless of the compensation paid and the prosecutions that may follow, Tanzania has been saddled with a debt of US$600 million which may not have been borrowed at a favourable rate. It remains difficult to prove what would have constituted a reasonable deal for the country; what is certain is that the decision to proceed with a private placement was made following a closed bidding process.

Although Tanzania had obtained a preliminary credit rating in February 2011, reception given to the sovereign note was described as a “disaster” for the borrower on the opening day of trading.

A Reuters report stressed Tanzania’s failure to achieve a comparable deal to Zambia or Ghana, whose Eurobonds were being traded at an interest rate of less than 4%. Tanzania could almost certainly have raised money at a rate more competitive than the 6% offered by the Standard Bank placement. Corruption Watch UK has argued that potential savings could have reached US$80 million over the life of the bond.

Regardless of the rate obtained, questions remain as to why the private placement was so poorly managed, and what could have been achieved in its stead. As Davide Scigliuzzo noted for Reuters:

“The deal, which was led by Standard Bank, perplexed the financial community from the moment news emerged about it nearly two weeks ago, especially as Tanzania has an unofficial mandate with Citigroup for a public Eurobond.”

In the absence of a competitive bidding process it is hard to believe that the private placement represented good value compared to other means of commercial borrowing available to the government. Equally, it is conceivable that plans for the Eurobond were delayed as a result of the private placement and that Tanzania may therefore have forfeited an opportunity to borrow at a more attractive rate.

In conversation with the author, Mark Bohlund, Africa and Middle East economist at Bloomberg, explained that:

“A Eurobond would have offered Tanzania cheaper sovereign borrowing, as it applies more downward pressure on interest rates through an open and competitive bidding process (and the possibility of re-sale) than a bank loan. It also creates a benchmark yield, which helps local corporations to take on loans from foreign creditors. Eurobonds help to familiarise foreign investors with local advantages and risks, which should boost FDI over time. The downside is high level of transparency and accountability required by regulators both in the country of issuance and domicile of potential investors, in particular, Regulation S and 144/A. This can be a cumbersome process and entails specialist skills that are not always widely available in frontier market economies like Tanzania.”

Neither the absence of competition nor the (lost) opportunity cost was factored in to calculations regarding the compensation due to Tanzania.

Institutional inertia

One could argue that the alleged corruption would not have been possible had the country’s financial institutions exercised greater oversight of its borrowing needs.

In December 2010, the International Monetary Fund (IMF) noted Tanzania’s desire to seek “non-concessional external financing of up to US$1.5 billion” over the coming three years, while maintaining that “weaknesses in debt management capacity must be promptly addressed.” By May 2011, this had become “a matter of urgency”.

In July 2012, the IMF proposed that Tanzania “establish a new Debt Management Office (DMO) in the Ministry of Finance to consolidate public debt management functions”. It emphasised that “existing procedures… [do] not provide strong assurances on value for money in public borrowing, an issue of particular concern given planned large investments”.

By the time of the private placement by Standard Bank, the DMO’s “organisational structure [had] been submitted, but [was] pending final approval by the Executive branch”. The IMF’s most recent report notes that the “new department still needs to be staffed and become operational”.

Might Tanzania have gone to the market in a different way or at a different time, if such structures had been in place?

Debt management remains an issue in the country. Brian Cooksey emphasised to ARI the need to consider the transparency and sustainability of external commercial borrowing, given Tanzania’s deteriorating finances. “We should be asking: was the bond money used for new projects, or paying off old debts?”

Under plans proposed by the finance minister, Dr Philip Mpango, the government could raise 1.8 trillion Tanzanian Shillings (approximately US$800 million) on international markets in 2016/17. This would include borrowing to repay the bondholders and service the debt placed by Standard Bank. The first of nine repayments is due on the third anniversary of the placement, 1 March 2016.

No doubt President Magufuli hopes to prosecute those who benefited from a questionable deal which his government will be paying off until March 2020, six months ahead of the next general elections. The SFO has provided Tanzania’s authorities with some promising leads, and US$7 million in compensation from Standard Bank will surely help; but, one is left wondering whether the DPA falls short of addressing the root of the problem.

original

Kenya economy continues to exhibit key weaknesses that must be addressed

This article was first published by Business Daily and is reproduced by kind permission of the editors and the author. ARI considers that the points about job creation and high dependency ratios, in particular, are worth underscoring.

On 8 March the World Bank launched the Kenya Country Economic Memorandum with the theme “From Economic Growth to Jobs & Prosperity”. Apurva Sanghi, Lead Economist and Program Leader at the Bank, made three core points during his presentation.

The first is that economic growth in Kenya is volatile, non-inclusive and marked by stagnation in agriculture and industry. In terms of volatility, Kenya’s growth has been volatile since independence and domestic shocks such as political instability (especially during election years) affect GDP growth more than external ones.

The second point was that growth is not inclusive and the country continues to register high poverty levels, the estimates of which sit between 36-42% in 2016. Further, job creation has been marginal and slow, clearly only able to absorb a fraction of the working age population that enter the labour market each year. Further, of the jobs created, the vast majority have been informal jobs.

Unemployment is a major issue in Kenya – Source: CCTV Africa
Another important point made by Sanghi was that economic growth in Kenya has been led by services which have been resilient with clear stagnation in agriculture and manufacturing. Services exports are catching up with goods exports and this is partly because the sector is less dependent on raw materials and not truly affected by changes in commodity prices.

In terms of agriculture, the main factors informing the stagnation include over-involvement of government in maize and sugar markets which keep prices high. In terms of manufacturing, it has marginal contribution to GDP, and Kenya has dropped 8 places in the rank of economic complexity of goods produced by the sector; in fact Kenya’s top exports are among the least complex.

Sanghi also mentioned that achieving the Vision 2030 GDP growth rate target of 7% has thus far been elusive with the country reaching 7% only four times since independence. In order for Kenya to grow more robustly and with less volatility, both savings and productivity have to increase, the performance of both manufacturing and agriculture need to improve, and public investment

How feasible is this? Well, with regard to savings, numerous factors negatively inform Kenyan saving habits, among which is the reality that there is no real social security net in Kenya. Yes government has a cash transfer system for the very vulnerable and poor but the lived reality for most Kenyans is that they cannot usually rely on government when they fall ill or lose a job. As a result, middle income pockets of Kenyans are under immense pressure for it is the middle and upper class that finance costs such as school fees, hospital bills and funerals for friends and relatives. Coupled with high dependency ratios linked to high levels of unemployment and underemployment, Kenya’s middle class has limited lived disposable income which of course makes saving very difficult. I have thus long held the view that the hype about the spending power of the African middle class is Panglossian.

In terms of productivity, the report itself makes the point that levels of productivity vary greatly between sectors and within sectors. Further, most Kenyans are employed in the informal sector which is characterised by low productivity due to a myriad of factors such as poor management skills, poor education levels and the lack of access to finance, technology and innovations. Therefore, the question on which government ought to be focussed is how to increase productivity, particularly in the informal sector. This is not necessarily synonymous with pushing for the formalisation of the informal sector but rather, supporting Kenyans trapped in the primarily low income informal sector by skilling up the population in informal labour, developing apprenticeship programs and loosening finance into the sector.

Finally, public investment must improve with a preponderance of development rather than recurrent expenditure. Public investment strategies must be devoid of corruption in order to ensure government spending is strategic and effective.

Nigeriahouseofreps

State(s) of crisis: sub-national government in Nigeria

In Nigeria’s March 2015 presidential election, the incumbent peacefully conceded defeat and transferred power to an opposition party for the first time since the end of military rule in 1999. Nigeria has the largest economy in Africa, generating about 20% of the continent’s total GDP, and transfers a far greater proportion of resources to sub-national government than any other country. Yet standards of governance remain extremely low, public services are among the worst in Africa and economic growth has exacerbated inequality rather than creating jobs. According to the National Bureau of Statistics, two out of three Nigerians live in poverty.

The federal system of governance in Nigeria is failing to provide the basic welfare for all citizens that the 1999 Constitution prescribes. On the first anniversary of the election victory of President Muhammadu Buhari, this Briefing Note examines the origins and purpose of the federation, state governments’ financial management and responsibilities, governors’ arbitrary power, and the need to increase internally generated state revenue. It suggests practicable reforms that could help change state governments from elected autocracies to agents of social and economic development.

SUMMARY

  • A federation for peace
  • Fiscal profligacy
  • The governor’s domain
  • Lagos: a state of exception?
  • Detached states
  • Sources

A federation for peace

Nigeria’s three-tier system of government – federal, state and local government area (LGA) – was born out of military rule. At independence in 1960, Nigeria had elected governments in its three regions – northern, western and eastern – and at federal level.1 The regions were autonomous and broadly self-sufficient, but prone to intense rivalry between their dominant ethnic groups: the Hausa-Fulani, Yoruba and Ibo, respectively. After two military coups and the eastern region’s failed bid for secession, which triggered the Biafran War (1967–70), Gen. Yakubu Gowon’s regime replaced the regions with 12 states. The purpose of this “military federalism”2 was to prevent Nigeria breaking apart.

In theory, by concentrating power and wealth centrally, the Federal Government could distribute resources to the states and balance the many ethnic, religious and other interest groups’ competing demands. Successive military rulers periodically created more states. By 1976, there were 19; two more were added in 1987, and a further 15 in 1996, as well as the Federal Capital Territory, which contained the national capital Abuja. The number of states has remained unaltered for two decades, but the creation of LGAs in 1979 established a third tier of government that has progressively expanded.

A federal structure, whose prime objective was to maintain security by curbing regional and ethnic influence, does not foster development. Despite receiving about half the national revenue – a sum of N2.7 trillion in 2014 (US$13.5 billion at current official exchange rate) – state governments fail to provide the services that could materially improve the lives of tens of millions of Nigerians. The 2015 United Nations Human Development Index ranked Nigeria 152nd out of 187 countries. State authorities are not accountable to citizens, state institutions are weak and corruption is endemic. The 774 LGAs – the most proximate form of government for most Nigerians – have all but ceased to function. Furthermore, groups armed by or linked to state governors have been responsible for the most deadly outbreaks of violence of the past decade: ethnic clashes in Plateau state, conflict in the Niger Delta and the Boko Haram insurgency.

Fiscal profligacy

The 1999 Constitution imposed by the outgoing military government, the fourth since independence, increased states’ responsibility to provide social services and infrastructure. Intended as an interim document, the constitution was deliberately vague about demarcation. A new constitution has never been forthcoming. Overlap and ambiguity regarding federal, state and LGA responsibilities persist, with intense debate and confusion about which tier of government is responsible for what. For example, responsibility for education is split across the three levels, but the collapse of primary and secondary schools nominally run by LGAs or states forced the Federal Government to intervene through the Universal Basic Education programme to reduce illiteracy.

Transparency in sub-national government is as lacking as clear definitions of responsibilities. No state government has issued audited accounts for a year more recent than 2013; Katsina’s most recent are for 2012. There is little public scrutiny of state revenues and expenditure. It is widely believed that many governors gain power through fraud or bribery and pack state assemblies with supporters who will not hold them to account.

The federal allocation is meant to supplement the revenue states generate from taxes on personal income, property and other sources. However, in more than three-quarters of states, the federal allocation provides more than 80% of total revenue. States’ internally generated revenue (IGR) falls well short of even covering personnel costs. Furthermore, IGR usually relies on sources that require the least tax effort such as PAYE – income tax automatically deducted at source from salaries. According to the National Bureau of Statistics, two-thirds of states make at least half their CapturetextboxIGR from this source.

Akwa Ibom, the state that produces the most oil, derives almost all of its N462 billion (US$2.3 billion) budget from the federal “handout”. It covers only a fraction of its recurrent costs with local revenue and routinely accrues substantial bank debts and salary arrears. The example may be extreme, but when receipts from the federal revenue pool in the first nine months of 2015 halved compared to the previous year, due to the collapse in global oil prices, most states rapidly became insolvent. One of Buhari’s first decisions as president was to authorise a bailout fund for 27 indebted states endowed with N338 billion (US$1.7 billion) of federal government funds – a sum substantially larger than the annual budget of the Ministry of Health or the budget for defence and the armed forces. In addition, the Debt Management Office converted N324 billion (US$1.6 billion) of state debt to long term bonds.

“If everyone in the states had budgeted correctly there would have been no need for this [bailout],” a former state finance commissioner told ARI. “Even when the oil price was high, virtually all the states were spending more than they earned”. Whether the bailout was to stave off a potential collapse of banks that had lent large sums to state governments or was politically motivated is unclear. But the finance commissioner regards the decision as a missed opportunity. “[Buhari] could have imposed conditions – revenue and spending targets – on the states before agreeing to bail out their debts and approve new money”. The Federal Government has in effect refunded the costs of state mismanagement and profligacy.

The governor’s domain

A governor’s character and intentions are the most important factors in determining a state government’s performance. This seldom works to the people’s advantage. According to Yusuf Tuggar, a candidate for the governorship of Bauchi in 2011:

“Many elected governors have no programme or blueprint at the start of their tenure and instead of working out a few priorities that the state can afford, they set up expensive projects which they pass on to the [Federal Government] to fund, or abandon them when the funding runs out. In my state, this involved roads and airports that we don’t need and for which some of the expenditure can be diverted into political funding.”
Misconceived or abandoned state-funded projects are found throughout the country, from Cross River’s grand plan to rival Dubai as a tourist attraction to a former governor of Jigawa’s scheme to turn his Sahelian state into an IT hub. The government of Katsina, Buhari’s home state in the far north-west, built a school in a different country – Niger.

State elections seldom hold anyone to account. Poor provision of health care, housing, education and infrastructure or lack of support for agriculture does not prevent the corrupt or ineffective from securing re-election. Electoral fraud is commonplace. “A governor is usually voted in because the political ‘godfather’ decided he should be,” explains Jibrin Ibrahim, professor of political science at Ahmadu Bello University in Zaria. The state administers LGA elections, which are typically either rigged or not held at all. “It’s very rare that a candidate from a party in opposition to the governor wins an LGA seat,” says Prof. Ibrahim.

Winning an election is an expensive business. Financial backers and supporters expect a payback within the maximum of two four-year terms a governor can serve. But the rewards are lucrative. By law, governors in many states receive their salary for life and keep perks from their time in office such as official houses, cars and furniture. Furthermore, many aspire to move further up the political ladder; for example, to a seat in the Federal Senate, where they can count on total remuneration of more than US$1.5 million a year. Short-term personal gain trumps concerted attempts at state management and development.

The marginal significance in most states of IGR further undermines representative government and accountability. State governments do not depend on the citizens they govern for revenue, so the citizens have little or no leverage. “As long as they receive a handout each month from the centre, governors can rig state election[s] and the constituents have no say in who governs them,” says Chidi Odinkalu, a senior lawyer and chair of the National Human Rights Commission. However, the oil price collapse is a warning against undue indifference among state governments. The Federal Government cannot afford repeated bailouts. According to the DFID-funded State Partnership for Accountability, Responsiveness and Capability (SPARC) programme:

“If oil were at US$20 a barrel, at 2014 budget levels only three states would be able to cover their recurrent costs with recurrent revenues: Lagos, because it generates substantial revenues internally and depends less on federal transfers; Kano, because of the amount the state receives in federal transfers due to the large number of local government areas; and Katsina, because the overhead and personnel costs are very low compared to other states”.

The nature of state governorship varies regionally. In the mainly Muslim north, where “cash and carry politics” is the norm according to one candidate in the recent state elections, imams and other religious leaders exert a powerful influence over state governments. The decision by almost all state governors in the north who took office in 1999 to adopt sharia law in the criminal code subordinated development objectives to religious observance. In the southern states, the political “godfathers” – former governors and their business backers – hold sway. Only in the south-west is there “a stronger culture of protecting the mandate of the electorate, so the popular pressure on the governors to perform is much higher than in most other parts of the country”, says Prof. Ibrahim. “But in general state governors are so powerful that they can choose to do whatever they want, which includes doing nothing.”
Improving governance is far from straightforward. A detailed study by SPARC of 10 states, rating each for governance systems and processes, found that Jigawa, in the far north, and Lagos had the greatest capacity to deliver realistic budgets, decentralise cash control, deliver improved procurement, account for LGA finances, manage staff for performance and
provide the public with better access to information.3 However, when Jigawa was advised to invest in corporate planning to improve its efficiency and quality of staffing, the state refused in favour of continuing to fund five emirate councils run by politically influential imams.

Lagos: a state of exception?

Lagos is frequently cited as setting the standard for improved state governance. It is the smallest by area but wealthiest state, home to Nigeria’s commercial capital, and has an abundance of well-qualified people. A decisive factor, however, in changing state administration was having its federal funding cut off in the early 2000s during a dispute between then President Olusegun Obasanjo and state governor Bola Tinubu, over Tinubu’s decision to create new LGAs in his domain. Shortage of funds forced the governor to assess what could be done to maximise the state’s IGR. But to raise tax revenues from various sources, including property, required a promise of benefits; and to make it sustainable those benefits had to be delivered to taxpayers. Federal funding resumed in 2007, but taxes still produce 60% of Lagos’s revenue. Its IGR, about N300 billion (US$1.5 billion) in 2014, is equivalent to the combined IGR of 32 of Nigeria’s 35 other states.4

Reliance on IGR made the Lagos state government more accountable to its electorate, who in turn became more aware of their right to judge its performance. Under Tinubu’s protégé and successor, Babatunde Fashola, crime was reduced, the environment improved, roads were built and the transport system expanded. Prompt action to contain a possible outbreak of Ebola in 2014 demonstrated governmental competence. Now that Fashola is a federal minister, many expect Nasir el-Rufai in Kaduna state, in the north-west, to earn the reputation as Nigeria’s most praiseworthy state governor. Elected in 2015, el-Rufai moved quickly to close the state’s commercial bank accounts; eliminate “ghost workers” from the payroll by introducing digital ID for the civil service; concentrate resources on infrastructure, transport and public services; and ensure that LGAs receive their correct share of funding.
While the marked improvement in the administration and revenue collection in Lagos state are commendable, admiration needs to be tempered. As a former state commissioner told ARI:

“Lagos could achieve far more. The state piled up huge debts to fund infrastructure on the wealthy islands, but we could have done better if more had been spent on housing and new towns on the mainland and the outer reaches of Lagos, which would have reduced congestion and created jobs. There was no emphasis on taking care of the less well-off. Lagos state since 1999 has done nothing for the under-privileged and low-income earners that make up about 90% of the population”.

The nature of politics and corruption has not altered. The same party – the Action Congress of Nigeria, now part of the All Progressives Congress national coalition – has controlled Lagos since 1999, which ensures that political patronage strongly influences investment decisions. Contract inflation is rife and transparency poor. As one donor official put it, “Lagos looks shiny from a distance, but not when you look closely”.

Detached states

Government in Nigeria “is detached from its people at every level of the federation”, says Chidi Odinkalu. The restoration of elected civilian government in 1999 has done little to invigorate state or local governments. The failure to promote transparent, accountable sub-national government as the engine for local development is a result of weak institutional capacity and lack of political will. Although most states appear to have been set up to fail economically, demands to create more continue. As a Nigerian political commentator put it to ARI, “people on a gravy train don’t ask to stop the train”.

Nigeria’s crude oil earnings declined by 40% in 2015. Low oil prices mean that states cannot rely on the Federal Accounts Allocation Committee to increase their diminished monthly payments. A process of “structural adjustment” is required. African Development Bank country director for Nigeria Ousmane Dore told ARI “we are very worried about state governments’ finances”.5 Some states will try to borrow their way out of difficulty rather than focusing on what, according to Dore, is “the main problem”: the lack of IGR. In the short term, the Federal Government needs to be clear that it will not reward profligacy with further bailouts. This would force state governors to live within their means, controlling expenditure and augmenting income by raising revenues, and providing services in return.

In the longer term, solutions abound that look effective and straightforward on paper. The federal allocation formula could be altered to reward better governance. The number of states could be reduced to create more economically sustainable units. The overlap in responsibilities between tiers of government could be eliminated. However, many such measures would require constitutional amendments that are extremely unlikely or well-nigh impossible to implement within Nigeria’s political economy for other reasons.

Less ambitious reforms may be possible. The prudent guidelines on government spending and debt that the Fiscal Responsibility Act requires are only binding on the Federal Government. The same limits and guidelines should apply to state governments to prevent a recurrence of the recent insolvency and bailout. The Debt Management Office should also have increased powers over state government borrowing. Stricter requirements for disclosure of revenue and spending, and the imposition of conditions, would improve state financial management; as would timely, independent audits of state-owned enterprises and the gradual privatisation of such companies. A new initiative, BudgIT (yourbudgit.com), is already making headway in providing the public with budgetary information that enables citizens to monitor the performance of their elected representatives.

The 1999 Constitution Alteration Bill passed by the National Assembly in 2015 included a provision securing the financial autonomy of state assemblies. This would have strengthened the authority of state legislatures over the executive, but other provisions in the Bill led to it being blocked by the outgoing president, Goodluck Jonathan. Legislation is urgently required to ensure that state assemblies cease to be mere appendages of governors.

The Independent National Electoral Commission (INEC) won praise for its conduct of the 2015 presidential election. Biometric identification was used effectively and the commission succeeded in maintaining its independence and integrity under the most testing circumstances. More credible state government elections would make it harder for state governors and their “godfathers” to secure power by fraudulent means.

The abolition of the state electoral commissions appointed by governors would be a step towards improving the autonomy of LGAs. Prof. Ibrahim, a member of the late president Yar’Adua’s Electoral Reform Commission, told ARI that “in every part of the country the commission visited, everyone wanted the LGAs to be elected fairly and democratically because that is the branch of government closest to everyone’s lives”. The task of organising LGA elections should be assigned to INEC. If elected, as opposed to selected, LGAs could be held to account by local voters, demand their federal allocation from state governments and do what they are mandated to do: deliver basic services at grassroots level.
Nigeria’s states are in crisis. But modest improvements in IGR, financial management, conduct of elections, the autonomy of state assemblies and LGAs, and service delivery are readily achievable and would improve the lives of millions of Nigerians.

SOURCES

  1. A fourth region, Mid-Western, was created shortly before the outbreak of the 1967-70 civil war
  2. Rotimi Suberu, “Federalism and Ethnic Conflict in Nigeria”, United States Institute of Peace Press, 2001
  3. SPARC also set up a state peer-review mechanism under the Nigerian Governors’ Forum (NGF), which reviewed Anambra and Ekiti states before the NGF suspended its meetings in 2013. Independent reviewers found that neither state had held LGA elections or raised adequate IGR, but rated them quite highly otherwise
  4. See BudgIT, “The State of States”, 2015, p.63
  5. The states have received substantial loans from the AfDB and World Bank