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Public Financial Management: Meaning, Importance And Methods

CHAPTER ONE

PUBLIC FINANCIAL MANAGEMENT: MEANING, IMPORTANCE AND METHODS

BY

UGWUANYI, BARTHOLOMEW IKECHUKWU Department of Public Administration

Institute of Management and Technology, (IMT) [email protected]

Tel: 08065332472

INTRODUCTION In order to understand the subject matter of public finance and its management, we need to have a good understanding of the basic issues involved. It is in an attempt to provide and afford students and the general public this opportunity that we will here, attempt to explain some of the fundamental issues. In this direction and, roughly in this order, we shall explain the following: 1. Public finance and public financial management, 2. Government income and expenditure 3. Government budget 4. Basic financial management policies 5. Taxation

1. Public Finance and Public Financial Management: i) Public Finance: The meaning and Essence: Public finance, as opposed to private finance, concerns essentially the sourcing and application of funds by government or its agencies. Accordingly, public financial management entails all the complex processes and methods of using the machinery of government to raise and expend public fund (Shaibu, 2003). It refers too to the measures put in place to control public fund (Ola and Ofiong, 2008). It is also conceived as

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Fundamentals of Public Financial Management: a Book of Readings

being concerned with how public fund is provided and its judicious use to enhance national economic growth and development. Basically, the subject matter of public financial management concerns the acquisition and disposal of financial resources by the government and its agencies through proper management and control. In the context of the foregoing definitions of public financial management, its study then entails the study of the complexity of problems that centre around the revenue generation and expenditure processes and the repercussions of different monetary and fiscal policies adopted by government. In essence, the study of public financial management concerns the questions of choice of these policies and their operations. In all, the study of the public financial management is essentially concerned with the fundamental issues of how public fund is raised, its expenditure and the implications on the economic situations of the individuals, institutions and the national economy generally.

ii) The need for the study of public financial management: People are increasingly becoming interested in how government gets its finance and how it expends it. This is because their lives are, in fundamental ways, affected by government’s economic and financial policies like monetary and fiscal policies. For instance policies or decisions in respect of workers’ salaries, the price of petroleum, taxation, debt management, government revenue and expenditure sources and patterns, all effect in varying degrees, individual citizens, institutions and the economy generally. For this, there is the increasing need and interest in studying and understanding public finance and its management by academics and practitioners alike. Again, people generally in contemporary times are increasingly getting interested in governance and public administration and naturally are interested in public finance that lubricates and greases the administrative machinery of government. The need for the study of public financial management also becomes more compelling in consideration of the fact that many of today’s governance problems border on how to raise and allocate public fund effectively, how to maintain accurate account of public fund, ensure financial discipline and adherence to due process in expending public fund.

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2. Government Revenue and Expenditure: a. Government Revenue: Government revenue can be defined as income generated by the public sector (government) from various services rendered. The major sources of revenue for government include: Profit from oil sales Import duties Export duties Personal income tax Company income tax Stamp duties Capital gains tax Value added tax Income from government investment Borrowing (loans). It is necessary to note that government revenue is of too types – non-tax revenue and tax revenue. Non-tax revenue includes income from public undertakings, fees, fines, forfeitures property inherited by government, gifts, grants and indemnities paid to government. Tax revenue include personal income tax, company tax etc (Nwizu, 2002). Tax revenue is undoubtedly the most important and largest single source of government revenue.

It is worthy to note that in Nigeria, the major government revenue source is from oil and gas. The income from tax in Nigeria, for reasons of tax evasion and avoidance, is usually not substantial. The government perhaps too for having a more reliable revenue source from the petroleum sector appear to have been lax on developing an effective system of taxation. For the ineffectiveness of the tax system, revenue from the oil sector since 1970 has been contributing between 70 – 76 percent of the federally collected revenue. (a more detailed discussion on taxation will be made at the later part of this chapter).

b. Government Expenditure: As the need of the society increases, government expenditure, in similar manner has continued to increase. Indeed, government continuously incure expenses in the

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course of providing infrastructural facilities and rendering other important social, economic and political services. Broadly, government incurs expenditures on the following heads:

a. Administration of law and order: Expenses are here made on police, law courts, prisons, civil services, government agencies, foreign affairs etc.

b. Defence: Government here expends money on the Army, Navy and the Air Force.

c. Social Amenities: Here government incurs expenditure on the course of providing services in the areas of Education, Health, Housing, Social Welfare, Environment and Recreation etc.

d. Economic Development: In this area, government expends money on agriculture, mining, power and electricity, oil and gas, commerce and industry, transport and communications etc. e. Miscellaneous: Here expenses are made in the areas of National Debt interest payment, grant to local government, social security, pension payment, aids to other countries etc. These two basic aspects of public finance, which are revenue and expenditure centre around and are captured in public or government budget at any point in time.

3. Government Budget: (i) Definition of Budget: A budget is a statement about how government plans to obtain income and the ways it plans to spend such income during a particular financial year. It is, in other words, described as a financial plan embodying an estimate of proposed expenditure for a given period (usually a year) and proposed means of financing them (Ezeani, 2006). In essence, it is through the budget that government forecasts and plans its revenue and expenditure for the coming year. For proper financial managements it is necessary that the budget is comprehensively prepared and ready for execution before the commencement of the fiscal year for which it is meant. Usually, budget estimates are prepared on the basis of sector, subsector, major heads and subheads (Nwizu, 2002). There are two aspects of budget framework:

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(1) Recurrent aspect: This includes recurrent revenue and recurrent expenditure. This aspect consists of items for the smooth running of government and of consumption. Items usually found in this aspect include salaries; purchase of stationery, maintenance of infrastructure etc. (2) The capital aspect: This aspect shows capital revenue and capital expenditure items.

Budget is the most important decision making process in public institutions and serves as a method of control by limiting the resources to be used by a government department, and by establishing standards against which actual performance are measured and compared (Bedeien, 1986:572).

(ii) Categories of Budget: Budgets are usually categorized into three as follows: 1. Balanced Budget: A budget is balanced if the revenue projection and expected expenditure in a budget are presumed equal. Generally, a balanced budget portrays thrift and astuteness in public financial management (Shaibu, 2003).

2. Surplus Budget: A budget is surplus where there is a presumed excess of revenue projection over estimated expenditure.

3. Deficit Budget: A budget is termed deficit if the expenditure in a budget out weighs the revenue projection.

(iii) The Budgetary Process: The budgetary process usually involves four distinct activities (Ezeani, 2006). These processes are usually strictly observed in democratic government. The four distinct stages are:

First Stage: Budget Preparation: At this stage, the major activities usually include articulation of government objectives for the fiscal year, issuance of call circulars to the ministries, departments and agencies to submit their proposals of revenue and expenditures, collection of the proposals by the budget ministry,

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defence of the proposal by the accounting officers of the ministries, departments and agencies before the inter-ministerial committee, preparations of the draft estimate by the federal executive council and sending of same to the National Assembly as appropriation bill. The basis of government budget preparation is the financial year which in Nigeria runs between 1st April to 31st March, (Nwizu, 2002).

Second Stage: Budget Authorization: At this stage, the budget proposal is presented to the National Assembly made up of the House of Representatives and the House of Senate as is the case in Nigeria. The National Assembly considers the appropriation bill for amendments and adoption and return to the president for his assent. In Nigeria, the authorization is done in joint sitting of the two Houses with the president of senate presiding. This is necessary because unless the peoples’ representatives approve of a particular expenditure, such expenditure cannot be incurred. In the House, a set of procedural steps are followed to introduce the budget proposals and this procedure ends when the budget is approved by the legislature.

Third Stage: Budget Execution: This is the implementation stage of the budget. At this stage, finance is disbursed to the ministries, departments and agencies according to the budget approved by the Parliament to finance expenditures as authorized. Indeed, a budget is of no use unless it is enforced and its enforcement or execution is the responsibility of the executive. Execution of budget has to do with the control of expenditure within the terms of the budget and the collection of revenue.

Fourth Stage: Budget Monitoring: This is the audit stage and the review stage, which constitutionally requires a post – mortem evaluation of government accounts by the Auditor-General of the federation. The Auditor General submits his report to the National Assembly. The essence of this control in the budgetary stage is to prevent fraud and to ensure that there is a legislative authority for all payments being made or expenditure being incurred (National Open

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University, 2013). It’s worthy to note that these budget processes as they obtain at the federal level are roughly the same at the state and local government levels.

(iv) Basic characteristics of budget: All budgets share similar characteristic which include the following: i. They are stated in numerical terms ii. They cover specific time period, usually a year. iii. They show managerial commitments as managers agree to utilize resources as allocated. iv. They are approved in advance by higher authorities. v. They can be altered only under previously agreed circumstances. vi. It is usually a political instrument that allocates scarce resources among the social and economic needs of the nation. vii. It is an administrative or managerial instrument that specifies the ways and means of providing programmes and services.

viii. Budget establishes the cost of programmes and criteria by which these programmes are evaluated for efficiency and effectiveness. ix. Budget allows for review or evaluation. x. It is an accounting system that holds government official responsible for the expenditure of funds with which they have been entrusted with (Shaibu, 2003).

(v) Objectives of government budget: Njemanze (2002) identified the following as the basic objectives of budget: i. To provide financial plan of action for the government. ii. To give legal authority for incurring expenditure and generating

revenue. iii. To provide reference point for decision and policy making

process. iv. To minimize waste by exerting control over revenue and

expenditure.

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v. To enable compliance with constitutional provision on budgeting and financial control. Pandey (2005) adds that budget as a management tool by the government is very necessary as it: (1) Compels plans to take place. (2) Helps to co-ordinate and integrate all efforts to achieve objectives (3) Facilitates control by providing definite expectations (4) Ensures evaluation of past expenditure and income patterns and comparison with present and future ones (5) Improves the quality of communication (6) Enhances optimum use of resources (7) leads to increased productivity (8) Leads to general efficiency in the conduct of government business.

(vi) Problems of Government Budgeting in Nigeria1. Conscious error arising from corrupt practices: There are cases where the actual or original figures in the published documents differ from those approved by the legislature and accepted by the president or the governor (Shaibu, 2003). In this scenario, some figures are increased while others are reduced contrary to what is appropriated for the particular items. This is done to satisfy secret clients who lobbied for higher appropriation. And since the total figures sum up to the amount legally appropriated, such errors are not usually noticed before the execution of the budget. This is, indeed, a very serious problem of government budgeting in Nigeria.

2. Problem of getting adequate and reliable data: A budget is a financial plan which relies heavily on data. In Nigeria, however, getting adequate and reliable data for budget preparation is problematic. This is mainly as a result of lack of historical base, financial resources and the technical equipment used for data collection and processing (Shaibu, 2003). Deliberate act of giving wrong information for corrupt reasons is equally a problem for budgeting in Nigeria.

3. Over estimation of figure: Most ministries, departments and agencies over estimate their budget figures particularly on the aspects of expenditures. This is usually done for corrupt and selfish

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reasons. Sometimes too expected incomes are out stated. This is usually in an attempt to create an impression of good performance in the area of revenue generation for the government.

4. Some Basic Financial Management Policies: We shall here discuss the two basic financial management policies, which are the monetary policy and the fiscal policy.

(i) Monetary Policy: Monetary policy is the regulation of money supply to achieve specific objective(s) (Shaibu, 2003). It is, indeed, a programme of action undertaken by the monetary authorities to control and regulate the supply of money and the flow of credit into the economic system with a view to achieving predetermined economic goals (Owivedi, 2005). It is perceived too as being concerned with discretionary controls of money supply by the monetary authorities in order to achieve desired economic goals. Formulating and implementing the monetary policy is usually the responsibility of the monetary authorities like the Central Bank in Nigeria. The need for monetary policy is based on the fact that each supply of money could lead to an excess demand for goods and services leading to rise in prices and ultimately causing inflation. On the other hand, an inadequate supply of money could lead to stagnation and depression in the economy, hence retarding growth and development. In any of these circumstances, central monetary authority like the Central Bank of Nigeria (CBN) tries to keep the money supply growing in an appropriate rate to ensure sustainable

economic growth and to maintain internal and external stability. Basic among the measures usually adopted by the monetary authorities to maintain the stability include the use of reserve requirements (the cash reserve and the liquidity ratio requirements), the regulation of credit supply by banks, the use of open market operations through conducting of sales and purchases of government securities, manipulation of the discount rate (prime rate), the interest

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rate and the exchange rate. These measures are called quantitative tools of monetary policies.

Specifically, the objectives of monetary policy are to: (1) Check inflation (2) Sustain exchange rate stability (3) Promote output and employment growth rate (4) Enhance overall efficiency of the economy.

(ii) Fiscal Policy: Fiscal policy is the manipulation of government finances by raising or lowering taxes or levels of spending to promote economic stability and growth (Shafritz and Russel, 2005). It is also conceived as the use of government and taxation policies to influence the level of economic activity, inflation and economic growth. From these definitions of fiscal policy, it could be deduced that the two major instruments of fiscal policy are (1) Taxation and, (2) Government expenditure. Economists call this type of fiscal policy functional finance. Functional in the sense that it serves the function of manipulating government income and expenditure in such a way that specific government macro-economic problems are solved.

Specifically, through fiscal policies government can: (1) Obtain higher revenue through taxation. (2) Equity in income distribution (3) Increase in investment in the economy (4) Price stability (5) Favourable balance of payments and; (6) Exchange rate stability.

Generally, both the monetary and fiscal policies are necessary to ensure high standard of living, income distribution or redistribution, efficient resource allocation, public accountability, optimal quantity of money in circulation, control of inflation, equitable and efficient tax system, effective and efficient means of raising revenue for the government etc.

5. Taxation: (i) The meaning of taxation: Taxation is the compulsory payment or levy imposed via legislations on the income of the residents. It is also defined as the legal demand by the government for its citizens to pay money on income, goods and services. The basic objectives of taxation are: (i) To collect sufficient revenue to

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meet government expenditure (ii) To reduce the inequalities of income and wealth (iii) To control and influence consumption and production pattern (iv) To promote industrial development through various tax exemptions particularly for infant industries (v) To raise the productive capacity of the economy by raising the will and power to save and invest or raising the rate of capital accumulation (Nwizu, 2002).

The most important source of government revenue in most countries of the world is taxation. It is, as such, a major base of financial management. In Nigeria, however, the oil and gas sector, for sometime now, have contributed in greater measures, to the revenue base of the nation. This is a result of the fact that in Nigeria, tax evasion and avoidance is very high among the ordinary citizens, those at the corridors of power and the corporate bodies. Perhaps too, the inability of the government to institute effective taxation system enhances or encourages the high incidence of tax evasion and avoidance.

(ii) Types of taxes: There are too major types of taxes. These are: A. Direct taxation: This is the tax paid by someone directly from his or her income. Such person alone suffers the loss of revenue involved and cannot transfer the loss so incurred to any other persons. Examples of direct tax are: i. Personal income tax ii. Company income tax (taxes on profit) iii. Capital gains tax (taxes on assets held for more than one year). iv. Stamp duties v. Motor vehicle duties. Forms of Direct Tax: There are three major forms of direct tax namely: a. Progressive Tax: In this form of taxation, the higher the tax base, the higher the rate of payment. In this case, the tax rate is graduated progressively as income increases. In essence, a progressive tax takes more and more proportion of income as income rises. Such tax tends to reduce economic inequality among tax payers (Shaibu, 203). Progressive tax equally increases aggregate demand.

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It is equally non-inflationary and yields more revenue to government (Nigerian Open University, 2013). Its major demerit, however, lies in the fact that those who work hard to acquire wealth are taxed more while those who are lazy are taxed less.

b. Regressive tax: Here the tax rate diminishes as income level/tax base increases. This is, indeed the opposite of progressive tax. Regressive tax creates incentives to work but reduces government revenues and widens inequality of income with its burden higher on the poor and lower on the rich sections of the society. Example of regressive tax is poll tax where tax payers pay flat amount (Nwizu, 2002).

c. Proportional tax: This is the type of tax that takes no cognizance of the tax base or income. This type of tax even though is deemed impartial, is, however, seen to be against social equity and does not yield optimal revenue to government.

Figure 1.1: Graphical expression of the behaviour of the forms of direct taxes (Progressive tax, Proportional tax and Regressive tax)

1.

A sectoral ceiling: During the indigenization exercise in Nigeria, for example, loan for purchase of shares were disregarded for the purpose of computing setoral allocation of reserve requirement and in 1986/87, lending in excess of credit ceiling was approved for the favoured sectors like agricultural production and export.

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Regressive tax

Progressive tax

Proportional tax

Income (in N)

Tax rate (%)


Other qualitative instruments of Monetary Policies are:

(i) Sectoral Allocation of Credit: This is a situation where the Central Banks divide economic activities into sectors for the purpose of sectoral credit allocation based upon the relative importance of each sector to the nation’s economic development. Quarrying, Manufacturing and Real Estate etc. are given specific percentages, with annual modifications, allocated based on national priorities. These activities were for sometimes classified as “productive” and “unproductive”, later as preferred and less preferred sector.

(ii) Interest Rate Ceiling: Interest rate may be controlled to favour particular sectors. For a long time, the preferred sectors enjoyed concessionary interest to create incentives for borrowing and attract more investors into such sectors. During the Structural Adjustment Programme (SAP), era in Nigeria, interest rate has been deregulated, regulated and now deregulated.

(iii) Indigenization of Credit: selective credit control may specifically be such that a particular percentage of bank finance should go to wholly indigenous enterprises.

(iv) Loans to Rural Borrowers: This is a way of improving investment in the rural areas. The control may specify that a specified percentage of deposit collected in the rural area be invested in such area.

(v) Refinancing Facilities : Central Bank can provide stable line of re-financing through loans, advances or discounting, especially by discounting bills that come from high priority sectors like the produce bill of the 1900’s and the export simulation finance.

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REFERENCES

Bedeian, A. (1986): Management; Chicago, The Dryden Press. National Open University (2003): “BHM 779: Public Financial Management”

Lagos. Pandey, I.M. (2005): Financial Management. New Delhi: Vikas Publishing

House Ltd. Kiragu, K. (2002): “Public Financial Management” In Adamolekun (ed.)

Public Administration in Africa Ibadan: Spectrum Books Ltd. Shaibu, S. (2003): Public Finance: An Indepth Analysis of Fiscal and Monetary

Theories and Policies. Enugu: John Jacob Publishers Ltd. Dwivedi, D.N. (2005): Managerial Economics (6th Edition) New Delhi: Vikas

Publishing House Ltd. Ola, R. and Offiong, D. (2008): Public Financial Management in Nigeria.

Lagos: AMFITOP Books. Francis O. (2006): Nigerian Local Government Finance: A Political Approach.

Enugu: John Jacob Classic Publishers Ltd. Anyanwu, C. (1997): Nigerian Public Finance. Enugu: Joane Educational

Publishers Ltd. Shafritz, J and Russel, E. ((2005): Introduction to Public Financial

Management. (Fourth Edition) New York: PEARSON Longman. Ezeani, E.O. (2006): Fundamentals of Public Administration. Enugu: Zik-

Chuks Publishers.

Nwizu, G. (2002): Studies in Modern Public Administration. Enugu: N GIB Publishers Ltd.

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CHAPTER TWO

PUBLIC REVENUE

BY

ESIAGU LILIAN NKECHISenior Lecture,

Department of Public Administration Federal Polytechnic Nekede, Owerri.

Public revenue is the name used to describe all the expected income by government within a specific budget period. Public revenue can be seen as the money generated for the interest of the economic growth and development of country. However, government is in charge of public revenue and welfare and as such, it has the duty to collect such revenue from the public. Osubor (2006) views public revenue as the income realized by the government for the purpose of financing public administration. Public revenue may be realized from taxation, of the various entities and activities within the country or from non-tax sources such as revenue from government owned corporation public wealth funds, grants etc.Sources of Public RevenueIn Nigeria it is difficult to give a complete list of all the sources of public revenue, but for easy understanding. The important ones are divided into two:1. Taxation revenue2. Non tax revenue Taxation or Tax Revenue

In Nigeria and beyond none of us can afford to live beyond our income for long and this is true of government as it is of people. However, individuals have to see what their income is likely to be and then plan their expenditures within that limit. In order for government to do that the following must be considered; a. To estimate the expenditure for the forth-coming year.

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b. To consider ways and means of raising the income necessary to meet it. Some of the income needed to come from regular source of income such as interest on investments, and fees for service but far, the bulk of it come from various types of taxes based on the above.Tax Revenue: can be defined as a compulsory levy payable by an economic unit to the government without nay corresponding entitlement to receive a definite and direct quit-pro-quo from the government (Bhaha, 2006).In Chukwudire (1996) Taxation is defined as a compulsory contribution from individual to government to defray the expenses incurred in the common interest of all without reference to special benefit conferred.According to Obiagbaoso (2008) tax is compulsory transfer of resources from private to the public sector, which must be levied on the bases of well established criteria of equity, certainty, convenience, and economy and productivity.Taxation represents a compulsory levy which is periodically imposed on individual and business by, and paid of the government. Every tax policy has a base and a rate.Tax Base Is the object which is taxed E. g. income, property, profit etc Tax base is the legal description of the object with reference to which the tax is payable. For instance, the base of excise duty is production, processing of specific goods; the base of an income tax is the income of the individual, this have time dimension (annual basis)Tax Rate Is the proportion or percentage of a tax base. The benefit received by the tax payer from government are not based upon their being tax payer. Tax rate is the proportion or a percentage of tax on the base. For instance; 20% on income 10% on the property value or 5% of the cost of asset. Every tax base must have a tax rate and like the tax base, a tax rate must have time frame.Tax Avoidance and Evasion Involves attempts by the tax payer to reduce the amount of tax payable by exploiting the problem in the tax laws and policy of the country. It is more serious because the expected tax payer has the capacity to pay tax but intentionally refuses to carry out this civic duty.Classification of Taxes

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Taxation revenue can be classified according to Irwin (1953) into three sections, namely:1. Taxes on income and expenditure: This covers all those taxes which are levied on receipts of income or expenditure such as corporation tax, income tax interest tax, expenditure tax etc. 2. Taxes on property and capital transaction: this covers taxes on specific forms of wealth and its transfers such as estate duty lift tax, land revenue stamps and registration fees. 3. Taxes on commodities and service: this covers production, scale, purchase, transport, storage, consumption of goods and services.Principles of Taxation1. Neutrality is a principle of taxation which states that a good tax does not unduly interfere with the normal market force of demand and supply as they affect goods and service in other words people is attitude towards working saving and investing, is not so much affected by the tax regime in particular country.2. Clarity and Certainty Mean that each tax payer should determine her or his tax obligation clearly and with certainty. In other to carryout this he or she must have adequate information of his tax incidence and exemptions.3. Equality and Equity Means that a good tax should be fair between individual.4. Administration Efficiency or Economy: A good tax system cost relatively little to collect. Put differently, a good tax is one which is economical to collect; its cost of collection form a very small fraction of the revenue levied from it.5. Flexibility: A good tax should be easily modified or adopted to suit changing situations.6. A good tax system must recognize that tax payer have some basic rights. He is expected to pay his tax but to undergo harassment. 7. Convenience: A good tax should be imposed and collected at a time most convenient for the tax payer.Reasons for introduction of Taxation

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To Combat Inflation: To remedy inflation the government would increase direct taxes without increasing its expenditure thereby reducing the amount that consumer have for spending e.g increase in personal income tax would reduce people disposable income. It will help to reduce the amount of money in circulation thereby remedying inflationary pressure within the economy. To regulate of reduce the production and consumption of commodities which are considered harmful or luxurious. To reduce or discourage consumption of certain goods or commodities by the public which have harmful effect, government usually imposes heavy taxes on them leading to higher selling prices. To Protect Infant Industries: Infant industries are firms in developing stage in the production of goods and services which cannot compete effectively with the established foreign industries. To protect them from unfair competition, the government imposes high rate or duty on importation of similar goods to those produced by the infant industries. This increases the prices of imported goods thereby making them less competitive with the goods produced by infant industries. To raise money or revenue to meet government expenditure: government usually requires money from the provision of essential services and also for financing of capital projects the essential services include and maintenance law and order, defense, the administration of justice, education health, and transport, the above are financed tax revenue. To Redistricted Income Wealth: Tax enables government to distinguish between objectives of resource allocation, income distribution and economic stability. This means that taxation should be based on ability to pay (payer), which is progressive in nature so that the burden of taxation ought to be heavier for the rich then the poor more. To simulate recovery from trade depression or to reverse a deflationary trend during trade depression aggregate spending is low and this leads to high level of employment this might make the government to decrease direct tax thereby increasing people disposable income and subsequently leading to rise in demand for goods and service thereby generating increase production and employment.

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To manage the economic growth and development of a country: Taxation is considered while planning for saving and investments by any government as such a powerful fiscal weapon to plan and direct the economy.

Non Tax RevenueThis is general name used to describe revenue raised from all the non tax sources of revenue other than borrowing.Obiagbaso (2008), outlines the following: Currency and coinage activities: in this era of fiduciary issues, the government makes a lot of profit from it currency and coinage operation.Fees from economics services which are also called user charges these are commercial revenue arising from the production/sales of economic goods whose beneficiaries can be delineated e.g fertilizer, improved seedlings etc in agro allied industry, returns from mass transit (transport) operation as well as fees from mines and communication telephones and telex services.Interest-profit and dividends from services and supplies and other public sector undertakings;Fees from social and community services, such as education, health, housing and broadcasting;Administrative revenue arising from the allocation and general administrative function of government; these include license fees, permits, fines, police, prisons and similar operations as well special assignments.

Grant and loans from national international and other agencies; this are called non quid pro-quo receipts. It is possible for the federal government to give grants to state and local governments under it for a purpose of e.g road drainage, irrigation, a forestation, erosion control etc.Loans and Grants from Individuals institutions and other GovernmentsAnother important source of government revenue or public revenue is loans or what we see as deficit financing means in excess of pubic revenue. The excess may be met by borrowing from the markets,

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borrowing institutions and administration or from abroad or grants in the case of borrowing abroad there cannot be any compulsion for the lenders but in the case of internal borrowing the government may force various individuals co-operations and other institutions to lend to it at rate much lower than would be the case, otherwise, when the government spends the additional funds to created. The aggregated demand increased and prices are pushed up. The government purchases always a part of resources and the market is left with smaller supplies. In other words, the government through the use of printing press, taxes away some resources of the market just as it could tax them away directly (Davis, 1980).Why Government Needs Loan/Borrowing - To bridge the gap between tax revenue and expenditure: when government revenue all short of expenditure (budget deficit) government has to go for loan or borrow to fill in the gap especially in a period of severe unemployment and depression. The importance is to bring abut increased output and great economic stability by lessening the severity of expression, which if left unchecked may create unfavourable political situation. - To settle outstanding debt that is due for repayment. This is called funding operation. It is process of converting short-term debt is called funding operation. It process of converting short-term to long-term debts.- To finance emergency situations like war and natural disaster. In Nigeria the Federal Government borrowed to finance the civil war of 1967 to 1970.- To finance, huge capital project majority of government projects are capital intensive and cannot be financed from recurrent revenue a lone. In this case the government will have no option than to borrow/loan to finance such projects. Sometimes these project when completed provide enough revenue to repay the load and meet running cost. Example, the Lagos-Ibadan expressway was financed by a loan from World Bank and Ajaokuta steel complex was financed by loans from Paris club.- Higher Debt Interest Payment: as borrowing increase, the government has to pay higher interest rate to those who hold bonds. (Lend government money). In some circumstances, high borrowing can push up interest rate because markets are nervous about

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government ability to repay. This means they have to pay even higher interest rate cost.- The interest obligation necessitates higher taxes for the citizens: this may result in a transfer of purchasing power form the lower to the higher income group against the accepted norm of equality in income distribution.- Crowding out: A classical monetarist argument in that high level of government borrowing cause crowing out. What they mean is that the government borrow from the private sector which have less money to spend and invest. Therefore although government spending increases private sector falls and there is no boost to the economy.

However, this is unlikely to apply in a recession because in the recession private sector saving is rising. The government is spending to offset the rise in private sector savings.1. It might attract full employment, as any increase in government expenditure not offset by equivalent decline in private spending will lead to government assuming the responsibility for engineering economic condition that make less flotation and greater stability. 2. It might lead to increase in government expenditure beyond the level regarded by the society as optimum. Government may become more complacent and wastage may result from inefficient operation. Beside, the accumulation of debts may reach a point where the government cannot meet is obligation, without serious diversion of resources for productive sector. If default arises, further borrowing becomes deficient. The resulting loss of credibility and confidence in the government will impair economic development through dampening business enthusiasms towards the future.

REFERENCES

Anyanwu, C.J. (1997), Nigeria Public Finance, Onitsha: Yoanee Educational Publishers limited.

Bhaha, H.L (2006) “Public Finance” Vikas: Publishing House. Chukwudire, P.O (1996) The Theory of Taxation, Gaski: Educational

publishers.

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Davis, D.G (1980) Measurement of Tax progressivty, American EconomicReview.

Irwin, P.C (1953) The Public Finance, New York: “Richard D. Irwin publishersObiagbaoso, G.C (2008) Principles and practice of public finance and

Budgeting in Nigeria, Abuja: pearl co-operation ventures limited. Osubor, J.U (2006) Institutional Finance, Owerri: Joag International Associate.

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CHAPTER THREE

TAX MANAGEMENT AND FISCAL POLICY

BY

ONYEJESI EKENE H.Lecturer,

Department of Accountancy,OSISATECH Polytechnic, Enugu

INTRODUCTION The issue and impact of taxation should be seen as highly

important. In that, every country has a sovereign right to request its citizens to support the government in raising funds for financing government expenditures for the same citizens.

Such supports are always raised from taxable portion of the income or profit from property, transactions or consumption of such individuals.

Hence, tax is a statutory change on individuals, companies, properties, and goods and services by government in return for the provision of social services. These are represented by personal income tax, company income tax, capital gains tax, capital transfer tax, value added tax and withholding tax. Education Tax is an additional charge (2%) on companies’ assessable profit to supplement government funding of educational sector.

DEFINITIONS OF TAX

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Tax is the most important source of government revenue. Therefore, it is defined as follows:Tax is a levy which a government imposes on the income of the citizens of a state for which the government makes no direct benefits to the tax year. Example; the government does not build a hospital for you because you paid your taxes. Tax is a compulsory levy imposed upon taxable persons and their consumptions by the government of any nation. Tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without reference to social benefits conferred. Tax can also be defined as a compulsory contribution levied by a nation on the employers, employees, and self employee individuals in order to finance government expenditures.

Generally, tax is a compulsory levy imposed on the incomes of taxable persons and their consumption and profits of businesses by the government of a country in order to raise revenue for carrying out the social, economic and political functions of the government.

NATURE OF TAXATIONSince tax is the most important source of revenue to

government, it simply means that tax payment by any taxable citizen is not a matter of choice; rather the payment is compulsory for all the taxable citizens of any country.

That is to say that as far as any adult citizen earns income such income or profit has to be taxed whether the taxpayer has enjoyed any related benefit or not, unless the income or profit has been legally exempted.

HISTORY OF NIGERIAN TAX SYSTEM The history of taxation in Nigeria dates back to the pre-colonial era. Before the colonization of the different entities which were later amalgamated under the name Nigeria. There were different systems of taxation existing in the forms of compulsory services, contribution of goods, money, Labour etc. amongst the various kingdoms, ethnic groups and tribes controlled by the Obas, Emirs, Ezes, Attahs, Ohinoyis and Amanyanabos, in order to sustain the monarchs. The traditional rulers imposed taxes in one form or the other on their subjects.

Nigerian taxation in its present form is traced to the establishment of a British Colony in Lagos on August 6,1861 and

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subsequent amalgamation of the Southern and Northern protectorates of Nigeria in 1914.

In order to achieve uniformity in the system of taxation throughout the geographical entity called Nigeria, the colonial government set up the Raisman commission in 1958. This commission recommended the introduction of uniform Basic income tax principles for application in the entire regions of Nigeria. The recommendation was accepted by Government, which incorporated same into the 1960 constitution of the Federal Republic of Nigeria. This led to the promulgation of the income tax management Act, 1961. Hence, the year 1961 was dated as a year of uniform tax Law in Nigerian federation.

Prior to this period of 1960, Lord Lugard as British High Commissioner in the then Northern Nigeria had passed many laws to enable him collect the taxes. These were: 1904 Land revenue proclamation - the proceeds of this tax were collected by the traditional rulers which were shared between them and the government 1906 Native Revenue proclamation -this replaced the former 1904 proclamation and aimed at unifying all existing forms of taxation. 1917 Native Revenue Ordinance -this replaced the 1906 proclamation and regulated the collection of imposed taxes from the Natives and the imposition was upon both the Northern and Southern parts of the Country.

However, in 1928 Native Revenue ordinance was extended to the Eastern provinces of Nigeria. Between the 1928 and 1958 Nigeria had various legislations for direct and indirect personal taxes.

NOTABLE TAX LAWS IN NIGERIA TODAYNotwithstanding the Legislations above, they were replaced and

re-enacted as the personal Income Tax Act CAP P8 LFN 2004, and the companies’ income tax Act CAP C21 LFN 2004, respectively.

Specifically, personal income Tax Act 2004 then called DecreeNo 104 of 1993, which regulates the personal income tax in Nigeria has been through subsequent amendments over the years but now been amended by the personal income tax (Amendment) Act, 2011, signed into law by the President of the Federal Republic of Nigeria on 14th

June, 2011).

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Therefore, there are in existence the various forms of taxes collected from individuals and companies by Nigerian government that are established by the under-listed notable tax legislations in Nigeria today. Even such laws that were made as Decrees have been adopted by the National Assembly (under the force of the 1999 Constitution), they are now referred to as Acts. These include:i. Personal Income Tax Act 1993 (PITA, 1993): This used to be called Decree 104 of 1993 and governs tax on the income of individuals, families and communities, trustees, executors, and partnerships. The finance (Miscellaneous Taxation provision) Acts 1994 and 1996 amended this Act.

ii. Company Income Tax Act (CITA) 1979: This was most recently amended by 1998 amendments and regulates the taxation of registered companies.

iii. Petroleum Profit Tax Act (PPTA) 1959 as amended: The Act regulates the assessment and collection of tax payment on companies dealing on petroleum productions and sale of petroleum products in Nigeria.

iv. Capital Gains Tax Act (CGTA) 1967: This was, called Decree 44 of 1967. The Act takes charge of gains accruing to persons that dispose fixed assets as from April 1, 1967.

v. Value Added Tax Act (VAT) 102 of 1993: The VAT repealed and replaced sales tax Decree of 1986. It targets at consumption of goods and services.

vi. Industrial Development (Income Tax relief) Act of 1990: This is said to be a pioneer legislation. The Act regulates conditions on Income Tax Relief Period and conditions for extension.

vii. Education Tax Act No 7 of 1993: Amended by Act (Decree) No 40 of 22nd Dec 1998. The Act imposes tax at the rate of 2% on the assessable profits of all incorporated bodies (Companies) registered in Nigeria. These assessable profits of a company shall be ascertained in the manner specified in the Companies’ Income Tax or the petroleum profits tax Act as the case may be.

viii. Withholding tax (Finance miscellaneous taxation provisions 1985): This is tax deducted whenever company pays interest, royalties,

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rent or dividend to person or company. The rate is 10%. Such tax must be paid over to the federal Inland Revenue Authorities within 30 days.

CANONS/CHARACTERISTICS OF TAXATIONThese are the necessary principles or attributes, which a good tax system should posses in order to achieve its objectives. They include the four canons of taxation prescribed by Adam Smith and others that have been added in the light of the increasing role of the government.i. Equality: This entails that the tax payers in this same income group should pay equal tax. This equality believes so much in progressive tax.ii. Certainty: This entails that the tax-payer should be able to know the amount of tax to pay with ease, in clarity and with less difficulty. Hence, Notice of Assessment showing the amount to be paid must be sent to tax-payer by the Assessment Authority.iii. Convenience: The mode and timing of tax payment should as far as possible be convenient to the payer. This is to avoid all sorts of ill-effects that may result from tax payment.iv. Economy: The cost of collecting tax should be as little as possible. Otherwise unnecessary and additional burden would be imposed on the society in the form of administrative expenses. Moreover, if it is realized that tax collections are being wasted, tax payers are likely to evade tax.

Others are:v. Buoyancy: Tax revenue should have an inherent tendency to increase along with an increase in national income even if the rates and coverage of taxes remain unchanged.vi. Productivity: This is also referred to as Canon of Fiscal Adequacy. It demands that the tax system should be able to yield enough revenue for the treasury so that the government will not be forced to resort to deficit financing. vii. Simplicity: The tax system should be simple, plain and intelligible to the common tax payer. It should be simple to understand; how it is calculated or determined, the amount to be paid, etc.viii. Flexibility: It should be possible for the authorities to revise without undue delay in the tax structure with respect to the coverage and rates to suit the changing requirements of the treasury and the economy.

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ix. Elasticity: This canon requires that the government should be able to raise the rates of taxes when it is in need of more revenue. In other words, taxes should be elastic.x. Diversity: This demands that the sources of tax revenue should be as diverse as possible so that any shortfall in revenue on account of any one source would not be very large.

OBJECTIVES/ PURPOSES OF TAXATIONThere are many reasons government imposes tax on her

citizens. These are grouped into general and specific objectives.

General Objectives:i. To raise revenue for the government: the main purpose of taxation is for the government to collect revenue to be used to finance the provision of basic infrastructures or amenities (eg electricity, good roads, education, healthcare etc) for her citizens.ii. To regulate the economyiii. To control income and employment

SPECIFIC OBJECTIVES:i. To Regulate the Production of Certain Commodities/Services The government imposes taxes in order to control the production of certain commodities which are considered harmful to human health.

ii. MONOPOLY POWERS Certain taxes are levied in order to curb monopoly powers. Such taxes include excess profit tax, etc.

iii. REDISTRIBUTE INCOME Taxation can be applied as a means of redistributing income, A progressive tax system takes away more money from the rich and the proceeds are used in providing goods and services whose marginal utilities are higher for the poor than the rich.

iv. PROTECT INFANT AND DOMESTIC INDUSTRIES Very high import duties can also be used to prevent dumping of relatively cheap products in the developing economies by the more technologically advanced countries.

v. BALANCE OF PAYMENTS EQUILIBRIUM

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Balance of payments deficits can be corrected by imposing taxes which discourage imports while taxes/ tariffs that encourage exports are at the same time introduced.

vi. CURB INFLATION Certain forms of taxes may be used to reduce the level of inflation. A high rate of taxation without a corresponding increase in government expenditure will reduce disposable income of consumer. This will help to reduce prices.

vii. REGULATE BUSINESS ACTIVITIES The form and direction of business activities can be regulated through taxation. A tax may discourage or encourage a given line of business. A high rate of taxation will discourage a business activity while subsidy (negative tax) encourages same.

CLASSIFICATION OF TAXATION Taxes may broadly be classified into: a. Standard Taxb. Tax basec. Systems of taxation a. Standard (main) tax- is divided into Direct and Indirect. i. Direct Tax: This is tax borne or paid by a person on whom it is legally imposed. The incidence of the burden fall upon the person who actually pays it, such taxes are charged on the tax payer’s income, profits or even other gains. Examples of direct taxes include: personal income tax, Petroleum Profit tax, companies income tax, capital gains tax etc.

ii. Indirect Tax: This is tax imposed on persons, but partly or wholly paid by another. The tax payer does not pay direct to the tax authority. The incidence and the impact fall on different persons. It is always a tax on services or on spending. Examples of indirect taxes are: Custom duties, excise duties, Value Added Tax, stamp duty etc.

b. Classification by tax base: these include;i. Income or profits base tax: These are taxes paid based on income or profits accruing to either individuals or companies, e.g. Personal income tax, Companies income tax, Petroleum profit Tax.

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ii. Capital base tax: These are taxes paid when individuals and corporate bodies dispose of their assets. E.g. Capital Gains Tax,iii. Spending or Consumption base tax: These are taxes paid based on having spent on buying goods or services rendered e.g. value added tax, custom and exercise duties.c. Classification by systems of taxation. These include: i. Progressive Tax System: This is a tax system where an increase in income rises along with the increase in the tax paid. Hence, the higher the increase in an individual tax payers income, the higher the tax rate to be paid.ii. Regressive Tax System: This type of taxation system occurs where the tax payer receives a higher income, but payer pays less amount of rate of tax.iii. Proportional tax system: This tax system is said to be proportional where every taxpayer pays tax according to the proportion of income earns. For example; Income yield of N500 owing to 10% rate will pay N50 tax; likewise income yield of N5000, proportionately will pay 10% of N5, 000 which still gives N500.

TAXATION EFFECTSOrdinarily, tax payment withholds resources from the private sector. This is owing to the fact that taxation by nature is compulsory on the income or profits of every taxable adult citizen or corporate bodies unless for few class of incomes/ profits exempted

Therefore, tax generally has various effects on production, distribution, ability or willingness to work, save or invest. Whether in production or distribution ventures, the effects could be positive or negative.

POSITIVE EFFECTS OF TAXATIONi. Provision of infrastructural facilities: this is achieved when revenue collected from taxation is used to provide infrastructural and social amenities to the citizens. These include: quality education, quality health services, steady electricity, good roads, pipe borne water etc. These help to improve standards of living.ii. The risk takers might be encouraged to invest as a result of the provision of some tax reliefs and capital allowances.iii. There could also be incentive to save with the provision made to exempt some personal incomes from tax. For example, contributions

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and incomes derived from the National Health Insurance Scheme (NHIS), Life Assurance policies, National Housing fund (NHF), the National Pension Schemes and Gratuities are now formally exempted from tax by the personal income Tax Act 2011, as amended.NEGATIVE EFFECTS OF TAXATION i. Avoidance may be witnessed: e.g when taking emoluments as non-taxable ii. Dis-incentive: to work, save and invest due to heavy taxation.iii. Diversion of resources from the taxed commodity to another which is not taxed.iv. Increase in productivity may be detered by the enterprises owing to taxation.v. Taxation may divert economic resources depending on the elasticity of demand for the relevant product.vi. Inflation could be encouraged by taxationvii. Prices may rise of fall in some circumstances. Example: state of demand, supply and full employment.

ADMINISTRATIONThe administration and management of company tax in Nigeria is vested in the Federal Board of Inland Revenue (FBIR), which implements its day-to-day functions through the executive agency known as the Federal Inland Revenue Service (FIRS). State Board of Internal Revenue (SBIR) manages personal income tax except the PAYE of the armed forces personnel, the police, staff of foreign affairs ministry and the residents of the Federal Capital Territory that are managed by the FIRS.Every tax-payer shall file his or her returns to the tax authority as required by law. The tax authority (FIRS or SBIR) shall access the returns and collect the tax due from the tax-payer. Tax Clearance Certificate will be issued to the said tax-payer thereafter for the year under review evidencing that he or she has legally executed his or her tax obligation.

PERSONAL INCOME TAX This Act (PITA, 1993), as amended imposes tax on the income of individuals, communities, families and a trustee of estate. Hence, this had to be determined under and be subject to the provisions of this Act.

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The various sources of income that are chargeable are always stated and as well the bases of assessment.

AllowancesUnder the unified tax administration, the personal income tax has the following relief up to 2011:a. Earned income of up to N30, 000 p.a. is subject to a minimum tax of 0.5%b. Personal allowance: N5, 000 plus 20% of earned income.c. Dependent relative – N2, 000 per person subject to maximum of 2 persons.d. Children allowance – N2, 500 per child subject to maximum of 4 children e. Disabled person – N3, 000 or 20% of earned income whichever is higher.f. Pension and Life Assurance Allowance – No restriction on allowable premium.g. Alimony Allowance – N3, 000 in respect of alimony paid for an individual who has divorced his or her spouse provided that this has been ordered by a court of competent jurisdiction.h. Pensions for self employed persons - The individual is allowed a deduction of premium for tax purposes as far as the premium so deducted does not exceed 10% of his / her total income. i. Donation to Research and Development Company Allowance- This allowance shall be the lower of: (i) The actual donation made (ii) 10% of the chargeable income. j. Investment in Research and Development Company Allowance- The allowance shall be the lower of: (i) The actual value of investment or (ii) 25% of the total income. Other allowances are tax-exempt subject to the following limits above which are taxable:Allowance Upper limit from 2001Rent Subsidy/Allowance N150, 000 per annumTransport Allowance N20, 000 per annumMeal Subsidy/Allowance N5, 000 per annum

Utility Allowance N10, 000 per annum Entertainment Allowance N6, 000 per annumLeave grant 10% of annual basic salary

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Personal income tax rate of 2001, 2002 - 2004First 30,000 5%Next 30,000 10%Next 50,000 15%Next 50,000 20%Over 160,000 25%

The personal income tax rate of (PIT) Amendment Act, 2011This amendment of 2004 Act resulted to “Graduated Tax rates

with consolidated allowance of N200,000 plus 20 percent of Gross Income, subject to a minimum tax of 1 percent of Gross Income, whichever is higher.First 300,000 7%Next 300,000 11%Next 500,000 15%Next 500,000 19%Next 1,600,000 21%Above 3,200,000 24%

Minimum tax Where the total income of a tax payer, for any particular year is less than the total or aggregate of all relief and allowances to which he is entitled, he will not be assessable to tax as per the graduated scale, since there is no income to charge.The minimum tax chargeable is 0.5% for total income of not over N30,000.Retirement gratuity and compensation for loss of employment is tax exempt.

Marginal tax rateMarginal tax rate is that rate of tax chargeable on the amount of

taxable income that is in excess of a given range of income base at a particular period. Thus, the marginal tax rates for various years are as shown below:Various years Marginal tax rate minimum tax rate1986 65% 1%1987 to 1991 55% 1%

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1992 45% 1%1993 to 1994 35% 1%1995 30% 1%1996 – 2010 25% 0.5%2011 24% 1%COMPANIES INCOME TAXCompany income tax is a significant source of revenue to the government of Nigeria. It is a direct tax levied on the profits of companies in Nigeria. The history of company income tax in Nigeria dates back to the colonial era. Hence, the companies Income Tax Act, is a Federal Law operated by the FIRS. It deals with the taxation of all limited liability companies in Nigeria with the exception of those engaged in petroleum operations. The most significant enactment on companies Tax is the Companies Income tax Act No 28 of 1979, which replaced CITA 1960. Filing of AccountsEvery company is expected to submit its accounts within 18 months after commencing business. Where a company has not commenced business after 18 months of incorporation, it has to submit a statement of affairs when it is applying for tax clearance certificate.Company’s tax returns must be filed within 6 months after the end of its financial year. Additional 2 months grace is given to those filing self- assessment notices.After this dates the accounts filed shall be deemed late and will attract a penalty of N2, 500 in the month failure continues with effect from January 1, 1994.Assessment and Objection Assessment shall be made in the currency in which the transaction giving rise to the assessment was effected. Objection to an assessment SHOULD contain the amount assessable and total and the amount of tax payable, to make such objection valid.Rules

- All assessment are payable within 2 months from the date of service of the assessment notice after which they become late and attract penalties and interest.

- If an assessment is disputed, there must be assessment notice of 30 days from the date of service of the assessment notice.

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- All tax assessment relating to each tax return must be paid within 2 months from the date of the assessment notice or before December 14 of every year whichever comes earlier.

- Penalty for late payment is 10% per annum of tax due plus interest at bank lending rate until tax is paid.

Collection of taxes From June 1996, the FIRS commenced the collection of all forms of taxes due to it via selected banks.To make payment for taxes, the following documents should be made available: i. Any of the following:

- Self Assessment form - Assessment notice (as issued by tax office)- Withholding tax schedule - Demand for provisional tax, or - Demand note for penalty and interest - Value added tax form

ii. A cheque, draft, cash or any other acceptable payment instrument for tax payable. iii. A duly completed pay-in slip (teller), which is to be collected from the cashier of the designated branch of the selected bank.The official receipt for payment will be issued to tax payer by the relevant tax office when the designated bank has confirmed that the money has been duly received.BASIS PERIOD OF ASSESSMENT Assessment for all the years is based on accounts of the immediately preceding year, except for the year of commencement and cessation when the assessments are based on actual.For example, a company commenced business on March 2000, adopting June 30, as the end of its financial year.The basis periods for the first three years are stated as follows:Year of Assessment Basis Period 2000 (1st year) Actual (10 months) 1/3/00- 31/12/002001 (2nd year) 12 months from the day of

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Commencement 1/3/00 - 28/2/0012002 (3rd year) Preceding year 1/7/00 - 30/6/01Cessation A company that has operated for so many years that ceased operation in August 2005, its financial year ends on November 30.The basis period for the last three years is as follows:

Year of Assessment Basis Period 2003 Preceding year 1/12/01-30/11/022004 Actual 1/1/04-31/12/042005 Actual 1/1/05-31/08/05Note that under commencement rule the option is that of the tax payer while cessation is tax authority’s option. COMPANIES INCOME TAX RATES With effect from 1996 the rate of income tax payable is:

- 20% for small manufacturing company- 20% for agricultural trade or business - 30% for other companies

Small companies are those with turnover of not more than N1m p.a.

SELF-ASSESSEMENTSelf-assessment is the most convenient means of payment of tax immediately the audited accounts with the relevant tax computation are filed, tax due as computed can be paid through the designated bank relevant to the tax office.

MINIMUM TAX Where in any year of assessment, the ascertainment of total assessable profits from all sources of a company resulted in a loss or where a company’s ascertained total profit results in no tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed below. Minimum tax charge is applicable to companies that have been in business for at least four calendar years. Calculation of minimum tax:a. If the turnover of the company is N500,000 or below:- 0.5% of gross profit; or - 0.5% of net assets, or

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- 0.5% of paid-up capital; or- 0.25% of turnover, whichever is highest? b. Where the turnover is above N500, 000.00 the tax payable is the highest from (a) above plus 0.125% of the excess turnover of N500, 000.

PETROLEUM PROFIT TAX The petroleum industry, or oil and gas for short, which encompasses the processes of exploration, extraction, refining, transporting and marketing of petroleum products, has been a subject of considerable interest, debate and even controversy for decades. For instance, oil has been associated with economic booms and recess. While oil is the World’s largest industry, in terms of dollar value and is vital to all economies, its activities have generated massive negative externalities, such as environmental degradation, fiscal dominance, vulnerability to external shocks, corruption, etc. In spite of this, presently between 76% and 86% of the revenue of the Federation accrue from the oil and gas sector.

Thus, petroleum profit tax law dates back to the discovery of petroleum in commercial quantities in 1956 and the actual export of crude oil in 1958.

Consequently, Petroleum companies are assessed for tax under the petroleum profits tax Act of 1959 (Cap. 354 of (LFN) 1990) as amended to date.Those chargeable are: Nigerian Company, Joint operation, Non-Resident Company and Company in Liquidation.

Allowable expenses All expenses must be wholly, exclusively, necessarily and for purposes of petroleum operation.The following categories are allowable under S 10 (1):- Exploration and drilling cost - All Royalties - Rent in respect of land or building occupied for petroleum interest

on money borrowed - Repairs and renewal of related assets to operation - Education tax

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- Duty and related charges to federal, state or local government e.g. custom duties

- Scholarships - Pension provident fund and other society fund - Difference in exchange

Deductions not allowed under S. 11 (1) as amended:- Any disbursement or expenses not being wholly, exclusively and

necessary laid out or expended or incurred for the purpose of petroleum operation.

- Transportation and refining expenses - Capital withdrawn or any sum employed or intended to be

employed as capital.- Capital employed in improvements as distinct from repairs.- Sum recoverable under an insurance or contract of indemnity.- Rent of or repairs to any premises or part of premises not used for

the purpose of petroleum operation.- Income tax, profit tax or other similar tax whether charged within

Nigeria or elsewhere.- Depreciation on any assets - Contribution to provident, savings, widow’s and orphan’s or other

society, scheme or fund except to such scheme approved by the tax board

- Any expenditure for the purchase of information relating to the existence and extent of petroleum deposit. This is so because such information is readily made available by government.

- Gifts and donations - Interest payable on money borrowed from connected or related

companies thus:a. Either company has an interest in the other company b. Both have interest in another company either directly or through other companies c. both are subsidiaries of another company.Note that with effect from January 1, 1999, the interest on intercompany loans is now allowable.Accounting period a. Accounting period in relation to a company engaged in petroleum operations means:

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(a) A period of one year commencing on January 1 ending on December 31 of the same year.(b) Any short period commencing on the day company first makes a sale or bulk disposal of chargeable oil under a programme of continuous production and sales, domestic, export or both and ending on December 31 of the same year.(c) Any period of less than a year being a period commencing on January 1 of any year and ending on the same year when the company ceases to be engaged in petroleum operations.

Computation of Petroleum Profit Tax Format for 2010 Tax year N000 N000

Export Sales xLocal Sales xIncome from gas sale xValue of chargeable oil disposed xxLess Expense:Production Cost: xTransportation cost xRent xRoyalties on Export sales xRoyalties on local sales xNon-productive rent xOperational cost xCost of drilling wells xCustom duty xHabour dues xEducation tax xStaff salaries xPrinting & stationery xLoss on exchange xIntangible drilling cost x xxAdjusted Profit xx Loss brought forward xRelieved (x) (x)Assessable Profit xxLess capital allowance

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The Lower of:i. Capital allowance for the year xCapital allowance b/f xPetroleum investment allowance x

Xor ii. 85% of assessable profit xLess 170% of investment tax credit x

xCapital allowance claim xChargeable Profit xxAssessable tax @ 85% xLess MOU Credit (x)Less investment tax credit xChargeable tax xEducation tax x

Total tax payable x

CAPITAL GAINS TAX Capital gains in Nigeria were not liable to tax until the introduction of Decree No 44 known as Capital Gains Tax Decree 1967, which imposed a charge on Capital Gains i.e. gains accruing on the disposal of chargeable assets. This particular Decree has been subject to various amendments. Presently, Capital Gains Tax in Nigeria is governed by the Capital Gains Tax of 1990, Chapter 42, Laws of the Federation of Nigeria.

Persons Liable to Capital Gains Taxi. A person is liable to capital gains tax on chargeable gains accruing

to him in a year of assessment during which he is a resident (staying for a total period of 183 days or more of domicile (staying all the year round).

ii. A person who is resident but not domiciled in Nigeria is liable to capital gains tax on gains accruing from the disposal of assets situated outside Nigeria if and to the extent that such gains are remitted to Nigeria. In such circumstance the gains are treated as accruing when they are received in Nigeria.

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iii. Where a person is domiciled abroad and remits a capital gain on or after Ist April, 1967, that gain is to be assessed to capital gains tax in the year it is remitted.

iv. A person who is not resident in Nigeria is chargeable to capital gains tax on gains accruing to him in that year if:

a. He is carrying on a trade in Nigeria through branch or agency, which is classified as a permanent establishment, and

b. He is not exempt from income tax on the gains in question by virtue of a double taxation agreement.

c. The charge arises on gains accruing on the disposal of assets situated in Nigeria, which are used in or for the purposes of the trade, or are used, held or acquired for the purposes of the branch or agency.

v. Companiesvi. Trusteesvii. Partners in partnershipThe State Internal Revenue administers Capital gain Tax in respect of individuals, while the Federal Inland Revenue administers that of companies and residents of Abuja and non-resident persons. The rate is 10%.

Chargeable Assets Capital Gain tax is chargeable on disposal of all forms of properties (assets) except capital gain arising from sale of stocks and shares with effect from January 1, 1998.Chargeable gain is arrived at after deducting the cost of the asset and the selling expenses from the disposal value.The major actions that give rise to paying capital tax are the sale, lease, transfer, assignment, compulsory acquisition, or another disposition Where a capital sum is received or derived from the actions listed below such events are taken as “disposal”; a. Compensation for any loss of office or employment, b. Settlement of a policy of insurance and the risk of any kind of damage or injury to or the loss or depreciation of assets.c. Forfeiture or surrender of rights, or for refraining from exercising rights.d. Consideration for use and/ or exploitation of any assets.

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e. Amount received in connection with or arising by virtue of any trade, business, profession or vocation, as opposed to loss of office or employment as in (a) above.f. part disposal of an asset, interest or rights there on.

Change of ownership This is found in section 44a CGTA and it states that the production of evidence of capital gain tax payment is a condition for effecting change of ownership or property.

CAPITAL ALLOWANCES These are deductions allowed on qualifying capital expenditure for the purpose of arriving at the tax payable by companies. Thus, for a company engaged in petroleum operations capital allowance is an allowance granted by the Petroleum Profit Tax Act of 1959 as amended till date when a qualifying expenditure is incurred. They are accepted in place of depreciation (non allowance deduction from company’s profit for tax purposes).With effect from January 1, 1996, capital allowances for both personal and company’s’ income taxes are as follows:

Initial Annual Building (Industrial & Non- Industrial) 15% 10%Plant: Agricultural production 95% NilOthers NilFurniture and Fittings 50% 25%Motor Vehicles: 25% 25% Public Transportation 95% Nil Others 50% 25%Plantation Equipment 95% NilHousing Estate 50% 25%Ranching & Plantation 30% 50%Research & Development 95% Nil

CONDITIONS FOR GRANTING CAPITAL ALLOWANCE The following conditions must be fulfilled for capital allowance

to be granted:1. The ownership of the asset must not be in doubt2. A claim in writing must be made to the relevant tax authorities.

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3. The asset representing such expenditure must be in use at the end of the basis period for the relevant years of assessment.

4. The asset must be used for the purpose of the business. Any private use element must be prorated accordingly and disallowed.

5. A capital expenditure certificate should be obtained from the Inspectorate Division of the Federal Ministry of Industry, to support application for capital allowance for all expenditures in any year in excess of N500,000 with effect from 1995 tax year.

TYPES OF CAPITAL ALLOWANCE a. Initial allowance: This is granted in the first year the asset is put to use. It is granted only once in the life of an asset. The period of use does not affect its computation. Thus it is not prorated based on the number of months making up the basis period for a year of assessment.

b. Annual allowance: Annual allowance is granted every year the asset is used. Thus, it is to be prorated based on the number of months in the basis period for profit for a year of assessment; example, 1/6/2012 – 31/12/2012.

c. Balancing adjustment (allowance and charge): The amount of the balancing charge or allowance is calculated by comparing the residual expenditure with the total sales proceeds. If the sales or disposal value is greater than the written down value of the asset on the day of the transaction a balancing charge results. Where the sales proceeds or value is less than the written down value, a balancing allowance arises.

d. Investment Allowance: This is sub divided into: (i) Petroleum Investment allowance: This is investment allowance granted on qualifying expenditure in respect of:1. Onshore operations 2. Offshore operationsa. Operation in territorial waters and continental shelf areas up to and

including 100 metres of water depth …….. 10%b. Operation in territorial waters and continental shelf area in water

depth between 100 meters and 200 meters…. 15%

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c. Operation in territorial waters and continental shelf areas beyond 200 metres of water depth …… 20%

(ii) Rural investment allowance: This is an investment allowance granted to businesses located in areas that are more than 20km away from infrastructural facilities. The rates of the rural investment allowance are as follows:No electricity – 50% of QCE in the first year onlyNo water – 30% of QCE in the first year onlyNo tarred road – 15% of QCE in the first year onlyNo telephone – 5% of QCE in the first year only.

VALUE ADDED TAX Value added tax is a multi: staged levy collected on sales at all stages of sales and distribution. It is the incremental value which a production using labour contributes to its raw materials or purchases before selling the product or service. The producer can be a manufacturer or a distributor or supplier of goods and services. The inputs are processed by labour to obtain the final goods or services which are sold. The incidence of VAT shifts or devolves in successive stages so that in the end, it is the final consumer that bears the tax.In the operation of VAT, each set of invoice gives the amount of VAT paid and it becomes a credit for further set-off. Such item is used as input in the chain of production or distribution.VAT is imposed at a single rate of 5% on the invoice value of goods and services supplied by a VAT able person.

Types of VatThere are two types of VAT – VAT INPUT and VAT OUTPUTVat Input: This is the VAT paid on the materials, goods and services to be used in producing vatable goods.Vat Output: This is VAT charged on the sales of goods or services which are to be remitted to the Board after offset able VAT input have been deducted.

Computation of VAT NVAT on goods sold/ services rendered (Output tax) xLess VAT on purchases & other input (input tax) xVAT payable x

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Remittances Remittances shall be made within 30 days of the month of which tax is collected. For instance VAT payable for the month of April shall be remitted on or before May 31 after which a penalty of N5, 000 per month is charged.Registration All taxable persons shall register with the FIRS within 6 months of either the commencement of the decree or business whichever is earlier. Branches of taxable person are to register separately.Failure to register attracts a penalty of N10,000 for the first month if the failure occurs, and N5,000 for each subsequent month in which the failure continues.Exemption from VATGoods exempted- All medical and pharmaceutical products - Basic food items produced locally- Books and educational materials - Newspapers and magazines - Infant’s food and baby products - Commercial vehicles and commercial vehicles spare-parts - Fertilizer, Agricultural and veterinary medicine, farming

machinery and farming transportation equipment - All Exports - Tractors, Ploughs, agricultural equipment and implementation - Plant, Machinery and equipment purchase for utilization in the

down-stream sector of petroleum operations - Agricultural and water treatment chemicals - Fertilizer (Locally Produced)With effect from January 1, 1999, the following were removed from the

list:- Newspapers and Magazines Services except:- Medication services - Services rendered by Community banks, Peoples Banks and

Mortgage Institutions

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- Play and performances conducted by education institutions as part of learning.

- All exported services EDUCATION TAX The ideal of an education tax evolved from the wider question on the extent of private sector participation in the funding of education in Nigeria. Hence, the crisis of education in Nigeria today is deeply rooted in, and caused by under-funding in respect of both recurrent and capital expenditure. By section 1 (1) of the Education Tax Decree (ETD) 1993, Acts amended “There shall be charged and payable an annual education tax which shall be assessed, collected and administered in accordance with the provision of this Decree” The rate of Tax which is 2 percent, shall be charged on the assessable profit of a company registered in Nigeria and the assessable profit is ascertainable in accordance with either the Companies Income Tax (CITA) 1990 or the Petroleum Profit Tax Act (PPTA) 1990 depending on whether the company is one governed by the CITA or PPTA.Tax rate for education tax is 2% of assessable profit. This tax is due from all companies to which provisions of the companies Income tax applies. However, Education tax on petroleum profit is 2/102 of assessable profit.

REFERENCES

Amaechina, P.U. (2009), Personal Income Tax in Nigeria, New Millennium: Aries publications (Nig).

Ani, W.U. and Ugbor, R. (2010), Companies Income Tax in Nigeria: Providence Press Nig. Ltd, Enugu.

Ani, W.U.; Ugbor, R. and Igbeka, V.C. (2012), Petroleum Profits and Miscellaneous Taxation in Nigeria: EMC publishers, Enugu.

Odoh, N.N (2004), Public Finance for Polytechnics: J.T.C Publishers, Enugu.

Students SWOT & Associates Memograph.

Udeh, O.S (2005), Theory and Management of Public Finance: Malik Enterprises Nigeria, Enugu.

Ugwuanyi, G.O. and Ugwuta, E.E. (2013) Guide to Personal Income Tax in Nigeria: Johnkens and Willy Publications Nig. Ltd, Enugu, Lagos.

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Wikipaedia: The free encyclop

CHAPTER FOUR

PUBLIC EXPENDITURE MANAGEMENT

BY

APEH GODWIN EJIKE Lecturer,

Department of Public Administration OSISATECH Polytechnic Enugu

NATURE OF GOVERNMENT EXPENDITURE Expenditure is as old as man, whatever be the form, individuals,

organizations, groups, clubs, governments etc, engage on the exercise. It is a belief that whenever and wherever people exist and try to get what they do not have, exchange or form of buying or paying for such things, expenditure takes place. The term “Expenditure” is derived from verb “expend” which means to use up or spend. Expenditure is defined as an actual payment or creation of an obligation to make a future payment for some benefits, items or services received.

Public expenditure is defined as expenses made by the government of a country on collective needs and wants such as pension, provisions, infrastructure etc. Public expenditure refers to expenditure made by local, state and federal governments and other agencies as

47


distinct from those of private individuals, organizations or firms (Philip, 1971:281). Public expenditure is also seen as expenditure made by government, ministries and extra-ministerial department on goods and services either directly or by subsidies.

Anayafo (1996:229) opined that government expenditure is the total in cash terms of the federal, state and local government spending, plus financial transfers to the parastatals at the three levels of government. Components of Public ExpenditureCategorically, there are two components of public expenditure, which include:1. Recurrent Expenditure: This is government expenditure that features regularly in the budget cycle that is from a year to a year. For instance, personnel and overhead costs such as travel and transportation, utility services, telephone service, maintenance of office furniture and equipment, entertainment and hospitality. 2. Capital Expenditure: This government expenditure involves a huge amount of money to come by capital experience which includes new construction on land and extensions of and alterations to existing buildings and acquisition of any fixed assets.

According to Partington (1989), the definition of public expenditure which was used for many years in UK comprised the Re-current and capital expenditure of central government and local authorities, other than expenditure charged to the operating account of trading bodies, together with the capital expenditure of nationalized industries and other public corporations and including debt interest and net lending.Elements of Public Expenditure:1. Expenditure on the government house administration at the federal, state and local government levels.2. Expenditure for the maintenance of the armed forces, internal

security agencies including the police.3. Expenditure on the legislature and judiciary at the federal, state and

local levels.4. Expenditure on maintenance of diplomatic agencies abroad.5. Expenditure incurred in the servicing of domestic and foreign

debts.

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6. Expenditure on economic, social and health services.7. Expenditure on the development of political institutions.Principles of Public ExpenditurePrinciples of Economy: The idea of this principle is that extravagance and waste should be avoided. Officers controlling public expenditure should exercise due economy or prove not To be wasteful. Duplication of overlapping of government functions and activities that may result in government funds being wasted must be severely checked.

In the case of recurrent expenditure, officers controlling expenditure are to arrange as far as practicable that expenditure be spread evenly over the years. There are special reasons for not doing so. For example, expenditure depending on the season of the year, officers responsible for capital expenditure are required to review such expenditures periodically.

In fact, the principle of economy in government expenditure has some implications for planning public expenditure requiring careful planning and also discipline to abide by the plan. 1, Canon of Sanction: Another important principle of public expenditure is that before it is actually incurred, it should be sanctioned by a competent authority. This is because unauthorized spending is bound to lead to extravagance and over spending. It also means that the amount must be spent on the purpose for which it was sanctioned. It is the belief of this principle that all public accounts at the end of the year should be properly audited to see that amounts have not been misappropriated or misused.2, Principle of Maximum Social Benefits: According to Dalton, the best system of public finance is that it secures the maximum social advantage from the operations which it conducts. This principle also advocates that public expenditure should be made in a way that the welfare of the society/public should be maximized; for this reason, government expenditure which promotes greater welfare should be preferred to anything that brings about less welfare. Under this context, welfare implies a condition of having comfortable living, a conducive and enabling environment for personal endeavours and good health.3. Principle of Balanced Budget: Every government must try to keep its budgets well balanced. This principle is also adherent to a

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situation whereby all levels of government should confine themselves to the limit of expenditure in the approved estimate/ Supplementary estimates. The principle advocates for a balanced budget as an important cornerstone of budget discipline. It requires that aggregate expenditure should be equal or preferably less than prudently determined aggregate revenue. Here, every recurring surpluses are not desired because it shows that people are unnecessarily and heavily taxed. If expenditure exceeds revenue every year, then that too, is not a healthy sign because this is considered to be the sign of financial weakness of the country. The government, therefore, must try to live within its own means (Anyafo, 1996).4. Canon of Elasticity: Another principle of public expenditure is that it should be fairly elastic. It should be possible for public authorities to vary the expenditure according to the needs. A rigid level of expenditure may prove a source of trouble and embarrassment in an ugly situation. This principle is not talking about perfect elasticity but a fair degree of elasticity which is essential if financial breakdown is to be avoided at the time of shrinking revenue. 6 Avoidance of Unhealthy Effects on Production or Distribution: It is also necessary to see that public expenditure exercises a healthy influence both on production and distribution of wealth in the community. It should stimulate productive activity so that the volume of production in the economy may increase and it may be possible also to raise the standard of living. But this idea of raising the standard of living of masses will improve if wealth is fairly distributed.

Public expenditure should aim at tuning down the inequalities in wealth distribution. These two objectives of this principle may be in conflict when attempts at reducing inequalities of income and wealth distribution adversely affect production. It discourages power and will to work.EFFECTS OF PUBLIC EXPENDITURE 1. Effects on Production: It is believed that expenditure to engage military on war or fight is very unproductive, without knowing that a successful war may bring much of economic gain to the country. Some of the priorities of the national rolling plan in Nigeria include:a. The provision of infrastructural facilities in both urban and rural areas with a view of giving adequate support the productive sectors and enhancing private participation in the various facets of the economy.

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b. Streamlining public expenditures to give priority to the compacting of critical on-going variable projects. There is no doubt that the effect of government expenditure on production cannot be over-emphasized. This is to say that government spends mainly on the establishments of economically viable commercial enterprises such as building and repairing of oil refineries, completion of Ajaokwuta Steel Industry, power etc. Also, public expenditure can be done in the provision of infrastructures such as roads, electricity, water, transports and communication facilities as long as it is designed to give support and enhance lives of people or citizens. Government expenditure also raises the level of production and influences the pattern of production and the composition of output, by designing a suitable public expenditure programmes, government diverts resources from the department where resources (money) was supplied in surplus or where it is short-supplied or is mostly needed. 2. Effects on Distribution: It is not contestable any where in the world that government expenditure can be of great help in turning/ balancing the inequalities of income and wealth distribution of the country. Government taxes the rich people at progressive rates reducing their high income. The money generated is spent for the benefits of the needy class of the society, government provides free education, free medical care cheap housing facilities and other necessities of life are subsidized. When the government is trying to make distribution of national income more even and fair for the people, it should be careful for such implementation.3. Effects on Employment: It is a fact that government expenditure on public works bring about an increase in the levels of employment and in the economy. Government uses this means to remove widespread unemployment during period of depression through liberal public expenditure on public works, by establishing programmes eg National Directorate of Employment (N.D.E), was established mainly for employment generation for the teaming unemployed youths.

As observed by Keynes that when government increases its investment in expenditure during an economic depression, incidence of unemployment could be eliminated. However, in Nigeria presently, the effect of government expenditure is very far from unemployment elimination though it has really contributed to a large extent.

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Classifications of Government ExpenditureCategorically, according to Hencesy (1992:38) there are two

classifications of government expenditure which include:-1. Current Expenditure: The main sources of financing current expenditure is the current revenue of the government, which consists of taxes and certain non-tax revenues like; profits, incidental incomes, fees and some other extra-ordinary items. Current revenue and current expenditure appear in the “Revenue Budget” of the government. Such expenditure is increased on day-to-day functioning of the government machinery, including civil administration, police, judiciary and current expenses of beneficent departments like education, health, agriculture etc. These heads are controlled by provincial governments. The federal government is responsible for defense, foreign affairs, currency and certain supervisory and co-ordinating functions, local governments have their own budgets with certain revenue sources of local nature e.g. rates.2. Capital Expenditure: The expenditure in the capital budget is incurred on building asset of a lasting character, like construction of dams, water storage, roads, railway lines etc, public building of various kinds, or parts etc. Expenditures of such magnitude are not possible to be accomplished from current revenues. It is mostly financed by raising loans from both internal and external. Other classifications of government expenditure especially in developing countries include: a. Non development expenditures that cause increase in public

expenditure.1. Increase in population 2. Growth of state functions3. Higher price level and rising cost of public services.4. Increase in national wealth and increased ability to pay tax.5. Provision of public utility services 6. Expansion of social services 7. Improvement in technologies8. Global environmental factors including IT, import and export

requirements, international, political changes and terrorism.9. Economic development 10. Political and social factors.

REFERENCES

Anyafo, A.M.O (1996), Public Finance. Development of Banking &

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Finance , University of Nigeria Enugu Campus

Expenditure “The Nigeria in Journal of Economic and Social Studies Volume 13 No. 3 (Nov. pp 351-364).

Hencesy, (1992), Public Sector Accounting and Financial Control, London, Chapman & Hall.

Partington, I. (1989), Applied Economic in Banking and Finance, Oxford University Press.

Omoruyi, S.E (1987), “Government Expenditure Sources of Intervention” 30 (Part I) p 12-13.

Philips, Adeoton, O. (1971), “ Nigeria’s Public Consumption

CHAPTER FIVE

BUDGETING IN THE PUBLIC SECTOR

By

STELLA CHIOMA OPARA Lecturer,

Department of Public AdministrationCaritas University Amorrji Nike Enugu

INTRODUCTIONThe fundamental economic problem of limited resources is

used to satisfy unlimited human wants. Therefore, budget is directed to solve the problem of scarcity. The public budget is the government’s counterpart of the individual’s scale of preference, while the national plan sees to the desired state of economy over the plan period; the budget is used in mobilizing available resources and allocating them based on priority of needs.

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The word budget originally meant the public purse which served as a receptacle for the revenue and expenditure of the state. Budget literally means an estimate of income and expenditure within specified limits. In Nigeria, the idea of budgeting was part of our national inheritance from Britain, our colonial master. Usually six months towards the end of one financial or fiscal year which runs from 1st January to 31st December, Government starts to budget for its revenues; capital and recurrent expenditures for the following year. Specifically, budget is often divided among the three tiers of Government, Federal, State and Local Governments. The budget is prepared and passed into law by the constituted authority usually the legislature, before it is implemented.

WHAT IS BUDGETA Budget is a financial plan expressed or prepared in

quantitative and monetary terms and approved prior to the defined period of time, usually a year. In other words, budget is a financial estimate of revenue receipts and proposed expenditures, covering a specified period of time.According to Nwosu (1981), a budget can be defined as a document containing words and figures which proposes expenditure for certain items and purposes. The words describe items of expenditure such as salary, education, health services, public works and external services, and figures attached to each item or purpose. In a sense, budget becomes a link between the financial resources and human behaviour to accomplish objective. In other words, the formulators of public budget tend to provide guide for future events and behaviour. Budgeting in a more general sense is concerned with the translation of financial resources into human purposes. Consequently, a budget may be characterised as series of goals with price tags attached; eg Education, Health, Transport, Housing, etc.

In Nigeria, budgetary process is usually an annual affair and therefore should contain all financial provisions needed for a particular year, prepared and submitted by the executive to the legislature whose approval is absolutely essential before the plan can be executed. It publicizes the activities of government as well as

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instils responsibility and accountability in the government structure and expenditure.

Budget typesSales budget – an estimate of future sales, often broken down into both units and currency. It is used to create company sales goals.

Production budget – an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material created by product oriented companies.

Capital budget - used to determine whether an organization's long-term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects are worth pursuing.

Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time-period; it usually covers a period in the short-term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget – a prediction of the costs associated with a particular company project. These costs include labour, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each. A cost estimate is used to establish a project budget.

Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.

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http://www.answers.com/topic/capital-budgeting-1

http://www.answers.com/topic/production-budget-1


Expenditure budget – includes spending data items.

PUBLIC SECTOR BUDGETINGThe public sector budgeting refers to the part of the economy concerned with providing basic government services. The composition of the public sector varies by country, but in most countries the public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the poor. The public sector might provide services that non-tax payers cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.

Public budget provides the most comprehensive picture of the government’s total expenditures and receipts as well as its policy thrust for the period. Thus, it offers some indications of the aggregate fiscal impact of Government programmes. The budget offers the government a vehicle for implementing its policies through the expenditures of the various Ministries and Departments. (Salawu, 2005)

OrganizationThe organization of the public sector (public ownership) can take several forms, including: Direct administration funded through taxation; the delivering organization generally has no specific requirement to meet commercial success criteria, and production decisions are determined by government. Publicly owned corporations (in some contexts, especially manufacturing, "state-owned enterprises"); which differ from direct administration in that they have greater commercial freedoms and are expected to operate according to commercial criteria, and production.

Decisions are not generally taken by government (although goals may be set for them by government).

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http://en.wikipedia.org/wiki/State-owned_enterprises

http://en.wikipedia.org/wiki/Corporatization

http://en.wikipedia.org/wiki/Commerce

http://en.wikipedia.org/wiki/Taxation

http://en.wikipedia.org/wiki/Public_ownership

http://en.wikipedia.org/wiki/Public_education

http://en.wikipedia.org/wiki/Public_transit

http://en.wikipedia.org/wiki/Public_roads

http://en.wikipedia.org/wiki/Police


Partial outsourcing (of the scale many businesses do, e.g. for IT services), is considered a public sector model. Complete outsourcing or contracting out, with a privately owned corporation delivering the entire service on behalf of government. This may be considered a mixture of private sector operations with public ownership of assets, although in some forms the private sector's control and/or risk is so great that the service may no longer be considered part of the public sector (Barlow et al., 2010).

TYPES OF BUDGET PREPARED IN THE PUBLIC SECTORThe Government role in the transactions in the life and the working of the economy cannot be underrated because of its numerous impacts, which they have; they are tool of management and instrument of economic policy, various facts of budget estimates are prepared and presented to indicate the manner in which the budget would be affecting the economy. There are two kinds of budgets being prepared in the public sector. These are:1. Revenue (income) Budget2. Expenditure Budget.

Revenue (income) BudgetRevenue budget spells out the estimated revenue of Government- both tax-revenue and non-tax revenue during a specific budget period. This may be in the form of capital or recurrent income.

Capital Revenue BudgetThis comprises of bulk earnings receivable by organizations which do not feature regularly in the budget cycle. These include revenue items like loans, grant, recurrent surplus and other miscellaneous revenue from other sources that do not feature regularly in the budget cycle.

Recurrent Revenue BudgetRecurrent revenue/income is a type of income that accrues to an organisation or government on regular basis and features in the

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http://en.wikipedia.org/wiki/Outsourcing

http://en.wikipedia.org/wiki/Outsourcing


budget cycle. They include revenue from taxes, personal income taxes, company income tax, and petroleum profit tax, etc. Non- tax –revenue receipts include revenue from rent on government properties, reimbursement, dividends, interest, and revenue from community and social services, fees, licenses and other miscellaneous sources of revenue open to the government or organization during the normal budget cycle.

Expenditure BudgetThis budget involves the estimated expenditure which government intends to incur out of revenue receipt under different headings within a specified budget period. This can be further classified into three main categories, which includes personal emolument budget, Overhead budget and Capital expenditure budget.

Personnel Emolument budget: This comprises of wages, salaries, leave allowances of members of staff within the Ministries, Departments and Agencies of Government for the specified fiscal year.

Overhead budget: This budget represents the estimated recurrent expenditure that features regularly in the organisation in the next fiscal year and which constitute the bulk of her daily expenditure such as stationery, repairs and maintenance, entertainment, transportation and travelling, as well as staff training and development./

Capital expenditure budget: This represents bulk expenses anticipated to be made during the budget period and which are not likely to be repeated very often under the same heading. These include construction of roads and bridges rural electrification, education, health, social and community developments etc.

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Estimates of Enugu State of Nigeria, 2012 The Budget Size- Resource Envelope

PARTICULARS 2011

BUDGET 2011 REVISED BUDGET

2012 REVISED BUDGET

A % % %

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Recurrent Revenue

1. Internally Generated Revenue (IGR)

7,314,977,267 17.29

5,574,835,342 9.95

8,000,000,000 15.09

2. (a) State share of Federation Accounts Allocation (FAAC) 28,976,485 68.48

43,549,663,480 77.76

45,000,000,000 84.91

(b) Value Added Tax (VAT)

6,025,208,903 14.24

6,881,137,088 12.29

See Capital Reciepts -

(c) Excess Crude Account Receipts See FAAC

See FAAC -

(d) Ecological Fund - - -

(e)Others - - -

Total Recurrent Revenue

42,316,765,655 100

56,005,635,910 100

53,000,000,000

100

B

Recurrent Expenditure

1. Personnel Costs15,184,039,640

11,080,815,882

14,008,769,819

(a) Add Possible Salary Increase

7,500,000,000

9,300,000,000

(b) Add 7.5% Contribution to Pension 400,000,000 -

(c) Outstanding Allowances to Civil Servants etc. 661,722,596

100,000,000

(d) Consolidated Revenue Fund Charges

8,952,484,000

5,945,864,252

9,000,000,000

TOTAL PERSONNEL COSTS

32,698,246,236 77.27

17,026,680,134 40.41

32,408,769,819 61.15

2. Overhead Costs (Including StandingOrder/Imprest and other releases

4,600,000,000 10.87

8,840,941,147 20.98

7,908,359,425

14.92

3. Subvention to Parastatals and

Tertiary Institutions

3,000,000,000 7.09

2,559,482,808 6.07

4,000,000,000 7.55

Total Recurrent Expenditure (B)

40,298,246,236 95.23

28,427,104,089 67.47

44,317,129,244 83.62

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C

Transfer to Capital Development Fund

2,018,519,419 4.77

13,705,621,147 32.53

8,682,870,756 16.38

TOTAL (B+C)42,316,765,6

55 10042,132,7

25,236 10053,000,0

00,000 100

D

CAPITAL RECEI[TS

1. Opening Balance from Previous Year 400,000,000 1.52

400,000,000 1.05

400,000,000 1.24

2. Transfer from Capital Development Fund

2,018,519,419 7.67

13,705,621,147 36.05

8,682,870,756 27.01

3. Value Added Tax (VAT) See Rec Rev -

See Rec Rev 0

8,462,000,000 26.33

4.Internal/Local Loans

12,000,000,000 45.58

12,000,000,000 31.57

5,550,347,000 17.27

5.External Loans4,556,600,00

0 17.314,556,60

0,000 11.993,057,49

3,000 9.51

6.Grants4,652,968,00

0 17.674,652,96

8,000 12.244,249,26

0,000 13.22

7. Miscellaneous 2,700,000,00

0 10.262,700,00

0,000 7.11,740,63

9,776 5.42

TOTAL CAPITAL RECEIPTS

26,328,087,419 100

38,015,189,147 100

32,142,610,532 100

GRAND TOTAL (BUDGET SIZE)

66,626,333,655

66,442,293,236

76,459,739,776

Attributes of a good Government Budget:Good budget must possess the following qualities:1. It must be comprehensive and clear,

2. A good budget should be accompanied by an analytical description of the current economic situation of the country.

3. It must reflect the overall policy and purpose of the Government as well as the fiscal and monetary control measures in place.4. A good budget should always cover a specified period. However in Nigeria our normal budget period is usually one year.

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5. It should reflect the estimates, both revenue and expenditure, arranged under recurrent and capital grouping.

Functions/Benefits of BudgetBudgets generally are directed to solve the problem of scarcity. The needs of any organization, government or non-governmental are numerous while the resources available for their satisfaction are limited. As a result some of these needs are met while others are left out. Budgeting therefore takes the responsibility matching and allocating scarce resources to only viable programmes based on the cost benefit analysis.

Aids Economic PlanningPlanning is about choosing alternative courses of action bearing in mind their various cost implications and tries to put these as alternatives. The government uses the budget to stimulate/regulate the different sectors of the economy.

Helps in efficient allocation of resourcesThe priority and essentiality of projects are studied and related to the end in view before determining how money should be spent and what is to be expected in the prosecution of chosen projects or actions.

Achievement of economic stabilityThere is a wholistic consideration of the economy of the nation in budgeting of public expenditure. Budget is a major instrument for achieving economic stability in prices, employment , income and wealth, output and in the foreign sector- Balance of payment (BOP).stability in the aforementioned economic indices cab be achieved by way of taxation and government compensatory expenditure.

Operations controlSound and efficient budgetary system enhances control mechanism for expenditures. Expenditures are tied to projections and estimations

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that have already been done. This helps to prevent deviations from predetermined goals.

Income redistributionEfficient budgetary process helps the government provide less affluent citizens with some essential social and economic amenities and means of progressive taxation, take away more income from the very rich persons.

Attainment of co-ordinated effortIn the budgetary process, coordination of ministries, departments, units, divisions and agencies is necessary for without that, concerted actions cannot be attained.

Prevention of wastagesThere is this fact that budgeting analyzes the reasons for a proposed expenditure in advance, wastages are therefore prevented or rather reduced to the barest minimum.

Objectives of Public Sector BudgetingBudgeting in the public sector context shares many similarities with the private sector but contains a greater focus on the relationship with policy development, performance monitoring and statutory objectives. The key objectives of public sector budgeting are: assisting in planning expenditure to meet policy requirements; policy implementation and control; measuring and monitoring performance; to determine the total expenditure of the organisation and ensure that it is consistent with total revenues (e.g. fixing the rate of local taxation); provide the basis for authorising expenditure and collection of fees and charges; To check inflation. provide the basis for budgetary control; satisfaction of statutory requirements.

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The Budget processA public budgetary system consists of the parts of an organization or set of units involved in the preparation of the budget. A public budgetary system consists of the executive branch, legislative branch and organized interest groups, which interact to produce or influence the production of the budget.Government budgeting passes through four important stages viz:1. Preparation2. Authorization/Legislation3. Execution4. Evaluation

Preparation of the BudgetThis is the first phase of the budgetary process. It starts around July of any year in all government agencies soliciting for their detailed request for funding in the next fiscal year with guideline on government projects that need to be given priority by all government agencies.It gives the control figure for recurrent and capital expenditure and expected revenue for each government agency.There are stipulated principles and guidelines which departments adheres in the estimation of their proposals. The extent to which each department complies determines whether their estimate proposals would be approved. Agencies develop estimates of the cost of providing services they plan to deliver during the upcoming fiscal year and narrative justifications for their requests. The budget requests are reviewed to ensure that they are in line with the policies of the chief executive and with the spending direction. Most times heads of operating agencies are summoned for administrative hearing (Budget defence) for reconciliations of the agencies requests and budget office. The government agencies are given specific time for their proposals to reach the department of Budget and planning for onward transmission to the legislature.

2. The legislative stage

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The draft budget estimates at this stage is presented to the legislature for consideration and enactment. The legislative consideration begins with the lower house in a bicameral legislature such as in Nigeria’s. The legislature reviews and modifies the budget proposals of the president and formulates an Appropriation Bill, following the process established by the constitution. The passages of the appropriation take the same process as a normal bill. Joint finance committee a special legislative advisory body, closely scrutinizes the budget proposals before legislative approval, agencies at this stage may be called upon to defend their requests in the budget document.

After the lower house has approved appropriation, the upper house goes through a similar hearing process. When both houses have approved the appropriation, the bill is sent to the chief executive (the President, Prime Minister or Governor as the case may be), for assent as stipulated by the constitution, the bill becomes law. This concludes the legislative process.

3. Execution This third stage of the budgetary process involves the actual expenditure of funds on items as contained in the budget. The onus of the budget execution rests on the executive through the various ministries and department and other government agencies. The requirements in this regard include strict control in the spending departments so as to ensure that spending is in conformity with what has been stipulated in the authorization so as to avoid sanctions.

4. Audit (Evaluation)This phase of budgetary process begins in the auditing of accounts produced during the execution phase, preferably, by an auditor independent of administration. A financial audit checks financial records and statements to ensure that they are complete and reliable.

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There is also management audit, which focuses on efficiency of operations, including utilization and control of resources. The main objective of management audit is to find out and possibly prevent waste of government resources.

Another approach is the programme audit, which examines the extent to which desired results are being achieved and whether there might be lower cost alternatives.Finally, there is the performance audit which assesses the total operations of an agency including compliance, management and programme audit.

Systems of BudgetingPerformance and Programme Budgeting System (PPBS) This system of budgeting stipulates criteria for assessing the actual performance as well as defining the steps in terms of relative cost and benefit for the execution of a particular project.

PPBS was developed in the U.S.A and has also been used in many other countries. It has an approach which systemically integrates all aspects of planning and complementation of programme. It emphasises the evaluation of the entire programme areas in the budget rather than on allocation of fund to individual ministry or parastatal. Each project is analysed and evaluated in terms of cost benefit analysis. PPBS comprises rules of managerial efficiency and flexibility.

Therefore PPBS is an outcome of efforts of government for improving the formulation and execution of its expenditure policy.

Benefits/Objectives(i) It increases accountability.(ii) It facilitates the process of decision- making at all levels of

government.(iii) It promotes optimal utilization of resources.(iv) It enhances more purposeful and effective audit performance.

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Zero- Based Budgeting (ZBB)The zero based budgeting also originated and developed in the U.S.A in 1969. Like the PPBS, the ZBB is also a rational system of budgeting. Zero-Based Budgeting is a broad-reaching cost transformation effort that takes a “blank sheet of paper” approach to resource planning. It differs from traditional budgeting processes by examining all expenses for each new period, not just incremental expenditures in obvious areas. Zero-Based Budgeting forces managers to scrutinize all spendings and requires justifying every expense item that should be kept. It allows companies to radically redesign their cost structures and boost competitiveness. Zero-Based Budgeting analyzes which activities should be performed at what levels and frequency and examines how they could be better performed—potentially through streamlining, standardization, outsourcing, off-shoring or automation. The process is helpful for aligning resource allocations with strategic goals, although it can be time-consuming and difficult to quantify the returns on some expenditure.

Benefits of ZBBa. It improves the programme effectiveness dramatically.b. It eliminates or minimizes the low priority programmes.c. Facilitates critical review of schemes in terms of their cost

effectiveness and cost benefits.d. It ensures that available resources are rationally utilized.e. It provides for quick budget adjustments during the year.

FORMS OF BUDGETBudget is a statement of government’s expected capital and recurrent revenues against its proposed capital and recurrent expenditures. Budget is always presented in form of balance sheet. It is prepared by the ministry of finance.Basically, there are three forms of budget, they derive their names from the relationship between the revenue and expenditure amounts. They are:

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(i) Balanced Budget ( ii) Surplus Budget (iii) Deficit Budget

Balanced BudgetA balanced budget is that budget where total revenue receipts of the government for a given year are just equal to its aggregate expenditures. This type of budget is referred to as an ideal budget situation.

Surplus BudgetSurplus budget is one in which the government revenue receipts is in excess of government expenditure for the period and the financial situation is known as surplus financing.However, the economic option here is for government to reduce the purchasing power of firms and consumers by increasing taxes and also reducing its own expenditure. It is not an ideal economic situation. Surplus budget has deflationary effect upon the national income because the flow of government funds into the income stream is less than the corresponding tax leakage from the income – stream.Advantages of Surplus Budgeta. It discourages borrowing.b. It is an anti-inflation device.c. It enables government to conserve resources for future use.d. It can be used to re-allocate resources between private and public

sector of the economy.e. Government uses surplus budget to solve exchange rate and

balance of payments problem.

Disadvantages of Surplus Budgeta. Surplus budget can complicate unemployment problem. b. It may have adverse effect on the standard of living as resources

may not be fully utilized.c. It discourages investment as growth and development of the

economy may be retarded.

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Deficit Budget A deficit budget is that in which the government’s total estimated expenditure exceeds its total estimated revenue for a period usually one fiscal year. This type of financing is known as deficit financing and may be adopted to stimulate economic growth during economic depression. A deficit budget can be financed by borrowing from banks and from individuals by means of treasury bills, bonds etc., and borrowing from abroad. Increasing tax rates and levying additional tax is another means of financing deficit budget, sales of Governmentproperties, increasing the source of revenue and raising the level of taxation.

Advantages of Deficit Budgeta. It stimulates capital formation b. It is a device to solve unemployment problem.c. A deficit budget tends to expand the national income because the

tax leakage from the income stream is less than the flow of government funds into the income stream.

Disadvantages of Deficit Budgeta.It encourages reckless spending on the part of government.b.It may generate inflation ( price instability)c.It may complicate the problem of exchange rate and balance of

payment.d.It encourages borrowing, which can complicate the problem of

debt-burden.Sources of Budget RevenuesFor Government to meet up its expenditure requirements of the budget derive its revenues from the following sources:TaxesDirect and Indirect taxes are the major expected sources of government revenue, and the income from other natural endowments like oil as in the case of Nigeria.

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BorrowingsGovernment borrows money by means of outright loan and through the use of financial instruments in the money and capital markets, which includes treasury bills, bonds etc.

Grants:Grants are a type of financial assistance from rich countries that does not have to be repaid. Grants are usually in the form of money, but some types of grants may offer access to resources, services and other aids. It is tax exempted.

REFERENCES

Adesola, S. M. (2001) Public Sector Financial Management and Accounting, Lagos: Comfort press and and publishing co. Ltd.

Laxmikanth, M. (2007) Public Administration for the Upsc civil service preliminary Examination. New Dehli: Tata McGraw Hill Publishing Co. Ltd.

Onah, R. C. (2005) Public Administration. Nsukka: Great Ap Publishers Ltd.

Salawu, R. O. (2005). Essentials of Public Finance. Ile-ife Obafemi Awolowo University Press Ltd.

Shaibu, T.S. (2003).Public finance: An in-dept analysis fiscal &monetary theories & policies. Enugu: John Jacobs Publishers Ltd.

Ugo, E.A. (2008): Modern Public Administration Theories & Practise. Onitsha: Abbot Publishers

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CHAPTER SIX

FISCAL AND MONETARY POLICIES IN NIGERIA

BY

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OGEH, FRIDAY EZE

B.Sc. (Hons) Public Administration M.Sc. Public Administration

Doctorate Student, Department of Public Administration and Local Governmnet

University of Nigeria Nsukka

One of the principal functions of the Central Bank of Nigeria (CBN) is to formulate and execute Monetary Policy to promote monetary stability and a sound financial system. The CBN carries out this responsibility on behalf of the Federal Government through a process outlined in the Central Bank of Nigeria Decree 24, 1991 and other Financial Institution Decree 25, 1991.In formulating and executing monetary policy, the governor of the CBN is required to make proposals to the president of the Federal Republic of Nigeria who has the power to accept or amend such proposals. The Central Bank of Nigeria (CBN), is also empowered by the two enabling laws to direct the banks and other financial institutions to carry out certain duties in pursuit of the approved monetary policy. Usually, the monetary policy to be pursued is detailed out in the form of guidelines to all banks and other financial institutions.WHAT THEN IS FISCAL POLICY?Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy. Fiscal policy is a powerful instrument of stabilisation, and thus a conscious attempt to direct the economic activities of the government towards achieving economic growth and stability.Arthur Smith defines fiscal policy as “a policy under which the government uses its expenditure and revenue programes, to produce desirable effects and avoid undesirable effects on the national income, production and employment”. Through the ultimate aim of fiscal policy is the long-run stabilization of the economy, yet moderating short-run economic fluctuations. In this context, Otto (2003) defines fiscal policy as “charge in taxes and expenditures which aim at short-run goals of full employment and price – level stability”. Fiscal policy and monetary policy go hand in hand with each other. Both are interdependent on each other. Before the great depression in the United States, the

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government’s approach to the economy was laissez-faire. But following the Second World War, it was determined that the government had to take a pro-active role in the economy to regulate unemployment, business cycles, inflation and cost of money. By using a mixture of both monetary and fiscal policies depending on the political orientations and the philosophies of those in power at a particular time, one policy may dominate over another thus, government are able to control economic phenomena.

By and large, the term can however be referred to as government actions affecting its receipts and expenditures, which we ordinarily take as measured by the government’s receipts, its surplus or deficit.

OBJECTIVES OF FISCAL POLICYThe major objectives of fiscal policy are as follows:a. Achieve desirable price level: The stability of general price level in an economy is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove fluctuations in price level, so that ideal level is maintained.

b. To achieve desirable consumption level: A desirable consumption level is important for political, social and economic considerations. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the economy through consumption level.

c. To achieve desirable employment level: The efficiency in determining the living standard of the people is necessary for political stability and for maximization of production. Fiscal policy should achieve this level.d. To achieve desirable income distribution: The distribution of income determines the type of economic activities or the amount of savings. In this way, it is related to prices, consumption and employment. Income distribution should be equal to the most possible degree. Fiscal policy can achieve equality in distribution of income.e. Increase in capital formation: In under-developed countries, deficiency of capital is the main reason for under development. Large amounts are required for industry and economic development. Fiscal policy can divert resources and increase capital.

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f. Degree of inflation: in under developed countries, a degree of inflation is required for economic development. After a limit, inflationary policy may be used to get rid of this situation.On the other hand, Monetary Policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy, in consonance with the expected level of economic activities. An excess supply of money would result in an excess demand for goods and services which would cause rising and/or a deterioration of the balance of payments position. On the other hand, an inadequate supply of money could induce stagnation in the economy, thereby retarding growth and development. Consequently, the monetary authority must attempt to keep the money supply growing at an appropriate rate to ensure sustainable economic growth and maintain internal and external stability.Monetary policy, like fiscal policy, has four goals namely, high employment, price stability (control of inflation), an appropriate exchange rate (maintenance of a healthy balance of payments position); and promotion of adequate and sustainable level of economic growth and development. In aiming at these goals, the CBN takes accounts of four constraints: it needs to prevent financial panics, to avoid “excessive” interest rate instability, to prevent certain sectors of the economy from bearing too much of the burden of a restrictive policy and to retain the confidence of foreign investors.

THE GOALS OF MONETARY POLICY The goals of monetary policies in a country are as follows: (a) High Employment: High employment is an obvious goal of any macro-economic policy. This is usually achieved through monetary policies of the Central Banks of the country concerned.(b) Price Stability (Control of Inflation): The next goal that monetary policy plays is price stability or control of inflation. Consider an economy in which prices have been rising at a rate of say 100 percent per year, and everyone knows with certainty that the inflation rate will continue to be 100 percent. The damage this inflation does is that it hampers redistribution income, because all wages and all contracts, as well as tax laws are adjusted for it. Such a fully anticipated inflation imposes some losses. First, since prices cannot be changed continually, they will be out of equilibrium for the presumably short periods between

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price changes. Second, inflation creates an incentive to hold too little cash because cash holdings lose their real value without having the compensation of the higher normal interest rate that other assets have. Therefore, people are put to the inconvenience of continual trips to get cash. But the inflations we actually experience are not fully anticipated, and our economy is not fully indexed. Thus, nominal rather than real interest income is taxed. At the same time, borrowers are allowed to deduct too much as interest payments from taxable income. In addition, the depreciation charges that firms are allowed to deduct against taxable income are too low because they are based on original cost rather than on replacement cost. This therefore raises their tax liability. Since inflation affects the tax burdens faced by corporations to varying degrees, it also leads to a socially inefficient allocation of investment funds, because after-tax profits become a less reliable guide to the true productivity of capital in various industries.Another effect of unanticipated inflation is its impact on the distribution of income and wealth. Obviously, it may help or hurt wage earners depending upon whether or not wages lag behind prices.Regardless of what inflation does to the distribution of income among different income classes, it generates substantial income redistribution within each income class; since some households are net borrowers and others net lenders. To anyone genuinely concerned with equity then redistribution is a major loss from inflation.Another loss from inflation is that it creates uncertainty and insecurity. Households can no longer plan confidently for the distant future since they do not know what their fixed naira assets will then be worth in real terms. Since people have been taught to save for the rainy day, such savings have been punished rather than rewarded, by unanticipated inflation. This is likely to cause people to lose faith in the government. The effect of this cannot be in any way quantified and may to reasonable opinion be the major disadvantage of inflation.Inflation also raises the government’s revenue relative to its expenditures. One reason is that part of the tax system is set in nominal terms, so that it is nominal capital gains and not just real capital gains that are taxed. Second, the government is the biggest debtor in the economy when inflation rate rises, the real value of its debt and of its interest payment falls.

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(c)Maintenance of Appropriate Foreign – Exchange Rate: The third goal of monetary policy is the maintenance of an appropriate foreign exchange rate or maintenance of a healthy balance of payments position in order to safeguard the external value of National Currency. The exchange rate is the price of foreign money is terms of domestic money. Changes in the exchange rate occur to restore or maintain balance between payments to foreign countries and receipts from these countries. The payment balance, which is frequently viewed as a measure of how well a country is doing, is one entry in the balance of payments. Balance of payments is the accounting record of all payments as well as all receipts between domestic residents and foreign residents. The payments balance is the value of the transactions of the Central Bank or monetary authority in official reserve assets. If imports of goods, services and securities exceed export of goods, services and securities during any period, the country has a payment deficit, which must be financed with the funds obtained from sale of securities or borrowing abroad. If exports of goods, services and securities exceed imports of goods, services, and securities, the country has a payments surplus. An appropriate exchange rate has at most time being a major policy problem for the CBN and the monetary authorities. Nigeria as an import oriented nation should strive hard to have an appropriate foreign exchange rate policy so as to safeguard the national currency.(d) Economic Growth: Another goal of monetary policy is the promotion of adequate and sustainable level of economic growth and development. Our rate of economic growth depends on many factors beyond the control of CBN but the CBN can influence one important determinant of the economic growth, investment. A higher rate of investment not only means more capital per worker, but is also an important way in which technological progress comes about, since innovations are embodied in new equipment. The invention of a new machine does not increase productivity until firms invest by installing and making use of it for production.

One way of raising investment is to keep the real interest rate low. This of course is expansionary, and to prevent inflation such a policy would have to be accompanied by a restrictive fiscal policy; that is, by a large government surplus, or more realistically, by keeping the deficit small.

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DIFFERENCES BETWEEN FISCAL AND MONETARY POLICIESThe following are the major differences between fiscal and monetary policies. They are:1. Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy. While monetary policy involves changing the interest rates and influencing the money supply.2. Fiscal policy is being carried out by the government, while monetary policy is usually carried out by the Central Bank.3. Fiscal policy is usually aimed at increased demand and economic growth; the government will cut tax and increase spending (leading to a higher budget deficit). While monetary policy is carried out by setting base interest rates (e.g. Bank of England in UK and Federal Reserve in US).4. Fiscal policy also tends to reduce demand and inflation, while monetary policy involves influencing the supply of money e.g. policy of quantitative analysis to increase the supply of money.5. Fiscal policy relates to taxes and the spending thereof. While monetary policy relates to raising and lowering of interests rates by the Central Bank.INSTRUMENTS OF MONETARY POLICY Instruments of monetary policy are many and varied. Their respective effects on the economy also vary in terms of where they start and the transmission route. Sometimes some tools are not compatible with others in which case the adoption of one set of instruments will negate or be at cross-purposes with the effects of others. That is why monetary authorities usually consider the operational efficiency, the technical features, the lags and other effects of any given instruments as well as their compatibility with other instruments before they can be used. Generally, instruments of monetary policy are broadly grouped into two as follows; i quantitative instruments ii qualitative instrumentQuantitative Instruments: These instruments are designed to control the volume of money and credit in the economy. The instruments in this group are:

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1. Bank Rates.2. Open Market Operations3. Legal Reserve Ratio4. Stabilization SecuritiesBank Rate: The bank rate is also called the discount rate. This is the rate at which the Central Bank discounts first class commercial bills for commercial banks, discount houses and other financial institutions. In developing countries like Nigeria, with largely under-developed financial system, the influence of discount houses and discounting activities are not well felt. Hence, in such countries, the term bank rate simply means the rate of interest at which the Central Bank lend money to Commercial and Merchant banks, while the rate of interest at which banks lend money to the public is known as the lending rate. The use of bank rate as an instrument of monetary policy is justified on two major grounds: (i) That the bank rate can influence all other rates in the economy; and ;( ii) That the demand for money is interest elastic.Loans from Central Bank to commercial banks enable them to increase the reserve of commercial banks and enable them to create credit. The use of bank rate as a monetary tool is to reduce the quantity of credits or to increase it as the need may arise, through upward and downward adjustments. The bank rate will influence all other rates in the economy if the financial system is well developed. For example, if the bank rate is 20%, it is expected that the lending rate (rate of interest at which commercial bank lends to the public) will be above 20% in order to cover cost of funds and make reasonable profits. If the bank rate increases to say 30%, the lending rate will increase and vice-versa. Given an elastic demand, advance in bank credit will fall and money supply will fall because of the high lending rate. The converse will happen if the Central Bank reduces the rate. The bank rate thus helps to ration credit and ensure that the available fund gets to the best users.OPEN Market Operation (OMO): Open market operation refers to the buying and selling of government bonds, treasury bills and other securities in the open market by individuals, commercial banks and other interested institution by the Central Bank. If for any reason, the Central Bank decides to reduce the amount of money in circulation, it could sell treasury bills in the open market. The intended effect will be to reduce commercial bank’s reserve and therefore reduce their ability to create credit.

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Let us assume that the Central Bank issues treasury bills of N15 million to be sold in the open market at a time when the legal reserve ratio is 20%. If everything is bought by the public, they will pay by issuing cheques in their accounts with commercial banks, thus reducing commercial banks’ reserves. The converse will hold if the Central Bank wants to expand the money in circulation.As has been stated earlier, this is an important instrument of monetary policy. Recall that monetary policy is designed with the ultimate objective of changing the aggregate demand through changes in the level of money supply. Open market operation is one of the tools used by the monetary authorities to change the level of money supply. Open Market Operation is the buying/selling of government securities by the Central Bank from/ to the public. By the time the whole process of buying /selling is completed, the level of money supply increases/decreases by a multiple of the original increase/decrease. Thus Open Market Operation is a good tool for both expansionary and contractionary monetary policy.An Evaluation of Open Market Operation as an Instrument of Monetary Policy In an economy where the Money Market is well developed, it will have quick effect on commercial banks’ reserve and helps to adjust liquidity in the economy. The effect of Open Market Operation may be quickly reversed, if need be. For example, if treasury bills are sold to mop-up liquidity, they could be bought back to improve liquidity if the situation so demands.

Open Market Operation may help in attracting funds that hitherto were leakages in the banking system. For instance, among those who will buy the treasury bills may be people who will pay with cash deposited into the banking system specifically for that purpose i.e. funds previously outside the banking system.

When treasury bills are sold, the banks are not consciously informed that their reserves are to be withdrawn and this helps to ensure success. Direct increase in reserve requirements for example, will have the same effect. OMO requires a well developed discount market to be effective. If therefore, the money markets are not developed with appropriate instruments, the effectiveness of OMO is impaired.

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Also, the transmission route is rather long. Any bank in the main will drastically reduce the effectiveness of OMO in immediately regulating the liquidity level. Again, its objective may not be achieved if the Central Bank decides to spend its excess reserves on treasury bills sold for the purpose of control. This is because the exercise is not intended to affect the reserves of the Central Bank.

Moreover, Poverty, low per capita income, low level of savings, poor exposure to financial market operations, availability of alternative and perhaps more profitable investment opportunities combine to limit the size of public subscription of treasury bills in developing countries. Open Market Operations cannot, therefore, be effective in contracting money supply in such countries. Again, the Treasury bill as a national debt instrument has a servicing cost, by way of interest rate.

The Finance Ministry may want to put control on the interest rate that would be payable; that being a cost to public, low interest rate may not make treasury bills to be very attractive. Open Market Operation can have unpredictable time and it may take a long time before its full effect is felt in the economy, especially if it is being used to reduce money supply.Legal Reserve Ratio: The legal reserve ratio is used by the Central Bank to control and regulate the cash or other reserves of banking institutions.

Traditionally, this instrument aims at ensuring that banks have sufficient cash or suitable liquid assets to meet daily demands for currency and reduce dependence on the services of the Central Bank as a lender of last resort. It is known that all customers cannot demand their deposit at the same time even if they so do, others are paying in just as some are withdrawing. It is therefore not necessary that all deposits be retained in cash and as such, only a prudently determined proportion is usually retained to meet daily currency demands while the remainder is invested to earn income. The proportion retained is known as “cash reserves” or “liquid reserve” as the case may be. It derives its name from the Statutory Power of the Central Bank to adjust the ratio according to the changing fortunes of the economy.

In addition to cash, other assets, which are capable of being converted into cash at call or short notice, are also used as reserves. This will minimize the loss sustained by banks if all reserves were held in non-interest bearing cash; hence, the existence of liquid assets-ratio in many countries. We can also have variable liquid asset ratio in which

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banks are asked to vary the composition of their liquid assets as per a given partner. The legal reserve ratio shows the proportion of liquid assets to deposit liabilities as must be maintained by banks.

Assets and liabilities that are eligible for inclusion in the computation of the ratio are clearly defined by the Central Bank, which usually varies among countries. The ratio can also vary from time to time even in the same country. The legal reserve ratio, through the money multiplier has a direct impact on the money supply. This fact explains why it has continued to remain an important instrument of monetary control. The ratio is adjusted upwards if the monetary authorities desire to reduce the level of money supply. Conversely, if the desire is to increase the level of money supply, the ratio will be adjusted downwards. The adjusted ratio affects directly the credit creating ability of the banking system.Stabilization Security: Stabilization Security or Special Deposit is one of the modern methods of monetary control, designed to supplement the traditional techniques earlier discussed. It has the same effect as legal reserve ratio in the credit creating ability of banks. QUALITATIVE INSTRUMENTS

Apart from the quantitative controls that aim at regulating credit creation and controlling money stock, the Central bank can also monitor the economy by giving directives to banks on priorities to be observed in virtually all areas of their operations. These are many and varied and can take any form as each country’s Central Bank may select. The aim of these instruments is to ensure that the hard earned savings are not directed to those sectors of the economy whose overall impacts are minimal. Indeed some activities such as importing can actually be against the spirit of self-reliance, economic development and balance of payments viability, which are duly acknowledged goals of any government. That is why it is necessary for the Central Bank to direct funds to those sectors of the economy, which have the greatest linkage with the overall development strategy of the country. In many occasions, it has been found that banks are more favourably disposed towards lending with the overall development strategy of the country. In many occasions, it has been found that banks are more favourably disposed towards lending to the commercial sector. They also prefer self-liquidating loans to medium and long-term loans that are really

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crucial for economic development. Besides, loans are often in favour of well established Urban based enterprises to the detriment of small-scale indigenous enterprises most of which are rural-based. Qualitative credit control aim at reversing this trend.The qualitative tools are broadly grouped into three as follows:2. The first group includes credit ceilings which are measures aimed at influencing sectoral allocation of credit to specified sectors. The allocation may be on percentages or a maximum or minimum amount of loans to be approved for a particular sector. The credit ceiling and rationing may be made to be flexible by making it incremental, i.e. after obtaining statistics on the existing patterns of lending the Central bank would impose ceilings of additional lending or distribute such additional lending to the different sectors.

3. There is also the core approach to selective control. This seeks to vary the re-discount rate of instruments coming from certain sectors or to specify concessionary interest rate on lending to favoured sectors thus making borrowing attractive in those sectors.4. The third system of selective control is that which has to do with reserve requirement. Lending to a high propriety sector may be accepted as part of liquid asset for the purpose of computing liquidity reserves or some lending may be disregarded in computing sectoral ceiling. During the indigenization exercise in Nigeria, for example, loan for purchase of shares were disregarded for the purpose of computing setoral allocation of reserve requirement and in 1986/87, lending in excess of credit ceiling was approved for the favoured sectors like agricultural production and export.Other qualitative instruments of Monetary Policies are:(vi) Sectoral Allocation of Credit: This is a situation where the Central Banks divide economic activities into sectors for the purpose of sectoral credit allocation based upon the relative importance of each sector to the nation’s economic development. Quarrying, Manufacturing and Real Estate etc. are given specific percentages, with annual modifications, allocated based on national priorities. These activities were for sometimes classified as “productive” and “unproductive”, later as preferred and less preferred sector.(vii) Interest Rate Ceiling: Interest rate may be controlled to favour particular sectors. For a long time, the preferred sectors enjoyed

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concessionary interest to create incentives for borrowing and attract more investors into such sectors. During the Structural Adjustment Programme (SAP), era in Nigeria, interest rate has been deregulated, regulated and now deregulated.(viii) Indigenization of Credit: selective credit control may specifically be such that a particular percentage of bank finance should go to wholly indigenous enterprises.(ix) Loans to Rural Borrowers: This is a way of improving investment in the rural areas. The control may specify that a specified percentage of deposit collected in the rural area be invested in such area.(x) Refinancing Facilities : Central Bank can provide stable line of re-financing through loans, advances or discounting, especially by discounting bills that come from high priority sectors like the produce bill of the 1900’s and the export simulation finance.

REFERENCES

Abbot, CC (1946): Management of the Federal Debt. New York. Macgraw Hill.

Abubakar, M.S. (1989): “Manufacture and Construction” in Kayhode, M.O. and Usmans U.B. (Eds): Nigeria Since Independence: The First 25 years vol. 11 (the economy) Heinemann Educational Books (Nig) Ltd. Ibadan, 99.86-104.

Adedeji, A. (1969), Nigeria Federal Finance; London, Hutchinson Publishers.Ahmed, A. (1986): Debt Management and Nigerian Balance of Payment.

Bullion, vol. 10, No 4, Lagos CBN.Akatu, P.A. and Olisadebe, E.U. (Dec. 1987), Management of the Nigeria

Economy’ Economic and Financial Review, VOl, 25 no 4, p. 62.Amacher, Ryan C and Ulbrich, Holley H. (1986), Principles of

Macroeconomics 3rd ed, Cincinnati, USA, South-Western publishing company.

Anyanwu, J.C (1993): Monetary Economics: Theory, Policy and Institutions. Hybrid Publishers, Onitsha.

Anyanuwuokoro, Mike. (2004), Elements of Public Finance, Hosanna Publications Enugu.

Attama, N. (2005): Fundamentals of Nigerian Public Finance. L & D CHOCHO ventures, Abakaliki.

Azi, Charles (1997). Monetary Economics: Theory and Policy and Institutions, Onishta, Hybrid Publisher Ltd.

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Blinder, Alan (1983) “Issues in the coordination of Monetary and Fiscal Policies” in Federal Reserve Bank of Kansas City.

Chukwudine, U. (1996): Essentials of Business Finance. Base 5 Communications, Onitsha.

Chukwudine, U. (1999): Public Finance: A Didactic Approach. Adson Educational publishers, Onitsha.

CBN Brief Series No. 96/03 Research Department, CBN.Central Bank of Nigeria, Annual Report and Statement of Accounts, various

years.Central Bank of Nigeria, (2002) Statistical Bulletin, Lagos, Research

Department.Dalton, Hugh (1964), Principles of Public Finance, London, Rout legde and

Kegan Paul Ltd.Due, John F. (1963), Government Finance; economic Analysis, Homewood,

Illinois, Richard D. Irwinm Inc.Emekaekwue, (1993). Principles of public finance, Kinshasa, Zaria, African

Bureau of Educational Sciences/Organisation African Unity.Ezeanyagu, J. E. (2000), The Economic of Public Finance, Government

Investments, and Banking in Developing Countries; the Nigerian case, Enugu, Rabboni Publishers.

Fisher, Stanley (1984) “The Benefits of Price Stability” in Federal Reserve Bank of Kansas City.

Levy, Mickey (1981) : “Factors Affecting Monetary Policy in an Era of Inflation” Journal of Monetary Economics. Pp 351-73.

Musgrave, Richard and Musgrave, Peggy B (1980), Public Finance in Theory and practice, 3rd ed, New York Mc-Graw-Hill Book Company.

Okigbo, Pius N.C. (1965) Nigeria Public Finance, Evanston, North-western University Press

Okigbo, Pius N.C. (1993) “Growth and Structure of Nigerian Economy”. Essays in the public philosophy of Development Vol 3, Enugu, fourth dimension

Okonkwo, Victor Ike (2001). Value Added Tax in Nigeria. Enugu, Hossana Publications.

Okpe, Ikechukwu I. (1998), Personal Income Tax in Nigeria, Enugu, New generation Books.

Okunrounmu, T.O. (1996;36) “Fiscal Federalism: Revenue Allocation for Economic Development” Bulltion vol.20 No. 2, Lagos, Central Bank of Nigeria.

Ola, C.S. (1983), Nigeria Taxation 3rd Ed. Graham Burn, United Kingdom.Orjih, John (2001), Financial Managment, Enugu, Splasmedia Organisation.

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Osisioma, Benjamin C., (1996), “Fiscal Federalism in Nigeria: The Search for a viable formula” Journal of the Management Sciences vol. 1, Awka, Faculty of Management Sciences, Nnamdi Azikiwe University.

Pandey, I.M., (1990), Financial Management, New Delhi, India, Vikas Publishing House PVT Ltd.

Samuelson, Paul A. (1980), Economic, 11th ed. New York, McGraw-Hill Inc.Thomas Mayer, James S.D and Robert Z. A. (1993): Money, Banking and the

Economy (5th Editions) (New York, W W Norton and Company).

CHAPTER SEVEN

PUBLIC DEBT AND PUBLIC DEBT MANAGEMENT

BY

OGEH, FRIDAY EZE (Hons) B.Sc. Public Administration

M.Sc. Public Administration

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Doctorate Student, Department of Public Administration and Local Government

University of Nigeria Nsukka

WHAT IS PUBLIC DEBT?Public debt means government debt. According to Anyanwu (1993), public debt is defined as all claims against the government held by the private sector of the economy or by foreigners whether interest bearing or not (and including back-held debt and government currency, if any) less any claim held by the government against the private sector and foreigners.Public debt is the debt of the federal government accumulated by borrowing on which interest is been paid. It is defined as the method of raising income through loans, either internally or externally. Thus public debt forms part of public revenue, but it differs from other sources of public revenue (Musgrave, 1976).Public debt can either be internal or external. Internal public debts include Loans through the issue of treasury bills, treasury certificates, development stocks, and means advance trade debts.External public debt on the other hand, refers to unpaid portion of external resources required for developmental purposes and balance of payment support, which could not be repaid when they fell due.

Classification of Public DebtsOne of the popular ways of classifying public debt is by identifying the sources within the country or from sources outside the country. This is based on whether the holder (or creditor) resides within or outside the country. Using this approach, public debt is classified into two: internal and external public debts.a. Internal Debt: - Public debt is said to be internal when the debt is obtained from sources within the borders of a country. Internal debts represent credit obligations owed by the government and government corporation/parastatals to bodies and individual residents, central bank of Nigeria, other banks and non-bank public. The government incurs internal debts by issuing government securities such as treasury bills, treasury certificate and development stocks. Internal debts are known as domestic debt based on the type of the holder.

b. External Public Debt: - External public debts are debts obtained from sources that are outside the borders of a country. They are

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debt from other countries. External debts are debts owned by the government and government owned institutions and parastatals to residents of other countries. This type of debts is made up of international credit obligations of the government owned institutions. Sources of Nigeria external debts include the Paris club of creditors, London club of creditors, and loans from IMF.

Classification by PurposeAnother way to classify public debt is by use to which the debt is to be put. That is, based on what the debt is placed for, the purpose, or need that gave rise to the debt. Based on these criteria, public debt is classified as follows: Trade Debt: - Trade debt arises when Nigeria trades with other countries and is unable to pay, either partly or wholly, for the goods and services supplied.

Dead weight debt, passive, active debt: - According to Hicks, alternative classifications of public debt is on the use to which a loan is put. Dead weight Debt is the debt which does not increase the productive capacity of the community, e.g. war, Passive Loans which neither yield an income nor increase the productive capacity of the community, but are used in such a way that they create satisfactions and enhance the enjoyment of the communities, e.g club pool, parks swimming pool. Active debts: this yields income and enhances the productive capacity of the country. Project-tied loans: - They are loans secured for investment purposes and are usually long term in nature. They are tied to a specific project that have adequate viability and self-liquidating. Such projects help to accelerate the economic growth and development of the domestic economy. In such cases, government takes loans to address socio-economic needs such as utilities and social services.

Classification by MaturityPublic debt is also classified based on the maturity period of the debt. This depends on when the debt is supposed to be repaid: how long it will take to repay the loan.Public debt can be classified into short-term, long-term and medium-term, this classification varies with the person making the classification.

a. Short-term debts

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A short-term debt is a debt that the original maturity date falls within one year. Trade debts and supplier credits are usually short-term in nature.

b. Medium-term DebtsThis class comprises debts that have original maturities that are more than one-year period but not more than five years. Most medium-debts are promissory notes and debts owed to bilateral and multilateral agencies.

c. Long-term debts Long-term public debts are debts, which the original maturity period is more than five years. They are usually obtained from bilateral and multilateral agencies like the IMF, Paris Club, London Club, etc.

Classification by productivityThis is the type of classification, which focuses on the productivity of the debt in terms of revenue yielding potentials of the project or expenditure term on which the debt is being utilized. We have the productive and consumption debts.a. Productive debtsPublic debt is productive when it is obtained to finance a project that can generate income from which the debt will be repaid. E.g. if government borrows money to finance a steel production plant, the plant will produce the income to be used in repaying the debt. It is therefore, a productive debt that provides more free income and financial freedom as time goes on. The borrower comes better off in future years if his expectations come true.

b. Consumption debtsA consumption debt is a debt obtained to finance goods and services that will be gradually used up without generating any direct income. But instead of generating any income, consumption debts become a constant source of drain to the borrower’s income. He has to get the fund from any other source to pay for the principal and interest on the loan, and also spend money to maintain and service the consumption goods.

THE ROLE/ RATIONALE FOR PUBLIC DEBTSA very pertinent question which often runs across peoples mind is: why do countries borrow or incur debts? Certainly borrowing is as old as nations. Countries borrow because of their inability to generate enough

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savings which could be used for investment and hence growth. Beside, part of the explanation of this argument is that the incomes of developing countries like Nigeria is low, to this effect, in recent years public debt has come to occupy an important place as a source of income to the state.The importance/role of public debt is becoming more and more appreciated because of the following reasons: - It helps in maintaining economic stability: - Public debts play an important role in avoiding economic fluctuations and thus ensuring stability in the economic system.- Development of Productive Enterprise: - Borrowing is especially important to finance the construction and expansion of productive enterprise like water works, railways, key industries, roads e.t.c.- Meeting Emergencies: - At times natural calamities upset completely the budgetary situation. Under such situation, public expenditure increase out of all proportions and becomes unduly large. It is not possible to meet such sudden expenditure through taxation. Rather public borrowing becomes most necessary in financing such emergencies.- Bridging the time lag between revenue receipts and expenditure: - At times income is generated slowly and at wide intervals, while expenditure is incurred on daily basis. At a period where the state is faced with the problem of heavy and urgent expenditure, it may not however, postpone it. And to finance such expenditure, money has to be raised by floating a short period loan in anticipation of the revenue receipts.- War expenditure: - Modern war is so costly and can only be properly financed through debt/borrowing. The borrowing may come in the form of exchange of resources for arms and ammunitions or outright borrowing. Taxation is neither desirable nor possible to finance a war.- Meeting current deficits: - Due to unseen circumstances, budgetary deficits are encountered and public debt becomes very helpful in financing the deficits. This of course should, however be adopted rarely and under exceptional cases as a frequent application of this policy may make the government extravagant.

CAUSES OF PUBLIC DEBT

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Numerous factors contribute to the increased size of Nigeria’s public debts, which by the end of 2012, stood at18.8%of the Nation’s GDP. These factors include the following: 1. Heavy Dependence on Oil Revenue: Oil boom was experienced in the 70’s because there were only few suppliers. The industrialized countries were interested more in the conservations of their oil revenue than the sale. Changes came up when UK discovered oil in the North Sea and other similar countries. As oil prices fall in the eighties due to these new discoveries, which in turn reduced the oil revenue, government resorted in borrowing to finance expenditures.2. Neglect of non-oil Sector: The oil boom of the seventies made Nigeria a mono-economy. Other sectors were neglected (especially agriculture) and so their contribution towards generating revenue to compensate the consequent shortfall in oil revenue was negligible. This became a great challenge to the government with the worsening situation of the Naira in terms of exchange rate in relation to other currencies of the world.3. Rise in interest rate: Some loans secured by the government have high interest charges, sometimes during the rescheduling of the interest charged it is also reviewed. Some

loans have floating interest rates; the cumulative effect has resulted in the debt crisis Nigeria is facing now.4. Short-term loans used to finance long-term projects: Loans that can be used for capital projects to develop the economy must be long term. But in Nigeria short-term loans are sort to finance trade and development projects. In such cases, the loans mature before the projects are completed, thus worsening the debt crisis.5. Reckless contraction of loans: Some projects embarked upon by the government are politically motivated; therefore the projects for which the loan is invested are not self-liquidating. Corruption, political factors and personal gains of government official necessitate the contraction of such loans.6. Huge budget Deficits: Due to persistent budget deficits over the years, the public debt crisis especially, internal debt has been on the increase, and to finance such deficit, government has to borrow, thereby enlarging the debt burden.

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SOURCES OF DOMESTIC PUBLIC DEBTDomestic debt, also known as, internal debts of a country usually comes from the following sources;1. The Central Bank: The central bank of Nigeria or of any country is the government banker. As banker to the government, the government of each country usually resorts to central bank to borrow money when the need arises, just like individuals go to borrow from their own banks. The government borrows from the central bank on short-term basis to finance its budget deficits. Such borrowing to finance budget deficits is referred to as ways and means of advances.2. Commercial Banks: The government at various levels also borrows from other banks apart from the central bank. They usually borrow from commercial and merchant banks. Apart from this aspect, banks buy government debt instruments, such as treasury bills, treasury certificates and other securities, as part of their investment portfolios.3. Non-Bank Financial Institutions: - Non-bank financial institutions also lend to the government by buying government debt instruments. These include; insurance companies, savings and loan, pension scheme etc.4. The General Public: The government also borrows from the general public and private business organisations, since government instrument such as treasury bills and treasury certificates are sold by the Central Bank in the open financial market.

SOURCES OF EXTERNAL DEBTExternal debts are debts obtained from outside the country, the loans and credit facilities obtained from foreign government and residents of other countries. Such debts are called foreign debts and they usually come from the following sources:1. Paris Club of creditors: This is made up of government of various developed countries who guarantee the export credit agencies (CBN, 1996). Members include UK, USA, Canada, Germany, and France. These countries guarantee debts owed to the citizens who export goods to other countries, thus encouraging export.

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2. London Club of creditors: This is made up of commercial banks mainly from industrialized countries that extend insured and un-guaranteed debts to citizens of other countries. Such debts from part of the public debt of the debtor country.3. Multi-Creditors: This is a group of international financial institutions that are funded by the member-nations. They receive contributions from the government of the member nations and in return help to provide credits to those nations for development purposes and balance of payments support.

MANAGEMENT OF NIGERIA’S PUBLIC DEBTOne of the functions of a Central Bank is to serve as Banker to the government. In doing this, it keeps the finances and accounts of the government. It is also involved in raising money from internal and external sources for the execution of government programmes. The money so raised or borrowed becomes a debt owed by the government. This debt is commonly referred to as public debt. Specifically, the public debt is the amount of money owed by the government to institutions, governments and individuals resident in or outside Nigeria. The Central Bank of Nigeria (CBN), in conjunction with the Federal Ministry of Finance (FMF), manages the nation’s public debt. Nigeria’s external debt management strategies varied from time to time since the early 1980s, when the debt crisis became pronounced. However, a more pragmatic articulate and all embracing plan was set out in February 1988 with the following policy objectives: i To outline strategies for increasing foreign exchange earnings thereby reducing the need for external borrowing, ii To set out the criteria for borrowing from external sources and determine the type of projects for which external loans may be obtained; iii To outline the mechanism for servicing external debts of the public and private sectors;iv. To outline the roles and responsibilities of the various organs of the Federal and State Governments, as well as the private sector in the management of external debt. Consequently, the following guidelines were issued as regards government borrowing:(i) Economic sector projects should have positive internal rate of return as high as the cost of borrowing.

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(ii) Social services or infrastructures would be ranked on the basis of their cost/benefit ratios.(iii) Projects to be financed with external loans should be supported with feasibility studies (which, of course, include loan acquisition, deployment and retirement plan schedule).(iv) External loans for private and public sector projects of quick yielding nature can be sourced from the private capital markets while loans for social services can be sourced from concessional financing institutions.(v) Borrowing by State Government, parastatals and private agencies must receive the approval of the Federal Government before they are contracted. The private sector borrowing approval does not constitute a Federal Government guarantee or currency undertaking, but to ensure that the borrowing conforms with national objective.(vi) The State Government borrowing proposals should be submitted to the Ministry of Finance and Economic Development and the Central Bank of Nigeria for consideration before they are incorporated in the final public sector borrowing for the annual budget.

(vii) State governments and their agencies, as well as Federal parastatals should service their debts through the Foreign Exchange Market (FEM) and inform the Federal Ministry of Finance and Economic Development for record purposes. For failure to service their debts the naira equivalents would be deducted at source before the balance of their statutory allocations are released.(viii) For loans on-lent by the Federal government to State Government, the Federal Ministry of Finance and EconomicDevelopment would make due payments and deduct the full amounts at source from their statutory allocation.(ix) As for the private sector, industries that are export-oriented should service their debts from their export earning while others should utilize the FEM facilities to service their debt.

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DEBT MANAGEMENT IN NIGERIA Definition of Debt ManagementDebt management refers to the establishment of the conditions of the issue and the redemption of public securities. It involves the process of administering the national debt that is providing for the payment of interest, and arranging the refinancing of maturing of bonds.Debt management has become the major responsibility of CBN in recent times, resulting in the setting up of a department in the Bank to undertake the function.Public debt management is the entire process of determining the desirability, acquisition, utilization, servicing, and repayment of public debt in such a manner as to minimize the burden of debt on both the present and the future generation. It is also the combination of policies that will allow for repayment of the debts or bring about its significant reduction. It also refers to how debt is administered or handled to avoid adverse economic effects. When the government borrows money to finance its activities, it creates a burden on the economy, which is ultimately borne by the tax payers, and the entire economy. This burden follows interest payments. In order to pay for this, the government may decide to raise the money through taxation. In that case, it is tax payers that will bear the burden of paying for servicing the debt. Holders of the debt instruments will receive the interest payments. It is domestic debt payments and receipt that will still be within the economy thereby balancing off the effects. But, if it is external debt, the interests have to be paid to foreigners.In view of balancing off effects of domestic debts, some economists have argued that a domestic debt imposes no burden. This argument however, does not totally remove the negative impacts of such debt servicing on tax payer. If debt servicing raises taxation so high, it may become too severe that it becomes tax disincentive. If this happens, the tax payer suffers more while those who hold government securities enjoy. Thus, there is still a burden on the tax payer.

The objectives of debt management/ rationale for public debt managementEffective debt management has the following objectives: a. To make a maximum contribution to public welfare by seeing that debt exerts minimum negative effects;

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b. To contribute to price stability;c. To serve as an instrument of economic control;d. To be used to raise national income;e. To be used in achieving equity in national income distribution;f. To maintain a relatively low interest rate in order to hold down the tax burden and in order to avoid any suspicion of a subsidy to bondholders, who as a class need it least;g. To maintain the debt as par value in order to facilitate flotation of new issue;h. To space maturities so as to assist in stabilizing the market; andi. To tailor the types and maturities of the government obligations to the requirements of the various classes of saver who prefer to invest in government debt.NIGERIA’S EXTERNAL DEBT MANAGEMENT STRATEGIES UNDER THE STRUCTURAL ADJUSTMENT PROGRAMMEThe management of external debt is an important component of the nation’s economic policy. In Nigeria, debt management rests on the Central Bank and the Federal Ministry of Finance, Treasury Division. Though the ultimate responsibility for public debt management resides in the treasury, the central bank serves as the main channel for administering debt policy. The central purpose of external debt management is to match a country’s foreign borrowings (size and terms), with overall economic performance and ability to pay which leaving sufficient margin for unforeseeable development needs to avoid balance of payment crisis. This involves enforcement of established procedures as to who can borrow abroad, a satisfactory system for registering approved foreign loans, adequate administrative follow-up to monitor their utilization and the timely payment as and when due.With Nigeria’s external debt mounting and its burden biting, the federal government adopted the technique of attempting to limit the size of the debt in the early 1980s. For instance, in 1980, strict guidelines, stating conditions for state governments borrowing abroad under federal government guarantees, were issued. In 1982 a ceiling of N200 million was put beyond which state government could not incur further external borrowing. Under the revised 1984 budget, further state government borrowing abroad was embargoed while the federal government was to borrow only under exceptional circumstance though drawings were

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allowed to continue on existing project tied-loans. This policy was to remain in force for 1985 and 1986.Another debt management technique adopted in Nigeria before July 1986 is the refinancing of short-term trade debts (trade arrears). In August 1983, for instance Nigeria refinanced N1.5 billion of trade debts in confirmed letters of credit within six months, beginning from January 1984. Interest was fixed at 11.2 per cent above LIBOR. Full repayments of the refinanced arrears were completed in July, 1986.Despite this refinancing, the arrears continued to mount and hence increased the nation’s level of indebtedness. In addition, the chances of opening new lines of credit became narrower and further reduced the level of economic activity. To secure further relief on debt a decision was reached in 1984 to refinance the remaining arrears, particularly those on open account, bills for collection and unconfirmed letters of credit through the issuance of promissory notes. In this regard, the terms of agreement included the payment of interest at the rate of 1 per cent. With effect from January 1984, maturity period of six years including a grace period of two and half years and the redemption of the promissory notes in fourteen equal quarterly instalments with effect from October, 1986 were agreed. The notes were to be redeemed in naira (local currency), based on terms to be agreed on with the Nigerian government.MECHANISM FOR PUBLIC DEBT MANAGEMENT IN NIGERIA1. Embargo on new loans: This is aimed at ensuring that the debt stock does not grow with its attendant debt servicing burden. This policy was first applied in 1984 but did not continue as the then military administration or State Governments resorted to borrowing from external sources. Occasionally, the federal Government have fixed the minimum level of debt for both the federal and state governments. In 1978, such a fixation was N5 billion for the federal government and in 1982 it was N 200 million for any state government.2. Limit on debt service payments: This involves defining the limit or ratio of income that can be used to service debt within any fiscal year. e.g. In 1980; state governments were required not to use more than 10% of their total revenue on debt service payments. In the case of federal government, 30% is set aside for debt servicing.

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3. Debt restructuring: This involves the conversion of debt into another debt. It can take the following form: the amount remains unchanged, and a short-term loan can be made to become a long-term loan.4. Debt rescheduling: This involves a rearrangement of the repayment terms of an original loan. Under this strategy, it involves changing the maturity period of the debt to a longer period of time. This is different from delayed payment in the sense that the maturity period is extended through an agreement between the debtor and creditor country in the case of rescheduling. For instance, a debt originally due to be paid within one-year can be rescheduled to be repaid after 5 years.5. Debt buy-back option: Here, the creditor offers a substantial discount to the debtor to induce the debtors to pay-off an existing debt thus the creditor buys back the debt at a discount. This option means debt discounting. By offering such a substantial discount, the entire debt is cancelled, as soon as the agreed amount of balance is paid after discounting. Thus this part payment for the debt becomes the full settlement.

6. Refinancing of trade arrears: This involves getting a new loan to pay off an existing trade debt. The new loan may be obtained from the same creditors. The terms of the new loan will usually be negotiated in such a way as to lighten the debt burden on the populace. For instance a new loan at 5% interest rate can be obtained to repay an existing loan that carries 10% interest.7. Debt Conversion: Debt conversion is the exchange of a debt instrument for other financial instruments or tangible assets. Unlike other debt management strategies, debt conversion reduces or cancels out an existing debt and it turns it into real assets or other financial assets. The major debt conversion option used in Nigeria are mentioned below:i. Debt-for-equity swap: This is the exchange of a debt instrument for equity participation in a domestic enterprise. By this approach, equity shares are issued to the creditor as the repayment of the debt. He ceases to be a creditor but co-owner of the enterprise.

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ii. Debt-for-cash conversion: - This is the sale of debt for cash. Under this arrangement one creditor pays cash to buy the debt from the existing creditor and becomes the new creditor. The debt can be sold at a discount. This can also mean that a new creditor uses the debt proceeds to pay his tax or to pay a local loan instead of capitalizing the debt.iii. Debt-for-Debt Swap: This involves the exchange of an external debt instrument for a domestic instrument. For example, trade arrears loan can be used to buy domestic treasure bills. Alternatively, the government can issue a domestic debt instrument and use the proceeds to repay an external debt.

THE INTERNATIONAL MONETARY FUND (IMF) AS A MAJOR LENDING INSTITUTIONInternational Monetary Fund (IMF) is one of the major lending financial institutions. It is an international organization that was initiated in 1944 at the Bretton Woods conference and formally created in 1945 by 29 member countries. The conference was tagged “the United Nations Monetary and Financial Conference” and was held to find solutions to the deficit balance of payments and other economic problems that were eating deep into the fabrics of the world economy.

The IMF describes itself as “an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Its headquarters are in Washington D.C, United States, with Christine Laggard as the managing Director.

OBJECTIVES OF THE FUNDThe major objectives of the international monetary fund (IMF) are as follows:1. To promote international co-operation by providing the machinery for consultation and collaboration by members on international monetary problems.2. To make temporary financial resources of the fund available to members nations with adequate safeguards thereby providing them with opportunity to correct maladjustment in their balance of payments.

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3. To facilitate balanced growth of international trade and to contribute to the promotion and maintenance of high levels of employment and real income.4. To promote exchange stability, maintain orderly exchange arrangement, thereby avoiding comparative exchange depreciation.

5. To facilitate corruptibility of currencies and create resource base for member nations.6. To foster multilateral systems of payments and transfers in respect of current transactions between member nations and in the elimination of foreign exchange restriction, which hamper the growth of world trade.

FUNCTIONS OF THE IMF The fund assists member nations through some scheme, which are now known as the functions of the fund.1. Providing short-term credit to member countries for meeting temporary difficulties due to adverse balance of payment.2. Reconciling conflicting claims of member countries 3. Providing a reservoir of currencies of member – countries and enabling members to borrow on another’s currency.4. Providing orderly adjustment of exchange rate5. Advising member countries on economic, monetary and technical matters.

THE IMF CONDITIONALITIES FOR BORROWINGWhen a country borrows from the IMF, its Government agrees to adjust its economic policies to overcome the problem that led it to seek financial aid from the international community. These loan conditions also serve to ensure that the country will be able to repay the fund so that the resources can be made available to other members in need. In recent years, the IMF has streamlined conditionally in order to promote national ownership of strong and effective policies. Against this background, the Executive Board approves the following guidelines on borrowing by the fund, (IMF). They are: 1. Fund borrowing shall remain subject to a process of continuous monitoring by the Executive Board in the light of the above considerations. For this purpose, the Executive Board will regularly

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review the funds liquidity and financial position, taking into account all relevant factors of a quantitative and qualitative nature.2. The Executive Board may establish at any time, in the context of circumstances prevailing at that time, limits expressed in terms of the total of fund quotas above which the total of outstanding borrowing plus unused credit lines would not be permitted to rise.3. Any limits that may be adopted pursuant to paragraph (2) above, are not to be understood, at any time, as target for borrowing by the fund.4. For each borrowing agreement entered into by the fund, other than the General Arrangements to Borrow and the New Arrangements to Borrow, the maximum amount of claims that may be subject to immediate repayment by the fund as a result of the balance of payments need of the creditor shall be SDR 15 billion.5. In the context of the financial transactions plan, the Executive Board shall determine the appropriate mix between borrowed resources (including any borrowing under the General Arrangement to Borrow and the New Arrangement to Borrow) and quota resources, in light of the fund’s liquidity needs and the expected availability of borrowed and quota resources, among other relevant considerations.6. The fund shall aim to maintain equitable burden sharing among lenders to the fund by seeking, over time, broadly balanced cumulative drawings relevant to amounts committed across borrowing sources.7. The fund shall review these guidelines no later than 90 days after the date of effectiveness of the expanded new arrangement to borrow.

THE AFRICAN DEVELOPMENT BANK (ADB) AS A LENDING INSTITUTION

The Africa Development Bank was established in the year 1963, but its operations only started in 1966. ADB was established to help member nations in their economic development and social progress both individually and collectively.

OBJECTIVES OF ADB African Development Bank (ADB) has the following as its major objectives:

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To use the resources at its disposal for financing of investment projects and programmes relating to economic and social development of its member countries. To mobilize and increase in Africa and outside Africa resources for financing of sub investment projects. To provide technical assistance as may be needed in Africa for the execution of development projects and programmes. To undertake such other activities and provide such other services as may advance its purpose.

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Chukwudine, U. (1999): Public Finance: A Didactic Approach. Adson Educational publishers, Onitsha.

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CHAPTER EIGHT

ANNUAL REPORT AND AUDITING IN THE PUBLIC SECTOR ORGANIZATIONS

BY

ANIKEZE NNAEMEKA HILLARY Lecturer,

Public Administration Our Savior Institute of Science, Agriculture and Technology

(OSISATECH Poly) Enugu Also

Part-Time Lecturer,Department of Public Administration

Institute of Management and Technology (IMT) Enugu

Definition of Auditing The term auditing is derived from the Latin verb “audire” which means “to hear”. The origin of audit dates back to ancient times when the land-owner allowed tenant farmers to work on their land whilst the landowners themselves did not become involved in the business of farming (Adeniji, 2004). According to Adeniji, the landlords relied upon an over seer who “listened to the accounts of stewardship given by the tenants. Thus, at this period, the word audit is described as ‘the independent examination of and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation”.According to Auditing Standard and Guideline of the Combined Councils of the Accountancy Bodies (C.C.A.B.) an audit involved an examination and investigation of statement in figure from relevant evidence with the objective of enabling the auditor to make a report on the state of the statement.Thus auditing involves the examination of business transactions with a view to ensuring that the balance sheet and the profit and loss account give a true fair view of the financial situation that is the examination of accounts to see they are in order.

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As noted by Nwabueze (1997), an audit is an exercise which is carried out in order to lend credence to statement prepared by the directors of the company (who are the owners) for use by the owners of business (shareholders). The creditors, the employees, the government etc, whereby the auditor expresses his opinion as to the true and fair nature of the transactions he examined while carrying out the audit. To him, the man objective to these shareholders creditors etc is to be convinced that the transactions carried out to arrive at the financial statement by the directors after all information and explanations exacted by the auditor in his opinions to be genuine and believable.Taylor (1982) sees Auditing as “an investigation by an auditor into the evidence from the final revenue accounts and balance sheet, or other statement, an organization have prepared, in order to ascertain that they present a true and fair view of the summarized transactions for the period under review and of the financial state of the organizations at the end of date so enabling the auditor to report thereon.According to Onoh et al (2010), Auditing can also be defined as embracing:- a. An examination of the records of an undertaking in order to assess the reliability of the information contained therein.b. An examination of the documentary evidence from which the records are written up in order to assess validity. c. As consequences of (a) and (b) above, the reduction and prevention of funds and errors.d. It is general examination of the financial statements (balance sheet and income and expenditure account). Prepared by a business enterprise to ensure that a true and fair view is given for the financial position at a specified date and transaction at a specified period.Objectives of Auditing The primary objectives of an audit under (companies and Allied matters Act (CAMA), , 1990, is for the appointed auditor to express a professional opinion on the financial position of an enterprise as contained in the financial statement prepared by the management so that any person reading and using them can have faith in them. Other secondary objectives include.1. To prevent fraud and errors.2. To detect any form of irregularity

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3. To evaluate the effectiveness or otherwise, of the internal control system within the enterprise.4. To assist the management in the establishment of effective auditing system5. To advice on financial matters for efficient decision making by the management6. To ascertain and ensure that an enterprise conform with statutory and professional requirement.Merits of Auditing 1. Auditing serves as a deterrent to fraudulent staff within an enterprise2. During amalgamation or acquisition, audited financial statement serves as basis of determining the net worth of a business for the purpose of ascertaining the purchase consideration of the about to be acquired or amalgamated business.3. Audited financial statement can be used to negotiate bank loan. 4. Audited financial statement examined independently by an auditor will be readily accepted by the tax authority for the purpose of taxation.5. Audited financial statement serves as a basis for measuring performances by the world to be (potential) investors.6. Audited account is one of the requirements of the Nigeria Stock Exchange for a business that is willing to be listed on the Nigeria stock markets.Demerits of Auditing 1. An auditing fee is seen as additional expense to a business enterprise.2. An audited financial statement, if qualified, could lead to liquidation of an enterprise, even when there is a solution aside.3. Auditing within the enterprise could lead to management/shareholder’s conflict.4. Auditing could be time-consuming as the time being used to attend to members of the audit team could be effectively used on productive matters by members of the company.Qualifications of an Auditor1. Integrity: An auditor must be honest and must be seen to be honest in the implementation of the audit assignment.

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2. Independence and Objectivity: During the course of the audit assignment, auditors must be objective and be independent as much as possible within the enterprise. He must have financial involvement in the business (affairs) of the enterprise. He must be able to plan, execute and report his findings on the statement examined to members of the enterprise without being biased and without undue influence either from within or outside the business centre.3. Conformity with confidentiality principles: Auditor must not disclose information about his clients to third parties except where the permission to do so have been granted4. Maintenance of Technical Standard: An auditor within an enterprise must comply with the provisions of auditing standards as well as guidelines being issued from time to time by the regulatory body.Auditing Principles Eze (2008) identified and discussed the following principles of auditing:Auditing is something that people do. It is a practical course. However, many attempts have been made to develop theories of auditing with a small range of underlying principles.The APB (Auditing Practices Board) in the audit agenda identified eight enduring principles of auditing. They are as follows:(a) Integrity:Auditors are not independent of the entity being audited or are not seen to be so, their reports will not be believed. It is necessary, that auditors must be objective, give their opinions without fear or favour and be unaffected by conflicts of interest or pressures from any sources.(b) IndependenceIf auditors are not independent of the entity being audited or are not seen to be so, their reports will not be believed. It is necessary, that auditors must be objective, give their opinions without for or favour and be unaffected by conflicts of interest or pressures from any source.

(c) AccountabilityAuditors should act in the best interests of shareholders and at the same time interest of the wider public.

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(d) JudgmentAuditors should apply sound professional judgment in specific areas where judgment is required. These include assessment of reasonable assurance, materials, miss-statements and risk.(e) CompetenceAuditors are seen as competent. If auditors are not competent, then the whole audit process is of no value. Professional bodies have encouraged competence by administering difficult exams, approved training, practicing certificates with inspection etc.(f) Rigour This implies that auditors should apply strictness in conducting their work and in forming their opinions. Auditors should apply a degree of professional skepticism to their work, should assess the risks involved and should obtain sufficient reliable evidence on all matters from a range of sources.(g) Communication Auditors should openly disclose all matters necessary to a full understanding of their opinion and should also make disclosure to the proper authorities, of matter they should disclose in the public interest.(h) Providing Valve:Usually, auditing should be concluded with minimum resource input and with a maximum of utility to the business community.Common Terms in AuditingThe following auditing terms are identified and discussed by Eze, (2008);1) Physical Examination: This procedure usually means identification of an item’s quality and sometimes its quality by physical inspection or count. The auditor can apply this procedure any time an item has a physical existence and is present.2) Confirmation: This is a type of inquiry by which an auditor obtains a written statement from outside companies or individuals on information which that person is qualified to give.3) Inspection: Is a general term for looking at documents. Examples are inspecting contracts, insurance policies, minutes etc. Usually, the

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auditor has to extract items of accounting or audit significance from these documents.4) Inquiry: Questioning management and employee about matters of accounting or auditing significance is called inquiry. The responses may be oral or written. Although inquiry is a useful procedure, the auditor does not accept unsupported responses.5) Observation: Visually reviewing client activities or locations is called observation. Examples include observing clerical processing operations and touring the client’s physical facilities.6) Vouching: This is a process of inspecting a document that supports a recorded transactions or amount. The direction is from the accounting record to the document. Examples are supporting recorded sales transactions by inspecting sales invoices and supporting recorded additions to property by inspecting manufacturer’s invoices. 7) Tracing: The opposite of vouching is tracing. The direction of tracing is from the source documents to the accounting record. An example would be tracing shipping documents to record sales.8) Scanning: Visually examining accounting records and schedules to identify unusual items or inconsistencies is scanning. Sometimes it is called Scrutiny. Examples include scanning the August sales journal for unusual and late sales and scanning expense accounts for anomalies. 9) Analytical Procedures: Making a systematic analysis or comparison of plausible relationships among information is generally refereed to as an analytical test. For example, the auditor might compare gross marginal percentages between accounting periods or the relationship between bad debts and sales.10) Recording: The entry of the transaction data into the accounting system.11) Reconciliation: This occurs when an accounting record is compared with related assets, documents, or control accounts.12) A Qualified Opinion: This ordinarily would be issued when the auditor takes exception to one or a few material items in the financial statements because of departures from generally accepted accounting principles or because audits is incomplete or deficient, with respect to one or a few significant financial statement items.

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13) An Adverse Opinion: This should be issued if there are departures from generally accepted accounting principles of a very significant and serious nature in the financial statements. 14) A Disclaimer of Opinion: This would be expressed if the audits were incomplete or circumstances caused the audit to be deficient to the point where the auditor was unable to express an opinion on the financial statements.15) Standards: These are measures of an acceptable level of quality of professional activity.16) An Independent Auditor: This is used to describe a professional accountant who offers services to the public and whose chief service is an audit of financial statements.17) Tax Services: These involve tax planning and advice, preparation of tax returns, and representation of clients before government agencies.18) Consulting Services: These involve providing objective advice and consultation on various problems, such as design and installation of information and control systems, budgeting, cost control, profit planning capital budgeting and other quantitative analyses.19) Accounting Services: These involve providing special investigations and analyses, such as investigations pursuant to the purchase or sale of a business’ performing book-keeping services; and preparing unaudited financial statements. When certified Public Accountant or Chartered Accountant is associated with unaudited financial statements, a compilation report is attached explaining that no audit or review was performed and that the certified public Accountant or Chartered Account is not expressing any form of assurance on the statement.20) Review Services: These involve performing inquiring and analytical procedures on financial statement to obtain a basis for issuing a report that expresses limited assurance that there are no 21) material modifications that should be made to the statements for them to be in conformity with GAAP or, if applicable, with another comprehensive basis of accounting. Certified Accountants or Chartered Accountants provide this service to clients that want financial statements to give others but wish to avoid the expense of an audit.

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Review services are less expensive because the testing performed is less than that performed for an audit.22) Control Risk: The risk that a material mis-statement that could occur in assertion will not be prevented or detected on a timely basis by a company’s internal control structure policies or producers.23) Substantive Tests: Tests of details and analytical procedures performed by the auditor to detect material misstatement in the account balance, transaction class, and disclosure components of financial statement.24) Flow charts: Flow Charting is a technique that uses graphic symbols to present a diagram of an accounting system and control procedures.25) Audit Sampling: This is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristics of the balance or class.26) Sampling Risk: This arises from the possibility that, when an audit test is restricted to a sample, the auditor’s conclusion may be different from the conclusions he would reach if the tests were applied in the way to all items in the account balance or class of transactions.27) User Controls: These are those controls established and maintained by departments whose processing is performed using computers.28) EDP Controls: These are controls that are maintained in the location of the computer.29) System Analyst: This is the person responsible for designing accounting systems, developing data processing projects in conjunction with user departments, and developing specifications for applications programmers.30) Systems Programmer: This is the person responsible for maintaining and adapting the operating system and other systems software.

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31) Computer Operator: Responsible for the human intervention required to run application programs, such as mounting tapes onto tape drives.32) Librarian: A person responsible for maintaining and releasing for authorized use, files (magnetic tapes or disks) maintained off-line and written documental of production programmes (source code).33) Applications Programmer: Is responsible for developing and testing new applications programmes and changes to existing programmes that meet specifications established by the systems analyst.34) Data Entry Clerk: Responsible for keying information from manual source documents to developing computer-readable form.

35) Auditing around the Computer: A term used to describe the approach of manually testing transaction data by reconciling hard copy computer output to input in the form of manual source documents.36) Auditing through the Computer: A term used to describe the approach of testing the clients' application programmes using techniques such as test data.37) Auditing with the Computer: A term used to describe the use of audit software to automate audit procedures, or other computer-assisted audit techniques.38) Systems Software: This is a collective term for all programme (instructions to the computer) that co-ordinate and control the use of hardware or support the execution of application software. Some of the primary examples are assemblers, interpreters, utilities etc.39) COBOL:- A language specifically designed to meet the needs of business data processing, particularly the input and output of large amounts of data.40) BASIC:- A simple language that can be learned quickly and is used primarily in applications on small computer systems (Mini Computers and Micro Computers).41) On-Line: this means that the hardware is in constant contact with the Central Processing Unit, CPU or that data or programmes are accessible to the CPU without human intervention. For example, terminals and disks are hardwares that are generally on-line.

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42) Off-Line: A tape or diskette is off-line because human action is necessary to place it on the drive before it is accessible to the C.P.U.43) Qualified Opinion:- When the auditor believes that an item in the financial statements is stated on a basis that materially departs from generally accepted accounting principles, the auditors should express a qualified opinion.44) The Management Letter: The principal written communication between the auditor and management is the management letter that normally is issued annually at the conclusion of every audit engagement. This letter summarizes the auditor’s recommendations for improvement in internal control structure.45) Norm is Simply a Prescription or Proscription:- Something one should or should not do in a given situation. These norms can be formal and explicit or informal.46) Materiality: This is the magnitude of an omission or mis-statement of accounting information that in the light of surrounding circumstances make it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or mis-statement.47) Errors: Those are unintentional misstatement or omissions of amounts or disclosures in financial statements.48) Organizational Structure: A company’s organizational structure is the overall framework for planning, directing, and controlling operations. It includes the form and nature of the company’s organizational units, and related management functions and reporting relationships.49) Monitoring: The process of assessing the quality of the internal control structure’s performance over time is called monitoring.50) Accounting System: This consists of all the functions and procedures for recognizing transactions and recording, processing, and reporting the data representing them.51) Negligence: This results when the auditor fails to perform to the standard of care that the law requires. The law reads: “Every one is responsible, not only for the result of his willful acts, but also for injury

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occasioned to another by his want of ordinary care or skill in the management of his property or person….”52) Fraud: This is an international mis-statement concealment of a material fact.53) Assertions: These are representations by management that are embodied in financial statement components.54) Working Papers: These are an important physical aid in recording the results of audit tests. For example; when a sample is taken, the items drawn must be recorded and computations must be made.55) Permanent File: Contains all those papers which are of continuing interest from year to year.56) Current Work Paper File: Contains all papers accumulated during the current year’s audit.57) Audit Programme: This is a list, usually in detail, of the procedures to be applied to a specific accounts balance or class of transactions. An audit programme is one form of documentation of planning that is specifically required by professional standards.58) This is a billing statement for goods or services that are purchased or sold.59) Source Documents: These are the initial record of transactions in the system. Processing procedures usually provide for creation of a source document when a transaction is executed.60) Procedures Manual: These are instructions on the operation of the accounting system and the treatment of the various types of transactions that can occur.61) Control Activities: This term encompasses both policies and procedures that management has established.

62) Auditing: An activity carried on by the auditor when he verifies or examines accounting information, determines the accuracy and reliability of accounting statement and reports, and then expresses his opinion. It is also an activity carried on by an independent person, with the main objective of reporting on the true and fair view of financial statement.

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63) An Internal Audit: An independent appraisal function established by the management of an organization for the review of the internal control system as a service to the organization.64) Internal Check: This is the allocation of authority and work in such a manner as to afford checks on the routine transactions of day-to-day work by means of the work of one person being proved independently by another or the work of a person complementary to that of another.

65) Internal Control Questionnaire: Instrument used by auditors to appraise and evaluate internal control systems of an enterprise.66) Internal Control System: The whole system of controls, financial and otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records. The individual components of an internal control system are known as “Controls or internal controls”.Audit ClassificationAdeniyi (2004) classified audit into two main categories to include:a. Classification based on the nature of work undertaken by the auditorb. Classification based on the method or approach to the audit work.a. Classification Based on the Nature of Work Undertaken by the Auditor(1) Statutory Audits: These according to Adeniyi (2004) are those audits being carried out within enterprises as a result of being compulsorily required by legislation. They are those audits that are compulsorily required by law to be carried out within an enterprise. Example, auditing of companies, as contained in the provision of CAMA “90”, auditing of banks as required under BOFID etc.(2) Private or Non-statutory Audits: These are performed by independent auditors because the owners, proprietors, members, trustees, professional and governing bodies or other interested parties want them, rather than because the law requires

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them. In consequence, private audit may extend to every type of undertaking, which produces accounts, including; Clubs Charities Sole traders; and Partnerships.In private audit, it is important for the auditor to agree with the client, the terms and conditions under which the audit will be carried out. This is to prevent future disagreement.Auditors may also give an audit opinion on statements other than annual accounts including: Summaries of sales in support of a statement of royalties Statements of expenditure in support of applications for regional development grants. The circulation figures of newspaper or magazine.In all such audits the auditors must take into account any regulations contained in the internal rules or constitutions of the undertaking. Examples of the regulations, which the auditors would need to refer to in such assignment would include (Adeinyi 2004);i. The rules of clubs, societies and charitiesii. Partnership Agreements.Advantages of the Non-statutory AuditIn addition to the advantages common to all forms of audit, including verification of accounts, recommendations on accounting and control systems and the possible detection of errors and fraud, the audit of the accounts of a partnership may be seen to have the following advantages; (a) It can provide a means of settling accounts between partners.(b) Where the audited accounts are available, this may make the account more acceptable to the Inland Revenue when it comes to agreeing on individual partner’s liability to tax. The partners may as well wish to take advantage of the auditor’s services in the additional role of tax advisers.(c) The sales of the business or the negotiation of loan overdraft facilities may be facilitated if the firm is able to produce audited accounts.(d) An audit on behalf of a “Sleeping partner” is useful since generally such a person will have little or no means of checking the

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accounts of the business, or confirming the share of profits due to him or her. (3) External Audit:This is an independent examination of financial statement being carried out by non-employees of the business enterprise. External audit, therefore, can be statutory or private.(4) Internal AuditThese are those audits that are being carried out by employees within enterprises. Internal audit is an independent appraisal function established by the management of an organization for the review of the internal control system as a service to the organization. It objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper economic, efficient and effective use of resources. The head of internal audit department normally reports to the highest authority within the enterprise in order to be independent of members of staff. The audit approach under this type of audit is a continuous audit approach which involves examination of transaction and balances; throughout the accounting period, without auditing to a specific date.Classification Based on the Method or Approach to the Audit Work.1. Management Audit: This is an audit approach which involves examination of management activities in order to ascertain whether the rules and regulations established by management are being properly followed. 2. System Audit: This is an audit approach which involves evaluation of internal control system established within the enterprise. The objective of this type of audit is to enable the auditor to ascertain effectiveness or otherwise of the internal control system and also to determine whether information generated or obtained under the system can be relied upon. In practice, system audit are normally being carried out within the accounting period of a business enterprise after which a management letter shall be issued stating the weakness in the system as well as the effect on the enterprise and how the weakness can be improved upon. (Adeniyi, 2004).

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3. Transaction Audit: This is also referred to as vouching. It is an audit approach which involves examination of various transactions carried out by the enterprise within the period. The objectives of transaction audit are as follows:- a. To ascertain the authorization and approval of the transactionsb. To enable the auditor to determine the costs of the transactions.c. To identify whether the transactions are complete, accurate and valid.4. Balance Sheet Audit: This is referred to as verification. It is an audit approach being normally adopted by external and internal auditors on items in the balance sheet of an enterprise. The objectives of a balance sheet audit are as follows.a. To ascertain opening and closing balance as well as additions or disposals of items under consideration.b. To determine the cost.c. To ascertain authorization and approval.d. To confirm the value of assets and liabilitiese. To ensure that the assets liabilities acquired are of benefit or interest to the enterprise.f. To identify the ownership of assets and liabilities.g. To ensure that the assets and liabilities have been properly classified and presented in the financial statement.5. Internal Audit: This is an audit approach being used within the accounting period of an enterprise. Usually, internal audit is adopted when an interim account is to be prepared for the declaration of the interim dividends or for the purpose of carrying out system audit. This approach can also be adopted when the transactions of the enterprise are so voluminous such that examination of those transactions at the end of an accounting period may be impracticable. (Adeniyi, 2004).Advantages of Internal Audita. Fraud or errors can be easily detected before untold damage is done to the enterprise.b. Interim audit enables the auditor to have better knowledge about the business transactions, thereby enhancing quality control of an audit.c. Interim audit enables the auditor to express a professional opinion on the examination of transactions carried out on the financial statement which shall be considered to be of standard since a thorough

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examination of transaction and balances would be carried out during the completed audit or final audit.d. It enables the auditor to complete in earnest the examination of transactions as well as balances during the final audit.Disadvantages of Internal Audita. Financial figures may be altered thereby exposing the auditor to greater audit risk.b. Audit trend may be lost, particularly where different audit teams are involved. c. Additional cost is involved.6. Year-end Audit: This is an audit approach being carried out within an enterprise towards the end of accounting period of the enterprise. The objectives of years-end audit is to assist the enterprise in the preparation of financial statement, to attend to the exercise and to enable the auditor to test the adequacy or otherwise of the cut off procedures (cut off test).7. Completed or Final Audit: This is an audit approach being carried out by external auditors within an enterprise, which involves examination of transactions and balances as well as the content of financial statement, as a whole at the end of accounting period of a business enterprise. That is when the final account must be prepared in readiness for examination.(i) The works performed during the final audit are:a. Assets and liability verificationsb. Critical review of the accountsc. Comparison of final account with the underlined records.Advantages a. Financial figures cannot be altered because the audit assignments is carried out on a straight sectionb. No additional cost in involved.c. Trend of the audit assignment cannot be lost, except where the audit team that carried out the audit of previous account year has been changed.

Disadvantages a. Fraud or errors may not be detected or prevented before untold damage is done to the enterprise.

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b. Thorough audit assignment may not be carried out particularly where the volume of transaction is so high, thereby exposing auditors to engagement risks.c. Auditor within an enterprise may not have better knowledge of transactions being carried, thereby affecting quality control of an audit.d. Where this audit approach is adopted, auditors may not be able to meet the deadline for the completion of the assignment especially where auditors clients have the same accounting years end.

8. Continuous Audit: This is an audit approach being carried out by the internal auditor as well as the external auditor within an enterprise. This involves independent examination of transactions and balance on a daily basis with the objectives of ascertaining the completeness, accuracy and validity of those transactions.It is an audit where members of the audit firm are occupied continuously on the account, the whole year round or where they attend at regular intervals during the financial years. This audit approach will be adopted where the volume of transaction is huge.

Advantages a. It allows more detailed audit work or checking to be performedb. Fraud or errors can be discovered and corrected more quicklyc. The presence of the Auditor will have a positive impact on the quality of work of the company employees.Disadvantages a. It is possible for figure to be altered after checkingb. Auditor may be influenced if they stay too long in client premises.9. Partial or Incomplete Audit: This is an audit approach, in which the scope of the audit assignment to be carried out can be restricted. In other words, partial audit is private in nature.10. Complete or Full Audit: These are those audits under which the scope of the audit assignment to be carried out by the auditors can not be restricted.

11. Personnel Audit: This is an audit approach directed at the staff of the enterprise, which involves evaluation of personnel activities with the objective of highlighting redundancy or inefficiency for possible improvements.

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Auditing Standard Guidelines The Auditing FrameworkThese are rules and regulations guiding the implementations of accounting and auditing functions within an enterprise. Auditing framework therefore are those pronouncements or statements normally issued by professional bodies e.g. ICAN, NASB etc as well as statutory bodies, as contained in various government legislation.Professional RegulationsThese are pronouncement of rules and regulations guiding the conduct of an audit normally issued by professional accounting bodies such as: (1) The international Financial Reporting (IFR)-promulgated by the International Financial Reporting Standard Board (IFRSB)(2) The Statement of Accounting Standards (SAS) )-promulgated by the Nigerian Accounting Standard Board (NASB)(3) The International Auditing Guideline (IAG)- )-promulgated by the International Auditing Practice Committees (IAPC).(4) The Auditing Guidelines issued by the Institute of Chartered Accountant of Nigeria (ICAN) Professional(5) ICAN codes of conduct (May, 2000)(6) Auditor –General, Guideline.(7) Guidelines for Audit Alarm Committee(8) Financial Memoranda for Local Government Accounts.(9) Guideline for National Council on Government Accounting (Professional Pronouncement) .All members of the professional bodies must ensure strict compliance with the provisions of professional regulations issued from time to time. Failure to comply has been considered to be unethical and if litigation arises, the auditor shall be seen to have been professionally negligent and damages shall be awarded accordingly.Statutory RegulationsThere are pronouncements or statements emanating through government legislation, which regulates the implementation/ auditing functions. All auditors must adhere strictly to the regulations e.g. Auditing under CAMA’90, Auditing under BOFIA’91, Auditing functions under Insurance Act 2003 as amended.

Accounting Standards

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These are those pronouncements or statement being issued by professional accounting bodies e.g., ICAN, NASB, which states the basic procedures to be adopted by auditors when carrying out his audit functions of planning, investigation and reporting on the financial statement prepared by the enterprise.GuidelinesThese are also pronouncements or statements being issued by professional accounting bodies, which state or guide auditors on how the basic procedures contained in the standards, is to be applied. Auditor as well as accountants who are members of the professional bodies must ensure strict compliance with the provisions of standards and guidelines in the course of their audit.Objectives of Standards and Guidelines(1) To ensure uniformity in carrying out audit assignment(2) To ensure as a basis of controlling, co-ordinating and directing, the conduct of an audit within an enterprise.(3) To increase auditors image in the eyes of the users of the financial statements.(4) To ensure quality control of an audit(5) To close the gap which hither to existed in the pattern of auditor’s report(6) It serves as a means of ensuring that the audit assignment has been carried out with the highest standard.(7) To minimize engagement risks.

Limitations or drawbacks in the use of standards and guidelines1) Auditing standards or guidelines make auditing works to be too mechanical.2) They may not cover all the circumstances in which the auditor may find himself in real practice.3) The use of standards and guidelines may restrict the initiative of the auditors.4) Auditing standards and guidelines if not properly drawn could mislead the audit staff.Procedures/stages for Issuing Standards and Guidelines(1) Exposure Draft:- At this stage, the standard will be given or allocated name as well as the code number or standard number. The basic procedures i.e. the pronouncements must have been documented in writing.

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(2) Consideration and Recommendation by Members:-The draft shall be sent to all members of the Institute or Board members as applicable and other interested parties for their inputs and possible recommendations.(3) Consideration and Approval by Board or Council:- The amended draft from the various recommendations made by members must have been adequately taken care of. The council of the institute or the executive members of the board (NASB) will consider the provision of the draft, after which approval will be given accordingly. Open the council’s approval the draft shall be STANDARD, of be strictly adhered to by all members.Statement of Auditing Standards (SAS)Current SASs are listed below (with corresponding International Standards on Auditing (ISA) numbers in brackets).100 Objectives and general principles governing an audit of financial

statements (240)110. Fraud and Error (240)120. Consideration of law and regulations (250)130. The going concern basis in financial statements (570)140. Engagement letters (210)150. Subsequent Events (560)160. Other information in documents containing Audited Financial

Statements (revised 1999) (720)200. Planning (300)210. Knowledge of the business (310)220. Materiality and the audit (320)230. Working papers (230)240. Quality control for audit work (revised 2000) (220)300. Accounting and internal control systems and audit risk assessments (400)400. Audit evidence (500 and 501)410. Analytical procedures (520)420. Audit Sampling (530)440. Management representatives (580)450. Opening balances and comparatives (510 and 710)460. Related parties (550) 470. Overall review of financial statements

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480. Service organizations (issued 1999) (402)500. Considering the work of internal audit (610)510. The relationship between principal auditors and other auditors

(600)520. Using the work of an expert (505 and 620)600. Auditors report on financial statements (700)601. Imposed limitations of the audit scope (issued 1999) (700) matters to those charged with governance (revised 2001) (260). 610. Communication of audit matters to those charged with governance (revised 2001) (260). 620. The auditor’s right and duty to report to regulators in the financial sector.There are some IASs which do not have corresponding SASs. These are:400. Assurance engagements401. Auditing in a computer information systems environment800. The Auditor’s report on special purpose audit engagement810. The examination of prospective financial information910. Engagement to review financial statements920. Engagement to perform agreed-upon procedures regarding financial information930. Engagements to compile financial information.

REFERENCES

Adeniyi, A.A. (2004): Auditing and Inrestratrous Value Analysis Consult (Publishers) Lagos.

Agbo, O.G. (2003): Human Management 1, Enugu Iyke Ventures Production.Akpala, (1990): Management: An Introduction and the Nigeria Perspective,

Enugu: Department of Management, Faculty of Business Administrator. (University of Nigeria, Enugu Campus)

Nwabueze, C. (1997): Principles of Auditing and Edition London Macdonald and Evans Ltd; London.

Eze, (2008): Principles and Techniques of Auditing (Revised Edition) Enugu: J.T.C. Publishers.

San Tock, J. Case studies in Auditing 3rd Edition. Macdonald 8 Evans Ltd; London

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CHAPTER NINE

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GOVERNMENT ACCOUNTS: ANALYSIS OF REVENUE AND EXPENDITURE CONCERNS OF GOVERNMENT

BY

NGWU GABRIEL OKECHUKWU Senior Lecturer,

Department of Public Administration Institute of Management and Technology (IMT) Enugu

IntroductionGovernment account is subsumed in Public finance study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones. The purview of public finance is considered to be threefold: governmental effects on (1) efficient allocation of resources, (2) distribution of income, and (3) macroeconomic stabilization.Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems. In this view, public sector programs should be designed to maximize social benefits minus costs (cost-benefit analysis), and then revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible. In practice, government budgeting or public budgeting is substantially more complicated and often results in inefficient practices. Government can pay for spending by borrowing (for example, with government bonds), although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool. Deficits can also narrow the options of successor governments.

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http://en.wikipedia.org/wiki/Public_budgeting

http://en.wikipedia.org/wiki/Budgeting

http://en.wikipedia.org/wiki/Distortion_(economics)

http://en.wikipedia.org/wiki/Tax

http://en.wikipedia.org/wiki/Cost-benefit

http://en.wikipedia.org/wiki/Public_sector

http://en.wikipedia.org/wiki/Macroeconomics

http://en.wikipedia.org/wiki/Distribution_of_income

http://en.wikipedia.org/wiki/Economic_efficiency

http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/Government_expenditure

http://en.wikipedia.org/wiki/Government_revenue

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Public finance is closely connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently. The public choice approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate. The objective of this paper is to assess issues of functional imperative to government accounts with particular focus on government revenue, expenditure, public debt and financial administration by public authorities. Attention is also given to issues of public financial management as well as strategies for effective public financial management in Nigeria.

Conceptualization of Relevant TermsPublic finance refers to the revenue, expenditure and debt

operations of the government and their impact. Findlay defines public finance as the “study of principles underlying the spending and raising of funds by public authorities. Smith opines that the investigation into the nature and principles of the state expenditure and state revenue is called public finance. According to Bastable (1999), “Public Financedeals with the expenditure and income of the public authorities of the state and the mutual relation as also with the financial administration and control.”

From the above definitions, public finance identifies and assesses the effects of Government financial policies. It looks into the financial problems and policies of the government at different levels and studies the inter-governmental financial relations. The concept of public finance includes income and expenditure and it tries to analyze the effects of government taxation and other sources of revenue. It is a powerful instrument to promote social justice and economic welfare.

The scope of public finance includes public revenue; public expenditure; public debt and financial administration. 1. Public Revenue: It means the income of the public authorities to meet government expenditure. It is of two types- Non-tax revenue and tax revenue. 2. Non-Tax Revenue: This includes income from public undertakings, fees, special assessment, fines, forfeitures etc. This also

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includes property inherited by government, gifts, tributes, grants and indemnities paid to government.3. Tax Revenue: Taxation is undoubtedly the most important and largest single source of public revenue. A tax is a compulsory payment by the people to the government, levied for the general benefit of the public, irrespective of the exact amount of service rendered to the tax payer. According to Bastable (1999), “A tax is a contribution of the wealth of a person or body of persons for the service of the pubic powers. Finally Shirras (2001) opines that “taxes are compulsory contributions to the public authorities to meet the general expenses of the government which have been incurred for the public goods and without reference to special benefits. Saligman (1997) defines tax as a compulsory contribution from a person to a government to defray the expenses incurred in common interest of all without reference to the special benefit conferred.

Government Accounts An essential corollary to the issue of public finance is government accounts. Government accounts comprise the types, methods or stages of preparing and keeping proper records of government revenue receipts and expenditures. The sources of authority for preparing and keeping government accounts in Nigeria, for instance, are the 1999 constitution, financial instructions (FIs) issued by each of the 36 states of FCT and the Federal Government, Financial Memoranda (FM) for the 774 Local Governments, related legislations, and occasional directives (circulars) by both the Accountant General of each state and that of the Federation.

Types of Government Accounts Broadly speaking, government accounts could be classified into three types as follows:i. Preliminary Accounts:This type of account is usually expressed in the form of General Ledger Accounts. This form of account consists mainly of the account prepared from the entries in those basic books of accounts such as cash books, vouchers (receipts and payments), and journals. This type of account is called preliminary accounts because they form the building block to the intermediate and final accounts. ii. Intermediate Accounts

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This type of government account is usually prepared from entries as contained in the General Ledger accounts. It is expressed in the form of Supplementary Trial Balance Account. As the name implies, this account represents an attempt towards establishing whether or not the debit side could balance with the credit side of the emerging account. The name of this type of account is so because it comes in-between the preliminary account and the final accounts. iii. Final AccountsThe final accounts of government are prepared, as the name implies, from the entries as contained in the Supplementary Trial Balance account after due efforts have been made to ensure that both sides of the account have agreed in addition to some detailed explanations regarding the transactions or entries. Final accounts of government come into two broad forms as follows:a. Un-audited Final Accounts: These refer to the type of final accounts whose contents or entries at the receipt side and the expenditure side are not yet reviewed, examined or scrutinized by a competent auditor either by the Government’s Auditor-General or an external professional auditor. The un-audited accounts of government are made up of (a) Main Trial Balance which is compiled from the supplementary Trial Balance after the latter has been properly checked against any error and agreement, and (2) Balance sheet. The Balance Sheet is made up of, Statement of Assets and Liabilities, Statement of Revenue, Statement of Expenditure, and Surplus and Deficit Account.b. Audited Final Accounts: As the name implies, this type of account is that which have been reviewed, examined, or scrutinized and approved by either the Auditor-General or an external auditor. The purpose of such scrutinization is to identify areas of calculation errors, ordinarily error, or intention to commit fraud (forensic auditing) by those that prepared the said account. As earlier mentioned, the law requires the Accountant-General to submit the final accounts to the Auditor-General for a general audit and approval. In the same vein, section 135 of the 1999 constitution requires the Auditor-General to submit within 90 days of the receipt of the final accounts from the Account-General to present the audited final account of the State Government to the public Accounts Committee of the State House of Assembly for scrutiny and final approval after which it

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becomes generally accepted as the audited accounts of the State Government. These audited final accounts are finally sent to the Government printer for printing and gazette.

Public Financial ManagementCollection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation and expenditure management (resource utilization) are the essential components of a public financial management system.Public Finance Management (PFM) basically deals with all aspects of resource mobilization and expenditure management in government. Just as managing finances is a critical function of management in any organization, similarly public finance management is an essential part of the governance process. Public finance management includes resource mobilization, prioritization of programmes, the budgetary process, efficient management of resources and exercising controls. Rising aspirations of people are placing more demands on financial resources. At the same time, the emphasis of the citizenry is on value for money, thus making public finance management increasingly vital. The following subdivisions form the subject matter of public finance; 5.Public expenditure 6.Public revenue 4. Public debt 5. Financial administration and 6. Federal finance

Government ExpenditureScholars classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption, government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classified as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money – such as social security payments – are called transfer payments. The government of Nigeria has different sources of raising revenue for carrying out the various state functions. The sources of revenue can be

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classified into twelve (12) namely: customs and exercise, licenses and internal revenue, direct taxes, fees, mining royalties, earnings and sales, armed forces revenue, interest and repayment (general), interest and repayment (state), reimbursements; rent on government property; statutory and non-statutory financial transfers and miscellaneous revenue (Anyanfo, 1996; Anyanwu, 1997; Adams, 2001). However, Section 149 of the 1999 Constitution as amended provides that all revenues collected by theGovernment of the Federation shall be paid into the Federation Account except for the proceeds of personal income taxes of the Armed forces of the federation, the Nigerian Police Force, External Affairs personnel and residents of the Federal Capital Territory. Expenditure in Nigeria involves all the expenses which the public sector incurs for its maintenance, for the benefit of the economy, external bodies and for the country. Public expenditure in Nigeria is usually categorized into recurrent and capital expenditure. According to Anyanfo (1996), a recurrent expenditure is made frequently or regularly. In the context of government financial management, recurrent expenditure has an economic life span of less than one year. A capital expenditure has a life span of more than one year for the purpose of acquiring or improving on a fixed asset.

Income Distribution Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services also have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do (and to those that build the roads).

Income Security Employment insurance Health Care Public financing of campaigns

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http://en.wikipedia.org/wiki/Road_construction

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http://en.wikipedia.org/wiki/Public_education

http://en.wikipedia.org/wiki/War

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Financing of Government ExpenditureGovernment expenditure is financed primarily in three ways:

Government revenue o Taxeso Non-tax revenue (revenue from government-owned corporations, sovereign wealth funds, sales of assets)

Government borrowing Printing of Money or inflation

How a government chooses to finance its activities can have important effects on the distribution of income and wealth (income redistribution) and on the efficiency of markets (effect of taxes on market prices and efficiency). The issue of how taxes affect income distribution is closely related to tax incidence, which examines the distribution of tax burdens after market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.

TaxesTaxation is the central part of modern public finance. Its significance arises not only from the fact that it is by far the most important of all revenues but also because of the gravity of the problems created by the present day tax burden. The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare State to fulfill its obligations. Taxation is used as an instrument of attaining certain social objectives i.e. as a means of redistribution of wealth and thereby reducing inequalities. Taxation in a modern Government is thus needed not merely to raise the revenue required to meet its ever-growing expenditure on administration and social services but also to reduce the inequalities of income and wealth. Taxation is also needed to draw away money that would otherwise go into consumption and cause inflation to rise. A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example, tribes, secessionist movements or revolutionary movements). Taxes could also be imposed by a sub national entity. Taxes consist of direct tax or indirect tax, and may be paid in money. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government. . . a payment exacted by legislative authority."(Greene,

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http://en.wikipedia.org/wiki/Subnational_entity

http://en.wikipedia.org/wiki/Revolutionary

http://en.wikipedia.org/wiki/Secessionist

http://en.wikipedia.org/wiki/Tribe

http://en.wikipedia.org/wiki/State_(polity)

http://en.wikipedia.org/wiki/Juristic_person


http://en.wikipedia.org/wiki/Tax_incidence

http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price

http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price

http://en.wikipedia.org/wiki/Income_redistribution

http://en.wikipedia.org/wiki/Inflation

http://en.wikipedia.org/wiki/Government_debt

http://en.wikipedia.org/wiki/Sovereign_wealth_fund

http://en.wikipedia.org/wiki/Government-owned_corporation

http://en.wikipedia.org/wiki/Government-owned_corporation

http://en.wikipedia.org/wiki/Non-tax_revenue


http://en.wikipedia.org/wiki/Government_revenue


2011). A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government. . . whether under the name of toll, tribute, import duty, custom, excise, subsidy, aid, supply, or other name."(Gruber, 2005) There are various types of taxes, broadly divided into two heads – direct (which is proportional) and indirect tax (which is differential in nature): Stamp duty, levied on documents Excise tax (tax levied on production for sale, or sale, of a certain good) Sales tax (tax on business transactions, especially the sale of goods and services)

o Value added tax (VAT) is a type of sales taxo Services taxes on specific services

Road tax; Vehicle excise duty (UK), Registration Fee (USA), Vehicle Licensing Fee (Brazil) etc. Gift tax Duties (taxes on importation, levied at customs) Corporate income tax on corporations (incorporated entities) Wealth tax Personal income tax (may be levied on individuals, families such as the Hindu joint family in India, unincorporated associations, etc.)

DebtGovernments, like any other legal entity, can take out loans, issue bonds and make financial investments. Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central or federal government, municipal government or local government. Some local governments issue bonds based on their taxing authority, such as tax increment bonds or revenue bonds.

As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less creditworthy

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http://en.wikipedia.org/wiki/Revenue_bond

http://en.wikipedia.org/wiki/Revenue_bond

http://en.wikipedia.org/wiki/Tax_increment_financing

http://en.wikipedia.org/wiki/Local_government

http://en.wikipedia.org/wiki/Municipal_government

http://en.wikipedia.org/wiki/Municipal_government

http://en.wikipedia.org/wiki/Central_government

http://en.wikipedia.org/wiki/Government

http://en.wikipedia.org/wiki/Credit_(finance)

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Invest#Finance

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Voluntary_association

http://en.wikipedia.org/wiki/Hindu_joint_family

http://en.wikipedia.org/wiki/Personal_income_tax

http://en.wikipedia.org/wiki/Wealth_tax

http://en.wikipedia.org/wiki/Incorporation_(business)

http://en.wikipedia.org/wiki/Corporations

http://en.wikipedia.org/wiki/Corporate_income_tax

http://en.wikipedia.org/wiki/Customs

http://en.wikipedia.org/wiki/Duty_(economics)

http://en.wikipedia.org/wiki/Gift_tax

http://en.wikipedia.org/wiki/Vehicle_excise_duty

http://en.wikipedia.org/wiki/Road_tax

http://en.wikipedia.org/wiki/Value_added_tax

http://en.wikipedia.org/wiki/Goods_and_services

http://en.wikipedia.org/wiki/Sales

http://en.wikipedia.org/wiki/Sales_tax

http://en.wikipedia.org/wiki/Excise

http://en.wikipedia.org/wiki/Stamp_duty


countries sometimes borrow directly from commercial banks or international institutions such as the International Monetary Fund or the World Bank.Most government budgets are calculated on a cash basis, meaning that revenues are recognized when collected and outlays are recognized when paid. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt. This approach is called accrual accounting, meaning that obligations are recognized when they are acquired, or accrued, rather than when they are paid.Public Financial Management in NigeriaPublic financial management is concerned with the planning, organizing, procurement and utilization of government financial resources as well as the formulation of appropriate policies in order to achieve the aspirations of members of that society. Premchand (1999) sees public financial management as the link between the community’s aspirations with resources, and the present with future. It lies at the very heart of the operations and fiscal policy of government.The stages of public financial management include:1. Policy formulation: Policy formulation is one of the most important stages in public financial management structure. According to Premchand (1999), “the transformation of the society’s aspirations into feasible policies with well-recognized financial implications is at the heart of financial management. Issues not addressed during policy formulation tend to grow in magnitude during implementation and may frequently contribute to major reversals in the pursuit of policies or major slippages that may lead to contrary results”. Public financial management should be designed to achieve certain micro and macro economic policies. It entails a clearly defined structured and articulated system that moves to promote cost-consciousness in the use of resources. The government needs to have an estimate of revenue and expenditure to achieve the policy objective of government.

2. Budget formulation: The budget formulation is the step that involves the allocation of resources before the submission to the legislature for review and final approval. According to Appah (2009), in Nigeria the budget formulation involves the articulation of the fiscal,

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monetary, political, economic, social and welfare objectives of the government by the President; based on these,

(i) the department issues policies and guidelines which form the basis of circulars to Ministries/Departments requesting for inputs and their needs for the ensuring fiscal periods; (ii) accounting officers of responsibility units are required to obtain and collate the needs of their units; and accounting officers of ministries, in this case the Permanent Secretaries, are required to collate these proposals which would be defended by unit heads before the supervising minister.

3. Budget structures: According to Anyanwu (1997), budget structure addresses the question of how the budget is or should be composed. In Nigeria, budgets haverevenue and expenditure sides. According to Premchard (1999), many governments have yet to put in place cash management systems, which would pave way for coordinated domestic management. The practice of limiting outlays to collected revenues has exacerbated this problem. He, further argued that there is a massive underfunding of programs and projects provided for in the budget.

4. Payments system: This involves the operational procedures for receiving monies for the public and for making payments to them. In Nigeria, governments make payments using a variety of procedures. These include book adjustments, issue of cheques, and payment authorities and electronic payment systems.

5. Government Accounting and Financial Reporting: Government accounting and financial reporting is a very important component of the public sector financial management process in Nigeria. As Adams (2001) noted that government accounting entails the recording, communicating, summarizing, analyzing and interpreting financial statement in aggregate and in details. In the same vein, Premchard (1999) argues that government accounts have the dual purpose of meeting internal management requirements while providing the public with a window on government operations. Government financial reports should be prepared with the objective in mind of providing full disclosure on a timely basis of all material facts relating to government financial position and operations (Achua, 2009) Financial reports on

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their own do not mean accountability but they are an indispensable part of accountability.6. Audit: One of the fundamental aspects of public sector financial management in Nigeria is the issue of audit of government financial reports. Audit is the process carried out by suitably qualified Auditors during the accounting records and the financial statements of enterprises are subjected to examination by the independent Auditors with the main purpose of expressing an opinion in accordance with the terms of appointment. The high level of corruption in the public sector of Nigeria is basically as a result of the failure of auditing. As Premchard (1999) puts it “many audit agencies are legally prevented from reviewing policies. Most of them cannot follow the trail of money, as they do not have the right to look into books of contractors, and autonomous agencies”. One fundamental failure of audit is the absence of value for money in the Nigerian public sector.7. Legislative control: The legislature (House of Representative and Senate) in Nigeria is expected to perform this very important task of controlling and regulating the revenue and expenditure estimates in any fiscal year. It is the responsibility of the members of the National Assembly to ensure that the budget estimates are properly scrutinized to ensure accuracy, effectiveness and efficiency of government revenue and expenditure.

Methods/Stages of Preparing and Keeping Government AccountsThe following exposition constitutes the stages usually adopted in preparing or keeping the accounts of a typical state government in Nigeria. For the purpose of this discourse, these stages could also necessarily be regarded as the methods usually adopted in preparing and keeping government accounts.

Duties of Sub-TreasurerEach Sub-Treasurer is required to keep a Cash-book and such other books of account and record as may be prescribed by the Accountant-General. All receipts and payments will be duly vouched and will be recorded in the Cash-book as and when the transactions take place. Both receipt and payment vouchers will be numbered consecutively, from No. 1 onwards, a new series of numbers being commenced on the first of each month. There should be no voucher outstanding (i.e., missing) when the

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account is dispatched to Headquarters save in the most exceptional circumstances. Submission of Vouchers of Sub-TreasurersThe number of copies of payment and receipt vouchers which should be submitted to Sub-Treasurers is specified in F.I. 0825. Voucher substitutes giving full details of-

(i) Classification (ii) The amount to be debited (iii) The departmental voucher number(iv) The Treasury payment voucher.

Voucher substitute will be prepared for each one of the separate classifications on the composite voucher. These voucher substitutes will be prepared in duplicate and will be securely pinned to the respective original and duplicate copies of the main payment voucher. Sub-Treasurer/Accounting Officers Cash-Books: Balance StatementThe cash book will be ruled off and balanced daily by the cashier who will enter the cash specification of the balance in hand in the cash book. The Sub-Treasurer will check the cash against the specification and will initial the cash book. Cheques held as cash at the close of business will be paid to the bank or otherwise cleared on the next business day. In no circumstances may a cheque which has been presented to the bank and returned unpaid be held as cash. The procedure for dealing with dishonoured or unpaid cheques is laid down in chapter II. The cash book will be signed at the end of each month by the Sub-Treasurer whose signature will be taken as certifying the correctness of the entries and cash balance. The cash book will be supported by a balance statement as follows:

N KOpening balance (i.e. the closing balance of the previous month) … … …Add: Total receipts for the month … …Deduct: Total payments for the month … …Closing Balance …. …

………………………………………..Signature of Sub-Treasurer

Sorting of Vouchers by Sub-TreasurersReceipt and payment vouchers classified to Enugu State Heads and sub-heads and below-the-line accounts will be sorted separately into original

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and duplicate series; in large stations this should be done daily to expedite the dispatch of the accounts at the end of the month. The original receipt vouchers will be arranged in Cash-book order; the original receipt vouchers will be sorted into Head and sub-head order in the numerical sequence of the current Enugu State Estimates; and the triplicate copies of all other vouchers, i.e. Federal and those of other Governments and self-accounting organizations, will be sorted; receipt vouchers in Cash-book order with the original Enugu State receipt vouchers and payment vouchers into Head and sub-head order in the numerical sequence of the current estimates and below-the-line numbers, with the original Enugu State payment vouchers. Self-listing Sub-Treasuries will deal with Federal and other vouchers as in F.I. 0217 and such other instructions as the Accountant-General may consider necessary. The original and duplicate copies of all other vouchers will be sorted and listed in the manner prescribed by the Accountant-General from time to time. If, when the accounts are ready for dispatch, there are any outstanding vouchers, voucher substitutes should be raised in duplicate, the original vouchers, substitute being placed in its proper numerical order with the original vouchers and the duplicate voucher substitute in its order amongst the duplicate according to the Head and sub-head classification. The sorting of the vouchers and the preparation of the appropriate lists is of the greatest importance and Sub-Treasurers should personally supervise this work.Dispatch of Monthly AccountsThe Sub-Treasurers will submit their monthly accounts by the fifteenth day of the following month or within such other period as may be instructed by the Accountant-General. The monthly account as dispatched to Headquarters, Enugu will therefore comprise:(a) If any Cash-book or folios are spoilt, they should be endorsed “cancelled” in ink, indelible pencil or ball pointed pen and the originals, with the appropriate monthly account, forwarded to the Accountant-General in serial order by the Sub-Treasurers.(b) Original Enugu State receipt and payment vouchers and triplicate receipt and payment vouchers of other Governments and self-accounting organizations.(c) Lists and corresponding original and duplicate vouchers of other Governments and self-accounting organizations (except Federal pension vouchers: see 9d) below).

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(d) Duplicate Enugu State receipt and payment vouchers together with duplicate receipt and payment vouchers relating to the Federal Pensions Head.(e) List of outstanding vouchers, with relevant Cheque or Cash Order Forms attached.(f) The Sub-Treasurer’s advice to dispatch, giving details of the numbers of parcels dispatched and their contents. Items (e) and (f) will be sent under separate cover.

Action by Voucher Section, EnuguSecond StageThe parcels containing the lists, vouchers and Cash-book folios referred to in F.I. 0213 above will be carefully opened by the Voucher Section, Enugu and the contents checked against the Sub-Treasurer’s advice of dispatch. The original receipt and payment vouchers (triplicate vouchers in the case of other Governments and self-accounting organizations) will be carefully checked against the Cash-book and the appropriate Cash-book entry ticked with the blue pencil. Any discrepancy will be reported immediately to a senior officer. Care should be taken to ensure that every entry in the Cash-book is thus properly supported by a voucher or a voucher substitute. Where the voucher substitute represents an outstanding voucher, details of the missing voucher will be entered by the staff of the Voucher Section in an outstanding voucher register and be compared with the outstanding voucher list submitted by the Sub-Treasurer (see F.I. 0213 (e). If any vouchers (or substitutes therefore) are missing, the fact should be reported to the Chief Accountant. Any discrepancy between the outstanding vouchers register and the Sub-Treasurer’s outstanding voucher list must be investigated and reconciled. When outstanding voucher list must be investigated and reconcile. When outstanding vouchers are received from Sub-Treasurers, they will be deleted from the Voucher Sections register of outstanding vouchers and placed in their proper order in the original and duplicate series or be dispatched to the appropriate authority. An outstanding voucher may represent a potential fraud and it is of the utmost importance that the Voucher Section should keep a careful record in respect of each Sub-Treasury, and this record must be inspected every month by the senior officer to whom this duty is delegated.

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Sorting and Disposal of Vouchers by Voucher SectionWhen all action is detailed in F.I. 0214 has been completed, the Voucher Section will:(a) Sorting the Enugu State original payment vouchers and the triplicate copies of those of other Governments and self-accounting organizations into Head and sub-head order and code classification order within each sub-head, binding all the vouchers under each Head together. (Original adjustment and receipt vouchers are not sorted into Head and sub-head order). After sorting and binding has been completed, the vouchers are ready for audit. (b) Pass the duplicate vouchers as received from Sub-Treasurers direct to the Main Accounts Section.(c) Pass Federal original and duplicate vouchers (pinned together) and those of other Governments and self-accounting organization, and the Sub-Treasurer’s covering lists, direct to the Main Account Section. (See. F.I. 0213 (c))

Checking of Cash-Books and Vouchers by Main Accounts SectionThe Main Accounts Section will proceed as follows:(a) Check the arithmetical accuracy of the Cash-book (including the cash specification and balance statement). (b) Check the duplicate Enugu State vouchers against the Cash-book, and cross tick the Cash-book entry in red pencil.(c) Check the Federal Government original and duplicate vouchers against each other, and the supporting sub-Treasurer’s lists and the Cash-book, again ticking the relevant Cash-book entry.(d) Check the vouchers of all other Governments and self-accounting organizations by the procedure in (c) above. When this stage has been reached, and if the work has been properly performed, there should be no missing ticks in the Cash-book which will then have been properly vouched. The original and duplicate vouchers as in (c) and (d) above, together with covering schedules and Group Summary Cards, are then passed to the Voucher Dispatch Section for dispatch to the appropriate Government or self-accounting organization. Listing of Duplicate VouchersAction will be continued on the duplicate vouchers as follows:(a) Enugu State duplicate vouchers- As the vouchers are already in Head and Sub-Head order when received from the Sub-Treasurer,

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listing may be commenced at once, a Head at a time. The Head number, month of account and name of the Sub-Treasury will be written on each adding machine slip, the vouchers listed and a separate total extracted for each sub-head. A space of about four centimeters should be left between each sub-head and the listing continues until all the vouchers for that particular Head have been listed. The sub-head number will be written against each sub-head total. When all the vouchers for the Head have thus been listed and before the adding machine list are torn off the roll, the sub-head totals will be listed at its foot and the total for the Head thus obtained. The strips will then be torn across after each sub-head total and fastened together in a bundle. The total of each Head is thus similarly ascertained, a separate adding machine list (note less than ten centimeters long) being prepared for each Head (both above and below-the-line).(b) Federal Government Vouchers- Federal Government vouchers supported by lists prepared by the Sub-Treasurer will next receive attention. Sub-head totals need not be shown, however, so that there will be a maximum of six lists which should agree with those submitted by the Sub-Treasurer. Any discrepancy must be investigated. (c) All Other Government’s and Self-Accounting Organisations’ Vouchers-Action as in paragraph (b) for Federal Government Vouchers. Verification of Sub-Treasuries’ Cash Receipts and Payments for the Month When all the receipts and payments for a Sub-Treasury have been listed, the Head totals for receipts and payments will be separately listed to give the total receipts and total payments for that Sub-Treasury for that month. Before this summary is torn from the roll, the Balance Statement for the Sub-Treasury is taken out by:(a) Listing the opening balance (i.e. the closing balance of the previous months)(b) Adding total receipts;(c) Taking out the sub-total of (a) and (b);(d) Deducting total payments;(e) Taking out the remaining balance (i.e. closing balance).

The listing officer will not attempt to verify his Sub-Treasury lists but, as he completes each Sub-Treasury, will collect all the Head slips for that Sub-Treasury, pin them together with the Summary on top and

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pass them, together with the vouchers, to the Sectional Head. The Sectional Head will check the closing balance for each Sub-Treasury obtained from the Listing Summary with the closing balance recorded in the Cash-book for that month. If the two balances do not agree he will investigate and correct the discrepancies, altering and initiating the documents effected as required. When all Sub-Treasury lists have been received and discrepancies have been rectified as above, it has been proved that, financially, all cash vouchers in respect of each Sub-Treasury have been correctly brought to account in the adding machine lists.

Verification of State Cash Receipts and Payments for the MonthWhen the Listing Summaries for all the Sub-Treasuries (including the Enugu State Liaisons Offices) have been pasted in the Summary Cash Register, the Register will be passed to an adding machine operator who will therefrom:(a) List opening balances, total receipts, total payments and closing balances in respect of all the Sub-Treasuries, taking out the four separate totals. (b) Prepare a Summary from the above totals showing:

(i) Gross opening balances for all Sub-TreasuriesGross receipts (add) for all Sub-Treasuries.Gross sub-total for all Sub-Treasuries.Gross payments (deduct) for all Sub-Treasuries.Gross closing balances. When the summary is balanced it will be posted in its appropriate place in the Summary Cash Register. Atthis stage it has been proved that, financially, all cash vouchers in respect of Enugu State (including the Enugu State Liaison Offices) have been correctly brought to account in the Station Lists. Sub-Treasuries as Listing StationsThe Accountant-General may from time to time declare Sub-Treasuries to be Listing Stations, and such Sub-Treasuries shall carry out such instructions as in F.Is. 0216 to 0220.

AdjustmentsThe Adjustments Section will deal with charges and credits to Enugu State Votes rendered by all other Governments, Government Departments and other self-accounting organizations in particular:

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Adjustment Vouchers Adjustment vouchers will be separately listed by head of sub-head order in the way as vouchers received from sub-treasurers. Adjustment vouchers relating to the transactions set out in F.I. 0222 the corresponding total credit (or debit in the case of receipts or credits to Enugu State) will be classified to the appropriate General Ledger account for the organization concerned. The lists and vouchers will then be passed to the Listing Section of the Main Accounts for the vouchers to be amalgamated with the Enugu State vouchers in accordance with F.I. 0225 for the preparation of the departmental voucher schedules.

Preparation of Monthly Memorandum AbstractThe Monthly Memorandum Abstract is a register which gives vertically a list of all Sub-Treasuries and other sources form which accounts and received including Enugu State adjustment vouchers. Heads of revenue and below-the-line receipts and Heads of expenditure and below-the-line payments are shown horizontally. The Head totals in the machine lists will be posted thereto against the appropriate Station or other source and, when all the lists have been posted and totaled both vertically and horizontally, it provides a record complete in itself of the total debits and credits to every Head and below-the-line account for the month. It is used as a check on the departmental voucher schedules as explained in F.I. 0228 and is also agreed with the Group Summary Card totals, subsequently posted to the Journal by the Chief Accountant in charge as explained in F.I. 0238. The Monthly Memorandum Abstract will be totaled in two separate sections viz:(a) When all the Station Lists have been posted. These totals will agree with the totals of each receipt and cash payments as per the Summary Cash Register (see F.I. 0220).(b) When all other accounts, enumerated in F.I. 0222 have been posted. Amalgamation of Vouchers and Machine Lists

FOURTH STAGEWhen all the duplicate vouchers for the month have been listed as described in the foregoing paragraphs and the Monthly Memorandum Abstract has been posted, they will be carefully amalgamated in strict Head and sub-head order. Under each sub-head they will also be arranged in code number order, immediately the vouchers have been

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amalgamated similar action will be taken with the adding machine lists which will then be passed to the Chief Data Processing Assistant who will return them for checking the departmental voucher schedule prepared as explained in F.I. 0226.Preparation of Departmental Voucher Schedules

FIFTH STAGEAfter the vouchers have been amalgamated and passed to the Chief Data Processing Assistance they will be issued sub-head by sub-head to the Data Processing Assistants. The Data Processing Assistants will take the vouchers for one sub-head (they will contain all the debits (or credits) to that sub-head for the month) and prepare the departmental voucher schedule in duplicate. A separate sub-total for each Sub-Treasury is obtained. When the whole of the vouchers for the sub-head have been posted, the accumulated station total representing the total debit to that sub-head for the month is thrown out.Checking of sub-head Voucher SchedulesAs the department vouchers schedules are completed, sub-head by sub-head, they will be passed to the Chief Data Processing Assistant who will check the sub-head totals for each Sub-Treasury on the departmental voucher schedule against the corresponding sub-head total on the machine lists in his possession. Any differences discovered will be investigated by reference to the voucher schedule as the case may be. All such corrections must be initiated by the Sectional Head. As the machine lists have already been agreed in total, any error thereon should have a compensating error on another list for that same station. Any amendment on a departmental voucher schedule will be made beneath the total, and a new total inserted. Machined figures are not to be altered but a mark against the incorrect figure should be made to draw attention to the correction. The checking of the departmental voucher schedules against the lists should be a continuous operation and should never be more than one Head in arrears.

Checking of Departmental Voucher Schedules against Monthly Memorandum AbstractWhen all the departmental voucher schedules have been prepared, total of each Head will be compiled by summarizing on an adding machine list the totals of each sub-head. The Head totals thus obtained will be checked against the Monthly Memorandum Abstract Head totals which have been compiled as described in F.I. 0224.

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Compilation of Group Summaries of Transactions by Other Governments, etc., on behalf of Enugu StateWhen the Current Accounts Inwards i.e., lists with supporting vouchers) from the Federal, and other State governments and from self-accounting organizations are received (representing payments and receipts effected by these Governments and organizations on behalf of Enugu State), the vouchers will be checked against the supporting list, sorting into Head and sub-head order, and posted to departmental vouchers schedules in exactly the same way as the Enugu State voucher. Group Summary card as above will then be prepared, and a Main Journal Voucher raised debiting or crediting the votes and below-the-line accounts shown in the Group Summary Card and crediting or debiting the appropriate General Ledger Account. Details of such Journal Vouchers will then be entered in the Cash Summary as explained in F.I. 0234 (viii).

Preparation of Abstract of AccountsSEVENTH STAGE

The Abstract of Accounts will be prepared on specially designed cards. Postings of sub-head and Head totals for the month are affected by transferring the amounts shown on the Group Cards to the appropriate Abstract Cards. When the accounts for the year have been completed the cards are bound in folders and become a permanent record of the accounts of the Government. The card used show:(a) Blue (or Head) Card: The total receipts or payments under each head of account each month and a cumulative total for the year up to the last month of account;(b) White Card (for sub-heads of revenue and below-the-line receipts only). – The total received as above under each revenue sub-head or below-the-line Head(c) Yellow or Buff Card (for sub-heads of expenditure and below-the-line payments only). - The total paid as above under each expenditure sub-head or below-the-line Head. These cards are headed appropriately with the classification number and description of the Head and sub-head and there is a “box” in the top right-hand corner in which will be entered the amount of revenue estimated or expenditure authorized and details of authorities for such expenditure.

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Treatment of Warrants Authorizing Expenditure The authorities for expenditure are referred to in detail in Chapter 4. Attached to each warrant is a schedule setting out in detail the expenditure covered by the warrant. These amounts and the reference number of the warrant are entered in the “box” on each expenditure abstract cared (e.g. G.W., I – N50, 000). Any subsequent additions, reductions, or variations are similarly recorded, the abbreviations set out in F.I. 0804 being used for convenience. Where sums are vired from one sub-head to another, the reduction is recorded in red in. The Warrants themselves are kept in safe custody by the following officers:

By the Accountant-General(a) General, Supplementary General and Provisional General Warrants.(b) Requisition Warrant(c) Deferred Expenditure Release Warrant(d) Trading Account Warrant(e) Prescription Warrant(f) Transfer Warrant(g) Accounts (Operation) Warrant.(h) Deposits Account Warrant(i) Erroneous Receipt Repayment Warrant. (j) General Investment WarrantBy the Chief Accountant, Main Accounts:Contingencies WarrantRevote WarrantSpecial WarrantVirement WarrantBy the Chief Accountant i/c Subsidiary Accounts:Impress AuthorizationPreparation of Cash Summary: Preliminary Action

EIGHT STAGEBefore posting to the Journal the Chief Accountant will prepare Cash Summary which is a summary of all transactions embodied in the accounts for the month. To enable this Summary to be prepared the following preliminary action is taken:

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(i) The officer responsible for the maintenance of the Monthly Memorandum Abstract prepares an analysis of all receipts and payments effected through the Enugu State Sub-Treasuries. This enables the Chief Accountant to extract the figures required for his Cash Summary as set out in F.I. 0234 below.

(ii) The Adjustment Section analyzes the adjustments into:(a) above-the-line credits(b) below-the-line credits(c) above-the-line debits(d) below-the-line debits(e) Revenue debit adjustments(f) Expenditure credit adjustmentsThese are entered in the Cash Summary as follows:(a) Minus (e) as Revenue(b) As below-the-line receipts (c) Minus (f) as Expenditure(d) As below-the-line payments Preparation of Cash Summary: Action by Chief AccountantThe Chief Accountant will then enter in his Cash Summary

(i) The cash and bank balances of all Sub-Treasuries at the beginning of the month.

(ii) The total receipts of all the Enugu State Sub-Treasuries separated into Revenue and below-the-line receipts.

(iii) The total payments similarly separated into expenditure and blow-the-line payments.

(iv) The total cash and bank balance at the end of the month.(v) Sums received by the Sub-Treasuries and classified as

expenditure credits are deducted from the relevant above or below-the-line payment totals. (vi) Sums paid by the Sub-Treasuries and classified as revenue debits are deducted from the corresponding above or below-the-line receipt totals. (vii) A check will then be effected as follows:Balances at beginning of month (i)Add total net receipts (ii) minus (vi);Deduct total net payments (iii) minus (v)= Balance at end of month (iv).

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(viii) When action on the Current Account Inwards from other States has been completed (see. F.I. 0230) and the Journal Voucher has been prepared, the totals will be posted to the appropriate columns in the Cash Summary. Receipts on behalf of the Enugu State by other States are entered in the appropriate Revenue and below-the-line receipts columns, and the combined total entered as a balancing figure in the below-the-line payments column. (The Journal Voucher will credit the appropriate sub-heads and debit the General Ledger Account of the State concerned). Payments on behalf of the Enugu State will be similarly recorded in the appropriate expenditure and below-the-line payment columns, and the balancing figure in the below-the-line receipts columns. (ix) The Cash Summary will now be ruled off and balanced. The final totals show:(a) Opening cash and bank balances (b) Total net revenue for the month (which must be agreed with the Abstract)(c) Total below-the-line receipts(d) Total net expenditure for the month (also agreed with the Abstract)(e) Total below-the-line payments (f) Closing cash and bank balances Posting of Journal and General LedgerThe Data Processing Assistants will prepare the following:(a) Statement of Revenue (as published in the Official Gazette).(b) Statement of Expenditure (as published in the Official Gazette).(c) A Summary (head totals only) for below-the-line receipts. (The total of this Summary is agreed with the Cash Summary figures as at F.I. 0234 (ix) (c )(d) A Summary (head totals only) for below-the-line receipts. (Also agreed with the Cash Summary as at F.I. 0234 9ix) (c)

Posting Total Cash Receipts and PaymentsThe Chief Accountant now has all the information necessary to enable him to post the Journal and commence with the cash receipts and payment.

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(a) The cash receipts include items credited to revenue heads and sub-heads credits to below-the-line accounts and expenditure credits. These are posted in the Journal as Local Cash Receipts – Dr. (b) The cash payments include items debited to expenditure sub-heads, items debited to below-the-line accounts revenue debits. These are journalized as Local Cash Payments- Cr. The true cash receipts and disbursements through all the Sub-Treasuries for that month are thus ascertained. (Note: a revenue debit is a cash disbursement and an expenditure credit is a cash receipt).

Proving Accuracy of Cash Transactions The accuracy of these entries is proved by taken the opening cash and bank balance for the month; adding thereto the total true cash receipts as above and deducting the true cash payments. The resultant total should then agree with the cash and bank balances at the end of the month.

Posting Below-the- payments and receiptsThe sums to be credited or debited to each below-the-line account are prepared on group summary cards by the Data Processing Assistant as described in F.I. 0235 (c) and (d). These will be entered in the Journal as follows:Below –the-line payments … … DrBelow –the-line receipts … … Cr

These entries which will be transferred to the appropriate account in the General Ledger are thus directly opposed to the cash journal entries; the cash payments being a credit to the Cash Account in the General ledger but a debit to the receiving account. The converse applies, a cash receipt being a debit to the General Ledger Cash Account and a credit to the receiving account.

Posting of Revenue and Expenditure Totals Statements of revenue and expenditure for the month will also be prepared by the Data Processing Assistant as described in F.I. 0235 (a) and (b) and the two totals are posted in the Journal as follows:

Expenditure Account … … DrRevenue Account … … Cr

Balancing of the JournalAll the information to be posted to the General Ledger Accounts has now been journalized and the debit and credit columns of the Journal

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are cast and agreed. They should be equal and, if they do not balance, the error must be investigated and rectified.

Surplus and Deficit AccountAt this point, for the purpose of convenience only, the Surplus or Deficit on the month’s account will be ascertained and posted to the Journal. The total revenue as above is entered in the debit column of the Journal and the total expenditure in the credit, column, and the difference being entered as follows:

Deficit … … DrSurplus … … Dr

Posting the General LedgerThe items recorded in the Journal will now be posted to the General Ledger Accounts, the debit items in the Journal to the debit of the appropriate General Ledger account an the credit items in the Journal to the credit of appropriate General Ledger and the General Ledger folio in the Journal as the entries are made, to ensure that no items is overlooked in posting. Extraction of Trial Balance

NINTH STAGEWhen all items have been posted, all the accounts will be ruled off in the General Ledger (monthly) and the debit or credit balance (as the case may be) brought down as the opening entry for the next succeeding month. A Trial Balance as then extracted in the normal way. In his connection a Supplementary Trial Balance is compiled for convenience to summarize groups of similar accounts.

Monthly AccountsThe following Statements will then be prepared:

(a) Main Trial Balance (F.I. 0238)(b) Supplementary Trial Balance (F.I. 0238).(c) Statement of Assets and Liabilities (d) Statement of Revenue (F.I. 0230) (a)(e) Statement of Expenditure (F.I. 0230) (b)(f) Surplus and Deficit Account (F.I. 0236).

The originals are kept in the Principle Account’s office in a special folder and the duplicate of (c), (d), (e) and (f) are sent to the Government Printers for printing and gazette.

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Submission of Monthly Accounts to the Accountant General Before dispatching the accounts to the Government Printer, it is the day of the Principal Accountant to submit them to the Accountant-General, together with the Journal and the General Ledger, for security and signature.

Dispatch of Duplicate Schedules and VouchersTENTH STAGE

The duplicate of the voucher schedules prepared as described in F.I. 0221, with the duplicate copies of the relevant vouchers attached, will be passed by the Main Accounts Section to the Voucher Dispatch Section whence they are distributed to the officers shown in the Annual Estimates as charge with responsibility for the control of the votes.

Annual Accounts and Annual Report of the Accountant-GeneralFINAL STAGE

Within a period of six months or such longer period as the Legislature may, by resolution, appoint after the close of each financial year, the Accountant-General will sign and present to the Minister of Finance and the Director of Audit accounts showing fully the financial position of the Government of Eastern Nigeria on the last day of such financial year, together with his Report thereon. The accounts will include:

(a) An abstract of receipts and payments(b) A statement of assets and liabilities (c) A statement of revenue by sub-heads compared with the

Estimates for such revenue.(d) A statement of expenditure by sub-heads compared with the

authorities for such expenditure. (e) Such other statements as the Ministry may from time to

time require.The accounts and the Report will be laid by the Minister of

Finance on the Tables of the Legislature and will be published. Director of Audit’s Certificate and Report The Director of Audit will transmit to the Minister copies of the statements referred to in F.I. 0242 (a) and (b), signed and presented by the Accountant-General in pursuance of the provisions of the Audit Law, 1955, together with his Certificate and Report upon his examination and audit of all accounts relating to the public moneys,

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stamps, securities, stores and other Government property of any kind whatsoever. The Minister will lay this Report on the Tables of the Legislature and it will be published.

Director of Audit’s Special Reports The Director of Audit may at any time transmit a special report to the Minister of any matter incidental to the exercise of his powers and the performance of his duties under the Audit Law, 1955, and the Minister/Commissioner will lay such report on the Tables of the Legislature.

Revaluation of Securities At the close of each financial year each of the securities held on

account of the Government will be valued at the current middle market price on the last working day of the year, and the value assigned to each security in the accounts will be adjusted so as to correspond to that price. The amount by which the new value exceeds or fails short of old value will be carried to the credit or debit of the Consolidated Revenue Fund. Where securities are held on behalf of a specific fund, a similar procedure will be followed, but the gain or loss will be dealt with according to the rules of that fund.

Organizational Structure of a Typical State Government Treasury in Nigeria In Nigeria, each State Government has a Treasury which is usually composed of the State Accountant-General at the head, the State Auditor-General, Accounting Officers (Permanent Secretaries), Sub-Treasurers, Revenue Collectors, and Impress Holders in that order of hierarchy. The functions or responsibilities of each of these officers that make up the organization of a typical State Government Treasury are stated below. Accountant-General and FunctionsThe Accountant-General of the State is the Head of the State Government Accounting Services and the Treasury. He is responsible for:(i) Receipts and payments of government funds;(ii) Supervision of the Accounts of the Ministries and Extra-Ministerial Departments;

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(iii) Collation, presentation and publication of statutory financial statements of the state and any other statements of Accounts as required by the Commissioner for Finance;(iv) Management of Ministry of Finance Investments (MOF).(v) Maintenance and operation of the Accounts of the Consolidated Revenue Fund, Development Fund, Contingencies Fund and other Public Funds as may be created by the State Government and Provision of cash backing for the operation of the State Government;(vi) Procurement, maintenance and operation of the State Share of the Federation Accounts;(vii) Establishment and supervision of Sub-Treasuries/Pay offices in the state and the State Liaison Offices;(viii) Conduct of routine and in-depth inspection of the books of accounts of the State Ministries and Extra-Ministerial Departments to ensure compliance with Financial Instructions, regulations, policies and decisions. This includes surprise cash survey and annual board of survey;(ix) Maintenance of Accounting Codes and Internal Audit Guides;(x) Investigation of cases of fraud, loss of funds, assets and store items and other financial malpractices in Ministries and Extra-Ministerial Departments;(xi) Provision of Financial Instructions and issuance of Treasury Circulars to Ministries and Extra-Ministerial Departments to ensure that there are adequate accounting systems in the public offices for the control of the collation and disbursement of public fund and for the co-ordination of the accounting systems;(xii) Ensuring Revenue Monitoring and Accounting Policy, (xiii) Issuance of Treasury Forms and Books with identifiable numbers for use in all Ministries and Extra-Ministerial Departments to ensure uniformity;(xiv) Formulation of the Accounting Policy of the State Government?(xv) Servicing of loans and Public Debt Management;(xvi) Organisation of training of accounts officers and audit personnel in all Ministries and Extra-Ministerial Departments;

Auditor-General

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The Auditor-General is responsible for the audit of and report on the public accounts of the state including all Ministries/Extra Ministerial Departments, persons and bodies established by law entrusted with the collection, receipt, custody, issue, or payment of State public money or with the receipt, custody issue, sale, transfer or delivery of any stamps, securities, stores or other property of the State Government and for the certification of the Annual Accounts of the Government. The Auditor General of the State shall examine and ascertain in such manner as he may think fit the accounts relating to public funds and property and shall ascertain whether in his opinion. (i) That the accounts have been properly kept in accordance with the financial instructions. (ii) Those public monies have been fully accounted for, and the rules and procedures applied are sufficient to become an effective check on the assessment, collection and proper allocation of revenue.(iii) Those monies have been expended for the purposes for which they were appropriated and the expenditures have been made as authorized. And (iv) That the essential records are maintained and the rules and procedures applied are sufficient to safe-guard and control public property and funds. By virtue of the responsibilities and the functions of the Accountant General and the Auditor General of the State, the two officers or their representatives shall have free access at all responsible times to all files, safes, documents books and other records relating to the Accounts of the Ministries/Extra-Ministerial Departments or units. They shall also be entitled to require and receive from members of the public services such information, reports, and explanations as they may deem necessary for the proper performance of their function.Accounting Officer and FunctionsThe term Accounting Officer means the officer of a Ministry or Department who upon receiving an appointment or acting appointment as a Permanent Secretary or Head of an Extra-Ministerial Department is consequently designated and appointed Accounting officer for his Ministry or Extra-Ministerial Department. Hereinafter any reference to an Accounting Officer in the Financial Instruction means the Permanent Secretary of a Ministry or the Head of Extra Ministerial Department. The Accounting Officer is responsible for the stewardship; that is safe-

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guarding of public funds and the regularity and the propriety of expenditure under this control. The function of the Accounting Officer shall include:(i) Ensuring that proper budgetary and accounting systems are established in his Ministry/Extra-Ministerial Department to enhance internal control accountability and transparency. (ii) Ensuring that the essential management control tools are put in place to minimize waste and fraud;(iii) Ensuring that all Government revenues are collected and paid into the Consolidated Revenue Fund promptly. (iv) Rendering monthly and other periodically accounting returns and transcript to the Account-General as required by the Financial Instructions. (v) Ensuring the safety and proper maintenance of all government assets under his care. (vi) Responsibility for answering all audit queries pertaining to his Ministry/Department or Agency including appearances before the Public Accounts Committee;(vii) Ensuring accurate collection and accounting for all public monies received and expended and(viii) Ensuring prudence in the expenditure of public funds.

The Accounting Officer shall be held personally and Pecuniary responsible for all wrong doings in his Ministry or Extra/Ministerial Department. Delegation of his duties or functions shall not absolve him from these responsibilities and liabilities. Sub-TreasurerThe term Sub-Treasurer means an officer who is entrusted with receipt, custody and disbursement of public money and who is required to keep Cash Book ENT Book 107 together with such other books of accounts as may be prescribed by the Accountant General (See F.I. 0209), the transaction is which are subsequently embodied in the final accounts rendered by the Accountant-General (See also F.I. 0202).

Revenue CollectorA “Revenue Collector” means an officer, other than a Sub-Treasurer who is entrusted with an official receipt, license or ticket booklet for the regular collection of some particular form of revenue and who is

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required to keep a Revenue Collectors Cash Book or such other books as may be prescribed by the Accountant Genera (See Also F.I. 0201).Impress HolderThe term “impress holder” means an officer other than a Sub-Treasurer who is entrusted with the disbursement of public money, for which vouchers cannot be presented immediately to a Sub-Treasurer and who is required to keep a Vote Book (DVEA BK) and other books of accounts necessary for his work. (See also F.I. 0201).Office of the State Accountant-GeneralUnder the State Accountant-General the staff includes his Deputies, Directors of Finance and Suppliers, Chief Accountants, Assistant Chief Accountants, Principal Accountants, Senior Accountants, Accountants and Executive Officer of all grades, Sub-Treasurers and other subordinate staff; officers of the office are stationed in the Enugu Headquarters and at Local Government Areas throughout the State. Sub-Treasurers are also established in the Lagos and Abuja officers of the Enugu State Government.

Cadre of Accounts OfficersAll grades of Accountants and Executive Officers (Accounts) in every Ministry and Extra-Ministerial Department. Constitute a cadre of accounts officers which are subjected to control for professional purposes and deployment by the Accountant General and for disciplinary and other establishment purposes by the Permanent Secretary, Ministry of Finance.

Achieving Accountability in Public Financial Management in Nigeria1. Legislatures to champion the cause of accountability: The legislators in Nigeria and other developing countries have the constitutional responsibility to ensure that the executive are accountable to the people for the management of public funds. But the revise is the case in Nigeria, where the legislators are part and parcel of the collapse of the system. However, for accountability to be achieved in Nigeria, legislators at all level of government must ensure that appropriate laws and over-sight functions are properly performed by them.2. Re-orientation of Value System: One fundamental problem in Nigeria is the failure of the value system. This failure has resulted to the high level of corruption and lack of accountability by public officers.

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According to Adegite (2010), that corrupt tendencies pervade the strata of the Nigerian society so much so that the youths, who are supposed to be the leaders of tomorrow, are neck deep in examination malpractice, 419 and internet fraud. She recommends that for Nigeria to be among the most developed economies in 2020, and then the nation’s value system should be strengthened through the reintroduction of civics and ethics into the curricula of our educational system while a national orientation for the rebirth of our value system should be urgently initiated.3. Management accountability framework: Accountability law is only a part of the accountability process. A proper accountability framework would require that the government should put in place guidelines for preparing and approving work plan, method of monitoring plans, reporting performance, accumulation of portfolio of evidence on performance reporting, system of validation and oversight of performance reports, establishing and resourcing public accountability institutions, training public managers and guidelines for dealing with political institutions by public managers.

4. Protection of Whistleblowers: One fundamental means of achieving optimum accountability in Nigeria is the protection of the whistle blowers. An effective framework of accountability requires that those who blow the whistle should be protected against any reprisal. The government in Nigeria should establish appropriate laws to protect the whistleblowers.

5. Creating an environment of accountability: An effective framework of accountability rests, besides, formal structures, on a proper environment. It requires such things as existence of a proper code of conduct, training in ethics, appearance of equal treatment by senior managers toward all employees, and unforgiving accountability of senior officers. It also means that the oversight bodies should adopt a reasonable attitude toward public managers.

6. Adoption of International Public Sector Accounting Standards: The success of accountability in the public sector in Nigeria lies on the proper implementation of the International Public Sector Accounting Standards. Public sector organizations in Nigeria use the cash basis of accounting. It is very necessary that Ministries, Departments and

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Agencies should begin to use the accrual basis of accounting. A complete accrual basis of accounting would make public managers accountable for recording and safeguarding of public assets, managing public cash flows, and disclosing and discharging public liabilities. Adegite (2010) says that to attract foreign direct investments to Nigeria, the financial reporting processes must be aligned with international standards.

7. Public performance reporting: Public managers are in a business that affects virtually every aspect of a person’s life. People, therefore, have a right to know, how the public managers are doing their business. The legislators need to take a lead in this regard and enact necessary laws making it obligatory for all public entities to report on their performance. Public reporting on performance of departments or programs should be made mandatory.

8. Determination of the cost of doing government business: One major problem affecting the growth of public expenditure and corruption in Nigeria is the high cost of doing government business. A large number of costs in the form of use of existing assets and facilities are not recorded in the year the assets are used. The government following cash-based accounting does not have a system of charging depreciation to the government assets and allocating them to various programs and projects. Thus the true cost of doing government business remains hidden. A proper accountability framework would require that a detailed cost accounting system be introduced in government.

9. The establishment of the benchmark of efficiency: A very important problem facing public sector managers in Nigeria is the clear absence of performance benchmark. Public performance reporting requires that benchmarks of efficiency be devised for all ministries, departments and agencies. This should be done in consultation with the MDA’s themselves and should remain open for periodic review and revisions.10. Strengthening the Public Accounts Committee: Public accounts committees play a very significant role in accountability of public officers in Nigeria. Public accounts committees should be strengthened with a system of familiarizing the members with the audit scope, approach and methods through workshops and powers to take action if their recommendations are not implemented.

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11. Change in the structure of Government Accounting and Auditing: Governmental accounting system in Nigeria is grossly deficient. Financial reports are outdated and unreliable at all levels of government. Little attention is paid to financial accountability

in the public service. Achua (2009) posit that there is an urgent need to protect the commonwealth from poor performance and fraud, and to protect individuals from lawless, arbitrary and capricious actions by the state’s surrogate administrators. Therefore, the is an urgent need to restructure the public sector accounting system taking into consideration the frailties and flaws of governmental accounting in Nigeria. Adegite (2010) also says the rapid development and changes that have taken place in the nation’s public sector since 1958. It is urgently necessary a comprehensive revision of the entire audit laws of the country with a view to aligning them with current realities and demands of globalization. Summary and ConclusionPublic Finance [or Government Financial Accounts] statistics generally refer to data on the various types and forms of revenue and expenditure of Government. The public sector in Nigeria consists of the three tiers of Government [Federal, State and Local] and their parastatals.There are 36 States, a Federal Capital Territory (FCT) at Abuja and 774 Local Government Areas (LGAs) in the Federation of Nigeria. All the Governments in the country are required by law to prepare annual budgets and render accounts of their financial operations.The relevant laws in this regard are “The Finance [Control and Management Ordinance of 1958, the Constitution of the Federal Republic of Nigeria, 1999, and the Civil Service [Re-Organisation Decree/Act 43 of 1988”. By law, the Minister in charge of Finance is required to make a full financial disclosure to the legislature, prepare estimates of revenues and expenditures [that is, the budget] on a yearly basis, while the Accountant-General is enjoined to sign and present to the Director of Federal Audit the financial position of Government on the last day of each financial year.Furthermore, the law demands that “the public accounts of the Federation and of all offices, courts and authorities of the Federation

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(including all persons and bodies established by law and entrusted with the collection and administration of public moneys and assets) shall be audited and reported by the Auditor-General, and for that purpose, the Auditor-General or any person authorized by him or acting on his behalf shall have access to all books, records, returns and other documents relating to those accounts”.Finally, for the sake of accountability, the relevant Nigerian laws also direct that:(a) all instructions relating to expenditure of public funds by Accounting Officers shall be in writing.(b) all Ministers and Chief Executive and Accounting Officers shall render Annual Reports of their Ministries in order to ensure accountability and enforce performance ethics.(c) Ministries shall render monthly returns of receipts and expenditures to the Accountant-General with copies to the Budget Department and the Auditor-General not later than three weeks of the following month”. It is important to note that the Civil Service Reforms Act 43 of 1988 is applicable to all the three tiers of Government.

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Adegite, E. O. (2010): “Accounting, Accountability and National Development”, Nigerian Accountant, 43(1): 56-64.

Amah, G.A.N. (2002): Financial Accounting, Enugu: John Jacob’s Classic Publishers.

Akufor, A.M.O. (1998): Public Finance in Developing Countries, Enugu Abic Books & Equipment Ltd.

Anyafo, A. M. O. (1996): Public Finance in a Developing Economy: The Nigerian Case. Enugu: B& F Publications UNEC.

Anyanwu, J. C. (1997): Nigerian Public Finance. Onitsha: Joanee Educational Publishers Limited.

Appah, E. (2008): Financial Management: Theory, Strategy and Practice. Port Harcourt: Ezevin Printing and Publishing Company.

Appah, E. (2009): “Value for Money Audit: A Viable Tool for

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Promoting Accountability in the Nigerian Public Sector”, Nigerian Accountant, 42(2):33-35.

Appah, E. and Appiah, K.Z.A. (2010): “Fraud and Development of Sound Financial Institutions in Nigeria”, Nigerian Journal for Development Research, 1(1): 49 – 56.

Appah, E. and Coleman, A. (2009): “New System of Public Sector Budgeting: A Technique and Strategy for the Development of Nigeria’s Economy”, International Journal of Economic and Development Issues, 8(1 & 2): 118- 129.

Asian Development Bank (2009): “Pakistan Sindh Province: Public Financial Management and Accountability Assessment”, Asian Development Bank. Retrieved on 2/4/2011 from http://adb.org

Bello, S. (2001): ‘Fraud Prevention and Control in Nigerian Public Service: The need for a Dimensional Approach”, Journal of Business Administration, 1(2): 118-133.

Bruce, H. (1976): Public Finance, New York: McNally Publishing Co.

Bhatia, H. L. (2004): Public Finance. New Delhi: Vikas Publishing House PVT limited.

Buchanan, J. M. (1987): Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, UNC Press

Coker, O. (2010): “Accountability in Third Sector Organisations: What Role for Accounting?”, Nigerian Accountant, Vol. 43(1): 23-29.

Druke, H. (2007): “Can E-Governance make Public Governance more Accountable” in Shah, A. (ed) “Performance Accountability and Combating Corruption”, World Bank. Retrieved on 2/4/2011 from http://worldbank.org

ENSG (2001): Enugu State Financial Instructions (Finance and Stores) Revised for Journal 2013), Enugu Government Printer.

Eastern Region Government of Nigeria (1963): Eastern Nigeria Financial Instructions, Amendment No. 15, Vol. 1 (May), Enugu Government Printer.

Greene, Joshua E (2011): Public Finance: An International Perspective. Hackensack, New Jersey: World Scientific.

Gruber, Jonathan (2005): Public Finance and Public Policy. New York: Worth Publications. p. 2.

Henry, N. (1999): Public Administration and Public Affairs New Delhi: Prentice-Hall.

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International Federation of Accountants (2001): “Governance in the Public Sector: A Governing Body Perspective”. International

Public Sector Study; Retrieved on 2/4/2011 from http://www.ifac.orgInternational Monetary Fund (1998): “Code of Good Practices on

Transparency”. International Monetary Fund; Retrieved on 2/4/2011 from http://www.imf.org

Jayawickrama, N. (1999): “Transparency and Accountability for Public Financial Integrity” in Schviano-Campo, S. (ed). “Governance, Corruption and Financial Management”: Asian Development Bank, Manila, Philippine. Retrieved on 2/4/2011 from www.adb.org

Jenfa, B. I. (2000): Elements of Professionalism and Practice of Accountancy. Jos: Ehindero Nigeria Limited.

Jenkins, R. (2007): “The Role of Political Institutions in Promoting Accountability” in Shah, A. (ed) “Performance Accountability and Combating Corruption”, World Bank. Retrieved on 2/4/2011 from http://worldbank.org

Johnson, I. E. (2004): Public Sector Accounting and Financial Control. Lagos: Financial Institutions Training Centre.

Kaufman, D. (2005): “Myths and Realities of Governance and Corruption; World Bank Governance Programme, Washington, DC.

McCourt, W. (2007): “Efficiency, Integrity, and Capacity: An Expanded Agenda for Public Management” in Shah, A (ed) “Performance Accountability and Combating Corruption”, World Bank. Retrieved on 2/4/2011 from http://worldbank.org

Musgrave, R. A. (1959): The Theory of Public Finance: A Study in Public Economy, McGraw-Hill.

Nwagboso, J. (2008): Professional Ethics, Skills and Standards. Jos: Inspirationz Media Konsult.

Nwizu, G.O. (2008): Issues in Modern Public Administration, Enugu: NGIB Books.

Ojiakor, N. (2009): Nigerian Socio-political Development: Issues and Problems, Enugu: John Jacobs Classic Publishers.

Okoh, L. and Ohwoyibo, O. (2010): “Public Accountability: Vehicle for Socio-Economic Development of Nigeria”, International Journal of Investment and Finance, 3(1 & 2): 145-149.

Okwoli, A. A. (2004): “Towards Probity, Accountability, and Transparency in Revenue Generation in the Nigerian Public Sector”, Nigerian Journal of Accounting Research, Vol. 1(1): 1-9.

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Oshisami, K. (1997): Government Accounting and Financial Control. Ibadan: Spectrum Books Limited.

Peter, G. (2007): “Performance – Based Accountability” in Shah, A. (ed) “Perfromance Accountability and Combating Corruption”. World Bank: Retrieved on 2/4/2011 from http://worldbank.org

Premchand, A. (1999): “Public Financial Accountability” in Schviavo-Campo, S. (ed). “Governance, Corruption and Public Financial Management”: Asian Development Bank. Manila, Philippines. www.adb.org

Premchand, A. (1999): “Public Financial Management: Getting the Basics Right”, in Schviavo-Campo, S. (ed); “Governance, Corruption and Public Financial Management”: Asian Development Bank, Manila, Philippines. www.adb.org

Russel-Einhorn, M. (2007): “Legal and Institutional Framework Supporting Accountability in Budgeting and Service Delivery Performance” in Shah, A. (ed) “Performance Accountability and Combating Corruption”, World Bank. Retrieved on 2/4/2011 from http://worldbank.org

Ryan, C., and Walsh, P. (2004): “Collaboration of Public Sector agencies: reporting and accountability challenges”, International Journal of Public Sector Management, 17(7): 621-631.

Schiavo-Campo, S. and Tommasi, D. (1999): “Reform Priorities for Public Financial Manageemnt in Developing Countries”, in Schviavo-Campo, S. (ed); “Governance, Corruption and Public Financial Management”: Asian Development Bank, Manila, Philippines. www.adb.org

Sharma, M.P and Sadana, B.L. (1989): Public Administration in Theory and Practice, Akahabad; Kitab Mathal.

Stiglitz, J. E. (2000): Economics of the Public Sector, 3rd ed. Norton Description.Tanzi, V. (1997): “Governance, Corruption, and Public Finance: An Overview”, in

Schviano-Campo, S. (ed); “Governance, Corruption and Public Financial Management”, Asian Development Bank, Manila, Philippines. www.adb.org

Transparency International (2010): “Nigerian Ranking in the Corruption Index”.United Nations (1999): “Transparency and Accountability in Government Financial

Management”, United Nations, New York. Retrieved on 2/4/2011 from unpan.1.un.org/intradoc/group/public/documents/un/unpan

Government Account Office (1993): Performance Budgeting: State Experience and Application for the Federal Government, Washington D.C. GAO.

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http://www.adb.org/


CHAPTER TEN

FISCAL RELATIONS AMONG THE THREE TIERS OF GOVERNMENT IN NIGERIA: Issues, Principles and Practice

BY






IntroductionAccording to Ojo (2010), the perennial problems which has not only defied all past attempts at permanent solution, but also has a tendency for evoking high emotions on the part of all concerned (each time it is brought forth for discussion or analysis) is the issue of equitable revenue allocation in Nigeria. It is an issue which has been politicized by successive administrations in Nigeria both military and civilian regimes. Indeed, in virtually all federations in which the constitution shares power between the central and regional or state governments and, for each level to be “within a sphere co-ordinate and independent” (Wheare, 1963:93) enough resources need be allocated to each tier to justify their existence. The nature and conditions of the financial relations in federal systems particularly one that is transfixed on a multi-ethnic society like Nigeria is crucial to her continuing existence (Badmus, 1989:7) for fiscal matters transcend the purview of economics alone. They have in most cases in Nigeria assumed political, religious and social dimensions (Adesina, 1998:234). In the words of James O’Connor, allotments of money (and resources) must reflect “social and economic conflicts between classes and groups” (O’Connor, 1993:276). It is not surprising therefore, that the basis of federal statutory revenue allocation has

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always been one of the “most contentious and destabilizing factors in the Nigerian polity”. No doubt, ‘public finance is one of those subjects which lie on the borderline between economics and politics’ (Dalton, 1929 in Ekeh, 1994:234).

It needs be emphasized that whatever may be the origin of a federation, whether aggregation or devolution, its establishment at once raises three salient problems: “how to allocate functions rationally; how to allocate taxing powers; and how to share revenue between the governments of that federation” (Phillips, 1971:389 in Adebayo, 1990:246). Revenue allocation formula must accomplish via: (i) national unity; (ii) economic growth, (iii) balanced development, (iv) self-sufficiency and (v) high standard of living for the citizens (Nigerian Tribune editorial comment 11th August, 1995:1). The hitch however in Nigerian context is how best to resolve these complex revenue allocation problems that will achieve the aforementioned objectives. Thus, on several occasions, successive governments have been revising revenue allocation formula till date. So far, an acceptable formula is yet to be arrived at; in view of the agitations here and there for an acceptable formula. Meanwhile, it is imperative to note that Nigeria’s revenue sharing debates have revolved basically around three issues namely: (i) the relative proportions of federally collected revenues in the federation account that should be assigned to the centre, the states, the localities and the so-called ‘Special Funds’ (vertical revenue sharing), (ii) the appropriate formulae for the distribution of centrally devolved revenues among the states and among the localities i.e. local governments (horizontal revenue sharing) and (iii) the percentage of federally collected mineral revenue that should be returned to the oil-bearing states and communities on the account of the principle of derivation and compensation for the ecological risks of oil production (Suberu, 1995:8-9). It is equally important to note that since the oil boom in the early 1970s, the revenue allocation formula has been bedeviled by time inconsistencies – a tendency of one of the parties in a consensual agreement to change the terms after the negotiations have been completed. The formula has been continually manipulated in the service of interregional and inter-ethnic cross-subsidization (Olopoenia, 1998:51). Suffice to say that revenue allocation formula are warped because they have not been ‘‘open covenants openly arrived at’’. Rather, they reflect the views of commissions, individuals, or groups

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within the commissions, which have shown proclivity for embracing theories, beliefs, ideals and approaches which have not only proved unrealistic, but have thereby contributed to the dislocations within the Nigerian state (Adesina, 1998: 232).

The historical analysis of the revenue allocation commissions is vitally important in unravelling the paradoxes of our time, and to understand our contemporary predication. The thrust of this discourse therefore is to access the challenges of fiscal relations among the three tiers of government in Nigeria. The objective is on evolving a viable revenue allocation formula vis-à-vis the contradictions in Nigeria’s federal system.

Fiscal Federalism: Conceptual Issues and Theoretical InsightFiscal federalism, a subfield of public economics, is concerned with "understanding which functions and instruments are best centralized and which is best placed in the sphere of decentralized levels of government" (Oates, 1999).

In the words of (Arowolo, 2011:11) understanding federalism as a concept facilitates the understanding of fiscal federalism as a larger concept. This is because federalism is the operational context within which fiscal federalism is situated. Thus, it is an integral aspect of federalism. But according to Iyekekpolo, et al (2011), it has been difficult for scholars over the years to reach a consensus as regards the definition of federalism. This difficulty is hinged on the problem of inability to establish a proper linkage between theory and practice of federalism on the one hand and the issue of different scholars viewing federalism from different perspectives, on the other hand. However, the concept of federalism has attracted the attention of various scholars, in their definitions of the concept of federalism.Conceptually, federalism, according to (Ajayi, 1997:150) refers to a political system where there are at least two levels of government. In such cases, there is the juxtaposition of two levels of power of a central government otherwise called the federal government and other states labeled variously as states, regions, republics, cantons or unions.Etymologically, Akindele and Olaopa, (2002) revealed that federalism is derived form the latin word “foedus “ meaning covenant, with a governing representative head, further, the term is also used to describe a system of the government in which sovereignty is constitutionally

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divided between a central governing authority and constitutional political units such as states and local governments.

Itse Sagay (2008) conceptualized federalism as “an arrangement whereby powers within a multinational country are shared between a federal government and component units in such a way that each unit, including the central authority exists as a government separately and independently from others, operating directly on persons and prosperities with its territorial area and with a will of its own as apparatus for the conduct of affairs and with an authority in some matters exclusive of others”

In line with the claim that federalism as a political theory is divergent in concept, varied in ecology and dynamic in practice; having to do with power is distributed or shared territorially and functionally among the various units in a federation, Wheare (1967), the highly acclaimed father of federalism concentrated on the legal perception of federalism, when he defined federalism as a constitutional arrangement which divides law making powers and function of the state between two levels of government which are coordinate in status (Iyekekpolo, et al 2011). In lieu of his definition, it become obvious that (he) Wheare accentuated the need for respect of the federal structure as enshrined in the constitution of the land, especially when consideration is paid to the coordinate status of the components of the federation. He went further to argue that if the components discover that the services given to them are too expensive for them to perform and call on the federal government for assistance, they are no longer coordinated to the federal government, but subordinate to it and when this happens, federalism cease to exist.

In support of this observation, Nwabueze (1983:1) acknowledged that: federalism is an arrangement whereby powers of government within a country are shared between a national (nationwide) government and a number of regionalized (i. e. territorially localized) governments in such a way that each exists as a government separated and independently from the others, operating directly on persons and property within its territorial areas, with a will of its own and its own apparatus for the conduct of its affairs and with an authority in some matters exclusive of all others.

In the final analysis, it is pertinent that each unit of government within a federation exists, not as an appendage of another government,

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but as an autonomous entity capable of conducting its own will free from directive by any other government. It is in this context that federalism is been seen as the approach to governance that seeks to combine unity or shared rule with diversity or self rule (Kincaid, 1995).

With over 150 million people, two or more major religions, a few major and many minor languages, major geographic difference, 36 states and 774 local governments, Nigeria is one of the largest and most complex federations in the world. It has been said that countries are not difficult to govern because they are federations; they are federations because they are difficult to govern. Surely, Nigeria exemplifies this.The knowledge derived from the conceptualization of the concept of federation makes it easier to come to terms with the assertion that fiscal federalism is concerned with “understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized level of government” (Oates, 1999:1120).

Characteristically, fiscal federalism is typified by the fiscal relations between central and lower levels of government, especially as made manifest by the financial aspects of the development of authority from the national to the state and local levels, covering two interconnected areas- the division of competence in decision making about public expenditures and public revenue between the different levels of government (national, state and local ) and – the degree of freedom of decision making enjoyed by states and local authorities in the assessment of local taxes as well as in the determination of their expenditure (Kesner- Skreb, 2009:235).

Semantically, Akindele and Olaopa, (2002) sees fiscal federalism from the standpoint of the allocation of tax raising powers and expenditure responsibilities between levels of governments, hence fiscal federalism concerns the division of public sector functions and finances among different tiers of government (Ozo-Eson, 2005:1). Sharma (2005:38) perceives fiscal federalism as a set of guiding principles, a guiding concept that helps in designing financial relations between the national and subnational levels of the government, fiscal decentralization on the other hand as a process of applying such principles.In any federal system, there must be an arrangement on how the revenue of the state will be shared among the component parts. In supporting this view, Ronald Watts (1970) argues that:

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The observation of Ronald Watts on fiscal federalism and revenue allocation is instructive particularly for Nigeria. As recognized by him, federal finance is a controversial subject. It also affects the allocation of administrative responsibilities. The percentage of revenue allocated to a tier of government will definitely affect or influence its performance. The assumption of Ronald Watts that the fiscal power and revenue allocation will determine the tier of government that controls the political economy is relevant to the situation here.

The nature of the fiscal federalism and revenue allocation places the federal government at a vantage position and to control the economy. The economic role of the public sector in a federal polity is the joint responsibility of all tiers of government. But in the case of Nigeria, the joint responsibility of these tiers of government in carrying out the functions of socio-political, administrative and economic management introduces complications in the nation’s fiscal system (Central Bank of Nigeria , 2000 ).

Fiscal laws in Nigeria tend to give more powers to the federal government than the other sub-federal units combined. In fact, there is an increased dependence of the sub-federal units on the federal government particularly for their finances. State and local governments are neither given any strong fiscal incentive nor encouraged to generate

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revenue internally. In view of this, they are weak financially, whereas the weak financial base of states cannot strengthen or guarantee true federalism. As a result, there are discontentment, conflicts and agitation by the two other tiers against the federal government for self-reliance. It is argued that, for any federation to be sustained there must be fiscal decentralization and financial autonomy. However, in the case of Nigeria, there is fiscal centralization.

A number of factors account for this, including the growing importance of crude oil, the civil war, military incursion into politics, the centralizing tendencies of the military and state creation exercises. But the factor that is of immediate concern here is the importance of crude oil and proliferation of states which, since 1967 has reduced the size and capacity of the states and made them inherently weak and excessively dependent on statutory allocation.

Further, Kalu (2011) made pungent analysis of Nigeria’s fiscal federalism, bringing to the fore the prevailing issues and practice coterminous with fiscal relations in Nigeria. In his enlightened submission; the issue of fiscal federalism is an intrinsic element in a federation, which is dependent on, but synonymous with fiscal decentralization. Suffice it however to aver that decentralization is a very important concept in any federalism question, including fiscal federalism. This is why; fiscal federalism has been considered a general normative framework for the assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions.

According to Arowolo (2011:2) fiscal decentralization has become fashionable regardless of levels development and civilization of societies. Hence nations are turning to devolution to improve the performance of their public sectors. In the United States, for instance, the central government has turned back significant portions of federal authority to the states for a wide range of major programmes, including welfare, Medicare, legal service, housing, and job training. The hope is that state and local governments, being closer to the people, will be more responsive to the particular preferences of their constituencies and will be able to find new and better ways to provide these services (Sharma, 2005;169).

The basic foundations for the theory of fiscal federalism were laid by Kenneth Arrow, Richard Musgrave and Paul Samuelson. Three roles were identified for the government:

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Correction of market failure Ensuring equitable distribution of income Maintaining stability in the economy (full employment and stable prices).

The government was expected to interfere with the market system only when it failed (Oates, 1999; Olson, 1996; Bird, 2009). According to the basic theory of fiscal federalism, the central government should ensure equitable distribution of income, maintain macroeconomic stability and provide public goods that are national in character such as defense and security, and money and fiduciary printing etc. Decentralized levels of government on the other hand should concentrate on the provision of local public goods while the central government provides targeted grants in cases where there are jurisdictional spill-overs associated with local public goods.

In relation to revenue (tax, in the first instance) collection and administration, two factors are considered central for allocating tax-raising powers among the levels of government. These are administrative efficiency and fiscal independence. Tax raising powers should be assigned to the level of government that will administer it efficiently at minimum cost. It is also important that each level of government should be able to raise adequate resources to meet its needs and responsibilities.

In broad terms, fiscal federalism is the division of power, functions and resources among the tiers (Federal, State and Local government) in a federating system. There are principles that guide fiscal federalism and sustain the overriding factors of administrative efficiency and fiscal independence. These, according to Ndubuisi (1996), include:1. Independence and Responsibility - The respective tiers of government should not only be autonomous in their resources but such resources should be enough to carry out their autonomous functions.2. Adequacy and Elasticity - The principle of adequacy means that the resources of the government should be adequate so that each government discharges its obligation. Elasticity implies the expansion of resources in response to rapidly growing needs and responsibilities of the government concerned.

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3. Administrative Economy and Efficiency - The administrative cost should be minimal and there should be no frauds and evasions in matters of finance.4. Accountability - Every layer of government should be accountable to their respective legislature.5. Uniformity - The financial system should be such that every government in the system should provide adequate level of public service without resort to higher rates of taxation than other states.6. Fiscal Access - Every state should have the authority to develop their sources of revenue within their own ambit.It is in furtherance of these principles that the adoption of exclusive and concurrent legislative lists in a federal system becomes relevant. Both the national and state governments are granted certain exclusive powers (the exclusive list) and share other powers (the concurrent list).

A conflict often emerges on making decisions based on these criteria. To achieve administrative efficiency centralization is encouraged due to the lower administrative capacity at the decentralized levels. The goal of fiscal independence would encourage the devolution of more revenue-raising powers to lower levels of government to match the functions assigned to them. Hence, the means to these ends contrast.Fiscal Federalism in NigeriaHistorical Constitutional EvolutionFiscal Federalism in Nigeria is synonymous with revenue allocation and “resource control”. There has always been controversy on the appropriate formula that should be used to divide resources in Nigeria. Indeed, Nigeria’s fiscal federalism has emanated from geographical, historical, political, economical, cultural as well as social factors, the basic point has remained that in all these, and fiscal arrangement that can guarantee peaceful coexistence had remained a mirage.Various commissions have been set up to work out acceptable and equitable revenue allocation formula for the country. The commissions include: The Phillipson commission of 1946 The Chicks -Phillipson commission of 1951 The Chicks commission of 1953 The Raisman Commission of 1958 The Binns Commission of 1964 The Dina Interim Revenue Allocation committee of 1968 The Aboyade Technical Committee of 1977

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The Okigbo Presidential Commission of 1979 The T.Y Danjuma Fiscal Commission of 1988

Many suspect that the position of the various commissions tend to shift to suit particular constituencies and that their analyses are not informed by logic but preconceived self or sectional interests rationalized and justified by theories (Citizens Forum for Constitutional Reform (CFCR) Report on Fiscal Federalism Colloquium).

The structure of federalism in Nigeria started to emerge under the Macpherson Constitution of 1951. This constitution differed greatly from the preceding 1946 Richards constitution in this regards. The Lyttleton Constitution of 1954 then developed upon the existing delicate features of federalism, treating the regions as separate entities to some extent- a confederation. The Independence constitution fine-tuned the federal features of the 1954 Constitution and provided fiscal independence in the regions under sections 134-136 of the 1960 Constitution.

A review of fiscal federalism in the immediate postcolonial Nigeria reveals two distinct phases: the phase before military rule- the first republic- and the phase after the military take-over in 1966. During the first republic (1960- 1966), the revenue of the country was distributed based on derivation principle. 50% of the sum of rents and royalties received by the federation from mining and minerals, including mineral oil, within each region was being paid to the region while 30% was credited to the Distributable Pool Account (DPA) after any refunds or repayments relating to those receipts had been deducted or allowed for. Only 20% went to the Federal Government. The DPA was further shared with 40/95, 24/95 and 31/95 going to the North, West and East respectively. An important feature of the derivation policy during this period is that the continental shelf of a region was also deemed to be part of the regions where applicable.

The military took over power in 1966 with a unitary structure, and was followed by a 30 month civil war. Most of the oil producing communities was in the Republic of Biafra that was declared by the Biafran regime under Col. Emeka Odumegwu Ojukwu. In 1969, when the Federal Military Government had recaptured the oil producing communities, it promulgated the petroleum Decree (No 51) of 1969 that vested all the lands and the resources in, under or upon the Land on the

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Federal Military Government. It is obvious, despite the increase in derivation from 0% to 13% that this element of the decree has remained in force in the fiscal federalism system till date. Table 1: Derivation Formula 1960- Till Present

Years Producing State (%)

Federal Govt (%)

Distributable Pool (%)*

1960-67 50 20 30

1967-69 50 501969-71 45 551971-75 45 minus off-shore

proceeds55 plus off-shore

proceeds1975-79 20 minus off-shore

proceeds80 plus off-shore

proceeds1979-81 - 1001982-92 1 and half 98 and half1992-99 3 971999- 13 87

Source: Adapted from Sagay, 2001 * Beginning from 1967, the federal government shares from the distributable pool.

Considering table 1 above, it has been argued in some quarters that the shift in the derivation formula towards more centralized system to the disadvantage of the oil producing states represents sustained domination of the minority by the majority. Professor Sagay observed that “In 1960, there were no petroleum resources of any significance. The main income earning exports were cocoa from the Yoruba dominated west, groundnuts, cotton and hides and skin from the Hausa/Fulani dominated North and palm oil from Ibo in the East. Therefore, it was convenient for these majority groups usually in control of the Federal Governmentto emphasize derivation, hence its entrenchment in the 1960/63 constitutions. However, by 1967 and certainly by 1969, petroleum, particularly the mineral oil, was becoming the major resource in terms of total income and foreign exchange earnings in the country. It was therefore, not difficult for the majority groups who are in control of the Federal Government to reverse the basis of revenue allocation with regard to petroleum resources from derivations to the Federal Government’s exclusive ownership”.

The failure of many attempts by successive governments- Military though, to at least increase the principle of derivation to favour the oil producing areas gave strength to this line of argument. The

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Babangida administration created the Oil Mineral Producing Areas Development Commission (OMPADEC) to administer monthly sums from the federation account to each oil mineral producing state for the development of the areas. This was to be based on oil production in each state without considering the dichotomy of on-shore or offshore production thus abolishing the decree 9 of 1971. It also raised the derivation quota from 1.5% to 3%. Unfortunately this was never implemented to the letter (lyayi, 2002). That administration also created additional states and increased the existing states to eleven to promote equality among the states. However, the unitary legal structure was maintained.

While it is not hard to agree with Professor Sagay’s position, it needs to be understood that the usurpation of the administration of the Nigerian federation by the military for 29 years is a major factor in the abuse of fiscal federalism in Nigeria. The military’s centralised command structure laid the foundation for the increased unitary structure enforced on the Nigerian federation since 1966. The policy of abandonment was therefore entrenched across the states in the military administration as the centre controls the administration of resources, thereby providing little reason for the military state leaders to develop local revenue generation capacities. The result is the collapse of local productive and consequently revenue generating sources across the states.

In response, non-oil revenue plummeted from 97% as a proportion of total federally collected revenue in the first decade post-independence to 24% in the 1970s. In contrast, oil revenue rose from a mere 3% to 76% over the same period. By the decade of 2001-2009, oil revenue accounted for 82% of the total federally collected revenue compared to 18% from the non-oil revenue sources.

Across the states, internally generated revenue (IGR) declined from 30% of the total state government revenue in the decade post-independence to 13% in the decade of 2001-2009.

The above explains why the 1999 constitution had unitary features and represents little departure from the past as a creation of the military. The constitution, upon which the current democratic government is based, has such unitary features such as the creation of a centralized body for census, retaining the centralized police force, empowering only the federal government to set up a court of appeal and

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appointment of judges to State High Courts subject to recommendation by the national judicial councils.

In terms of fiscal federalism, the 1999 constitution provided in sections 31, 44(3) and 162 (1), (2), for: The entire property of all minerals, mineral oils and natural gas in Nigeria or its territorial waters are vested in the Federal Government. The principle of derivation shall be reflected in any approved formulas which are not less than 13% of the revenue accruing to the federation account from natural resources in any state. A special account called the Federation Account into which revenue collected by the government of the federation shall be paid except personal income tax of the personnel of the armed forces, the Nigerian Police Force, the Ministry or the department of government charged with responsibility for foreign affairs and the residents of the Federal Capital Territory. The National Assembly to ratify the allocation formula after receiving the proposal from the President who has been advised by the Revenue Mobilisation and Fiscal Allocation Commission (RMFAC). The National Assembly is to consider the population, equality of states, internal revenue generation, land mass, terrain as well as population density before making a decision.

The above suggests a perpetuation of the status quo. Unfortunately, federal government spending in the states has been criticised to be lopsided in favour of some states and zones of the federation. In performing the functions assigned in the lengthy exclusive list, and hence the federal presence in the states, it seems that the areas where most of the revenue comes from received less attention over the years. For instance, the south-south zone has only 12% of the total federal roads while the North-East and North- Central has 23% each of the total federal roads in the country. The South-East has only 9% of the total federal roads. The same trend has been observed in the distribution of utilities, such as electricity and water as well as internal security, education and other federal government institutions/establishments that are federal government expenditure centres by virtue of their inclusion in the exclusive legislative list. This glaring disconnect is central to the increased agitation for ‘resource control’ and a drastic redistribution that reflects true federalism.

We review in the next section the current practice of fiscal federalism.

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Current Issues and PracticesThe Presidential Committee on the Review of the 1999

constitution (Inaugurated on 19th October 1999) stated emphatically in page 43 volume 1 of their report that “The twin issues of Derivation formula and resource control stand out and constitute the greatest test of the political will of the constitution review process to effect the desired restructuring of the Nigerian Federation so that justice is done to all stakeholders in the Nigerian Nation”. This opinion was formed by the massive rejection across the country of the revenue allocation, derivation and resource control structure in the country. The report stated that “the derivation principle or formula from natural resources was accordingly rejected in several parts of the federation in preference for a return to fiscal federalism principle under which federating states (or regions under the 1963 constitution) owned, controlled and developed the natural resources which were located on their land”. Despite the above, unfortunately, section 31, 44 (3) and 162 (1), (2) remains in the constitution till today.

One of the primary features of a federal system of government is the assignment of functions between the various components of the federal government. This also forms the basis for the determination of revenue rights and the delimitation of revenue raising powers. This allocation is done via the two legislative lists- the exclusive and concurrent legislative list. According to Akindele and Olaopa (2002), the assignment of functions among federating units should be organized in the following ways:1. Functions which can be more efficiently performed by the federal government than lower levels of government should be assigned to the former (i.e. be placed in the exclusive legislative list). These include national defense, external relations (including borrowing and external trade), banking, currency, nuclear energy, etc.2. Functions whose benefits are more local than national but with the possibility of spillover effects should be placed in the concurrent list. Such functions include industrial, commercial or agricultural development, post primary institutions, health care, etc.3. Functions which are purely local in character, in the sense that the benefits accrue, in the main, to limited geographic areas within the country,

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are usually assigned to local authorities. Such functions would include the establishment and maintenance of markets, car parks and public conveniences, refuse disposal, primary education and the construction and maintenance of local roads and streetsTable 2: Nigeria's Federal, State and Local Tax Jurisdiction and Assignment

Source:

Anyanwu, 1995, Jimoh, 2003; Federal Republic of Nigeria Constitutions, 1963, 1979 and 1999

TaxLegal Jurisdiction Collection Retention

Import duties Federal FederalFederation Account

excise duties Federal FederalFederation Account

Export duties Federal FederalFederation Account

Minning rents & Royalties Federal FederalFederation Account

Petroleum Tax Profit Federal FederalFederation Account

Capital Gains Tax Federal State StatePersonal Income Tax Federal State StatePersonal Income Tax: armed forces, external affairs, officers. Non-residents, residents of the FCT and Nigeria Police force. Federal Federal FederalValue added Tax ( Sales tax before 1994) Federal Federal/ State Federal / state

Company tax Federal FederalFederation Account

Stamp duties Federal State StateGift tax Federal State StateProperty tax and ratings State State/ Local State/ LocalLicenses and fees Local Local LocalMotor park dues Local Local LocalMotor Vehicle State Local LocalCapital transfer tax (CTT) Federal State StatePools betting and other betting taxes State State StateEntertainment tax State State StateLand registration and survey fees State State StateMarket and Trading icense and fees State Local Local

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The foregoing suggests that the exclusive list should be smaller and limited to fewer items that will allow the centre to focus on the unity of the federal system while the concurrent list is utilized to empower the states to develop at their own paces. In Nigeria, the reverse seems to be the case. While the exclusive legislative list in the 1999 constitution consists of 68 items in the second schedule, the concurrent list contains only 30 items. The Federal Government has shared oversight function with the states in about 20 items in the concurrent list. The revenue of the federation comes from seven distinct sources. These are sale of crude oil, taxes, levies, fines, tolls, penalties and charges. Oil revenues account for about 80% to 85% of the total revenue in the last three decades (AfDB, UNECA, and OECD, 2010).s

In the period 2001-09, oil revenues as a proportion of GDP averaged 27% while tax revenues averaged 6.4%. Oil revenues have however been volatile, ranging from 35.6% in 2001 to 19.6% in 2009 when oil prices dropped as a result of the global recession.

According to Salami (2010) ‘the lion’s share of total Nigerian revenues is collected and retained by the federal government. For instance, between 1980 and 2008, about 93.9% of the total Nigerian government revenues were collected by the federal government. This is not unexpected as the federal government is solely responsible for the collection of mining rights and royalties, petroleum profit tax (Nigeria’s major revenue source) and share VAT collection with state governments. This implies that the local and state governments put together, collect less than 7% of Nigeria’s government revenues.On the other hand, about 70% of the federal government revenue comes from the federation account. However, internally generated revenue (IGR) efforts of states at 14% in the same period are generally very weak. State governments rely mainly on federal allocation, grants and proceeds from excess crude account as their major sources of funding. Also, the structure of local government revenue follows the same trend exhibited by federal and states government. In effect, the fiscal autonomy derived from coordinate and independent fiscal powers by the regions/states between 1954 and 1966 is virtually ineffective in the Nigerian federation today. Ojo (2010) traced this to:

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The discontinuation of export duties and sales tax on agricultural produce, which used to be major sources of income for the regions in the 1960s The standardization of personal income tax rates throughout the country thereby rendering the states powerless to change rates- Exclusive list item. Introduction of uniform fuel prices across the country thereby removing the power of the state government to levy petroleum sales taxes Federal control of all onshore and offshore oil and royalties and rent which eroded the principle of derivation from the 50% to 13% currently in operation.The impact of the above would be appreciated when the enormous natural, agricultural and enterprising potentials of many Nigerian states that are currently lying untapped are reviewed. Unfortunately, the fiscal unitarism, in the words of Ojo (2010), in the Nigerian polity, brought about by the above, provided incentive to abandon internal revenue generation drive, macroeconomic mismanagement and instability in the states. It is also an open license for uneconomical competitiveness in the federal government’s provision of public services and public goods across the states, the so called ‘federal presence’.

7 Initial 1981 Act 1/

Revised 1981 Act

1990 January 1992

June 1992 to April

2002

May 2002 (1st Executive Order) *

July 2002 (2nd Executive

Order) *

March 2004

(Modified from FMF) 2/ *

Federal Government

55 55 50 50 48.5 56 54.68 52.68

State Government

26.5 30.5

30 25 24 24 24.72 26.72

Local Government

10 10 15 20 20 20 20.6 20.6

Special Funds 8.5 4.5 5 5 7.5-A) Derivation (Oil-Producing States)*

2 2 1 1 1 0 0 0

-B) Dev. Of Mineral Producing Areas

3 1.5 1.5 1.5 3 0 0 0

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-C) Initial development of FCT Abuja

2.5 0 1 1 1 0 0 0

-D) General Ecological problem

1 1 1 1 2 0 0 0

-E) Stabilisation

0 0 0.5 0.5 0.5 0 0 0

-F) Savings 0 0 0 0 0 0 0 0-G) other Special Projects

0 0 0 0 0 0 0 0

TOTAL 100 100 100 100 100 100 100 100

Table 3: Vertical allocation of the federation account, 1981-Till DateSource: Adapted from Ojo, 2010

Note:1. Nullified by Supreme Court in October 1981* From the 1999 Constitution, the 13% Derivation provision is accounted for before the revenue is allocated into the federation account.2. The current revenue formula is based on the modified grant from the Federal Ministry of Finance, which came to effect in March, 2004In a radical shift from the ad hoc committee model of revenue allocation and revision processes of the past, the Babangida Administrationthrough Decree No. 49 of 1989 established the Revenue Mobilization, Allocation and Fiscal Commission (RMAFC) to oversee revenue sharing and mobilization. The 1999 constitution entrenched the RMAFC into the constitution. Nigerian practice is unusual in the arrangements of the management of federal revenues. As is well known, the constitution provides that all federal revenues must go into the Consolidated Revenue Account. This is standard practice in most federations. However, the constitution also establishes a second account, the famous Federation Account, into which the vast majority of federally raised revenues must flow with the exception of personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja. Funds from this account are then to be allocated by a set formula amongst the federal and state governments after the 13% derivation from oil has been deducted.

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Historically, the federation established vertical and horizontal allocation pattern. Table 3 above presents the historical evolution of the vertical revenue allocation formula since 1981. The horizontal allocation formula is presented in Table 4 below.

Principles

1970-80 (%)

Initial 1981

Act (%)

Revised

1981 Act (%)

1990 to

1995 (%)

Proposals

of NRMAFC (%)

Proposals of NCC

Committee on

Revenue Allocatio

n (%)

Current Formul

a (%)

September 2004 Proposal (%)

Equality of States (Minimum responsibility of Government)

50 50 40 40 40 30 40 45.23

Population

50 40 40 30 30 40 30 25.6

Population Density

0 0 0 0 0 10 0 1.45

Internal Revenue Generation Effort

0 0 5 10 20 10 10 8.31

Land mass

0 10 0 10 0 10 10 5.35

Terrain 5.35

Social Development Factor

0 0 15 10 10 0 10 8.71

Education

4 3

Health 3 3

Rural Road/ Inland Water Way

1.21

Water 3 1.5

Total 100 100 100 100 100 100 100 100

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Table 4: Horizontal revenue allocation formula, 1970-Till DateSource: Adapted from Ojo 2010Since inception however, opinions had it that ‘virtually all the revenue allocation formulas are warped because they have not been “open covenants openly arrived at”’ (Omitola, 2005). Rather, they reflect the views of commissions, individuals or groups within the commissions, which have shown proclivity for embracing theories, beliefs, ideas and

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approaches which have not only proved unrealistic but have thereby contributed to the dislocations within the Nigerian State by the unitary Military structure. One striking feature of the recommendations of various Revenue Allocation Commissions with respect to the revenue allocation formula adopted from the 1970s is a phenomenon tagged the “concentration process” in Nigeria’s fiscal federalism (Mbanefoh and Egwakihide, 1998). This refers to situation whereby there is a gradual reduction of State Government Accounts, and this is further exacerbated with the establishment of Special Accounts by the Federal Government (Mbanefoh and Egwakihide, 1998). This is because it was used to favour a few selected states/Local Councils more often than not, it provoked inter-state hostility and rivalry, thereby undermining the stability and corporate existence of the country. Rivers, Akwa Ibom, Delta, Bayelsa and Ondo, all oil producing states receive the highest amount from the federation account. This has been the trend for the past 8 years. However, the revenues allocated to oil producing areas over the years are not sufficient to remedy the negative externalities of oil production let alone grant them access to equal opportunities for development with other states of Nigeria (Anderson, 2007). According to Anderson (2007), in matured federations, such as the USA, Canada and Australia, onshore resource ownership is normally with the states, though there are substantial “federal lands” in the Western states of the US and in Alaska while newer federations have assigned natural resources exclusively or substantially to the federal government. In virtually all federations, offshore resources are federally owned. Canada, in exception, has transferred management and the royalties and license fees to the provinces. In most federations with twentieth century constitutions, natural resources are owned by the federal government. This is particularly true of the heavily oil dependent federations: Mexico, Venezuela, and Russia. Thus Nigeria’s arrangement whereby oil and gas ownership and revenues are federal may not be unusual, particularly given the centrality of oil and gas in the economy. However, Nigeria is not similar to any of these countries in many respects. Nigeria is not a homogeneous federation. The issue of the ‘fair share’ of such Federal revenues remains a thorny issue even where the allocation is accepted.

Analysis of Some Major Challenges of Nigeria’s Fiscal Federalism

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For the purpose of this discourse, there are three salient fiscal challenges in Nigeria. They are enumerated and analyzed below;• Managing a petro- economy with its swings and the eventual depletion of the resources;• ` providing regional and vertical` equity in the distribution of fiscal resources; and• Promoting coordination of major policies within the federal system.Managing a Petro-economy with its Swings and the Consequential Resources DepletionOil revenues account for about 80 to 85 percent of all government revenues in Nigeria. The only federation that comes close to that is Iraq. Other federations such as Venezuela, Mexico and Russia have a very large proportion of their revenue coming from oil and gas, but significantly less than that of Nigeria. However, such dependency has consequences such as:_ Political accountability issues because the federal government raises its revenues from such a narrow base and most states contribute very little to national or their own revenues. Hence only 9 out of 36 states in Nigeria produce petroleum, with 4 being the most important. Thus the large majority of states turn to the federal government for the vast majority of their revenues and most of those revenues are effectively collected in other parts of the country. The public, on its part, pays little of the cost of government programs (tax aversion)._ Sources of major tensions between the producing and other regions of the country:_ stifled development of alternative revenue sources because it is easier to tax oil than citizens. This has longer- term (adverse) implications for any economy._ Destabilization of public finances tied to a resource whose value swings widely and deplete over time. This poses short- term issues about the central government’s ability to manage cyclical pressures on the economy as well as longer- term issues about the sustainable level of public services. This issue has led a number of countries (Russia being probably the best federal example) to be very aggressive in developing revenue stabilization funds. But suffice it to say that Nigeria has largely succeeded in this regard, with the policy of basing budget on a $40 per

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barrel price. But this type of policy inevitably gives rise to conflicts over the appropriate level of spending, as well as over the control and purposes of the stabilization funds (George, 2007).

[Providing Regional and Vertical Equity in the Distribution of Fiscal ResourcesEvery federation is confronted with the need to achieve some sort of fit between the revenues of the federal, state and local governments and their responsibilities. There is also the very closely related need to promote some measure of equity between the regions or state of the county. In the case of Nigeria, there has been a rapid (but not enough) decentralization of revenues to state and local governments to address their responsibilities, lending credence to the recent clamour for further decentralization by the components. With the federal government now spending somewhat less than 54 per cent of total government spending, Nigeria falls in the broad company of federations such as Argentina, India, Mexico, Russia, Spain, south Africa and the united states. By that count, her spending is a good deal hence more decentralized than Brazil, Malaysia and Venezuela. However, some federations are still more decentralized, hence in Belgium, Canada, Germany and Switzerland, the federal government accounts for between 30 and 40 percent of direct government spending; perhaps why the current state clamour for higher share of the generated collected revenue (George, 2007).Promoting Coordination of Major Policies within the Federal SystemThe classic or simplistic notion of federalism is that each order of government has its responsibilities get on with doing its business in water tight compartments. The reality is quite different because all federations face the need to coordinate some major policies such as the spillover of public goods. There are essentially three devices for achieving such coordination:• Concurrent powers;• The use of the federal spending power; and• Intergovernmental meetings and mechanisms.Concurrent powers are a classic way in which to try to balance the need for a national framework policy with the need for flexibility on the part of stats. While Nigeria has a concurrent list attached to her constitution, it appears that many of her problems of coordination lie outside that list.

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The second way to promote coordination is through the use of the federal spending power. In most federations, the federal government can spend on ay object and can make conditional payments or grants to the states. In the USA, all transfers from eh federal government to states are program specific, frequently requiring matching funds and states compliance with very detailed conditions. The use of condition grants is quite a typical means for federal governments to try to shape national programs. In Canada, such grants were used to establish some of the major programs of the welfare state, but as the programs became established the conditions became less and less onerous, so as to permit the provinces to experiment with aspects of program design. There have been some such programs here in Nigeria, such as the universal basic education, but they are typically small and the federal government does not have the resources to make great use of the spending power because most revenues are allocated out of the federation account by formula.Finally, intergovernmental mechanisms and meetings can be helpful. Nigeria has a large number of these, but I would make the point that in many federations these mechanisms are very important not just for policy coordination at high levels, but also for detailed information gathering and exchange regarding implementation. Given the weakness of the first two instruments for coordination in Nigeria, you have a heavy stake in effective intergovernmental mechanisms (George, 2007).

Issues in the Management of Fiscal Federalism in NigeriaThe dynamism and complexity of Nigeria’s federalism has generated so many problems that have threatened the corporate existence and continuity of the Nigerian polity. Its perennial nature has therefore called for investigation into the real issues that has kept the management of Nigeria’s fiscal federalism on a cliff-edge. Authors have adduced many such issues as federal character, power sharing, revenue allocation, maintenance of public order, fiscal federalism tenets, prudent judiciary, etc. as the major centripetal and centrifugal forces that have threatened the consolidation of the Nigeria federation or what may be called “true federalism”.In lieu of the current situation where the federal government is accused of towering overlord over the component states on issue s enumerated above, and much to the disenchantment of the states, a thorough re-examination and possible redress becomes eminent to avert the

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imminent dangers that looms. On the basis of the above, this paper seeks to probe the character of the following in the Nigeria’s fiscal federalism management crises. Such factors include but not limited to the following: Minimum Wage PhenomenonOn the 23rd of February, 2011, the senate of the federal republic of Nigeria approved eighteen thousand naira (N18, 000) as the minimum wage for the Nigerian workers. The bill which was given an expeditious passage by the upper chamber increased the minimum wage from N7, 500 to N18, 000 (USD$118.00). section 2 (1) of the national minimum wage states, “as from the commencement of this act, it shall be duty of every employer to pay a wage not less than the national minimum wage of N18, 000) per month to every worker under his establishment”. Its applicability has been subject to employers whims and caprices hence many workers in Nigeria today earn between #5, 000 and #17,000.00 in fact, the law seems for the government workers alone but considering the provision of section 2 (1) of the national minimum wage, all workers are indicated but even the state and local governments refused to comply let alone the private sector. Aside the above cited point, the international labour organization, ILO’s definition of minimum wage, “as a wag which provides a floor to the wage structure in order to protect workers at the bottom of the wage distribution” and that “minimum wages are a nearly universal policy instrument” its application in Nigeria is austerely flawed.Against the background of ILO’s further note that minimum wage must take a legal perspective that must have the backing of force by law and be enforceable under threat of penal or other sanctions, which is lacking in Nigeria. It is however, this aspect of the minimum wage saga that generates the heated battles between labour organizations and governments on the one hand and between the federal government and the state governments on the other hand over shares in the federal allocation.

Federal Character PrincipleThe composition of the Government of the Federation or any of its agencies and the conduct of its affairs shall be carried out in such a manner as to reflect the federal character of Nigeria and the need to promote national unity, and also to command national loyalty, thereby ensuring that there shall be no predominance of persons from a few

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States or from a few ethnic or other sectional groups in that Government or any of its agencies. Constitution of the Federal Republic of Nigeria: section 14 subsection (3)

The above provision of the Constitution enshrined the federal character principle: arguably one of the most controversial provisions of our Constitution (Amanni, 2011). The phrase Federal Character was first used by the late General Murtala Ramat Muhammed in his address to the opening session of the Constitution Drafting Committee on Saturday the 18th of October 1975. Federal character of Nigeria, according to the CDC’s report of 1977, refers to the distinctive desire of the peoples of Nigeria to promote national unity, foster national loyalty and give every citizen of Nigeria a sense of belonging to the nation notwithstanding the diversities of ethnic origin, culture, language or religion which may exist and which it is their desire to nourish, harness to the enrichment of the Federal Republic of Nigeria.Mindful of the country's diversity, Nigeria's founding fathers had evolved measures to ensure that every component and group in the Nigeria project is fairly represented in the running of the country's affairs. The 1979 constitution incorporated it as a core principle that should be observed by all levels of government and their agencies. However, over the years, its application has belied the spirit behind its introduction. Federal character principle through its dubious application has become an instrument for enthroning and nurturing mediocrity, denying opportunities to capable Nigerians and, in the long run, damaging the country's development strides. In his opinion, (Amanni, 2011) the federal character principle is a necessary evil that Nigerians, have to endure because it is a sacrifice work making for the emergence of the just and egalitarian society we all aspire to have. But the president of Nigeria- Goodluck Jonathan thinks otherwise.

Issues of State and Local Government CreationAs a resolve to make federalism more relevant to development and governance increases, so do consultations dialogue, negotiation and consensus over emerging issues hence new conditions, consultations, dialogues, negotiations, consensus, balance and new problem-solving responses (Ola, 1995:5), but since 1995, efforts to revise the revenue

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allocation formula have been bogged down by intrigues. State and local government creation is a tactics of revenue sharing in Nigeria. Since, the states are not viable economically, but totally dependent on the monthly allocation from the federal government, ethnic groups and region balkanized into more states, receives more from the federation account (Mbanefoh and Egwaikhide 2004), and that does not benefit the Niger Delta. According to Aiyede (2005) once a state is spilt in to two, each of the parts become equal with those that remain intact with respect to the size of allocation to be received automatically from the federal government. The equality principle, for instance, has been the major incentive for the proliferation of non viable sub-federal administrations in Nigeria since it ensures that each constituent unit (no matter how demographically small and administratively and financially weak) is guaranteed an equal share with other units of nearly half of federal revenue in the horizontal distributable pool. In this way, the existence in Nigeria of too many sub-national governments which simply exist to receive and consume their own equal shares of central financial handouts, has undermined the very essence of governance (Olashore, 2003:19).Oil Revenue Issues and Application of the Principle of Derivation Following from the above, it becomes correct to assert that there is a high level of financial imbalance in the Nigerian federalism. With the present 36 States and 774 local government structures, where as the federal central government has huge revenue at its disposal to execute its functions much less is available at the level of the other tiers of government. The politics of revenue sharing was brought to limelight when oil became the main source of national revenue and oils the wheels of the Nigerian economy. The revenue allocation commissions that were constituted when oil gradually displaced agriculture as the bane of the nation’s economy trickled down the derivation percentage, and eventually displaced cum ignored it, as shown in Table 1 below. The commissions were the Binns (1964), Dina (1968), Aboyade (1977), and the Okigbo (1980) Revenue Allocation Commissions. The interest of minorities does not count if they do not have a significant representation in the ruling class. Therefore, instead of derivation that hitherto benefits the regions, the commissions lay emphasis on Need, Population, Landmass, Balance Development, Equality of states, National minimal standard etc., to the detriment of the goose that lays

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the golden egg. Without mincing words, the implication is the deliberate and criminal transfer of the oil wealth out of the Niger Delta to develop other regions. It is evidently clear from the tables 1 and 2 that, with the ascendance of oil (found mainly in the homelands of the ethnic minorities) as the pivot of the nation’s economy, the interest of derivation on the part of those who wields state power faded, given that it will now promote the interest of the minorities who do not control state power (Ibaba, 2005).The abundant crude oil in the minority territories of the Niger Delta region became a subject of envy, and the majority groups adopted every means to ensure that the owners receives very little benefit from it (Etekpe, 2007). Due to the difficult terrain of the Niger Delta, and the effect of oil exploration and production, the region obviously needs more funds to promote development, hence agitations to reverse to at least 50% derivation fund for the region. Some may argue that, the Niger Delta, which is agitating for increment in the derivation percentage equally benefits from the era the principle held sway in the pre-oil economy era. However, the undeniable truth is that, the region was Balkanized into the Eastern and Western regions, where they constitute minorities. For example, the western Ijaws in present Delta State were minorities in the Yoruba’s dominated western region, and as such were even excluded from the famous free education legacy that the Yoruba’s enjoy. More so, the glaring need of development and absence of basic social infrastructures, excruciating property and generation backwardness in the region corroborates the fact, the Niger Delta was neglected parts of the Regions. Yenagoa which was a provincial head quarters since the pre independence era was connected to the national grid in terms of electricity only in 2007.The simple logic of this misfortune is that, the federating or Oil Economy and the Revenue Allocation Debacle in Nigeria component units are not allowed to control the resources produced in their territories, as was practiced before the advent of the oil regime. The laws that govern the Nigerian Oil industry equally give the federal Government dominion over oil proceeds. For instance, under the Petroleum Act of 1969, the entire ownership and control of all petroleum in, under or upon any land in Nigeria is vested in the state (Omorogbe, 2001:20). This and other obnoxious laws like the Land Use

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Act of 1976 etc., denies the ethnic minorities populated Niger Delta from benefiting from the resources whose burden of production they bear.The Statutory Role of RMAFCSequel to the turmoil from the oil economy and derivation principle application saga, the establishment in 1999 of Revenue Mobilization Allocation and Fiscal Commission (RMAFC) was a response by the Federal Government to provide for all-embracing and permanent revenue body in Nigeria. RMAFC is a body that reflects the Federal Character Principle in its membership composition and has enabling laws which empower the commission to act as follows:1) Monitor the accruals into and disbursement of revenue from the federation account;2) Review from time to time, the revenue allocation formula and principles in operation to ensure conformity with changing realities;3) Advise the federal, state and local governments on fiscal efficiency and methods by which their revenue is to be increased;4) Determine the remuneration appropriate to political office holders; and,5) Discharge such other functions as may be conferred on the commission through the constitution or any act of the National Assembly (Shuaibu, 2002)Statutorily, Part I, Section 32(b) of the Third Schedule to the 1999 Constitution, empowers the Commission to “review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities”. Again, Section 162(2) of the same Constitution which stipulates that “The President, upon the receipt of advice from the Revenue Mobilization Allocation and Fiscal Commission, shall table before the National Assembly proposals for revenue allocation from the Federation Account, and in determining the formula, the National Assembly shall take into account, the allocation principles especially those of population, equality of States, internal revenue generation, landmass, terrain as well as population density: Provided that the principle of derivation shall be constantly reflected in any approved formula as being not less than thirteen percent of the revenue accruing to the Federation Account directly from any natural resources”, alongside their substantive rules shows that they are fully empowered by the constitution to ensure that the issues of revenue and

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expenditure at the national level are disbursed judiciously, but the obvious question is have they lived up to their constitutional requirement or are they bought over by the executives? There are still others questions such as who determines the appointment, determination and pay of the officials of the commission. The essence is to juxtapose the assertion that he who pays the piper dictates the tune and have a soft land on the RMAFC in the management or mismanagement of the Nigerian fiscal federalism. ConclusionA number of questions raised by Peter Ozo-Eson are relevant here at concluding this discourse. These are; how should we restructure our fiscal federalism so as to maximize the reaping of economic efficiency and the stimulation of national development? Does theory for example have anything to tell us about the implications of the present centralized control over resources? In his view, ‘the failure to grant control of resources to the lower tiers of government is impeding overall national growth and development’. Considering that every region and state in the Nigerian federation is well endowed with abundant resources- oil, solid minerals, forest resources, arable land, etc., the centralization of oil wealth and the resultant over-dependence of all states on the revenues therefrom accelerated the national degeneration into the resource curse and Dutch disease conundrum. Nigerian states are shielded from a hard budget constraint, thus encouraging them to merely raid the common pool. Incentives for developing own tax bases and resources are thus stultified to the detriment of overall growth and development. However efforts have been made to break out of this erstwhile lock jam in some states such as Lagos, Kwara and Edo etc.In other words, the call for the practice of true federalism in Nigeria where derivation principle and state ownership and control of resources is permitted is central to the future of our nation. While these calls seemingly pay little attention to the postulates of fiscal federalism regarding administrative efficiency and equality but are mostly reactions to the unfair treatment of the oil producing states against which development is skewed, a return to the 50:50 derivation formulas would provide the incentive for the states to begin to develop their revenue generating capacity. The clamour for oil wealth has left other viable options significantly underdeveloped. Nigeria is a resource rich nation

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and there is potential for developing more stable, sustainable sources of non-mineral revenues. There is also a need for increased transparency and better coordination of policies in the bodies responsible for allocating and performing these roles. For the RMFAC, there is the need to move towards carrying the Nigerian populace and stakeholders along in the development of its recommendations via public hearings and submissions. The discrete nature of the commission’s activities provides the boldness for its recommendations to be easily tampered with by the executive or the legislative arms of the federal government even when it contradicts the will of the people.

REFERENCES

Abiodun Awolaja (2011) Nigeria and Challenges of Fiscal Federalism. http://tribune.com.ng/index.php/politics

Adedotun O. Phillips (2003) Managing Fiscal Federalism: Revenue Allocation Issues. Nigerian Institute of Social and /Economic Research. http://publius.oxfordjournals.org

Adilieje, C. (2003), Issues in Nigerian Federalism in Akinjide Osuntokun et al (ed.) Issues in Nigerian Government and Politics: Ibadan, Rex Charles Publications.

Agalamanyi, C.U, Emeh, I.E.J, & Eme, I.O (2012) Adoption and Application of Information and CommunicationTechnology (ICT) In Human Resource Management: the University of Nigeria Experience: Problems and Prospects. Journal of Commerce, (JOC) U.K. Vol.4, No.2 (April Edition) pp.12-29

Agbodike, C. C. (1998), Federal Character Principle and National Integration in Federalism and Political Restructuring in Nigeria: Ibadan, Spectrum Books Limited.

Aiyede, R (2005) “Intergovernmental Relations: the Strengthening of the Nigerian Federation”, in Onwudiwe, E. and Suberu, R. (eds) Nigerian Federation in Crisis: Critical Perspective and Political Opinions. Programme of Federal and Ethnic Studies, Department of Political Science, University of Ibadan, 221-230.

Akindele, S.T. and Olaopa (2002), “Fiscal federalism and local Government Finance in Nigeria: An Examination of Revenue, Rights and Fiscal

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http://tribune.com.ng/index.php/politics


Jurisdiction” in Contemporary Issues in Public Administration. Omotoso, F. ed. Lagos: Bolabay Publications, pp.46-64.

Ammani, Aliyu A. (2011), The Federal Character Principle as a NecessaryEvil.http://healnigeria.blogspot.com/2009/04/federal-character-principle.html

Amuwo, K. (1998), Federal Systems: A Theoretical Perspective In: Re-Inventing Federalism in Nigeria: Issues and Perspectives,

Babawale, T. K. O. and F. Adewunmi (eds). Friedrich Ebert Foundation, 14 – 56.

Amuwo, Kunle et al (eds) (2004) Federalism and Political Restructuring in Nigeria, Spectrum Books Limited, Ibadan.

Danjuma, T. (1994) “Revenue Sharing and Political Economy of Nigerian Federalism” Journal of Federalism, 1, 43-48.

Anyanwu, J.C. (1995), Nigerian Fiscal Federalism: Concepts Issues and Problems, Paper Presented at the National Workshop on Additional Sources of Revenue for Federal State and Local Governments Organized by NCEMA, Ibadan, May 7-19, 1995.

Daily Trust (2012), The Clamour for New Revenue Allocation Formula. http://allafrica.com/stories

Dare Arowolo (2011), Fiscal Federalism In Nigeria: Theory And Dimensions. Afro Asian Journal of Social Sciences, Volume 2, No. 2.2 Quarter II 2011 ISSN 2229 - 5313

Dike, C. and Iwuamadi, F.C (2005), Trends in Inter-governmental Relations; a Pragmatic Nigerian Approach, Aba: Cheedal Global Prints Ltd.

Egwaikhide, F. Aiyede, R, et al (2004), Intergovernmental Relationships in Nigeria. Programme on Ethnic and Federal Studies (PEFS) Department of Political Science, University of Ibadan, Ibadan.

George Anderson (2007), Nigerian Fiscal Federalism Seen from a Comparative Perspective. Notes for Address to Governors' Forum Abuja, Nigeria, 28th October, 2007

Ikporukpo, C. (1996) “Federalism, Political Power and the Economic Power Game: Conflict over Access to Petroleum Resources in Nigeria’’. Environment and Planning: Government and Policy, 14. pp 159-177

Iyekekpolo, Wisdom; Gloria Okonye, Helen Okonye, and Stanley Nwadiaru (2011), Federalism In Nigeria: Problems And Prospects Of

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Consolidation; A Seminar Paper presented in the Department of Political Science and Public Administration, University of Benin, Benin City, Nigeria

Kalu, I. K. (2011, February 14), Fiscal Federalism in Nigeria: Practice and Issues. Abuja: BGL Plc.

Muhammed, A. A. (2007), Reflections on Five Decades of Nigerian Federalismin Jimoh, H. I. et al (eds.), Perspectives on Nation Building. Lagos; New Generation Publishers.

Omotoso Femi (2010), Nigerian Fiscal Federalism and Revenue Allocation Formula for Sustainable Development in Niger Delta. The Social Sciences. Vol 5, (3).

Onwudiwe, Ebere and Suberu, Rotimi (eds) (2005), Nigerian Federalism in Crisis. Critical Perspectives and Political Options, Programme on Ethnic and Federal Studies, Department of Political science, University of Ibadan.

Ozo-Eson, (2005) “Fiscal Federalism: Theory, Issues and Perspectives”. Daily Independent

Sagay, I. (2008) “How a True Federal System Should Run”. The Nation, Lagos, Vintage Press Limited, May 19th.

Sharma, C.K. (2005). “The Federal Approach to Fiscal Decentralization:

Conceptual Contours for Policy Makers”. Loyola Journal of Social Sciences, XIX(2): 169-88.

Suberu, R. (2004), “Pseudo-Federalism and the political Crisis of Revenue Allocation” in Aghaje, A. et al (eds) Nigeria’s Struggle for Democracy and Good Governance: A festschrift for Oyeleye Oyediran, University Press, Ibadan.

Suberu, R.T. (2001), Federalism and Ethnic Conflict Nigeria, Washington: U.S Institute of Peace

The Nation (2012), States demand more cash to pay minimum wage. http://www.nigeriannewsservice.com

Ugwu, S. C. (1998), Federal System: The Nigerian Experience. Enugu: May Dan Publishers.

Ugwu, S.C, Eme, O.I. & Emeh, I.E.J, (2012), Issues in Nigerian Fiscal Federalism; the Relationship between the Principle of Derivation and Resource Control; Arabian Journal of Business and Management Review (AJBMR) Vol.1, No. 5, pp.78-91

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http://www.nigeriannewsser/


Waheed Odusile (2012), The problem with our federalism. The Nation. Tuesday, August 21, 2012

Wheare, K. C. (1967), Federal Government 4th edition. London: Oxford University Press.

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CHAPTER ELEVEN

ETHICS OF PUBLIC FINANCIAL MANAGEMENT

BY

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OFODU PAULINUS CHIDI.B.Sc.(Hons),Political Science and M.Sc. Public Administration

INTRODUCTIONTransparency in public financial management is a constant preoccupation of modern democratization and citizenries, as the publicity of public finance, citizen participation in government decision making and the introduction of various forms of control of government activity have become the rule rather than exception in all geographies. In order to respond to mounting demands from the public, key public financial managers are required to obtain not only professional qualifications (like university degrees in Accounting, Economics, and Public Administration; but also specific certifications (internal auditing) and abide by ad hoc codes of conduct. This multiplies the ethical responsibilities of governments and public financial managers as well as the implementation of appropriate policy responses. To ensure good governance, the public finance managers must adhere to certain ethical values, standards and conducts. In other words, efforts should be made to guard against certain conducts that are classified unethical or unprofessional by the customers of public finance

DEFINITIONS OF ETHICS Ethics is defined by the American Heritage Dictionary (Third Edition) as “the study of the general nature of morals and of specific moral choices: moral philosophy; and the rules or standards governing the conduct of the members of a profession. Taylor (1975) defines ethics as the “inquiry into the nature and grounds of morality, it’s taken to mean moral judgments, standards and rules of conduct.Ethics of Public Financial Management: Ethics in public financial management is the application of a code of behaviour for public financial professionals. Like other people with professional certification public finance managers have certain obligations and expectations from the public. They must act responsibly and with good faith when handling public funds. Professional certifications in the public finance come with codes of ethics and additional requirements from government with standard for public servants. Public finance managers have a degree of obligation higher than public servants who do not handle

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public funds because of their professional standings. The general public and government have different expectations than individuals or non-governmental organization who deposits money in a bank, for example. In exchange for a higher degree of faith and trust from the members of the general public and government professional; finance managers have to comply with higher guidelines. Ethics in public financial management provide clear guidance.

REASONS FOR THE STUDY OF ETHICS Ethics of financial management aims at introducing participants to state- of- the art standards and practices in ethics relating of public finance and administration. We study ethics of financial management for the following reasons:1. It helps public finance managers to adhere to certain ethical values by trying to do the right thing at all times.2. To ensure good governance, government must adopt effective Ethics of financial management, capable of minimizing fraud, and preventing wasteful use of public funds. Any government that develops higher levels of trust in public finance enjoys popularity.3. It helps to identify ethical issues and recognize the approaches to solving their problems.4. Knowledge of ethics in public financial management leads to more realistic budgeting and promote ethical bahaviour within the government.5. Ethics of public financial management teaches public servants how to cope with conflicts between personal values of those of the government and general public he/she live to serve. 6. Adherence to the ethics of public financial management makes the general public to believe that government officials are good in themselves and that every section of the society deserves to be treated fairly, morally and rightly.7. Ethics of public financial management as a code of conduct, based on universal moral duties and obligations, indicates one’s behaviour. Thus it strengthens the moral foundation in public sector. In Nigeria, ethics in public financial management has been subverted in public sector, so much that government official are plagued with intractable ethical problems.8. Knowledge of ethics public financial management ensures professionalism in managing public funds.

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9. Ethics of public financial management provides the yardstick for rewarding compliance and punishing non compliance with expected bahaviour in any government. In Nigeria, the Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices commission plays enormous role in enforcing ethics in financial management both in private and public sector.

PRINCIPLES OF ETHICS OF PUBLIC FINANCIAL MANAGEMENTGovernment exists to achieve set objectives which have direct impact on the society. The general public expects the government to make right decisions at the right time. However, the government in making right decisions allocates recourses, which belong to the public. Therefore, application of the following ethical principles guides public officials:a. Principle of solidarity: The governments exist to promote the well-being of the people as against promoting one’s own well-being. An ethical public finance manager should know that the use of public funds for personal aggrandizement is unethical even though law punishes such.

Similarly, to ensure good governance, public officials should consider it ethical to minimize fraud and prevent wasteful use of public funds for personal gains.b. Principle of fairness and impartiality: Ethics of public finance demands that public servants must use the same standard in dealing with all people (that is, ones tribe and other tribe): Government must not show preferential treatment in the allocation of resources to various segments of the polity. It is unethical to treat a group of people dear to us in a special or favourable manner and not to do same to strangers.A public officer is fair if he/she does not allow self-interest to override his official interest. A government is fair and impartial if it is universal or general in allocation of resources, applying polices, rules and procedures. c. Principle of efficiency This refers to the ability to use pubic funds effectively with a view to achieving its objectives. Governments allocate funds to every sector of the economy. Therefore every public servant who manages these funds

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should ensure that they are used for the purpose of stimulating national development. Thus, government should be ethical in revenue generation, service delivery and pubic expenditure. To be efficient, public officials must utilize every Kobo of the government for the good of public. d. Principles of rationality: Public officials or public finance managers must think clearly before allocating fund for anything and make financial decision based on reason rather than emotion. All public finance managers must be intelligent in order to control his/her emotions. According to Elegido (1996), to be intelligent means allowing our intelligence rather than our feelings, emotions or primordial loyalties to play the ultimate directive role in allocating public funds. To achieve the objective of good governance, public servants must act intelligently by carefully considering available means of effectively attaining it. For instance, during oil boom in Nigeria, public office-holders engaged in irrational spending of public funds without considering the outcome of such expenditure. Irrational spending creates room for embezzlement of public funds. e. Principles of role responsibility: Government cannot satisfy the well-being of all human beings in the society but must take special responsibilities and use public funds to fulfill those responsibilities to the best advantage of majority of citizens. The principles of role responsibility in public financial management concerns the ability of the government to identity its numerous goals, evaluating them individually with a view to choosing few priority ones that maximize good governance and concentrating on them with total commitment. f. Principles of refraining from willingness harm others: Public office-holders should avoid allocating funds to those policies that directly harm the majority of the populace. In other words, public funds should not be made available to decisions which can harm human beings or good governance.

UNETHICAL PRACTICES/ UNPROFESSIONAL CONDUCT IN PUBLIC FINANCIAL MANAGEMENTCertain conducts are classified unethical/unprofessional in public financial management. These include but are not limited to;Conflict of interests:i. Engaging in extraneous activities which compete/interfere with or constrain good governance. Recently in Nigeria, some public

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servants engaged in diversion of pension funds to their private purse to the detriment of the well-being of the pensioners who have meritoriously served the national during their youthful age.ii. Colluding with third parties to inflate contracts in the business of governance with the aim of receiving kick-backs.b. Abuse of trust/office:i. Abuse of position and taking advantage of the institution to enrich oneself. It is unethical for public office-holders to abuse their offices by enriching themselves while managing public funds.ii. Inappropriate and unauthorized use of public facilities/fund for private use. iii. It is unethical to exploit the ignorant public or unsuspecting citizens through excessive/unwarranted tax changes or rates.iv. It is unethical for allowing a public official known to be of bad character or doubtful integrity to be the custodian of public funds.v. It is unethical to collude with anybody to divert public funds and facilities for unauthorized purposes.c. Offer and acceptance of gratifications: i. Offering/accepting gratification by the public officer as an inducement to waive the imposition of penalties arising from failure to comply with laws or regulation.ii. Applying uneven standards, imposing unfair policies by the regulator with the intention to induce gratification.i. Offering/acceptance of gratification to/from the people to facilitate service.ii. Aiding individuals or corporate bodies to evade tariffs and taxes and to make unwarranted earnings.iii. Aiding and Abetting:i. Aiding and abetting the failure of new staff to need the financial obligations to a previous employer.ii. Employing staff without obtaining suitable reference iii. AssociationPublic servants/financial managers should not knowingly associate with or do business with people of doubtful character.F. Misuse of information:a. Misuse, manipulation or non-disclosure of material information on operation supplied to regulatory authorities in order to derive some benefits or avoid liability.

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b. Misuse of various financial inaccurate returns to the regulatory authorities with intent to mislead

CLASSIFICATION OF ETHICAL ISSUES a. Conflict of Interests This exists when ones’ personal interest clashes with that of the public organization one works for or those of some other groups. This is a situation when a public finance manager must choose whether to advance his own interest, those of the organization he works for or those of the people in power. Integrity and confidence are the foundation of the financial system: hence public finance manager should avoid conducts that will bring fraud or wasteful use of public funds. Such actions may lead to unrealistic budgeting or budgeting implementation. Some examples of such conducts classified unethicals are highlighted under unethical practices.

b. Honesty A public servant is said to be honest when he is truthful, trust-worthy and commands high integrity. Honesty in public financial management consists of steering clear from theft, deceit and taking advantage of others/public. A public finance manager should follow all laws and regulations of public service and regulatory authorities. He should not harm the public, his employer or co-worker through deception, misrepresentation or coercion. The general public should be able to trust him and repose confidence in him. For a public finance manager to remain honest and be seen as such, he must;i. develop a strong character and not be moved by money and money’s worth to the extent that it becomes the root of evil for him.ii. report to the employer or other commissions promptly all fraudulent acts that come to his knowledge. He should know that the consequences of fraudulent acts should they come to light-that they may ruin the organization, the wealth of the government and the image of financial management profession.iv. Be conversant with laws that affect public financial management, changes in legislation and how to obey rules and regulations prescribed by the law of the country.v. seek clarification from superior managers on issues not clear to him or pronouncements which his organization has not confirmed or made definite.

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c. Acceptance of gratification In other to demonstrate commitment to public financial managementethics, managers of public finance should not accept gifts or gratification (bribery) from anybody or organizations, with intent to influencing or rewarding the person or organization in connection with any business or contract. Soliciting or accepting gifts, tips, or anything of value, directly or indirectly from such individuals or organization could becloud the officers’ sense of judgment, thereby causing him/her to be biased in his dealings with the general public.

In the same vein, public finance managers should not give or offer anything of monetary value to co-workers or commissions or external auditors in order to receive preferential treatment or cover up fraud.

d. Freedom of Information In the course of managing public fund managers must make

public all information considered to be public for public scrutiny. All information on public organization is to be considered public, and shall not be hidden from general public. Public finance managers are specifically prohibited from hiding information from inquisitive individuals or general public for no reason other than those regulated by a clear legislation.

However, public finance managers must release accurate information to the general public within a stipulated time within which request was made.Whistle-Blowing

Whistle-blowing is the act of an employee exposing his employer’s wrongdoing to the general public, such as the media or government regulatory agencies. This is the act of complaining by a public officer to a higher body or commission, about a corporation’s unethical practices.

Public officers come about sensitive information on the public organization in the ordinary course of carrying out their day-to-day activities. They are obliged by law to use such information to promote the common good of the organization and general public. Similarly, they owe a duty to the public to protect them from harm. This means that every public officer has dual role of performing his/her duties and protecting the masses from harm.

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Whistle-blowing conflicts especially when the organization they work for engage in unethical practices, which is capable of causing harm or untold hardship to the public. For example, the former CBN Governor(Sanusi Lamido Sanusi) engaged in whistle-blowing to expose the inability of the NNPC to remit oil revenue in the tune of $49.8 million dollars in 2013 in Nigeria. It is assumed that anybody who discovers any wrongdoing anywhere has a clear duty to expose it publicly. Whistle-blowing according to Obodo and Obodo (2010:159) is common in the United States of America “as the law protects the whistle-blower and whistle blowing mechanisms are installed internally by many organizations” however, in Nigeria there is neither law that protects whistle-blower from retaliatory action nor establishment of whistle-blowing mechanism. The barriers to whistle-blowing in Nigeria included the following:a. Absence of protective law or legislation.b. Absence of whistle-blowing mechanism.c. Fear of job loss d. Harassment from co-workers or superior workers e. Inability to by-pass one superior in communication, that is adherence to chain of command.f. Need to be identified with the work group.Conditions for Legitimate Whistle-blowing a. The actions or inactions of an organization are causing or are likely to cause harm to the public or a group of people.b. There must be a reasonable expectation that blowing the whistle will have a situational impact on the harm caused by the organization.c. One must have a moral duty to prevent the harm.Employees resort to whistle-blowing because of retaliatory action from his co-workers or supervisors and absence of internal whistle-blowing mechanism.

Methods of Assisting Public Servants In Whistle-Blowing i. Provision of commission like EFCC or ICPC, Agencies such as NDLEA or other regulatory authorities and such other judicial person and the central bank.

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ii. Installation of anonymous reporting services, usually toll-free numbers, for workers to express their concerns.iii. Establishment of whistle-blowing mechanism that is provision of central whistle-blowing hot-line phone numbers which anybody can dial to report sharp practices noticed in public business.iv. Enacting of law that protects whistle-blowers against retaliatory actions.

REFERENCES

Bassiry, G.R (1990): Business Ethics and the United Nations: A Code of Conduct SAM Advanced Management Journal.

CIBN (2009), Ethics and Professionalism in the Nigeria Banking Sector: A Review of Decided Cases: the CIBN Nigeria.

Obodo, N and Obodo, A. (2010), Law and Ethics of Banking in Nigeria: Enugu, Nikal Printing and publishing co.

HABUS (2009), Harvard Business Review on Corporate Ethics: Harvard Business School Publishing Corporation Baston, M.A 02163.

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CHAPTER TWELVE

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FINANCIAL PLANNING AND DECISIONS / PROGRAMME AND PROJECT APPRAISAL TECHNIQUES

BY





Institute of Management and Technology (IMT) Enugu.

Introduction Most government activities and expenditures are broken down

into programmes and projects especially with reference to the realization of the goals of development. Programmes and projects are therefore manifestation of governments’ concrete effort in making democracy dividends available and accessible to the citizenry. In view of the above, the techniques adopted by government in the realization of the above goes a long way in asserting governments’ readiness and commitment in the performance of its constitutional responsibilities with intent to actualizing national development objectives. In his submission, Olewe (1995), states that the development of any economy is very much dependent on proper implementation of policies, programmes and/or projects. He further opines that, the developed countries have so far achieved much progress due to the extent to which their projects were implemented. The inhibiting factor in the developmental perspectives of the New Nations or Developing Countries revolves around implementation.The project implementation processes in developed countries are followed systematically from the design stage till the last stages which is feed-back and control. But in the developing countries, such process are usually derailed midway prior to termination or complete realization

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of project. This is a serious setback to the pace of development in developing economies which Nigeria is part of.

This chapter clearly attempts to analyze the core ingredients of programme and project appraisal techniques. In so doing the writer examines the definitional issues, identifies and discusses the typologies, steps involved as well as advantages and disadvantages of the various appraisal techniques. The study further presents using relevant examples and illustrations, the models of project appraisal, for better understanding of students and practitioners. Meaning of Programme

In an attempt to define the term programme; The Oxford Advanced Learners Dictionary describes it as, “a definite plan or scheme of any intended proceedings, or an outline or abstract of anything to be done.” Lending voice to the meaning of programme, Edegebert, views it as “a form of organized social activity, a specific objective united in space and time.” Olewe (1995) further notes that a programme often consists of inter-related groups of projects and usually is limited to one or more organizations and activities. Programme may also be referred to as “a written notice, proclamation, or edict posted for the public, such a public notice may relate to a function, celebration or event about to take place.Meaning of Project

The word project is susceptible to common and daily usage but the deeper dimension of its meaning may not be easily comprehended. On the one hand, project has been described as compilation of data which will enable an appraisal to be made. More so, it also connotes the economic advantages and/or disadvantages attendant on allocation of a country’s resources to the production of specific goods and services.

In Salawu (2005), a project is defined as “a unit of activity or a group of activities, which is planned and is expected to be carried out during a given future period. Contributing to the search for meaning, Goel (1981) opines that a project means specifications and accomplishments within a given period of related set of activities that will result in a measurable change in any system’s capacity to improve the status of the community directly or indirectly.

From what has been explicitly stated above, project occupies a place of prominence in governmental functional engagements. Most government projects are usually classified as capital, which underlines

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the place of prominence of such projects to the development aspiration of the government.Features and Characteristics of a Project

A good number of features are distinctive in identifying what a project is all about. In attempting to outline these features, Salawu (2005) offered the following characteristics of a project, which are considered apt here:1) It involves the investment of substantial amount of resources. 2) There is a time lag between the time resources are invested and

when benefits are derived.3) A project will have a boundary of accountability. 4) It has a period of accountability.5) A Project is designed and implemented in accordance with the

social system of the country.Rather deviating from Salawu’s outline, Olewe (1995) offered

the following as the characteristics of a project:(a) Well defined Collection: A project consists of a well-defined collection of jobs, or activities, which when completed mark the end of the project.(b) Independence of Starting and Conclusion: In a project, the jobs may be started and stopped independently of each other; within a given sequence. It is important to note that this requirement continuous-flow processes, such as oil refinery, where “jobs” or operations necessarily follow one after another with essentially no time separation.(c) Ordering of Job: In projects, jobs are ordered. This signifies that jobs must be performed in technological sequence. For instance, the foundation of a house must be constructed before the walls are erected.Project Design ProcessAddressing the issue of project design, Salawu (2005) offered the processes of a project design as;

(a) Generation of possible investment projects. (b) Identifying possible alternative to the project being evaluated. (c) Collection of relevant data on the projects under consideration.

(d) Evaluating the projects from the data assembled. (e) Selection of project based on acceptable criteria. (f) Project implementation. (g) Project monitoring and control.

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Broad Goals/Objectives of Project DesignAccordingly, project design is a problem solving process with the following objectives:1. It facilitates work completion on record time in the most efficient way. 2. It creates the opportunity of identifying the right problem and its solution.3. It makes possible the availability and proper usage of all relevant information for the solution of the problem.4. It gives the project direction and guidance about what should be done as the project proceeds.5. It assists management by producing reports on projects status and keeping track of resources needs.6. Project analysts and designers are guided in solving problems that crop up during project development7. Project design usually encourages top-down problem solving.Project Appraisal Techniques

Three major techniques shall be considered with respect to project appraisal;

1. Cost – Benefit Analysis2. Cost – Effectiveness Analysis3. Cost of Service AppraisalCost-Benefit Analysis (CBA)

Cost-Benefit Analysis is a technique, which enables a systematic comparison to be made between the estimated costs of undertaking a project and the estimated value and benefit which may arise from the implementation of such a project. It is regarded as an analytical tool in decision-making. CBA takes into account not only the private cost and benefits of a project but also the social costs and revenue.

In a period of capital rationing when there is shortage of funds to be invested by the government, it is essential to select the optimal project. In CBA, the decision on project is often taken by ranking alternative projects after the calculation of Benefit/Cost ratio or Net Benefit/Cost ratio. It is an investment appraisal for large project with multitude of benefits, many of which are often difficult to measure.Advantages

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Below are some of the advantages or merits of cost-benefit analysis;1. It provides a framework for consistent and uniform project evaluation.2. It is useful in allocating scarce resources between different public services.3. Cost-benefit analysis provides a guide to Government policy makers to make rational decisions concerning public sector project selection.4. It helps to ascertain the financial implication of projects.5. It helps to know the social benefit derivable from a project. The technique is also useful in making the choice between two projects that are intended to achieve similar ends.DisadvantagesThese among others include the under-listed;1. It does not take into consideration the time value of money.2. It involves a considerable amount of forecasting which a difficult exercise is definitely.3. It does not permit wide choice of projects that are dissimilar.4. It creates the problem of cuts off and estimation.Evaluation on the Basis of Benefits

A Project is evaluated on the basis of the benefits accruing from it. Benefits here refer to the addition to the flow of national output accruing from a project. Benefits may however be real or nominal. It may also be direct or indirect.Real and Nominal Benefits:

Cost benefit analysis is concerned with the real benefits rather than with the nominal benefits flowing from a project. Take for instance, a river valley project, which may increase irrigational facilities, raise the productivity of land per acre and increase the level of real income of the farmers (real benefits). But if at the same time the state levies heavy tax on them, the benefit is nominal.Direct Benefits:

These are benefits, which are immediately and directly obtainable or derivable from a project. They are the value of the immediate products and services for which direct costs are incurred.Indirect Benefits:

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These are otherwise known as secondary benefits. They are the values added to the direct benefits as a result of the activities stemming from or induced by the project.Tangible Benefits:

These are the benefits, which can be computed and measured in monetary terms. For example, benefit from construction of a bridge.Intangible Benefits:

These are the benefits that cannot be measure in monetary terms. They enter into individual valuations, for which there is neither a market nor a price.Evaluation on the Basis of CostsThere are various types of costs:Project costs: They are the value of the resources used in constructing, maintaining and operating the project e.g. cost of labour, capital, natural resources, etc.Associated costs:

They are the value of goods and services needed beyond those included in the costs of a project available for use or sale.Real and nominal costs:

Real costs are the expenses incurred by the people directly involved in the project. The money borrowed to execute a project is of nominal costs properly incurred for the construction maintenance and execution of a project.Indirect costs:

These are secondary costs. They are the value of goods and services incurred to provide indirect benefits of a project, namely; houses, school, and hospital, etc.

Objectives of Cost-Benefit AnalysisWe can distinguish the following as objectives of cost-benefit analysis;1. The determination of the ways in which the most efficient use can be made of scarce resources.2. To determine the best decision as regards the selection of competing alternative projects.3. To assist in appreciating and making the projects under review for implementation4. To allow externalities to be taken into account in appraising investment projects.

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Limitations of the Cost-Benefit AnalysisThere are problems, shortcomings and challenges associated with cost-benefit analysis. They are as follows; 1. There are problems surrounding the valuation of indirect costs and benefits since a monetary value has to be placed on intangible elements such as time, discomfort, pain and death. 2. It creates the problem of which costs and benefits to include and which to exclude.3. It makes the choice of the discount rate in cost-benefit. Analysis, costs and benefits come in streams over long periods.4. It adds to the problem of relevant constraints, which have to be taken into account.5. It is difficult to handle non-economic issues e.g. equity, regional imbalance, and social integration etc.6. It neglects joint benefits and costs.7. The Cost Benefit Analysis also ignores the problem of opportunity cost.8. It generates the problem of externalities: The side effects of a project are difficult to calculate in the analysis.Steps in Cost-Benefit AnalysisThere are five steps which are characteristic of the cost-benefit analysis, they are as follows;1. Determine the projects to be considered2 Ascertain alternative solutions to the projects3 Estimate and analyse the costs and benefits of the project 4. Appraise the estimated costs and benefits5 Decide on the optimal solution.Example The following estimated costs and benefits are related to five different project been executed by Amamba East Local Government Council. A B C D E

N’000 N’000 N’000 N’000 N’000Estimated Cost- of Investment 10,000 20,000 12,000 24,000 30,000Estimated Benefit 25,000 22,000 20,000 26,000 36,000Amamba East Local Government Council has made a budget of N52, 000.000 to be invested in undertaking the different projects.

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You are required to;(a) Calculate benefit/cost ratio of each of the 5 projects(b) Compute the Net Benefit/Cost ratio of each project(c) Advise the Chairman of the Local Government Council on the project to be undertaken on the basis of the year’s computation in ‘a’ and ‘b’ above.SolutionAmamba East Local Government Council Computation of the Benefit/Cost ratio of each of the five projects A B C D E N’000 N’000 N’000 N’000 N’000 Estimated Benefit (B) 25,000 22,000 20,000 26,000 36,000Estimated Cost (c) 10,000 20,000 12,000 24,000 30,000Net Benefit (NB) 15,000 2,000 8,000 26,000 36,000(a) B/C ratio 2.5 1.1 1.67 1.08 1.2(b) NB/C ratio 1.5 0.1 0.67 .08 0.2Ranking 1st 4th 2nd 5th 3rd

Ranking projects Estimated cost of investment Cumulative Budgeted sum of money for Investment

N N 1st A 10,000.000 52,000.0002nd C 12,000.000 42,000.0003rd E 30,000.000 30,000.000(c) The Chairman of Amamba East Local Government should embark on project A, C and E

Cost-Effectiveness Analysis (CEA)Cost-Effectiveness Analysis is a technique that enables the management to determine the cheapest strategy to meet a well-defined objective or to determine the optimal strategy to meet an objective when given a fixed budget cost, Under CEA, costs are calculated and alternative ways are compared for achieving a specific set of results. It does not give information about the benefits of meeting objectives.

Characteristics of Cost Effectiveness AnalysisThe following are among the characteristics of cost effectiveness analysis;i. CEA comparison may be stated in terms of cost per unit of effect or in terms of effect per unit of cost

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ii. CEA is used as a comparison of different ways of reaching the same objectivesiii. In CEA, the alternatives are usually (but not necessarily always) mutually exclusiveiv. CEA identifies either the least cost method of achieving a particular objective or the maximum output that can be attained for a given cost.Steps in Cost Effectiveness AnalysisA series of steps are necessary to be adopted in cost effectiveness analysis. They are;1 Define the objective: The more precise the definition of the objective of a programme, the better.2 Formulate Alternatives to achieve the objectives3 Measures the effectiveness: Overall performance must be combined into appropriate measures that group the effectiveness of each alternative4 Compute net cost: Estimation of the cost of the alternatives is very important5 Compute net effects6 Apply Decision Rules or Choice Criteria Cost-Effective Ratio = Net Costs

Net EffectsObjectives of Cost -Effectiveness AnalysisThese objectives are as follows;1. To determine the least cost of achieving a well-defined objective.2. To determine the maximum output that can be derived or obtained from a given cost.3. Allowing externalities to be taken into account in appraising investment projects.Example: 1The medical practitioner who treated a young man for his ailing heart considered the following options;Treatment Option Cost of Treatment Life years gained from treatment

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N1. Heart Transplanting 900,000 l52. Artificial Heart 240,000 83. Heart By-pass operation 300,000 12What is the most cost-effective method of treating the young man’s heart problem?Solution to example 1TreatmentOption

Cost of treatment

Life years gained Ranking

N 3rd

Heart Transplanting

900,000 15

Artificial Heart

240,000 8 2nd

Heart by-pass option

300,000 12 1st

Decision: The most cost-effective method of treating the Young man’s heart problem is Heart By-pass operationExample 2Idaw River Local Government is planning to construct a road using two methods of construction. The following data were given

Method 1 Cost per kilometer N

Initial capital cost 10,000,000Cost of Maintenance in every 4 years 2,000,000Method 2Initial Capital cost 7,840,000Cost of maintenance in every 3 years. 2,400,000Additional informationIt is expected that the road will have a maximum lifespan of 28 years, if properly maintained. It is required to determine the cost effectiveness of each method. The rate of interest is given as 10%

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Solution to Example 2Idaw River Local Government Computation of Cost Effectiveness of Constructing a RoadMethod 1Year Outlay Discount Factor Present Value

N 10% N 0 10,000,000 1,000 (10,000,000) 4 2,000,000 0,683 (1,366,000) 8 2,000,000 0,467 (934,000)12 2,000,000 0,319 (638,000)16 2,000,000 0,218 (436,000)20 2,000,000 0,149 (298,000)24 2,000,000 0,102 (204,000)28 2,000,000 0,069 (138,000)

PV = (14,014,000)Method 2Year Outlay Discount Factor Present Value

N 10% N 0 7,840,000 1,000 (7,840,000) 3 2,400,000 0,751 (1,802,400) 6 2,400,000 0,564 (353,600) 9 2,400,000 0424 (1,017,600)12 2,000,000 0,319 (6,388,000)15 2,400,000 0,239 (573,600) 18 2,400,000 0,180 (432,000)21 2,400,000 0135 (324,000)24 2,400,000 0,102 (244,800)27 2,400,000 0,076 (182,400) `PV = (14, 408,400)Total Cost at Present Value per Kilometer:For Method 1 = N14, 014,000For Method 2 = N 14,408,400

Decision rule: Method 1 is preferable because it is more cost effective than method 2.Example 3

The Road Maintenance Department of the Rainbow State Ministry of Public Works is responsible for operating a toll gate on the

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Garrison-Waterworks by-pass in the State. The Chief Highway Engineer has reported the need to carry out urgent repair works, between k+250 and km 9 + 600, the failed portion of the road leading to the Toll Gate. Furthermore, he is of the opinion that unless some repairs are undertaken immediately, the tollgate will have to be closed. The Chief Highway Engineer has also pointed out that the volume of traffic/commuters using the road during the third quarter of the year is low, relative to the rest of the year.It is now the end of the fifth month and he has submitted the following repair options for the consideration of the Honourable Commissioner for Public Works, viz:Option 1: To close the toll gate for 15 weeks and complete repairs, once and for all, in one operation. The opportunity cost will be an immediate repair cost of N1, 152,000 and the loss of toll revenue of N432, 000.Option 2: To carry out the repair works in phases, over the third quarters for the next three years. The opportunity cost will be an immediate repair cost of N288.000 plus a further N384, 000 a year from now, N432, 000 two years from now and N480, 000 three years from now. This option will lead to traffic hold-ups, necessitating the diversion of users of the toll gate to an alternative route. Loss of revenues from toll charges is estimated as follows:This year - N72, 000Next year - N93, 600Two years from now - 96, 000Three years from now - 110,400.The Ministry can currently borrow funds from financial institutions at the concessionary rate of 10% per annum.You are required to:(i) Calculate the present value of the two repair options.

(ii) Identify the most cost-effective way of undertaking the repair giving your reasons;(iii) State two other factors that should be consideredNB: Take discount factor to three (3) decimal places and present values to the nearest whole number.Solution to Example 3

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The Road Maintenance Department, Rainbow State Ministry of Public Works Appraisal of Repair Options of Garrison-Waterworks Road

Km 2 + 250 – Km 9 + 600Amount N

PV Factor(10%)

Present Value N

Immediate repair costs

1,152.000 1,000 1,152.000

Lost of toll Revenues

432.000

1,584.000

Option 2 – Carry out Repair Work in Phases over the ThirdQuarter of the Next Three Years

Amount N

PV Factor(10%)

Project Value N

Immediate repair costs

288,000 1.000 288,000

Loss of toll revenues

72,000 1,000 72,000

1st Year repair cost 384 0,909 349,056Loss of toll revenues

93,600 0.909 85,082

2nd Year repair costs 432,000 0.826 356,832Loss of toll revenue 96,000 0.826 79,2963rd Year repair costs 480,000 0.751 360,480Loss of toll revenues

110,400 0.751 82,9101,673,656

The most cost-effective way of undertaking the repairs is Option 1 that is, closing the toll gate for 15 weeks, because the opportunity cost of N1, 584,000 is lower than that of Option 2.Other factors, which the Honourable Commissioner of Public Works should consider, include;(a) The inconvenience which the decision will cause the regular road/toll gate users;(b) The possible permanent loss of toll revenues as a result of some diverting users to alternative routes;

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(c) The effect of the provision of emergency services to towns/communities situated near to the road/toll gate Cost of Service Appraisal (CSA)

This technique of investment appraisal in the public sector implies that a public sector project provides an avenue for the Government to provide goods and services to the members of the public. The members of the society are expected to contribute to the cost of financing these services in accordance with the proportion of benefits derived from such services. The members who enjoy more of the services are expected to make more contributions than other members of the society who do not enjoy more of the services.

The viability of the project in the public sector is judged or appraised on the basis of the benefits derived by the society and the ability of the beneficiaries to make contributions toward financing the cost of the services.AdvantagesCost of service appraisal has the following advantages;1. It provides necessary information on the way and manner by which the public sector projects are being financed by the Government.2. It introduces a reasonable degree of fairness into the financing of Government project as members of the society are expected to pay in relation to the proportion of benefits derived.3. It enables the Government to determine the extent to which the members of the society are expected to contribute in meeting the cost of financing governmental projects.

DisadvantagesThe following are major disadvantages of cost of service appraisal;1. The technique may prevent the Government from considering the other sources from which revenues can be generated for the purpose of financing Government projects.2. The technique is associated with the problem of cost measurement and evaluation of the benefits being derived by the society.Other Investment Appraisal Techniques: these include; 1. Discounted Techniques:(a) Net Present Value (NPV)

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(b) Internal Rate of Return (IRR)(c) Profitability Index (PI)2. Non-Discounted techniques:(a) Payback Period (PBP)(b) Accounting Rate of Return (ARR)Discounted Techniques

The discounted technique takes into consideration both the time value of money and total profit or cash inflow over a project’s life. Cash flows are considered and the timing of cash flows is taken into account by discounting them.Discounting: This is finding out the value of future expenditure or income in today’s worth, given a rate of interest.Compounding: This is finding out the value of today’s expenditure/ income in future worth, given a rate of interest.Net Present Value (NPV) MethodThe NPV method is the value obtained by discounting all cash outflows and cash inflows of a capital investment project by a chosen target rate of return or cost of capital. This method compares the cash inflows with the cash outflows for an investment.Mathematically, the NPV is given as N

Co= initial outlay A1 = cash flow at time t = 1.Decision rule;1. If NPV of a project is positive, the project should be accepted.2. If NPV equals Zero, the project breaks even and should be accepted.3 If NPV is negative the project should be rejected.

Advantages of NPV MethodBelow are some of the advantages of the net present value method of project technique;1. It is project oriented and takes into account time value of money.2. It uses all cash flows occurring over the entire life of the project.

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3. It gives a clear decision whether to accept or reject decision. 4. It is useful in evaluating individual projects.5. It is useful in ranking projects in capital rationing situation.Disadvantages of NPV MethodThe disadvantages of the net present value project technique include the under listed;1. It does not take risk into account.2. It is relatively more difficult to calculate.3. It does not provide a measure of a project actual rate of return.4. It relies heavily on the estimation of cost of capital.ExampleUzongene Local Government is considering two projects A and B with the following cash flowsTime:Cash flow(N’000)

0 1 2 3 4 5

A 260 50 150 80 30 20B 240 80 100 120 120 60

Use Net Present Value Method and advice the Chairman of the Local Government appropriately. The cost of capital is 15%Solution:Uzongene Local Government

A BTime (DCF15%) Cash flow PV Cash flow PV0 1,0000 260 260 240 (240)1 0.8696 50 43 80 702 0.7561 150 113 100 763 0.6575 80 53 120 804 0.5718 30 17 120 695 0.4972 20 10 60 30 NPV (24) 85

Decision Rule: The Local Government should undertake Project B since the NPV is positive while project A should be rejected because NPV is negative.

Internal Rate of Return (IRR)The IRR method is the rate of returns that equate the present

value (PV) of future cash flows to the initial outlay. In other words, the

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IRR is the rate of return that gives an NPV of Zero. Thus, the rate can be derived by trial and error or interpolation.

Steps in Calculating IRRThe steps below are vital in calculating the internal rate of return;1. Calculate the 1st NPV by making use of the cost of capital given.2. Calculate the 2nd NPV by choosing rates for the cost of capital that will give an NPV close to zero.3. Several attempts may be needed in step II to find satisfactory rate (trail and error exercise)4. Ideally, one NPV should be positive and one negative 5. Apply interpolation formula to get IRR

IRR = R1 + P1 (R2-R1) P1 –PWhere:R1 = is the discount rate that gives positive NPVR2 = is the discount rate that produced negative NPVP1 = is the positive NPVP2 = is the negative NPVDecision rule;

(i) If the IRR exceeds the cost of capital, the project will be undertaken.(ii) If the IRR is less than the cost of capital, the project should be rejected.(iii) If the IRR is equal to the cost of capital the project can be accepted.(iv) For mutually exclusive projects, we select a project with a higher IRR, provided the IRR of that project is higher than the cost of capital Advantages of IRRStated below are advantages of internal rate of return;(i) It considers cash flows over the entire life of a project.(ii) It provides a margin for error(iii) It is a time-adjusted method,(iv) It has a psychological appeal to the user,(v) The calculation of the cost of capital is not a pre-condition for the use of this method.

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(vi) It is consistent with the objective of maximizing the wealth of shareholders.Disadvantages of IRRBelow also are listed some disadvantages of internal rate of return;(i) It does not consider risk(ii) It sometimes gives more than one result. That is, an investment may have more than one IRR(iii) Using IRR when choosing between two or more investments produces misleading results.

ExampleEgbeada Housing Corporation cost of capital is 9%. Using IRR method advice the chairman of the boardSolutionHousing Corporation Board of Gateway StateYear Cash flow DCF PV

#’000 9%0 (20,000) 1,0000 (20,000)1 8,000 0,9174 73392 8,000 0,8417 67343 8.000 0,7722 6178

NPV 251

Year Cash flow DCF PVN’000 12%

0 (20,000) 1,0000 (20,000)1 8,000 0,8929 71432 8,000 0,7972 363783 8.000 0,7118 5694

NPV (785)

The IRR, therefore, lies between 9% and 12%Apply the formula

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Decision rule: Invest only if the IRR is higher than the cost of capital. The Board should embark on the project since 9.7% (IRR) is greater 9% (cost of capital).

Profitability Index (PI) Profitability index is a measure of profit generated from a project in present value time expressed as a proportion of capital invested. It is a ratio that provides a ranking of alternative investments to the investor. It tends to estimate the total present value of future cash flows at the required rate of return over the initial cash outflows. It can be computed as follows.

(a) PI = Discounted Cash Inflow Discounted Cash Outflow Total concept(b) PI = Discounted Cash inflow

Initial Outlay (c) PI = Net Present Value Net Concept

Initial Cash Outlays

Definitions (a) and (b) are called total concept while definition (c) is called net concept. Under the total concept a project is viable if PI is greater than I; while under net concept a project is viable if PI is greater than O.

Advantages of Profitability IndexSimply represented below are the advantages of profitability index;1. It is a time-adjusted technique; it considers time value of money.

2. It facilitates the maximization of profit generated per capital.

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3. It considers cash flow over the entire life span of the project.

Disadvantages of Profitability IndexIt assumes a capital rationing situation that can lead to a wrong result where capital is not a constraint.

Illustration ISharia Local Government has the following information on five projects.Projects Capital outlay Discounted cash flow

N NA 20,000 25,000B 30,000 36,000C 35,000 40,000D 40,000 47,000E 48,000 53,000

These projects are not mutually exclusive, and are also divisible. The council has only N80, 000 to invest. Advise the chairman of the council.

Solution to Illustration ISharia Local Government Computation of Cost-Benefit RatioMethod 1: Cost –Benefit RatioProjects RankingA Benefit = 25,000 = 1.25 1st

Cost = 20,000 =B Benefit = 36,000 = 1.2 2nd

Cost = 30,000 =C Benefit = 40,000 = 1.14 4th

Cost = 35,000 =D Benefit = 47,000 = 1.18nd 3rd

Cost = 40,000 =E Benefit = 53,000 = 1.10 5th

Project Cost BenefitA 20,000 25,000B 30,000 36,000D 30,000 35,250 (3/4

x47,00080,000 96,250

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Method 2 Profitability IndexProjects Capital

OutlayDiscountedCash flow

NPV NPV/Capitaloutlay

Ranking

N NA 20,000 25,000 5,000 0.25 1st

B 30,000 36,000 6,000 0.20 2nd

C 35,000 40,000 5,000 0.14 4th

D 40,000 47,000 7,000 0.18 3rd

E 48,000 53,000 5,000 0.10 5th

Advice = The Chairman of the Local Government should embark on project A, B and part of project C, since the projects are divisibleIllustration III

General Electricity Distribution Board of Eluwa State has decided to undertake a programme of expansion. The Board has under consideration two mutually exclusive hydro-electricity dams and intends to invest in only one, which offers the greater optional plan. Each dam has a five-year life span. The first reservoir requires an initial capital investment of N420, 000 million, while the second will need N840, 000 million. The annual net cash in-flows, which are expected to rise from the construction of each of the dams, are as follows:Year First Dam Second Dam

N(Million) N(Million)1 90,000 300,0002 180,000 270,0003 180,000 270,0004 180,000 270,0005 72,000 162,000

Required:a. Calculate the Net Present Value of each of the two reservoirs, assuming a 14 percent cost of capital.b. Calculate the payback period of the reservoirs. What is your recommendation?c. Compare and comment on the result of your calculations under (a) and (b) above. Note: Take discount factor to your (4) decimal places.

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Solutiona. Calculation of Net Present ValueGeneral Electricity Distribution Board

First Dam Second DamYear

Cost of Capital 14%

Cash flowN Million

PVN (Million)

Cash flowN(million)

PVN(Million)

0 1.0000 (420, 000)

(420, 000) (840, 000)

(840, 000)

1 0.8772 90, 000 78, 948 300, 000 263, 1602 0.7695 180, 000 138510 270, 000 207,7653 0.6750 180, 000 121,500 270, 000 182,250 4 0.5921 180, 000 106,578 270, 000 159,8675 0.5194 72, 000 37,397 162, 000 84,143

62,933 NPV 57,185

b. Pay-back periodFirst DamTime Cash flows Cumulative

N (Million) Cash FlowsN (Million)

0 (420, 000) (420, 000)1 90, 000 (330, 000)2 180, 000 (150, 000)3 180, 000 30, 0004 180, 000 210, 0005 72, 000 282, 000

Second DamTime Cash flows Cumulative

Cash Flows

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N (Million) N (Million)0 (840, 000) (840, 000)1 300, 000 (540, 000)2 270, 000 (270, 000)3 270, 000 0The payback period is 3 yearsRecommendation: Based on payback period method, the first dam shall be recommended, because it has shorter payback period.d. Comparison and CommentsThe first dam is the more viable option. It has a positive net present value of N31, 466 million, while the second dam has N28, 593 million. When compared under the payback period, the first dam has a shorter payback period of 2 years and 10 months, as against that of the second dam of 3 years. Based on both methods, the first dam is recommended in preference to the second.

Non-Discounted TechniquesNon-discounted techniques are otherwise known as the traditional methods which involve the use of Payback Period and Average Rate of Return methods.

Payback Period (PBP) MethodIt measures the length of time that cash return (inflow) from investment will be sufficient to recoup the initial capital outlay.Decision Rulei. For the single project, the lower the PBP the better the project when compared with a set standard.ii. When deciding between two or more competing projects the usual decision is to accept the one with the shorter PBP.Advantages of PBPThe payback period is credited with the following advantages;i. It is simple to calculate.ii. It is simple to understand.iii. It may be used as safeguard against risk.iv. It is less affected by uncertainty.v. It is less expensive.vi. It acts as a simple initial screening for project appraisal.Disadvantages of PBP

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The payback period also holds the following disadvantages;1. It ignores time value of money.

2. To find a realistic PBP may be a problem.3. It disregards total cash inflow and so could favour projects with a poor overall profitability just because they had a relatively large initial cash flow.Example 1Universal Basic Education Board is considering two mutually exclusive projects A and B, which have the following capital investment and returns.

Year AN

BN

Cost 100,000 100,000Residual value after 5 years

Nil Nil

Yr 1 20,000 80,000 2 30,000 60,000 3 40,000 20,000 4 50,000 10,000 5 60,000 10,000

Calculate the payback period of each project. Which project should be accepted based on the criterion?Solution to Example 1

Year Project ACash flow

Cumulative Cash flow

0 100,000 (100,000)1 20,000 (80,000)2 30,000 (50, 000)3 40,000 (10,000)4 50,000 40,0005 60,000 100,000

The PBP is between year 3 and 4

Time Project B Cumulative

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Cash flow Cash flow0 (100,000) (100,000)1 80,000 (20,000)2 60,000 (40, 000)3 20,000 (60,000)4 10,000 70,0005 10,000 80,000

ConclusionsBased on the explanations, analyses, examples and illustrations provided in this chapter, one easily appreciates the need for programme and project appraisal techniques, particularly with reference to public sector management. Project appraisal is a highly practical field, which every well meaning government or organization should adopt in arriving at major decisions with respect to what projects to execute at any given point in time considering the inadequacy of resources. The writer therefore recommends that managers and administrators should always ensure that all available alternatives should be explored before arriving at important decisions concerning project techniques. The reason is to ensure that maximum benefit is derived by the citizenry or the organization from every single programme or project executed.

REFERENCES

Anambra State Government, (1986), Blue Print for Rural Development in Anambra State, Enugu: Government Printer.

Anikeze, N.H. (2010), Theories and Practice of Local Government in Nigeria: A Comparative Perspective, Enugu: Academic Publishing Company.

Anikeze, N.H. (2001), Public Administration: An Introduction and Comparative Approach. Enugu: Academic Publishing Company

Anikeze, N.H. and Ngwu, G.O. (2009), Fundamental of Public Enterprise Management: issues, concepts and Application “Second Edition” Enugu: John Jacob’s Classical Publishers

Federal Republic of Nigeria, (1989), “The Framework and Purpose of the Estimates”, Model Financial Memoranda for Local Government, Abuja: States and Local Government Affairs Office, The Presidency, 2nd Edition.

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Olewe, B. N. (1995), Development Administration. Aba: Grace Ventures and Publishers Limited.

Salawu, H. (2005), Approaches to Project Appraisal and Control. Lagos: Longman Publishers LTD.

Goel, P. (1981), Issues in Project Management. New Jersey: The Free Press Intl.

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CHAPTER THIRTEEN

CAPITAL BUDGETING/BUSINESS INVESTMENT APPRAISAL

BY

AGBACHI VINCENT ONYENEKELecturer,

Department of Public Administration of Accountancy OSISATECH Poly Enugu

INTRODUCTION Capital budgeting involves the entire process of planning expenditure whose returns are expected to extend beyond a very short duration. Orjih, (2009)According to Harold Blerman and Thomas R Dyckman, capital budgeting is the process of deciding whether or not to commit resources to project costs and benefits spread over several time period. In the words of Kuchal, S., capital budgeting process involves planning the availability and controlling the allocation and expenditure of long term investment fund.Therefore, capita budgeting is process of analyzing project and deciding whether they should be included in the capital budget. Thus, it involves a permanent commitment of resources that influences a firm’s long run flexibility and earning power, with a view to realize the benefits that are expected to occur over a reasonable long period of time in the future.Characteristic of Capital Investments 1. It is purely an irreversible commitment 2. Fund is committed in anticipation of obtaining future project.3. The benefits thereof are subject to element of risk and

uncertainty.4. The investment affects the long run flexibility and earning power

of the firm.5. It adds to a firm’s capital stock, thereby broadening the base on

which profit are earned.Capital Budgeting ProcessThe steps that are involved capital Budgeting are;

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1. Estimation of the expected cash flows form a given project.2. Estimation of the risk involved in realizing the projected cash flow.3. Appropriate discount rate at which the cash flows will be

discounted should be determined.4. Expected cash flows are discounted to their present value to

ascertain the present net worth.5. The computed value is compared to the cost of the project, “Where

the asset value exceeds cost, the project should be accepted.Investment Appraisal Techniques or Capital Budgeting Techniques Two broad approaches has been revered as investment appraisal techniques. These are:i. Traditional investment Appraisal Technique or non discounted

method.ii. Discounted cash Flow Techniques

i. Traditional investment Appraisal: According to Lucey (1988: 409) two particular methods of comparing the attractiveness of competing projects have become know as “Traditional Techniques”. These are the payback period and Accounting rate of return.Payback Period Lucey, T. (2002) said that this is a common used techniques which can be defined as “the time required for the inflows from a capital investment project to equal the cash outflows.The usual decision rule is to accept the project with the shortest payback period.

Decision Rule The followings are the decision rules for the payback period.IF PBP < PBP set by management, acceptIF PBP > PBP set by Management, rejectIF PBP = PBP set by Management, indifference

Example ICalculate the payback period for each of the following three projects

Project X Project Y Project ZYear

Annual cash flow

Cumulative cash

Annual cash

Cumulative cash flow

Annual cash

Cumulative cash

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flow flow flow flow0 -3,000 -3,000 -3,000 -3,000 -3,000 -3,0001 +900 -2100 1,000 -2,000 2,000 -3,0002 +800 -1300 1500 -500 1000 -1,0003 +1000 -300 1000 +500 1,000 -Nil4 700 +400 1000 +500 1,200 1000

Project (X)

3 years/5month (Y) 2 years months

Project Z 2years

Payback PeriodProject X 3yrs 5 months Project Y 2yrs 6 months Project Z 2yrs Ranking of the Projects Project PBP in years Position Z 2 years 1st Y 2 years/65months 2nd X 3 years 5 months 3rd Note The investment appraisal Assumptions here is that year means now (ie money invested awaiting returns) year 1 means at the end of one year of investment, year 2, the end of two years and so on and a negative signs represents a cash outflow and a positive sign represents a cash inflow.

Advantages and Disadvantages of Payback Period Advantages Simple to understand and calculate is more objectively based because, it uses project cash flows rather than accounting profit.Favour quick return projects which may produce faster growth for the first and enhances liquidity.Choosing project which payback quickest will tend to minimize time related risks.

Disadvantages i. Payback is a rough measure of liquidity not overall project worth

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ii. Payback provides only a crude measure of the timing of project cash flow.

iii. It ignores the time value of money.iv. It ignores the cost of fund used v. To support the investment.

Accounting Rate of Return (ARR) This can be defined as the ratio of average profits, after depreciation, to the capital invested Lucy, T. (2002). This also is a project evaluation method, which is also known as return on Investment (ROI). It is the ratio of the average annual profit after taxes to the amount of the average investment in the project.

Note With average income being defined as earning after taxes without an adjustment for interest, Viz:

Thus,

EBIT = Earning before interests and taxes I = Tax Rate lo = Beginning Book value of investment ln = Ending book value of investment at n years

Example 2A project costs N70,000 and has a scrap value of N20,000 at the end of 5years. It’s stream of earning before depreciation, interest and taxes (EBDIT) for years one through five are N12,000, N14,000, N16,000, N18,000 and N20,000. Given that depreciation

is on straight line basis, advice the investor whose minimum required rate of return on such project is 15%, and a 5% tax rate prevails.

Solution:Depreciation on a straight line method

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Where N = No of period of the investment will span

Decision Rule Accept IF ARR > Mgmt/investors determined minimum rate of return Reject IF ARR < mgmt/investor’s desired rate of returnIndifference IF ARR = mgmt/investors desired rate of return

Advice: Reject The Investment Proposal hence the project’s ARR of 8.8 percent is less than the 15 percent mgmt’s/investors minimum desired rate of return.

Example 3Calculate the Accounting rate of return of a project with the following accounting information. Estimated after tax cash inflows of 20,000 every year for 12 years, for a project which costs N100,000 with a

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salvage value of 10,000 at the end of the 12th year. Advice the investor whose minimum acceptable rate of return on investment is 10%

Solution

Advice Accept the project hence its ARR of 23 percent is higher that the investor’s minimum acceptable rate of 10 percent.Note, A project may not have a scrap value at the end of a certain number of periods/years. When this situation occurs, the original cost of the investment is divided by two, to get the average investment.

Example 4A projects has the following earning before depreciation, interest and taxes, N40,000, N34,000, N38,000, N42,000 and N50,000, for year one to five respectively. If the project cash n120,000 and a 50 percent tax rate prevails. Advice the management whose minimum acceptable rate of return is 20 percent. Depreciation is on a straight line method.

Solution:

Example 5

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Advice – Reject the investment hence its ARR of percent is less than the minimum required rate of return

Example 6A project whose management requires a minimum rate of return of 15% has a cash outlay of N80,000. After tax cash flows are as follows:1. 55,0002. 70,0003. 35,0004. 25,0005. 10,0006. 5,0007. 1,000If the prevailing tax rate is 40 percent and depreciation is on a straight line method, calculate the ARR and advice the management.

Advice = Accept the project hence the project’s ARR of 71% percent) is higher than management’s minimum rate of return of 15%

Selection by Observation/Intuition This method adopts visual evaluation to rank projects. The absolute net cash flows of projects are observed and subsequently, the project with the highest absolute net cash flow ranking first and vice versa.

Example 7OSISATECH (Nig) Plc, is considering investment in one of four projects whose cash outlay is N100,000 each. The projects cash inflow are:

Project Cash inflows A N12,000 14,000 19,000 40,000 30,000B N13,000 20,000 29,000 28,000 29,000C N11,000 30,000 20,000 21,000 30,000D N16,000 21,000 28,000 33,000 25,000Using selection by observation method of project evaluation, advise the firm. Pro 1 2 3 4 5 Net cash

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ject flow ie N100,000 – 1+2+3+4+5

A N12,000

14,000

19,000

40,000

30,000

15,000

B N13,000

20,000

29,000

28,000

29,000

19,000

C N11,000

30,000

20,000

21,000

30,000

12,000

D N16,000

21,000

28,000

33,000

25,000

23,000

Advantages - Very easy to understand - It has much regards to profitability - It is easy to calculate - It is a function of all cash inflows

Disadvantages 1. It does not recognized the time value of money 2. Regularity of cash inflows are not considered

Discounted Cash Flow Techniques of Capital Budgeting Hence the flows in the non-discounted methods were recognized, a search for better techniques of project evaluation began. All discounted cash flow measures use cash flows and make due allowance for the time value of money. The two features here are use of cash flow and time value of money.Use of Cash Flow: All discounted cash flow and methods uses cash flows and not accounting profits. Accounting profit are invariably calculated for stewardship purposes which are period orientated, thus, necessitating accrual accounting with its conventions and assumptions.For investment appraisal purposes a project oriented approach using cash flows is considered hence it is more objective and the accounting conventions regarding (revenue/capital expenditure/stock valuation) are exclusively redundant.

Time Value of MoneyMoney has a time productivity (ie money received earlier can be put to use through investment to earn interest). The provision on this is that investment appraisal most make due allowance for the time value of

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money. The amount of money arising of different times cannot be compared directly, they must be reduced to equivalent values at some common date.The two main discounted cash flow (DCF) methods of Net present value (NPV) and Internal Rate of return IRR are described below:

Net Present Value: The NPV is the value in present day term of the various cash flows expected to arise at differing periods in the future.The NPV method discounts to present time the value of all cash flows expected to result from an investment decision. The present value is generally defined as the maximum amount a firm could pay for the opportunity of making investment without being financially worse off. The NPV is the value of all receipts less the value of all payments of all prospective cash flows is the directs measure of the relative economic attractiveness of any proposed investment (Orji, John, 2009).The formular for NPV is as follows:

Where, Ci = is the cash flow (+ or -) at period i

i = Is the period number r = Is the cost of capital

Note – The discount factor can be found using a calculator,

equally discounted tables can even be used.Example 8The following cash flows have been estimated for a project Year 0 1 2 3 4 5

-2,000 +400 +600 +700 +600 +500

It is required to calculate the project NPV and state whether the project is acceptable assuming that the cost of capital is either @ 10% @ 20%

Year Cash flow Discount 10 PV0 2,000 1.00 (2,000)1 400 0.909 363.62 600 0.826 495.63 700 0.751 525.7

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4 600 0.683 409.85 500 0.621 310.5

2105.2NPV +N105ie Present value – cost of investment 2105 – 2,000+N105Decision Accept the project Year Cash flow Discount 10 PV0 2,000 1.00 (2,000)1 400 0.833 333.22 600 0.694 416.43 700 0.579 405.34 600 0.482 289.25 500 0.402 201

1645.1-355

Decision Reject the project proposal Decision making as regards to NPVAccept investment IF NPV > 0Reject Investment IF NPV < 0Indifference of NPV = 0Internal Rate of Return (IRR)The IRR can be defined as the discount rate which gives zero NPV. That is the rate which equates the present value of cash flows with the present value of cash outflows with the present value of cash outflows of an investment. Equally, it can be described as the break even rate of returnMethods of Calculating IRR 1) Trial and Error methods 2) Interpolation methods 3) Graphical methods Trial and Error Method Hence, the cost of capital is not given, one rate of return is tried after another until one gets the rate equal NPV zero.Thus, the option to minimize the number of trials are as followers:

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1. Add the cash inflow2. Divide the sum by the number of period/years of the project to get

average cash inflow, making the cash inflows an annuity.3. Divide the cost of investment by the average cash inflow to get a

discount factor.4. Using the PV of ordinary annuity table; under the appropriate n

period column, look up horizontally the discount rate that will give a figure closest to that discount factor.

5. The IRR is likely to be that rate or something very close to it.6. Having determined this rate, the trial can now start.

Example 9A project costs N500,000 and has cash inflows of N100,000 121,000 N151,000, N132,000 and 90,000 for years one to five respectively calculate the IRR of the project.

Solution To minimize the number of trials take the following stepsA) N100,000 + 121,000 + 151,000 + 132,000 + 90,000 B) 594,000 = 118,800 5C) 500,000 = 4,2088 118,800 = 4.2088D) From the present value of ordinary annuity (PVIFA) table

4.2088 falls under 6% along period n = 5E) The IRR is likely to be close or equal to 6% percent F) Then, start the trials First Trial 4%Period Cash flow Discount factor @

4%PV (N)

1 100,000 0.962 96,2002 121,000 0.925 111,9253 151,000 0.889 134,2394 132,000 0.855 112,8605 90,000 0.822 73,980

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NPV + 29,204Second Trial 8%Period Cash flow Discount factor @

4%PV (N)

1 100,000 0.962 92,6002 121,000 0.957 103,6973 151,000 0.794 119,8944 132,000 0.735 97,0205 90,000 0.681 61,290

474501

NPV + 25,499With discount rate of 8% the NPV is negative. Therefore, the IRR lies between 4 percent and 8 percent. Third trial 6%

Period Cash flow Discount factor @ 6% PV (N)1 100,000 0.9436 94.3002 121,000 0.890 107,6903 151,000 0.839 126,6894 132,000 0.792 104,5445 90,000 0.747 67,230

500,000Thus, 6% will give NPV figure relatively to the project cost of N500,000

This figure is insignificant; hence 6% remain the IRR.

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Interpolation Method In order to proud solution on IRR, using interpolation method there should be two discount rate ie, a lower discount rate with a positive NPV and a higher discount rate with a negative NPVUsing illustration on Example (9) where 4% and 8% respectively were used on trial and Error method.4% was given as a positive NPV while 8% a negative NPV.

Period Cash flow Discount factor @ 4% PV (N)1 100,000 0.962 96,2002 121,000 0.925 111,9253 151,000 0.889 134,2394 132,000 0.855 112,8605 90,000 0.822 73,980

Period Cash flow Discount factor @ 8% PV (N)1 100,000 0.926 96,6002 121,000 0.857 103,6973 151,000 0.784 119,8944 132,000 0.735 97,0205 90,000 0.681 61,290

Hence, we have raised to both of positive and negative (NPV’s) Interpolation thus apply

IRR = Internal Rate of ReturnLDR = Lower Discount rate NPVLDR = NPV of lower Discount rate

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HDR = Higher Discount Rate NPVHDR= NPV of Higher Discount rate

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%14.6

135388.244533847.04

454705

204,294

4825499204,29

204,294

x

x

xIRR


CHAPTER FOURTEEN

INTERNATIONAL FINANCIAL INSTITUTIONS: IMF, THE WORLD BANK AND ITS GROUP

BY

ASADU IKECHUKWU, Post Graduate Student,

Department of Public Administration University of Nigeria, Nsukka

INTRODUCTIONTowards the end of the Second World War, in 1944,

representatives of United States of America, Great Britain, France, Russia and forty other countries met at Bretton Woods, New Hampshire, to lay foundation for the post-war international financial order. Such a new system it was hoped would prevent another world economic cataclysm like the Great depression that had destabilized Europe and the United States in the 1930’s and had contributed to the rise of Fascism and the war. Therefore, IMF and the World Bank borne out of Bretton Woods Conference were to prevent economic crises and rebuild economies shattered by the war. The World Bank was established to help the restoration of economies disrupted by the war by facilitating the investment of capital for productive purpose and to promote the long-ranged-balanced growth of international trade. On the other hand, the IMF is primarily a supervisory institution for coordinating the efforts of member countries to achieve greater cooperation in the formation of economic policies. It helps to promote exchange stability and orderly exchange relations among its member countries. Therefore, the IMF would be aimed at stabilizing global financial market and national currencies by providing the resources to establish secure monetary policy and exchange rate regimes, while the World Bank would rebuild Europe by facilitating investment in reconstruction and development.

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Although intended to benefit the global economy and contribute to world peace, the World Bank and IMF, as well as other International financial institutions have become primary target of the anti-globalization movement. In many countries, particularly developing ones, they are resented and are viewed as imposing Western-style capitalism on countries without regard to the socio-economic and political effects. It is in this context that we shall review the purpose and workings of some international financial institutions and the contributions made by them in promoting economic and social progress in developing countries.The Origin of World Bank and IMF

At the time of Bretton Woods, there was serious concern about the stability of global economic market. Those that attended the conference in New Hampshire wanted to establish a monetary system that would prevent the repetition of the chaos during the inter-war period (1918-1939), which was marked by high inflation, restrictions on international trade and payment, speculation in the foreign exchange market, sharp movement in central bank’s reserves, widely fluctuating exchange rate movement, gold shortages and sharp drops in economic activity, that is deflation (Blanco and Carrasco, 2007). In fact, the World-wide depression of the 1930’s had been deepened by the instability of international currency markets and the contraction of international trade so that stabilization of those markets and promotion of trade were considered crucial to avoid another crisis.

The Bretton Woods Conference, which was held in New Hampshire during the summer of 1944 arose from the US Department’s invitations issued to forty-four governments, which included developing countries such as Brazil and Mexico. The invitations stated that the purpose of the conference was to formulate definite proposal for an International Monetary Fund, and possibly a Bank for Reconstruction and Development (Blanco and Carrasco, 2007). Although the Conference’s objective mentioned “development” relatively little time was devoted to discussing the plight of developing countries. Rather, the participants, the United States and the United Kingdom in particular, focused on promoting currency stability, devising a

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system of international payments, and organizing the economic reconstruction of Europe. Most of the discussions related to figuring out how the IMF would operate, a subject that required much debate and analysis of technical issues relating to international monetary affairs.

The Bretton Woods Conference, therefore, gathered together some of the World’s most prominent minds in economic policy and some of its most powerful policy-makers to chart a new course. Representing the United States and serving as the chairman of the conference was Henry Morganthau, the US secretary of the Treasury. Morganthau was accompanied by Harry Dexter White, the Assistant secretary of the Treasury who had laid the ground work for the conference and originated the key ideas and policies to be discussed. Along with them was Dean Acheson, then the under secretary of the state who later became Harry Truman’s influential secretary of the state during the early years of the cold war, and a number of senators and congressman. The British delegation was led by the famed economist John Maynard Keynes. Other delegations of notables were from China, India, Russia and France . Some leading economists from smaller nations such as Louis Ramisky of Canada, Kyriakos Varvaressos of Greece, and Jonan Beyen of the Netherlands were also quite influential at the conference. The conference was declared open by Morgenthau who remarked “what we do here today will shape to a significant degree the nature of the World in which we are to live” (Van Dormeal, 1978)

The conference was controversial and each of the leading participants especially United States and Britain , trying to outwit each other. For instance, although both the U.S and the U.K agreed that some sort of mechanism would have to be created to supply countries experiencing balance-of-payments deficit with temporary loan (liquidity), the two countries disagreed over how resources would be provided. Keynes, representing a deficit country (the U.K) wanted to create a system that would provide deficit countries with plenty credit upon request. He therefore proposed an international clearing union (ICU), that would issue a new form

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of international money called “bancor” and monitor the lending from one country to another. Keynes wanted the ICU to issue about $26 billion worth of the new liquidity mechanism. The USA represented by Harry Dexter White objected to Keynes’ proposal because it would amount to a huge loan from the United States to the rest of the World. In contrast to the Keynes plan, the White’s plan reflected the agenda of creditor nation, or more specifically the only expected creditor nation, the United States. The USA had the highest level of gold reserves, its infrastructure was not damaged by the war, and neither was its economy. So it was probably going to be the main contributor to the liquidity mechanism. To limit the extent to which the United States would be liable for financing the post-war adjustments of other countries, White proposed an international organization called Stabilization Fund (SF). To address the liability concern, the stabilization fund plan unlike the international clearing union (ICU) proposal, required members to contribute their own currencies and gold to the fund. Rather than borrowing from other countries as proposed in the ICU plan, deficit countries would have to obtain the currencies they needed from a fund established and operated by the SF. Each country’s contribution would reflect its relative economic strength.

A series of compromise led to the creation of the International Monetary Fund, which closely resembled the White plan. Meanwhile, Keynes, leading the committee that drew up plans for the World Bank, dominated the drafting process and forged the institution largely along his preferred lines and implementing his key economic idea that government should spend their resources to stimulate their economies during depression. The conference’s financial Act was signed on July 22, 1944 although the institutions did not actually start operations until the following year.

INTERNATIONAL MONETARY FUND (IMF)Governance/ Structure of IMF

The IMF has a Board Governing that consists of a representative from each of the member states. Most of the state’s representatives are the finance ministers or heads of the

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central bank of the member states. The Board meets once in a year to discuss major issues affecting members and possibly reach a consensus on the issues. The day-to-day operations of IMF are managed by a 24-person Executive Board. The World’s major economic and political powers such as the United States of America, Great Britain, France, China, Russia and Saudi Arabia have permanent seats on the Executive Board, while the 16 other directors are elected for two year term by groups of countries divided on geographical basis: Caribbean, Africa, South Asia etc. The Executive Board is headed by the managing director who is elected for renewable five year terms. The IMF also has an International Monetary and Financial Committee of 24 representatives of the member countries that meet twice yearly to provide advice on the International Monetary and Financial system to staff of IMF. In all its operations, voting power in IMF is weighted based on the size of the economy and therefore the quota allocation of each country. Decisions are usually taken by consensus, however, the United States of America as the major shareholder in IMF, has the most influence in the institution’s policy-making. Additionally, IMF staff is sub-divided into a number of regional and functional departments. The functional departments include: Finance, Fiscal affair, IMF institute and administrative departments. Five regional departments cover operation for the whole World. On joining the IMF, each member country contributes a certain sum of money called a quota subscription as a sort of credit union deposit. Quotas serve various purposes: they form a pool of money that IMF can draw from to lend to members in times of financial difficulties, they form the basis of determining the Special Drawing Rights (SDR), they determine the voting power of the member. (IMF and World Bank < http://www .globalization 101.org)

Statutory Purpose of IMFThe Bretton Woods Conference set out six goals for the

IMF in its Articles of Agreement. Therefore, the purposes of the international monetary fund are:o To promote international monetary cooperation through a permanent institution that provides the machinery for

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http://www/


consultation and collaboration on international monetary problems.o To facilitate the expansion and balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.o To promote exchange stability to maintain orderly exchange of arrangements among members and to avoid competitive exchange depreciation.o To assist in the establishment of multilateral system of payment in respect of current transaction between members and in the elimination of foreign exchange restrictions which hamper the growth of World trade.o To give confidence to members by making the general resources of the fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustment in their balance of payments without resorting to measures destructive to national or international prosperity.o In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.

How IMF Achieves its GoalsThe IMF has three main activities: Surveillance, Financial assistance and Technical assistance.Surveillance

After the collapse of the Bretton Woods system based on fixed exchange rates, the IMF’s charter was amended to allow member countries to choose their own exchange rate system. However, under Article IV of the charter, members agreed to collaborate with the fund and

other members to assure orderly exchange arrangement and to promote a stable system of exchange rate. Moreover, Article IV gives the IMF broad powers of surveillance over exchange rate policies of members, and gives it the authority to adopt principles that will guide members with respect to those policies.

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Each year, the IMF sends economists to each of its member countries to analyze the country’s economic stability and any related policies such as labour policy, trade policy and social policy.

IMF surveillance takes on two forms. First, bilateral surveillance is carried out in part through annual consultations with member countries. This process is known as Article IV consultations. During these meetings with member countries’ officials, IMF staff members analyze the country’s economic development policies. Second, the IMF supplements its Article IV consultations with multilateral surveillance, which focuses on economic and policy spillover between countries. The IMF examines both regionally designed policies such as those of the European Monetary Union or the Central African Monetary and Economic Union and national policies that have regional consequences. After the team finishes its analysis, the IMF executives discuss the report and give it to the leaders of the countries in question as the official opinion of the IMF. A version of the report is also published and made available as an IMF Public Information Notice (PIN)

Although it is frequently said that IMF has no real authority to force members to comply with the IMF rules and policies, in truth the IMF commands considerable leverage over member countries. Technically, letter of intent, stand-by arrangements and other IMF loans are not contracts or any other type of legal obligation. Thus, a failure to abide by a letter of intent or stand-by arrangement is not a breach of contract that would enable the IMF or anybody else to sue the country. Still, there are many other ways the IMF can apply pressure on countries to comply. First, conditionality enables the IMF to withhold funds if a member country does not comply with the conditions of the loan. Second, member country knows that by violating the

rules and policies of the IMF they may be shut-out of the international capital markets. Third, the fund can prohibit a member country from using the General Resource Account. Fourth, the IMF can kick the country out of the organization as it

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did to Czechoslovakia in 1954. Finally, through collaboration and consultation with member countries, the IMF tries to persuade and cajole countries into complying with rules and policies (IMF and World Bank <http//www.globalisation101.org)Financial Assistance

The IMF lends money to member countries with balance of payments problem. A member with a payment problem can immediately draw from the IMF the 25% of its quota. A member country in greater difficulty may request for more money from the IMF and can borrow up to three times its quota provided the member through a “letter of intent” undertakes to initiate a series of fiscal and monetary reforms and use the borrowed money effectively. The loans are disbursed in phases to ensure that the receiving country moves forward with the reforms required of it. Loans are generally granted for relatively short periods of time. For just a few months or for as long as ten years, depending on the type of loan. The receiving country must pay back loans on time, on a rigorous schedule, because the loans are intended to be temporary assistance. The frequently used mechanisms by IMF to lend money are Standby Arrangement, Extended Arrangement and Structural Adjustment Mechanism. Standby Arrangement: These are designed to provide short-term balance of payments assistance for deficit of a temporary or cyclical nature. Such arrangements are typically for 12 to 18 months. Drawings are phased on a quarterly basis, with their release made conditional on meeting performance criteria and the completion of periodic programme reviews.

Extended Fund Facilities (EFF): This is designed to support medium-term programmes that generally run for three years. The EFF aims at overcoming balance of payments difficulties from macro-economic and structural problems.

Enhanced Structural Adjustment Facility (ESAF): This facility was established in 1987 and enlarged and extended in 1994. Designed for low-income member countries with protracted balance of payments problem. ESAF drawings are loans and not purchases of other member’s currencies. They are

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granted at low interest rates to poor countries. Other facilities of IMF include:

The Supplemented Reverse Facility: This grants short-term loans during crises, but adds a surcharge to discourage too much borrowing.

Contingent Credit Lines: These are granted during waves of crises that can spread from one country to another called “Contagious”.

Emergency Assistance: This is granted to countries facing military conflicts or other sudden disasters.

Special Drawing Rights (SDRs)As time passed, it became evident that Fund’s resources

for providing short-term accommodation to countries in monetary difficulties were not sufficient. To resolve the situation, the IMF, after much debate and long deliberations, created new drawing rights in 1969. Special Drawing Rights, sometimes called paper gold, are special account entries on IMF books designed to provide additional liquidity to support growing world commerce. Although SDRs are a form of money not convertible to gold, their gold value is guaranteed, which helps to ensure their acceptability.

Participant nations may utilize SDRs as a source of currency in a spot transaction, as a swap against currency or in a forward exchange operation. A nation with a balance of payment need may use its SDRs to obtain usable currency from another reaction which was designated by the IMF, such as repurchases. The IMF itself may transfer SDRs to a participant for various purposes including the transfer of

SDRs instead of currency to a member using the IMF’s resources.Technical Assistance

Another function of the IMF is to provide technical assistance. The IMF began to give countries technical assistance in 1954 when ex-colonies wanted help in setting up their own central banks and ministries of finance. The IMF provides

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assistance in the areas of fiscal policy, monetary policy, banking, institutional-building, financial legislation and statistics. These programmes are aimed at strengthening developing countries’ ability to reform and properly manage their macro-economic policies. The IMF dispatches its own experts and private consultants on training mission to educate government officials and also runs the IMF institute in Washington D. C. to provide courses for officials.

In addition to these activities, the IMF also has instituted various programmes to ensure the stability of financial system management on a global scale. For example, the IMF, along with the World Bank and other institutions, has drafted voluntary standards and codes for countries and financial institutions to adopt in order to increase accountability and transparency and to limit corruption. The IMF also has developed two systems of collection and dissemination of statistical information to help assess the economic viability of the domestic and international financial system. Criticism Against IMF

The activities of IMF have been criticized by anti-globalization agents particularly scholars from developing countries of Africa and other third world countries who perceive Bretton Woods Institutions as agents of liberal economy that has placed the developing nations on the disadvantaged position.

First, critics say that the conditions placed on loans offered by IMF are too intrusive and compromise the economic and political sovereignty of the receiving countries. For instance, Joseph Stiglitz a winner of the Nobel Prize in economics and former Chief economist of the World Bank writes that those conditions, often referred to as a whole “conditionality” are not just the typical requirements that anyone lending money might expect the borrower to fulfill in order to ensure the money will be paid back. The IMF has used conditionality to exact major changes called structural adjustment in borrowing countries’ fiscal and monetary policies even when such adjustment adds to the hardship of the citizens of the countries.

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Second, it has been argued that IMF imposes the policies of the Washington Consensus on countries without understanding the distinct characteristics of these countries that made those policies difficult to carryout or even counter-productive. According to Stiglitz the economists of the IMF had a “one-size-fit-all” policy based on their academic models with unrealistic assumption about how real-life economies work.

Third, critics say that the policies of IMF are imposed all at once rather than in an appropriate sequence. For example, the IMF demands countries it lends money to privatize government service rapidly. According to Stiglitz, this is a result of the IMF’s “market fundamentalism”, a blind faith in the free market that ignores the fact that the ground must be prepared for privatization. Private owners are most interested in operating a company efficiently, which often means letting go of staff. If a country’s unemployment programme and other social safety nets are not sufficiently developed, those fired staff will have no way to support their families.

Fourth, it is further argued that IMF is not open to criticism or public oversight when working on these policies, leading to arrogance and lack of connection to the reality on the ground in the affected countries. Some opponents of the IMF and globalization in general claim that the entire international financial system is corrupt and unfair. They argue that the IMF, World Bank and the World Trade Organisation (WTO) are anti-democratic institutions, responsible for the impoverishment of the developing world and benefiting only rich countries and Multinational Corporations (IMF and World Bank<http://www.globalisation101.org)

THE WORLD BANKThe World Bank group is a multinational financial

institution established at the end of the World War I I (1944), to help provide long term capital for the reconstruction and development of member countries. The group is important to Multinational Corporation because it provides much of the planning and financing for economic development projects involving billions of dollars for which private businesses can act

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as contractors and suppliers of goods and engineering related services.Purposes for setting up of the World Bank To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the re-conversion of productive facilities to peace-time needs and encouragement of the development or productive facilities and resources in less developed countries. To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources. To promote the long-range balanced growth of international trade and maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labour in their territories. To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, can be dealt with first. To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in bringing about a smooth transaction from a war-time to peace-time economy.The World Bank is the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD has two affiliates, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). The Bank, the IFC and MIGA are sometimes referred to as “World Bank Group” (Blanco and Carrasco, 2007).

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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

The IBRD was set up in 1945 along with the IMF to aid in rebuilding the world economy. It was owned by the governments of 151 countries and its capital is subscribed by those governments; it provides funds to borrowers by borrowing funds in the world capital markets, from the proceeds of loan repayments as well as retained earnings. At its funding, the bank’s major objective was to serve as an international financing facility to function in reconstruction and development. With Marshall Plan providing the impetus for European reconstruction, the Bank was able to turn its efforts toward the developing countries.

Generally, the IBRD lends money to government for the purpose of developing that country’s economic infrastructure such as roads and power generating facilities. Funds are directed towards developing countries at more advanced stages of economic and social growth. Also, funds are lent only to members of the IMF, usually when private capital is unavailable at reasonable terms. Loans generally have a grace period of five years and are repayable over a period of fifteen or fewer years.

The projects receiving IBRD assistance usually require importing heavy industrial equipment and this provides an export market for many US goods. Generally, bank loans are made to cover only import needs in foreign convertible currencies and must be repaid in those currencies at long-term rates.

The government assisted in formulating and implementing an effective and comprehensive strategy for the development of new industrial free zones and the expansion of existing ones; reducing unemployment, increasing foreign-exchange earnings and strengthening backward linkages with the domestic economy; alleviating scarcity in term financing; and improving the capacity of institutions involved in financing; and regulating and promoting free zones.

The World Bank lays special operational emphasis on environmental and women’s issues. Given that the Bank’s primary mission is to support the quality of life of people in

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developing member countries, it is easy to see why environmental and women’s issues are receiving increasing attention. On the environmental side, it is the Bank’s concern that its development funds are used by the recipient countries in an environmentally responsible way. Internal concerns, as well as pressure by external groups, are responsible for significant research and projects relating to the environment.

The women’s issues category, specifically known as Women in Development (WID) is part of a larger emphasis on human resources. The importance of improving human capital and improving the welfare of families is perceived as a key aspect of development. The WID initiative was established in 1988 and it is oriented to increasing women’s productivity and income. Bank lending for women’s issues is most pronounced in education, population, health and nutrition and agriculture. Since 2000, the World Bank has been devoted to helping implement the Millennium Development Goals (MDGs) drafted by the United Nations at the Millennium World Summit. The goals are. Eradicate extreme poverty and hunger. Achieve universal primary education. Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for developmentExamples of the World Bank funding programmes are: In Bangladesh, the World Bank provided a $59.8 million credit for medical services and nutritional supplement to children and their mother In Bosnia, the World Bank helped offer micro-credit loans typically less than $1,000 to individuals who wish to start small businesses and otherwise would not have access to bank credit. In Cote d’Ivoire, the World Bank has financed an emergency urban infrastructural project intended to improve access to and quality of facilities and services in Abidjan and other select cities.

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INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)The IDA was formed in 1960 as a part of the World Bank

Group to provide financial support to LDCs on a more liberal basis than could be offered by the IBRD. The IDA has 137 member countries, although all members of the IBRD are free to join the IDA. IDA’s funds come from subscriptions from its developed members and from the earnings of the IBRD. Credit terms usually are extended to 40 to 50 years with no interest. Repayment begins after a ten-year grace period and can be paid in the local currency, as long as it is convertible. Loans are made only to the poorest countries in the world, those with an annual per capita gross national product of $480 or less. More than 40 countries are eligible for IDA financing.

An example of an IDA project is a $8.3 million loan to Tanzania approved in 1989 to implement the first stage in the longer term process of rehabilitating the country’s agricultural research system. Co-financing is expected from several countries as well as other multilateral lending institutions.

Although the IDA’s resources are separate from the IBRD, it has no separate staff. Loans are made for similar projects as those carried out by IBRD, but at easier and more favourable credit terms.

As mentioned earlier, World Bank/IDA assistance historically has been for developing infrastructure. The present emphasis seems to be on helping the masses of poor people in the developing countries become more productive and take an active part in the development process. Greater emphasis is being placed on improving urban living conditions and increasing productivity of small industries. To help developing countries, the IDA has established a framework that emphasizes six core principles; The IDA seeks to promote growth through macro-economic

policy especially in rural and private sector. The IDA concentrates on social issues such as gender

equality and public health. The IDA works to improve governance by assisting in public

management and combating corruption.

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The IDA strives for sustainable development projects that help protect the environment.

The IDA fosters recovery efforts in post conflict countries. The IDA promotes economic integration through regional

trade.

INTERNATIONAL FINANCE CORPORATIONThe IFC was established in 1956. There are 133 countries

that are members of the IFC and it is legally and financially separate from the IBRD, although IBRD provides some administrative and other services to the IFC. The IFC’s main responsibilities are (i) To provide risk capital in the form of equity and long-term loans for productive private enterprises in association with private investors and management; (ii) To encourage the development of local capital markets by carrying out standby and underwriting arrangements; and (iii) To stimulate the international flow of capital by providing financial and technical assistance to private firms in the developing member countries and are usually for a period of seven to twelve years.

The key feature of the IFC is that its loans are made to private enterprises and its investments are made in conjunction with private business. In addition to funds contributed by IFC, funds are also contributed to the same projects by local and foreign investors.

IFC investments are for the establishment of new enterprises as well as for the expansion and modernization of existing ones. They cover a wide range of project such as steel, textile production, mining, manufacturing, machinery production, food processing, tourism and local development finance companies. Some projects are locally owned, whereas others are joint ventures between investors in developing and developed countries. In a few cases, joint ventures are formed between investors of two or more developing countries. The IFC has also been instrumental in helping to develop emerging capital markets.

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THE MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

The MIGA was established in 1988 to encourage equity investment and other direct investment flows to developing countries by offering investors a variety of different services. It offers guarantees against non-commercial risks; advises developing member governments on the design and implementation of policies, sponsors a dialogue between the international business community and host governments on investment issues. Since its inception in 1988, MIGA has insured more than $20.9 billion of foreign direct investment in over 100 developing countries. The result of all of MIGA’s activities is that with the potential reduction of risks through insurance, developing countries are encouraged to adopt policies that promote investment. In Azerbaijan, MIGA provided insurance to protect Turkish investors in a project to expand and modernize a flour mill to produce and distribute flour sold in Azerbaijan and Georgia.

What the World Bank does?The World Bank is the world’s largest source of

development assistance, providing nearly $30 billion in loans, annually, to its client countries. The Bank uses its financial resources, its highly trained staff and its extensive knowledge base to individually help each developing country onto a path of stable, sustainable and equitable growth. The main focus is on helping the poorest people and the poorest countries but for all its clients, the Bank emphasizes the need for: investing in people , particularly through basic health and education, protecting the environment; supporting and encouraging private business development; strengthening the ability of the governments to deliver quality services efficiently and transparently; promoting reforms to create a stable macro-economic environment conducive to investment and long-term planning; focusing on social development, inclusion, governance and institution building as key elements of poverty reduction. The Bank is also helping countries to strengthen and sustain the fundamental conditions that help to attract and retain private investment. With

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Bank support (both lending and advice) governments are reforming their overall economies and strengthening banking systems. They are investing in human resources, infrastructure and environmental protection which enhance the attractiveness and productivity of private investment. Through World Bank guarantees, MIGA’s political risk insurance and in partnership with IFC’s equity investments, investors are minimizing their risks and finding the comfort to invest in developing countries and countries undergoing transition to market-based economies.

How World Bank is FinancedThe World Bank raises money for its development

programmes by tapping the world’s capital markets and in the case of the IDA, through contributions from wealthier member governments. IBRD, which accounts for about three-fourths of the Bank’s annual lending, raises almost all its money in financial markets. One of the world’s most prudent and conservatively managed financial institution, the IBRD sells AAA-rated bonds and other debt securities to pension funds, insurance companies, corporations, other banks and individuals around the globe. IBRD charges interest from its borrowers at rates, which reflect its cost of borrowing. Loans must be repaid in 15 to 20 years; there is a three to five year grace period before repayment of principal begins. IDA helps to promote growth and reduce poverty in the same ways as does the IBRD but using interest free loans (which are known as IDA “credits|”), technical assistance and policy advice. IDA credits account for about one-fourth of all Bank lendings. Borrowers pay a fee of less than 1 per cent of the loan to cover administrative costs. Repayment is required in 35 to 40 years with a 10 years grace period. Nearly 40 countries contribute to IDA ‘s funding, which is replenished every three years. IDA‘s funding is managed in the same prudent, conservative and cautious way as is the IBRD’s. Like the IBRD, there has never been default on an IDA credit.

How the Bank is governedThe World Bank is owned by more than 180 member

countries whose views and interests are represented by a board of governors and a Washington based board of directors.

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Member countries are shareholders who carry ultimate decision-making power in the World Bank. Each member nation appoints a governor and an alternate governor to carry out these responsibilities. The governors, who are usually officials such as ministers of finance or planning, meet at the Bank’s annual meetings. They decide on key Bank policy issues, admit or suspend country members, decide on changes in the authorized capital stock, determine the distribution of the IBRD’s net income and endorse financial statements and budgets.

ConclusionInternational financial institutions originally emerged

from the Bretton Woods Conference held in New Hampshire in 1944. The outcome of the conference gave birth to International Monetary Fund (IMF) and International Bank for Reconstruction and Development, otherwise known as World Bank. In fact, the World Bank consists of the International Bank for Reconstruction and Development and the International Development Association (IDA). The IBRD has two affiliates, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). The Bank, the IFC and the MIGA are sometimes referred to as the World Bank Group. The World Bank was established to help in the restoration of economies disrupted by war by facilitating the investment of capital for productive purposes and to promote the long-range balanced growth of international trade. On the other hand, the IMF is primarily a supervisory institution for coordinating the efforts of member countries to achieve greater cooperation in the formulation of economic policies. It helps to promote exchange stability and orderly exchange relations among its members. However, the Bretton Woods Institutions have come under attack by anti-globalisation scholars. International financial institutions such as IMF, IBRD, IFC, IDA and MIGA have been criticized as being instruments in the hands of advanced Western Nations for the exploitation and appropriation of the economy of the less developed nations.

REFERENCES

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Blanco, S. and Carrasco, E. (2007). The Functions of the IMF and World Bank, E-Book

IMF and World Bank <http/www.globalisation 1001.orgInternational Monetary Fund Organisation chart, 1 April 20, 2007IMF Article of agreement Data and Statistics : IMF LendingJohn, W. (2003) “A Short History of the Washington Consensus, and

Suggestion for what to do Next” Reform Agenda September, 2003.

Kanneth, J. T. (1998). Financial Market Institution, John WillyMadhu, V. (2001). Multinational Financial Management , Excel BookStiglitz, J. (2002). “Globalisation and its Discontent”Van Dornael, A, (1978) “Bretton Woods: Birth of Monetary System

World Bank Organisation Chart <http://www.worldbank.com

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CHAPTER FIFTEEN

INCOME DETERMINATION AND MEASUREMENT

BY

BEN NNADI Lecturer,

Department of AccountingInstitute of Management and Technology (IMT) Enugu

INTRODUCTION One of the cardinal objectives of accounting is the

determination and measurement of Income and Capital.Capital generates income. It is this ability to generate income

that gives value to capital. Accounting principles and conventions have been developed to help in determination and measurement of income and capital of business entities at different period of business cycle.

Income DefinedIncome is increases in economic benefits during the accounting

period in the form of inflows or enhancements of assets or decreases in liabilities that result in increase in equity, other than those relating to contributions from equity participants.

Income is normally viewed by accountant to be the net increase in value of business as between two dates provided there were no fund injections or withdrawals. By these concepts income can be defined equally as the maximum amount which one could afford to consume within a time frame without impairing the ability of a business entity from further generating income or value in future. A net increase would therefore,indicate income while a decrease indicates a loss. It has been a rule in accounting to continue to measure the increase or decrease of business entity so as to ascertain the survivability of the same entity as a going concern. To ascertain the income, values must be placed on the remaining assets and liabilities; hence the values placed on the surviving assets affect the amount of profit disclosed within a period.

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The higher the values, placed on surviving assets, the higher will tend to be the profit disclosed in the current period, while the lower such values, the lower also would be the profit disclosed.

Due care is normally adopted to avoid over-statement or under- statement of profit. Actually, the going concern assumption as normally viewed by accountants would portray an entity to be healthier position.

The going concern assumptions is very important assumption in accounting because it influences the decision as to how much value one could afford to postpone to future periods, and consequently, the value of income disclosed with the current period.General Nature of Income

At the heart of business activities and financial recordings lies the income. The central aim of business entity is the income generation.

The volume of income so generated gives the owners of business entities the incentive to continue in the same business organization. The volume of income generation, therefore, determines the viability of the same business entity and its ability to retain and attract more investors. The function of income determination and its compassion to another organization in the same line of business is that for accountants and accounting professions.

However, due to different views and concepts by different professions and persons, income determination and continued measurement has not been an easy task. There have been different views on what the income is as being used in law, economics and accounting, for instance. Income of course does not take any form of asset acquired such as cash and cannot always be separately identified and proved. To an accountant income is the gain in wealth. It is the net as compared to inflow and outflow of an entity within a given period of time. In an accounting point of view it is that which can be eased off without encroaching on the initial or statues quo of a business organization. Wealth, of course, is the net stock of assets owned by an organization or firm. By definition wealth is the monetary measure of the firm’s own economic resources after deducting the financial obligations to outsiders (excluding the owners). Economic resources comprise all the assets having market price, and this means that they are

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capable of rendering future services ie, having a productive potential and /or that they can be converted to cash at will.

The fundamental problems of income determination in a given period of time are reduced into two approaches namely:a) How to measure the stock of assets and liabilities at two dates i.e., the valuation of wealth problemb) How to divide the wealth of the later date into its two notional parts – the base, initial capital component and the incremental income component. This is the capital maintenance problem.An entity’s net worth at the end of a period differs from its worth at the beginning of the period because it trades with its factors of production and secondly there could be changes in factors external to the firm which affect the monetary values of the assets (eg changes in prices, the purchasing power of Naira, expectations of future trading conditions and rate of interest).

To solve the valuation of wealth problems information required include:-1. Physical quantities of assets and liabilities2. The measurement quality of Naira being used to express these quantities in monetary terms.3. The basis for valuing individual assets and liabilities so as to express them in monetary terms.Capital maintenance problem involves an examination of capital maintenance benchmarks and the criteria which can be used to separate the increment in net assets from the base level.

Valuation of WealthQuantities of Assets and Liabilities

These quantities can be got by examining the assets and liabilities concisely and determining their separate existence through physical inventory of items/asset and liabilities and cross checking the records of the preceding transaction with the management decisions.

Measurement Properties of Naira

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The medium of exchanging property and the general purchasing power of Naira used in financial statement impact on the value of wealth.

Asset Valuation has several values simultaneously and each one can be used as a basis for account reporting purposes.Wealth and income determination or measurement systems

A number of wealth and income determination and measurement systems can be got by combining the measurement properties of naira with the asset valuation base.

However, a key to understanding the manner in which accountants value assets is to classify the assets into two namely:- fixed and current assets. Fixed assets are long term assets whose usefulness in the operation of a business entity is to extend beyond one accounting period. They are not intended for resale, and so their economic value depends upon the future earnings accruing from its use. By contrast, current assets are those assets intended to be exhausted within a given accounting year or period. They are needed for meeting current liabilities within the same accounting year or period.Capital Maintenance Concepts The concept of capital maintenance is critical to distinguishing between a return of and a return on capital invested, and thus, to the determination of income.There are two main concepts of capital maintenance namely:- financial maintenance of capital and physical capital maintenance.

Financial capital maintenance occurs when the financial (money) amount of an entity’s net assets at the end of the period exceed financial amount of net assets at the beginning of the period, excluding transactions with owner, this view is transaction based.

Physical capital maintenance implies that a return on capital income occurs when the physical productivity capacity of the enterprise at the end of the period exceeds its physical productivity capacity at the beginning of the period, excluding transaction with owners. The above means that income is recognized only after providing for the physical replacement of the operating assets. Physical productive capacity at a point in time is equal to the current value of the net assets employed to generate earnings.

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The difference between physical capital maintenance and financial capital maintenance lies in the treatment of holding gains and losses. It is the view of physical capital maintenance that holding gains and losses are returns on capital invested and therefore would not be included in income. It implies that holding gains and losses would be treated as direct adjustment to equity. On the other hand, financial capital maintenance view holds that gains and losses should be recognized and included in income.Current Value Accounting:

As previously listed, physical capital maintenance requires that all assets and liabilities be stated at their current values. The usual approach in current value measurement includes:1. entry price or replacement cost2. exit value or selling price, and 3. discounted present value of expected future cash flows.

Entry Price Or Replacement CostUnder this approach, assets are state at the cost to replace them with similar assets in the same separating condition. To maintain the business organization’s physical productive capacity, the entity must generate enough cash flows to provide for the physical replacement of the assets.

Revenue so generated would be matched against the current cost of replacing those assets. The surplus income could then be distributed to owners without impairing the physical capacity to continue operating into the future. Edwards and Bells hold that current prices allow the assessment of managerial decisions to hold assets by segregating current value income (holding gains and losses) from current operating income.This helps in the proper assessment of the long run profitability of the enterprise. Replacement cost of course, provides a measure of the cost to replace the current operating capacity and, hence, a means of evacuating hold much the firm can distribute to shareholders and still maintain its productive capacity.

The drawback to this approach include that even though an entity may be able to determine the replacement cost for inventories and

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certain other assets; however, for many assets such as plants, there may not be a ready market from which to acquire replacement assets. In this case the assets are only appraised to arrive at an approximate value of replacement.

An alternative of using approximate values is to use the specific purchasing power index. A specific index could be designed to measure what happened to prices of equipment in some sectors of the economy such as mining industries.

Such agitations include that of Sterling who argued that the entry value of un-owned assets is relevant, only when the assets purchased are contemplated. For owned assets, entry value is upon sale of those assets and to their purchase since they are already owned. Moreover, the current replacement cost of an entity’s asset does not measure the capacity, on the basis of present holdings, to make decisions to buy, hold, or sell in the market place. Exit value selling price:

Another approach to determining current value is the exit value or selling price. This valuation approach requires each asset at its current market price, ruling at closing. This means that all assets – inventory, plant, equipment are valued using the ruling market price. Such determination should assume that the assets would be sold in an orderly manner, rather than forced liquidation. The important event for earning recognition purposes is the point of purchase rather the point of sale.

Chambers and Sterling contend that exit prices have decision relevance. It follows that managers decide in each accounting period whether to hold, sell, or replace the assets. Exit price, could provide the users better information to evaluate liquidity and thus the ability of the entity to adapt to changes in economic stimuli. It equally provides a guide for evaluating management stewardship function.

However, determining exit values also poses measurement problems. There is the fundamental problems of determining a selling price for those assets, such as property, plant, and equipment; for which there is no ready market. Secondly, the notion that exit price should be based on prices arising from sales in the normal course of business, but may be impracticable, if not impossible, for the physical plants, since it would not be disposed of in the normal course of business.

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It could be argued that replacement costs are more relevant measures for evaluating the current values of fixed assets, whereas exit values are better measures of evaluating the current values of inventory items. Since business entity aim to use rather than sell fixed assets, their value in use is what it could cost to replace them. On the other hand, inventories are purchased for resale, so their value is directly related to its selling price to customers.

Conclusively, exit value or selling price is inconsistent with the concept of physical capital maintenance. Sales generate the cash inflows which must cover the expected cost of replacing operating assets before a return on capital can be distributed to owners. Exit value is a type of opportunity cost. It measures the sacrifice of holding our asset rather than the expected cost of replacing it. Also physical capital maintenance is based on the concept of continuity, not liquidation.Discounted Present ValueThe third approach to the measurement of net asset value is discounted cash flow. This approach assumes that the present value of the future cash flows expected to be received from asset (or disbursed for liability) is the balance sheet. Under this viewed income is equal to the difference between the present value of the net assets at the end of the period and their present value at the beginning of the period, excluding the effects of investments by owners and distributions to owners. This measurement process is similar to the economic concepts of income because discounted value is perhaps the closest approximation of the actual value of the assets in use, and hence may be seen as more appropriate measure of entity’s well-offness.

A good point in favour of the discounted cash flow is that all assets are presumed to be purchased for the further services of potential service rendered to a business entity. Also there is the pre-assumption that the initial purchase price was paid because of the belief that the assets would generate enough revenue to make the acquisition worthwhile. It has to be got clear that the change in expected future cash flows and thus present value from one period to the next is decision relevant. Also, it is assumed that the present value at the end of the period would approximate what the organization would be willing to invest to buy a similar asset and thereby maintain its physical operating

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capacity. This means that the resulting income measurement is consistent with the physical capital maintenance concept of income.

There are about three major measurement problems associated with the concept of discounted cash flow. Firstly, the concept relies on estimation from the future cash flows within time periods. It follows that both the amount of cash flows to be generated in the future and timing of the cash flows must be determined.

The second problem is the choice of appropriate discounted rate. This is because the Naira worth today is not same in future. Theoretically, the discounted rate is the internal rate of return on the asset. This rate can only be approximated hence knowledge of the exact rate of return would require exact knowledge of the amounts and timing of future cash flows expected when the asset was purchased.

The third problem arose because the assets of an entity are interrelated. Revenue are therefore, generated by the combined use of the firms resources. It follows then that even if the firm’s future cash flows and the appropriate discount rate could be precisely determined, it would not be practicable to determine exactly how much each asset contributed to the total volume of cash.Income Recognition

In the bid to overcome the subjective bottlenecks associated with using the economic concept of income and other measurement approaches, which are consistent with concept of physical capital maintenance, accountants have traditionally assured a position that a transactions approach should be used to account for assets, liabilities, revenues, and expenses. This assumption is based on the fact that elements of financial statements should be reported when there is evidence of an outside exchange for an arm’s length transaction. Transaction based accounting actually requires that reported income be the result of dealings with entities external to the reporting unit and gives rise to the realization principles. The realization principles assume that income should be recognized when the earnings process is complete or virtually complete, and an exchange transaction has taken place. The exchange transaction is the basis of accountability and determines both the timing of revenue recognition and the amount of revenue to be recorded.

The emerging financial statements show the financial capital or money invested and the return on investment to the shareholders. It

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follows that transaction based accounting is consistent with the financial capital maintenance concept.

Transaction-based accounting contrasts with economic concept of income in that accounting income is determined by measuring only the recorded net asset values exclusive of capital and dividend transactions, during a period. The accounting concept of income does not attempt to place an expected value on the firm or to report on the exchanges in the expected value of assets and liabilities.

Although empirical research has indicated that accounting income is related to market based measures of income such as stock returns, the transaction based approach to income determination has been criticized for not reporting all relevant information about a given business organization. Edwards and Bell suggest that; with only slighter changes in present accounting procedure, four types of income can be isolated. These income measures are defined as:1. Current operating profit – the excess of sales revenues over the current cost of inputs used in production and sold;2. Realizable cost saving – the increases in the prices of assets held during this period;3. Realization cost saving – the different between historical costs and the current purchase price of goods sold; and 4. Realizable capital gain – the excess of sales proceeds over historical costs on the disposal of long term assets. Edwards and Bell contended that these measures are better indications of well-offness and provides users more information to analyze enterprise results.6

In elaborating his findings of Accounting Research study No 3 Sprouse has the following conclusion to make; ‘Because ownership interest are constantly changing hands, we must strive for timely recognition of measurable change, and in so doing we must identify the nature of changes. As currently reported, income may well be composed of three elements, each of which has considerably different economic significance; Is the gross margin truly the result of operations – the difference between current selling prices of products and current cost of producing products, both measured in today’s naira? How much of the company’s income is not the result of its operations but is the result of changes in the value of a significant asset, for example, a large supply of raw material, perhaps a warehouse full of sugar? Such changes are apt

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to be fortuitous and unpredictable and therefore, need to be segregated, if financial statements are to be interpreted meaningfully and if rational investment decisions are to be based on income measurement. And how much of what is now reported as income is not income at all but is merely the spurious result of using a current unit of measurement for revenues and an desolate unit measurement for cost – particularly depreciation?

The different views held by both Edward and Bell and Accounting Research study No 3 is the reporting of unrealized gains or losses in net asset of an organization during the period. The gains and losses is the hold gains and losses; the proponents believes that such reporting of gains and losses would enlarge the information content of published financial statements.

The effect of non reporting of such gains and losses can be illustrated for clarity. Supposing Ikechukwu and Obiajulu purchased a parcel of land in Enugu Layout at the cost of N100,000 each in January 2002. Assuming the land was evaluated in January 2014 to be N200,000 each in the same layout. If Obiajulu sell his own parcel of land after the evaluation while Ikechukwu holds his, Obiajulu would realize a gain N100,000 whereas Ikechukwu cannot record his of N100,000 hence it has not been realized by an arm’s length transaction. The difference continues to exist even though the substance of both events is actually the same. This is an illustration of the effect of the transactions approach to income determinationMeasurement

The reporting characteristics of business events assume that items of revenue can be measured in Naira terms. Measurement entails assigning values or numbers to an object of events according to rules. If brings about comparison in order to distinguish an event or object from another.In business activities problem arise due to instability of unit of measure which is naira, dollar or pounds. A football pitch when measured with tape remains the same years to come. However, in business such factors as inflation, depreciation and obsolesce brings about changes and different values attached to event, transaction and item of value.Revenue Recognition and Realization

In transaction based accounting system, recognition is the formal process of recording a transaction or event. Realization on the

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other hand is the process of converting non-cash assets to cash or claims to cash. Transactions based accounting recognizes and reports revenues that are realized or realizable. Accounting recognition relies upon the determination of when realization has occurred.

The use of the realization convention usually results in revenue being recognized at the point of sales; however the timing of event recognition or business event may be advanced or delayed by the specific type of transaction concerned.

When there is a high level of certainty surrounding realization, revenue recognition may precede the point of sales. On the other hand at high level of uncertainty associated with realization, the greater is the likelihood of delay in the recognition of revenue.We can now consider different stages and levels of revenue recognition.Revenue Recognition during the production processRevenue Recognition at the completion productionRevenue Recognition as services are performedRevenue Recognition as cash is receivedRevenue Recognition on the occurrence of some eventsIncome Recipients

It is relevant at this point to ask: who are the recipients of income. This question requires determining who these recipients of income are and the proper/procedure for recording each recipient.

Heydriksen has suggested that net income may be presented under the following concepts. Value added; enterprise net income, net income to investors, net income to stockholders and net income to residual equity holders”.The determination of net income figure to be reported in each case turns on the next question on whether deductions from revenue are to be viewed as expense or as income distributions.

Value Added Concept of IncomeThe value added concepts of income can be defined as the net

amount of the increase in the market value of product attributable to each enterprise. It indicates the total amount of income that can be divided among the various parties involved.

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Enterprise Net IncomeModern corporate body has two activities - operations and

financing.Enterprise net income is determined by the operations aspect only and all financing activities and other payments necessitated by operations are regarded as return on investments rather than as expenses.

Income tax paid by an organization is based on enterprise net income and it is viewed as distribution of income to government. Thus shareholders, bond holders and indeed government are seen as the recipients of income under this view, revenue less all expenses, exclusive of interest and income taxes provides the net income figure.

Net Income to Investors The concept of net income to investor is also viewed, and it is

consistent with the entity theory. It is based on accounting equation which states that assets equal equities.

Net Income to ShareholdersThe business owners are usually viewed as the proper recipients

of income. The net income to shareholders concept is based on the proprietary view of the accounting equation that states that assets minus liabilities equals proprietorship.

Accounting Theory and Policy The concept of “variable income” attempts to eliminate the

effect of a change in the expectation from our measure of economic income.

Constituents of Variable Business Income 1. The change in net tangible assets valued at cost.2. As a deduction, the expected loss of market value of assets through use or obsolescence

3. Internally generated differences between the view of both tangible and intangible assets at the accounting dates and their cost at date of acquisition to the extent that these differences have not already been included in 2 above.

The emergencies of income reporting as a primary source for investor’s decision making has been well documented. The study group in Business Income documented the need for income concept as Soutdy and Alexander note the following uses of income in this work:

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1. Income is used as the bases of one of the principled forms of taxation.2. Income is used in public reports as a measure of the success of a corporation’s operation.3. Income is used as a criterion for the determination of the availability of dividends.4. Income is used by rate-regulating authority for investigating whether those rate are fare and reasonable.Income is used as a guide to trustee charged with disbursing income to life tenant while preserving the principal for a reminder man. Income is used as a guide to management of an enterprise in the conduct of its affairs.

In summary, income is the result of two factors:1. The sale of organizations product realize income and2. Increases or decreases in the retained net assets, realizable income, that is holding gains.

A divergent view on income concept is that different groups can be viewed as income recipients. The expenses deducted from revenue in reporting income vary with the different assumptions as to the income recipients. It goes to show that there is no one correct view of income recipients.

Revenue Recognition during the Production Process: Production of some products last for more than one accounting

period. The allocation of revenue from one to various accounting periods is considered essential for proper reporting. In such case however, a method known as percentage of completion is employed.

The basis of this allocation is on total cost incurred during the production process. This method requires the ability to determine the selling entry price of project or product and the ability to determine the total cost on completion. It is used in long term contracts such as road construction, ship building etc. This method determines and recognizes the income as it is earned so that the expenses associated with the project can be settled.

Revenue Recognized and Completion of ProductionSome products have fixed price. This method assumes that

when events critical to earning process has occurred revenue can be

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recognized. Some farm products meet this requirement. Also gold mines owned by Government face this category of project hence the Government acquire the gold produced at a fixed price at run off mines.

Revenue Recognized as Services are performed: In this method of revenue recognition three steps are required

namely:1. Order taking2. Performance of services3. Collection of cash

These steps could be performed in one accounting period or spaced through different accounting periods. Revenue realization is based on the performance of services and on such degree of performance. The signing of the contract forms the initial performance of services while project execution preceede the cash collection of the services rendered

Revenue Recognized as Cash is receivedIn some circumstances revenue collection, proves very difficult.

Based on such doubtful situation revenue recognition is delayed till the cash is received.

Revenue Recognized on the Occurrence of Some Events:In some business activities where contract becomes ratified,

certain levels of contract execution revenue recognition could be delayed until certain levels of business performance is reached.

REFERENCES

Richard, G Schroeder and Myrtle W. Clark: Accounting Theory Text & Reading 6th Edition

Glautier, M.W.E and Under down (2001): Accounting Theory and Practice 7th

Edition; England:– Peason Education Ltd

Anao, A.B. (2004) Introduction to Financial Accounting 5 th Edition – Longman Nig. Plc. See Income measurement at 110 – 130

Keith Alfredson, Ken Leo, Ruth Pick, Paul Pacter, Jennie Rarford (2005): Applying International Accounting Standard. Accounting Standard; Australia – John Wiley & Sons, Ltd.

Barton A. D. (1978) The Anatomy of Accounting UK Academic Press Pty Ltd.

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CHAPTER SIXTEEN

EXCHANGE RATE POLICY IN NIGERIA

BY

OGOCHUKWU CHINELO OKANYA Principal Lecturer,


What is Exchange Rate?No country is completely self sufficient. In other words, no country has the capacity to produce all that it requires and to consume all that it produces. Consequently, trade among nations is inevitable. In trading with one another, countries have to address issues like how much of a given currency can be exchanged for a certain goods. For example, if I want to trade in fabrics from China, how do we then determine how much to pay for the curtains? In what currency will the curtains be paid for? Do I carry the Nigerian Naira and use this to pay for the goods in China? These and so many other similar questions can best be addressed by the foreign exchange policy of a nation. It is important to mention that there are currencies that are regarded as convertible currencies. These are the currencies that are readily acceptable in international transactions. Currencies like the US Dollar, the Euro, and British Pound are convertible currencies and no matter what part of the world you are in, with any of the convertible currencies, one can convert to the local currency and conduct business with relative ease. All nations have an active exchange rate policy. An exchange rate is simply the price of a country’s currency expressed in terms of another currency. It is the amount of a foreign currency that can be exchanged for a local currency. For example, if a US dollar exchanges at the rate of one dollar to twenty Naira, we can state this functionally as US$1 = N20.00.From the above equation, the US dollar is the base currency while the Nigerian Naira is called the counter currency. However, if I were an American tourist planning to visit Nigeria and I wanted to

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exchange my dollars for Naira, then the exchange rate would be expressed thus N1= $0.05. The base currency is now the Naira while the US dollar becomes the counter currency.A country’s foreign exchange policy is important and this explains why countries all over the world spend a lot of time and resources in addressing the determination and management of its foreign exchange. We shall in a subsequent section explain why it is necessary for countries to have a proper policy governing its foreign exchange rate. Foreign Exchange Management in Nigeria There are essentially two main types of exchange rate policy that a country may wish to adopt. The first category is the fixed exchange rate regime, where the authorities decide to peg the official rate of exchange for the nation’s currency. The second type is the flexible exchange rate regime, which allows the rate of exchange to be determined by the market forces of demand and supply. Nigeria has used both the fixed and flexible exchange rate regimes. Before the establishment of the Central Bank of Nigeria (CBN), Nigeria’s foreign exchange was usually earned through individual efforts mostly from the production and sales of agricultural produce. When the need arose, commercial banks were engaged to transact business involving foreign exchange and essentially act as the agents for the exporters. This was the acceptable practice until the Exchange Control Act of 1962 was enacted. This Act empowered the Central Bank to become the official body responsible for the management and control of all foreign exchange matters (Omojimite and Akpokodje, 2010). Bearing in mind that the CBN now had the responsibility of gaining both internal and external balance in the economy, there have since 1962 been about fifteen different exchange reform episodes. It is important to mention that each foreign exchange reform has had its own particular effect on the economy. From independence, Nigeria started out with a fixed exchange rate system. The adoption of a fixed exchange rate system meant the adoption of administrative mechanisms to determine the exchange rate. Initially the Naira was pegged to the British Pound.. When the British Pound got devalued in 1967, the Nigerian currency assumed a higher rate than the Pound. Eventually, the Naira would be pegged to the dollar (Ogiogio, 1996). However it became necessary to abort pegging the

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Naira to a single currency whether the pound or the dollar and so starting from 1974, the Nigerian government experimented with tying the value of the Naira to more than one currency depending largely on which of the two main currencies (pound or dollar) at the time had a higher exchange rate at the foreign exchange market. Later, the value of the Naira was pegged to a basket of currencies. The basket of currencies were those of Nigeria’s major trading partners and so starting from the late 1970s, the US dollar, British pound, French franc, Japanese yen, Swiss franc and the Dutch guilder were used to determine and subsequently fix a suitable exchange rate for the naira (Ogiogio, 1996). This method of using a basket of currencies led to some stability. The problem which became evident as the 1970s gave way to the 1980s was that the Naira had become overvalued. Falling oil prices at the international market meant that less revenue accrued to Nigeria from the sales of crude oil, which by this time had become Nigeria’s main export commodity. The drop in revenue was however, not matched by the demand for foreign exchange, which continued to increase as the years went by. It soon became apparent that continuing to overvalue the naira through a process of subsidization which the fixed exchange rate system implied no longer seemed feasible. To continue to tinker and fix the exchange rate meant that the Nigerian government also had to keep tampering with trade controls and so it was inevitable that it would have to ditch the fixed system in favour of a flexible exchange rate system.Indeed there have been several authors (Frankel and Rose (2002); McKinnon (1963)), who have proffered that fixed exchange systems are ideal and they suggest that economic growth and stability are ensured if fixity is used to determine the exchange rate. In Nigeria’s case, it became quite clear that fixity could no longer be sustained by 1986. 1986 marked the beginning of change in Nigeria. The economic downturn that followed the oil glut of the early 1980s and the Structural Adjustment Programme (SAP), meant that the entire economy was in need of an overhaul. Widespread financial sector reforms led to deregulation in several key areas and it was therefore not surprising that as the first wave of economic reforms became operational in 1986, the foreign exchange policy would also change. Consequently, a market regulated regime was preferred in the place of the direct administrative control exchange rate policy.

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A principal goal behind the adoption of a flexible exchange rate system was to ensure macroeconomic stability. Rather than the previous method where administrative controls were used to determine exchange rate, the flexible system allowed market forces to influence the rate at which the naira was exchanged for other currencies. Increases in demand would lead to weaken the naira relative to other currencies and vice versa, should there be a decrease in the demand for foreign exchange.Several methods have been used over the years. The first method adopted in 1986 was the use of a dual exchange rate regime that included both the first and second tier foreign exchange market SFEM. SFEM gave way to FEM foreign exchange market in 1987. The change from a fixed system did not immediately yield a less tumultuous economy as had been hoped. There continued to be immense pressure on the naira as the exchange rate remained volatile, fluctuating constantly. The Autonomous Foreign Exchange Market (AFEM) was also tried temporarily and paved the way in 1999 for the Inter- Bank Foreign Exchange Market (IFEM), which was a daily trading that involved a two-way quote. Starting from 1995 when it appeared the naira was headed to a freefall, a policy of guided regulation was introduced. More recently, the Central Bank has alternated between the Dutch Auction System (DAS) and the wholesale Dutch Auction System (WDAS) as the main method for allocating foreign exchange in the foreign exchange market. Whichever method is adopted, a primary aim is the stability of the naira.Demand and Supply of Foreign ExchangeJust like with other commodities, there is a thriving market for foreign exchange and it is one market where the forces of demand and supply determine the rate of exchange between currencies. In Nigeria, foreign exchange is gotten from oil and non- oil exports, transfer payments and expenses from tourists. The demand for foreign exchange is principally to pay for imports, Nigerians wishing to travel abroad and in the servicing of external debt and other obligations and payments that all nations have to make. Anyafo (1996) believes that activities within the foreign exchange market have far-reaching effects on the financial health of an economy. Major factors affecting the demand and supply of foreign exchange include:

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InflationInflation refers to a persistent increase in the general price levels. Inflationary trends tend to affect the ability of an economy to function properly. Consequently, inflation results in distortions which tend to weaken the domestic currency. For instance, when the Zimbabwean economy was plagued by incredulous levels of inflation, its foreign exchange rate was most unfavourable to the local currency.

Balance of Payments (BOP)Every country strives to have a positive balance of payment, where its payments for imports are much lower than its receipts from sales of its exports. A surplus in the current and capital accounts will automatically strengthen the domestic currency. The higher the capital flows the stronger the currency.

Interest ratesExchange rate is affected by interest rates. Countries with higher interest rates attract more foreign direct investment as capital tends to move to areas with higher interest rates and so it automatically follows that higher interest rates translates to more capital, more jobs being created which ultimately leads to the attainment of sustainable of economic growth. Simply put higher interest rates lead to higher capital flows, which in turn would strengthen a nation’s foreign exchange position.

Political stabilityThe activities in the foreign exchange market are directly affected by the prevailing political system of a country. In the event of a political crisis, the resulting instability often leads to capital flight and discourages inflow of direct foreign investment. Principally because of the capital flight, there is an increase in the demand for foreign exchange. This increased pressure would present as a higher demand which may be in excess of the supply. Consequently, in the aftermath of any conflict or crisis which results in a capital flight, there would be a corresponding depreciation in the value of the domestic currency. SpeculationKnowing the immense benefits that accrue to participants at the foreign exchange markets, a lot of persons engage in foreign exchange trading to make profits. In Nigeria for instance, it appears that between June and August of every year there is a marked increase in the demand for

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foreign exchange by Nigerians wishing to travel for their summer holidays. Speculators knowing this are likely to start buying up dollars at cheaper rates in order to make profit when they sell at a higher price. We can then deduce that speculators influence foreign exchange rates.

Government policies Government policies are also known to influence the demand and supply of foreign exchange. Policies made by governments or agents working for it like the Central bank and/or Ministry of Finance. For instance with the policy of guided regulation, government can directly influence the demand for foreign exchange.Another way government policies can influence the demand and supply of foreign exchange, centre around the ability of a government to attract the influx of capital into a country. Foreign capital is more likely going to flow into countries that are perceived as being stable rather than those that are characterized by elements of instability. Stability in foreign exchange would be an attractive factor in considering whether or not to invest in any given country. The influx of capital would lead to a positive balance of payments, which would also improve the supply of foreign exchange. In summary, exchange rate determination is influenced by the demand and supply of foreign exchange. Currencies that have a higher demand have a higher value and hence exchange rate than those that have a high supply not matched by a corresponding high demand. Consequently, the convertible currencies being in constant demand are naturally priced higher as reflected in the high(er) exchange rates they command. Simply put, there is an inverse relationship between a country’s exchange rate and that country’s demand for other currencies. An increased demand for other currencies translates to a decrease in the value of the local currency. With regards to the supply of foreign exchange, the supply is largely determined not by the prevailing exchange rates at the foreign exchange market but is rather influenced by the demand; therefore, the higher the demand, the higher the supply. At any point in time (that is in the short run), the supply of foreign exchange is fixed and determined by the relevant authority, which in Nigeria is the Central Bank of Nigeria (CBN).

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The Impact of Foreign Exchange on the EconomyIn discussing a country’s foreign exchange rate or policy, it can become quite easy to underestimate the effect of a country’s exchange rate on the activities within the domestic economy. One often only thinks about the implications on foreign trade but we must always recognize that a country’s foreign exchange rate influences not only international transactions but also affects monetary policy which directly or indirectly affects us personally in areas like interest rate, investment options and even the prices of goods in the market, particularly if that good is an outright import or has components that are imported. Exchange policies have direct impact on the ability of a country to attain and sustain economic growth. Take the case of over-valuation or under- valuation. Sometimes countries deliberately pursue a policy of devaluation or over-valuation of its foreign exchange. Devaluation refers to instances when a country’s foreign exchange is kept low. That way, the country’s exports become cheaper and more attractive relative to the products of other countries. China is one country that has maintained a devalued currency to the detriment of other economies that trade with it. China’s trading partners are unable to compete with its incredibly lower prices. Countries have in the past engaged in competitive devaluation which is unhealthy to the world economy.Over-valuation of exchange rate is a situation where a country lives and operates a kind of ‘fool’s paradise’, with a nation fixing its exchange rate at a rate higher than what should obtain if the market forces of demand and supply are allowed to determine the value of the currency. Most times, when a country chooses to operate an over-valuation, the foreign exchange must then be heavily subsidized. Both devaluation and over-valuation have effects on an economy. Whereas devaluation would lead to increased exports, over-valuation would lead to fewer exports. On the subject of over-valuation, Mireille (2007) contends that when exchange rates are overvalued, the economy suffers a setback. With the benefit of hindsight, one can agree that in Nigeria’s case the economy did in fact suffer a setback because of the over-valuation that occurred during the fixed exchange rate policy in the pre-devaluation era. Mireille (2007) further adds that instead of over-valuation, devaluation can improve economic performance.

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Indeed a country’s foreign exchange rate affects its balance of payments, has implications for improvements in the standard of living and economic growth and also affects the balance of payments. Again, a country’s foreign exchange policy has the capacity to facilitate imports and exports thus encouraging economic growth. Consequently with this understanding that there are far reaching effects, countries pay a significant amount of attention in determining which foreign exchange policy to adopt.

Revision questions1. What is foreign exchange rate? In detail, discuss the factors that may affect the demand and supply of a country’s foreign exchange.2. Provide a brief account of how the foreign exchange rate is determined and managed in Nigeria?3. In what ways does a nation’s foreign exchange policy affect it?

REFERENCES

Anyafo, A.M.O., (1996) Public Finance in a developing economy: the Nigerian Case, retrieved online at http://www.amazon.com/ Aiafo-M.O.-Anyafo/B001JOXC74

Frankel, J. and Rose, A., (2002), ‘Is trade good or bad for the environment? Sorting out the causality’ (NBER Working Paper No. 9021, NBER Research Associates, 2002).

McKinnon, R. I., (1963), “Optimum currency areas.” American Economic Review, 53

Mireille, L., (2007), “The Impact of the Real Exchange Rate on Manufacturing Exports in Benin”, Africa region Working paper series, No 107

Ogiogio, G. O. (1996). “A statistical analysis of foreign exchange rate behavior in Nigeria’s auctions” RP No. 49. African Economic Research Consortium, Nairobi.

Omojimite, B. U. and Akpokodje, G. (2010), “The impact of exchange rate reforms on trade performances in Nigeria,” Journal of social sciences, Vol. 23. No.1. Retrieved from www.krepublishers.com

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http://www.krepublishers.com/

http://www.amazon.com/


CHAPTER SEVENTEEN

MONETIZATION OF FRINGE BENEFITS IN NIGERIA

BY

OFODU PAULINUS CHIDI.B.Sc.(Hons),Political Science and M.Sc. Public Administration

INTRODUCTIONOver the years, the cost of administering public sector in Nigeria has continued to escalate, which has put greater stress on government budget in the country. It was observed that more than 60-70% of Nigeria public sector expenditure went to the maintenance of public officials and servants who constitute less then 2% of the Nigerian population. Due to the abuse of the regime of fringe benefits bequeathed by Nigeria’s former colonial masters the government has been unable to get the true picture of what it cost to maintain public officials in office. The spiraling cost of providing “fringe benefits and “allowances” to the public officials have continued to manifest in huge cost of government expenditure. Government institutions in Nigeria lack accountability transparency, professionalism and general ideals of good governance. To ensure good governance, the government must adopt policies aimed at minimizing fraud, preventing wasteful use of public funds and facilities as well as checking abuse of power by public officials which will lead to more realistic budgeting and budget implementation. Against this backdrop, Obasanjo administration adopted monetization policy in Nigeria

CONCEPT OF MONETIZATIONIn a very broad definition, the Chambers Dictionary, likened Monetization “as something that gives the character of money to an economic policy” As a new approach to the remuneration of public officers in Nigeria, Monetization is also referred to as “Monetization of fringe benefits”. The Act of 2002, which gave legal backing to the monetization of the salaries and allowances of all categories of Federal Pubic servants, stipulates that “The Fringe benefits which were formally

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paid in kind be converted to cash by the Salary and Wages Commission”.

Mobolaji defines Monetization policy “as government initiative that involves systematic cash payment for benefits previously available in kind to public officers”

Monetization policy can be defined as a process of converting into cash the fringe benefits being provided by government to public officers or servants as part of their remuneration package and conditions of services. It is a systematic replacement of extant work benefits previously available in kind to public officers with cash payment.

Fringe benefits As noted earlier “monetization policy” in Nigeria is also

referred to as “monetization of fringe benefits”, so it is important to explain what “Fringe benefits stand for which is a cardinal concept in the definition of monetization. According to Oxford Advanced Learners Dictionary Fringe benefits are extra things that an employer gives you as well as your wages.

Fringe benefits are additional special incentives or supplementary compensation for an employee. These special allowances or incentives have a variety of titles depending on the types of public institutions viz-“employee sub-wages: social charges” “extra wage” “welfare benefit” “hidden payroll”, “Pecuniary incentives “wage supplements” or “non-wage payments”.

Flipo defined fringe benefits as payment made to employee in addition to their salaries and wages. Gorden (1977) noted that they are known as fringe benefits but are not merely so as they are a substantial part of the expenditure incurred on wage and salary administration. According to him, fringe benefits are those payments or benefits which a worker enjoys in addition to the wages or salary he/she receives. The benefits are not given to workers for any specific jobs they have performed but are offered to them to stimulate their interest in their work and make their more attractive and productivity. They boost the earnings of the workers and put extra spending money in their hands and pockets. They are never a direct reward geared to the output, effort or merit of an employee. It is offered not on the basis of length of life encountered in the course of his/her work.

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The nature of fringe benefits in Nigeria was also a colonial heritage. This is because, the regime of fringe benefits in Nigeria were bequeathed by her colonial masters. Hence it was patterned to suit the living style of the itinerant expatriates who left the avalanche of attractive employment opportunities in Europe for service in an environment they considered hostile and less attractive.

OBJECTIVE OF MONETIZATION POLICY Monetization of fringe benefits is a public policy that is capable

of eliminating wasteful use of public funds and facilities as well as checking abuse of power by public officials which will lead to more realistic budgeting and budget implementation. Monetization policy in Nigeria helps to i. curb the excesses of public officers: instead of “one official car” public office-holder has more than ten official cars at his beck, has more than ten servants, three government houses, flies in first class plane and so.ii. Reposition Government institutions in Nigeria towards accountability, transparency, professionalism and general ideals of good governance.iii. Determine what it costs to maintain political office holder or public servant in office.iv Corrects the wrong public perception of government utilities such as telephone, electricity etc as limitless resources which were used without caution.v. Ensure equality in the allocation of scarce resourcesvi. Ensure that public officers develop and imbibe disciplinary culture of frugal use of public utilities.vii. Encourage increased productivity because of the euphoria of increased income.viii. Enable the public servants to plan for a more comfortable post service life.ix. Encourage public officers to own their vehicles, houses, furniture and thereby assist them to plan better for their requirement.x. Minimize unauthorized journeys at government expense

COMPONENTS OF MONETIZATION POLICYThe monetization policy was given legal teeth with the passage

and coming into effect of the “Certain political, public and Judicial

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office-holders (salaries and allowances) Act 2002, which has now been extended by circular to cover all federal civil servants. The law took effect from 1st July 2003, for the designated political, public and judicial office-holders contained therein, while it was extended with somewhat modified rates of benefits to Federal civil Servants with effect from 1st

October 2003. The items recommended as its main components include.

i. Residential AccommodationThe provision of residential accommodation should be

monetized at 100% of Annual Basic Salary as residential accommodation allowance, which should be paid in block to enable an officer to pay for accommodation of his choice. In the first year of the monetization exercise, the occupants of government owned quarters would pay 100% of their accommodation allowances as rent for the quarter they occupy. Also government residential quarters across the country should be sold off by public auction at the end of the first year of commencement of monetization programme with their present occupants being given first option to purchase the houses but at the price of the highest bidder. Government would provide assistance (site and service scheme) to public servant to own houses.

ii. Furniture allowance The payment of 300% of annual basic salary is recommended as furniture allowance in line with the provision of the certain political, public and judicial office-holders (Salaries and Allowances Act, 2002).However, considering the likely problem to be faced in paying huge furniture allowance of 300% of annual basic embolic, this allowance would be paid annually at the rate of 75% which amounts to 300% in four years.

iii Utility AllowanceThe allowance had already been monetized in the circular for

public servants as well as the Act for political office-holders as follows:

Gl 01-06 (N3, 600) per annum Gl 07 – 10 (N3, 300) per annum Gl 12 – 14 ( 7,800) per annum Gl 15 – 17 (8,400) per annum Permanent Secretaries (N16, 800) per annum, Head of Service

(16, 800). Political office-holders 20% of annual salary.

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iv Domestic Servant Allowance This allowance has already been monetized for public servants.

The provision of the Act is recommended to be retained for political office-holders. The provision for domestic Servant allowance will be as follows:- Gl 15 – 1 domestic Servant - N199, 586 per annum - Gl 16 – 2 domestic Servant - N239, 172 per annum - Gl 15 – 3 domestic Servant - N358, 586 704.Permanent Secretaries 4 domestic servant – N 478,344 per annum Head of Service – 4 Domestic Servant – N478,344 per annum

Political office holders 75% of annual basic salary v. Fueling/Maintenance and Public Transport Allowance In line with current economic realities, 30% of annual basic salary as provided for in the “Certain political, pubic and Judicial office-holders (Salaries and Allowances Act 2002”, is recommended as fuelling/maintenance and transport Allowance.

vi. Medical Allowance The provision in the Public Service Rules, Chapter 9 section

09203 has been prone to abuses and sharp practices particularly with the submission of take bills as claims to Government. Government is therefore proposing the payment of 10% of an officer’s annual basic salary as medical allowance. However, special case requiring government intervention would be considered on merit.

vii. Leave Grant The Grant had already been monetized through the provision in the Public Service Rules, chapter 13, section 13213 at 10% annual basic salary.viii. Meal subsidy The allowance had already been monetized through the provision is the circulars No5 SWC 04IVOi IV 1991, dated 5th may 2000 and SWC 04/S.I/Voi IV/136 dated 15th may 2000, issued by the National Salaries. Income and Wages Commission as follows;

- Gl 01- 06 N6,000 per annum - Gl 07 – 10 N8,400 per annum - Gl 12 – 14 N9,600 per annum - Gl 15- 17 N10,800 per annum

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- Permanent Secretary N16, 200 per annum - Head of service N16, 200 per annum

ix. Entertainment allowance The Act stipulates 10% of annual basic salary for political office holders as follows.- Gl 15 – N8400 per annum - Gl 16 – 17 N9,600 per annum - Permanent Secretary N27,00 per annum Head of service N27, 000 per annum

x. Motor Vehicles Allowance The provision of motor vehicles to public office is to be monetized by provision of motor vehicle loan of 350% of the annual basic salary is line with the provision of “certain Political, Public and Judicial office-holders (Salaries and Allowances) Act 2002. The loan, however, would be recovered in 6 years for both public servants and political office-holders. In granting the loan, the government would retain the existing interest rate of 4% on motor vehicle loan. For the successful monetization of this service, government would ensure that; a. No vehicles would be purchased by all ministries, extra-ministerial departments and federal agencies b. Offices currently entitled to government vehicles would return them to the presidency for disposal or private sector will assist in the provision of urban mass transit at commercialized rates.

CHALLENGES FACING IMPLEMENTATION OF MONETIZATION POLICY IN NIGERIAA well articulated but unimplemented policy on any business of government is decidedly less valuable than the paper on which it is written. Despite the perceived gains of monetization policy, the implementation process is facing enormous challenges.

1. Poor mobilization of the required amount of resources to fund the monetization of allowances and terminal benefits of workers who will be laid off due to the policy.2. Another challenge is the general skepticism among public servants that their jobs are on the line.3. A policy of integrity, trust and ethics is a big challenge to the implementation of monetization policy. The monetization policy can

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hardly yield the desired result in an atmosphere where corruption is prevalent.4. Lack of continuity. Policy in Nigeria depends so much on the political survival of the initiator.5. The need to develop equitable criteria for disposal of the public assets, for example, Government owned houses that would become available for sale as a result of the policy

REFERENCES

Almed, U.A, Ejika, Sambo and Amos, H M (2005), The effects of Monetization policy on workers productivity: International Journal of social and policy issues; Vol. 3 No. 1.

FMF (2003): Monetization Policy: Abuja, Federal Ministry of finance.

Obasanjo, O (2002) Monetization Policy: Abja Federal Ministry of Information and National Orientation.

NNPC (2000), Monetization policy and implementation Guidelines: Abuja NNP

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Fundamentals of Public Financial Management: a Book of Readings 298


CHAPTER EIGHTEEN

LOCAL GOVERNMENT FINANCE IN NIGERIA

BY

OGBUENE ANTHONY CHINWEIKELecturer,

Department of Public Administration Institute of Management and Technology (IMT) Enugu

Local government finance is an aspect of public finance that deals with the generation of revenue and its utilization by the government at the grassroot level. In other words, since finance is central to the activities of government at all levels, local government finance simply refers to the entire gamut of activities revolving around generation of income and expenditure by the government closest to the people. Understandable, local government as the government at the grassroot level, is vested with the duty of making the rural dwellers or people under its jurisdiction in the case of urban local government, feel the impact of government through the provision of social services and infrastructural development, like the construction and maintenance of roads, markets, schools, health centres etc. This was clearly stated by Mbam (2012), when he noted that “local government councils in Nigeria being the closest to the people occupy a peculiar position as promoters of grassroots mobilization and participation in governance, and catalyst for rural transformation and development. Local government requires fund to be able to do all these and more. Local governments, therefore, seek ways of raising funds. The activities directed at raising these funds and also dispensing the funds judiciously in an attempt to make the people at the grassroots feel the impact of government are what we refer to as local government finance.

Among the critical issues to be looked into under local government finance are;- Sources of Local Government Revenue- Revenue Allocation / Fiscal Federalism in Nigeria- Control of Local Government Finance in Nigeria

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- Factors Affecting Local Government Finance in Nigeria

SOURCES OF LOCAL GOVERNMENT FINANCE IN NIGERIA Here, attempt is made to review the various means through

which local governments in Nigeria generate funds to meet their financial obligations. There are many sources of local government finance in Nigeria. They are categorized into two broad sources. The internal and the external sources of local government finance.Internal Sources

The internally generated revenues include; revenues generated within the geographical territory of the local government. They also include such revenues generated from local tax or community tax, poll tax, or tenement rates, user fees and loans, death and birth registrations; licensing etc. The externally generated revenues refer to all the funds accruing to the local government from outside the territorial boundaries of the local government such as grants, aids, and federal cum state allocations, and subventions.

Internally generated revenue is a strategic source of financing local government operations. These can be explored given the enabling environment and the political will of the ruling class. The amount of internally generated revenue by each local government depends on the size of the local government, nature of business activities within its territory, urban or rural nature of the council, rate to be charged, instruments used in the collection of revenue, political will and acceptability by the people to pay based on the legitimacy of the council and the socio-cultural beliefs of the citizens regarding the issue of taxation (Anifowose and Enwmuo, 1999).

According to Atakpa et al (2012) the various ways local government generate revenue internally are community tax and rates, property, (tenement) rates; general/development rates, licenses, fees and charges like marriage registration fees, cart/truck licenses, interest on revenue such as deposits, investments, profits from the sale of stocks, shares, etc, departmental recurrent revenues from survey fees, repayment of personal advances, nursery and day-care centre fees, rents on local government quarters, etc. Olaoye (2008) insists that tax is a compulsory levy imposed by the government on individuals, companies for the various legitimate functions of the state (and local government).

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The 1999 constitution of the Federal Republic of Nigeria provides tax jurisdiction of federal, state and local governments (Agba et al, 2014). The table below shows tax jurisdiction in Nigeria.Jurisdiction & Assignment Table 1: Nigeria’s Federal, State and Local Tax Jurisdiction & Assignment

Tax Legal Jurisdiction Collection Retention

Import duties Federal FederalFederation Account

excise duties Federal FederalFederation Account

Export duties Federal FederalFederation Account

Mining rents & Royalties Federal FederalFederation Account

Petroleum Tax Profit Federal FederalFederation Account

Capital Gains Tax Federal State StatePersonal Income Tax Federal State StatePersonal Income Tax: armed forces, external affairs, officers. Non-residents, residents of the FCT and Nigeria Police force. Federal Federal FederalValue added Tax ( Sales tax before 1994) Federal

Federal/ State

Federal / state

Company tax Federal FederalFederation Account

Stamp duties Federal State StateGift tax Federal State StateProperty tax and ratings State State/ Local State/ LocalLicenses and fees Local Local LocalMotor park dues Local Local LocalMotor Vehicle State Local LocalCapital transfer tax (CTT) Federal State StatePools betting and other betting taxes State State StateEntertainment tax State State StateLand registration and survey fees State State StateMarket and Trading license and fees State Local Local

Source: Anyawu, 1995, Jimoh, 2003; Federal Republic of Nigeria Constitutions, 1963, 1979 and 1999 cited in Kalu, K.I. (2011:11)

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Agba et al, (2014) insist that “tax if properly collected and transparently accounted for is a substantial source of annual income for local governments in Nigeria”. Nonetheless, the scholars noted that inadequate and unreliable population statistics, corruption, large scale tax evasion, unemployment and poverty, lack of qualified personnel, poor planning and poor performance of local governments hinder tax collection in rural areas by local authorities. They maintain that government needs to convince rural dwellers to pay tax, through effective and efficient social services delivery, and provision of public goods that are localized in nature.

Apart from tax, local government also generates reasonable revenue internally through commercial activities of people within its jurisdiction. Also, engaging in business ventures like setting up of business entity such as microfinance, savings and loans or mortgage finance, building of stores or shopping malls, renting local government properties like reception halls, chairs, canopies, tables, local government plants like tractors, generators, local interstate transportation and ferrying and boat transportation (in the river rine areas), commercial farming and so on (Ajayi, 2000).

External SourcesThe external sources of revenue to local government include the

following:

Statutory Allocation: This was provided for by the 1999 constitution of the Federal Republic of Nigeria. Section 7(69-b) of the said constitution provides that the federal and state governments are required by law to provide funds for local governments for both developmental purpose and the administration of good government. This consists a major source of revenue for local governments in Nigeria. This particular provision of the constitution has given impetus for continuous clamour for creation of more and more states and local governments by different peoples of Nigeria. Over time, the statutory allocations for local government have been witnessing upward review since 1979, leading to increased volume of fund continually earmarked for that level of government.

For instance, in 1979, the statutory allocation to local governments was 10% of the Federation Account. This was later reviewed to 15% in 1991 and 20% in 1992. Below is a table showing the administration of statutory allocation of revenue from Nigeria’s

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federation account from 1981 to 2004 and the distribution of monies accruing to the Federation Account among the three tiers of government from 1999 to 2007.

Table 2: Vertical Allocation of the Federation Account from 1981-2004

ITEMS Initial 1981 Act 1/

Revised 1981 Act

1990

January

1992

June 1992

to April 2002

May 2002 (1st

Executive

Order) *

July 2002 (2nd

Executive

Order) *

March 2004

(Modified from FMF) 2/ *

Federal Government

55 55 50 50 48.5 56 54.68 52.68

State Government

26.5 30.5 30 25 24 24 24.72 26.72

Local Government

10 10 15 20 20 20 20.6 20.6

Special Funds 8.5 4.5 5 5 7.5-A) Derivation (Oil-Producing States)*

2 2 1 1 1 0 0 0

-B) Dev. Of Mineral Producing Areas

3 1.5 1.5 1.5 3 0 0 0

-C) Initial development of FCT Abuja

2.5 0 1 1 1 0 0 0

-D) General Ecological problems

1 1 1 1 2 0 0 0

-E) Stabilisation

0 0 0.5 0.5 0.5 0 0 0

-F) Savings 0 0 0 0 0 0 0 0-G) other Special Projects

0 0 0 0 0 0 0 0

TOTAL 100 100 100 100 100 100 100 100Note:2. Nullified by Supreme Court in October 1981* From the 1999 Constitution, the 13% Derivation provision is accounted for before the revenue is allocated into the federation account.2. The current revenue formula is based on the modified grant from the Federal Ministry of Finance, which came to effect in March, 2004Source:Ojo, 2010 cited in Kalu, K.I. (2011).rmafc.gov.ng. (n.d.). Retrieved fromhttp://rmafc.gov.ng/2011%20RETREAT/PAPER.Fiscal%20Federalism%20in%20Nigeria%202011%20kalu%20i%20kalu%5B1%5D.doc_br

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Table 3: Summary of Fiscal Allocation to Federal, State and Local Governments by RMAFAC (June 1999 – May 2007)

Beneficiary State Govt. Local Govt Total

1 Abia 113,956,322,728.62 66,957,033,320.83 180,913,356,049.452 Adamawa 111,973,469,608.66 88,385,118,660.50 200,358,588,269.163 AkwaIbom 384,370,238,540.34 110,896,366,303.24 495,266,604,843.584 Anambra 97,592,169,763.11 85,847,453,591.19 183,439,623,354.305 Bauchi 128,248,345,518.84 98,833,751,081.01 227,082,096,536.856 Bayelsa 414,158,710,867.12 38,101,830,075.82 452,260,540,942.947 Benue 120,963,431,284.39 100,676,342,004.41 221,639,773,288.798 Borno 127,814,189,455.35 114,329,322,081.28 242,143,511,536.629 Cross River 115,403,682,833.25 74,990,493,054.89 190,394,175,888.13

10 Delta 463,459,893,918.76 97,961,571,804.08 561,421,465,722.8411 Ebonyi 97,825,886,665.52 51,780,333,382.06 149,606,220,047.5912 Edo 119,085,051,909.31 77,565,785,400.62 196,650,837,309.9313 Ekiti 92,732,057,109.79 60,134,219,325.71 152,866,276,435.5014 Enugu 103,979,483,787.19 68,964,491,966.13 172,943,975,753.3115 Gombe 96,583,878,576.74 49,916,381,357.36 146,500,259,934.1016 Imo 132,104,455,243.39 99,280,101,362.71 231,384,556,606.1017 Jigawa 117,009,316,440.23 108,615,763,243.89 225,625,079,684.1318 Kaduna 138,928,609,161.09 117,182,125,094.69 256,110,734,225.7719 Kano 179,437,799,067.94 191,497,373,448.88 370,935,172,516.8120 Katsina 140,721,433,816.83 139,822,729,992.43 280,544,163,809.2621 Kebbi 109,325,901,797.25 86,787,009,340.22 196,139,911,137.4722 Kogi 108,937,683,153.98 86,187,515,182.33 195,125,198,336.3123 Kwara 99,576,991,214.56 66,011,107,696.79 165,588,098,911.3524 Lagos 182,535,977,642.02 149,392,517,393.59 331,928,495,035.6125 Nassarawa 90,518,301,030.98 54,487,876,090.81 145,006,177,121.7926 Niger 126,254,889,591.23 111,114,801,956.06 237,369,691,547.3027 Ogun 114,180,594,528.10 81,197,512,355.95 195,378,106,884.0628 Ondo 183,313,507,542.89 74,082,244,267.18 257,395,751,810.0729 Osun 107,476,926,982.08 102,574,611,292.67 210,051,538,274.7630 Oyo 135,928,952,381.15 127,369,093,326.38 263,298,045,707.5331 Platueau 81,759,592,808.53 73,434,508,057.07 155,194,100,865.6132 Rivers 517,682,993,860.57 104,313,280,579.65 621,996,274,440.2233 Sokoto 118,067,536,171.07 96,232,809,149.69 214,300,345,320.7634 Taraba 103,462,234,004.51 72,869,810,839.60 176,332,044,844.1135 Yobe 104,904,723,192.25 72,326,009,351.84 177,230,732,544.0936 Zamfara 112,898,217,046.50 70,091,324,490.36 182,989,541,536.8637 FCT 149,703,394,069.21 43,324,238,682.88 193,027,632,752.09

Total 5,742,903,843,313.33 3,313,534,856,541.80 9,056,438,699,855.1338 Fed Govt 7,390,688,951,768.72

Grand Total 16,447,127,651,623.80Source: Federal Ministry of Finance 2007

However, statutory allocations have always been attended with controversies, disagreements, agitations and criticisms. While agitations and controversies on the percentage given to derivation has continued to characterize any national discourse on statutory allocations, performance of the state government in relation to the local governments within the state as regards statutory allocations has

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continued to generate debate and criticisms. It is widely believed that the state governments have contributed to the poor performance of local governments in their jurisdictions. This arises because many state governments abuse their powers with the Joint State Account for Local Governments as required by the constitution. This has brought to the fore, the urgent need for further reform at that level of government with a view to granting the local government more financial autonomy. Grants: Grants are another external source of revenue for the local governments. Grants are essentially different from statutory allocations in the sense that grants are voluntary and occasional donations which has no tag of consistency or percentage. Also, grants are not constitutional entitlement of any local government.

Grants could come from state, federal or other donor agencies and are meant to be an intervention or assistance to address specific exigencies of the concerned. In the words of Agbo et al (2014), “Grants could come from the State, Federal or other donor agencies which are meant to assist them execute certain developmental projects”.

Notably, grants are usually earmarked for particular projects that are of utmost importance to the local communities and areas. Such developmental projects are usually supervised by the donor to ensure strict compliance to the conditions attached to the grant. Grants can also be for recurrent purposes. It can come as an intervention from the donor to assist in the payment of workers salaries. These are however, dependent on the relationship between the affected/concerned local government and the donor. Cordial relationship and possibility of mutual direct or indirect benefits facilitate grants from donor to the recipient. Grants are non-refundable.Loans: These are monies lent or sourced from financial institutions by local government for either short or long-term projects or programmes. These monies, so lent/borrowed are to be repaid under a clearly stipulated and agreed terms and conditions, which includes modalities and duration of repayment. Agba et al (2014) noted that, “local government councils could source for funds through loans to invest in capital projects such as construction of markets, roads, transportation, building of shopping malls and financing budget deficits”.

However, experience shows that most loans obtained by local government administrations in Nigeria have not been properly managed. This weakens the financial base of the local government and hinders

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performance of the incoming local government administration in discharging their constitutional duties.

REVENUE ALLOCATION / FISCAL FEDERALISM IN NIGERIA

A major source of revenue for local governments in Nigeria is the statutory allocations that come from federal and state governments. It is therefore a very important aspect of local government finance in Nigeria. The term revenue allocation often calls to mind the modalities of sharing funds commonly owned by the component units of the Nigerian Federal State. It is usually associated with the term fiscal federalism. Thus, the local governments are seen as a tier of government and partakers in the common wealth. Essentially, revenue allocation includes the allocation of tax powers and revenue sharing arrangements not only among the three tiers of government, but among state governments as well. (Olowonomi,1998; Dang, 2013). Anyajo (1996) maintained that fiscal federalism is a system of taxation and public expenditure in which revenue raising powers and control over expenditure are vested in the various tiers of government within a nation, ranging from the national government to the smallest unit - the local government.

Fiscal federalism presupposes the existence of different levels/ tiers of government and how revenues are raised and shared to these different levels of government for the development of the society. This was affirmed by Nyong (1999), when he asserted that “fiscal federalism concerns the relationship among the various levels of government with respect to the sharing of the national cake, assigned functions and tax powers to the constituent units in a federation. The scholar pointed out that the important issue in fiscal federalism is revenue allocation formula, sharing of the national revenue among various states (horizontal revenue allocation). Ekipo, (2003) argued that fiscal federalism is a mechanism in which relations arising from the political decentralization of the public sector functions and responsibilities are resolved. The term deals with the allocation of resources among the three tiers and units of government, and institutions for the discharge of responsibilities assigned to each jurisdictional authority. The nature and well fashioned fiscal relations in any federal system are crucial to the continual existence of such systems. (Agba, et al; 2014).

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Agba et al, (2014) further observe that one of the cardinal principles of federalism is that no level of government is subordinate to one another, though there must be a central government for this arrangement. The important features of federalism are:

i. Division of powers among levels of government. ii. Coordinate supremacy of each level of government. iii. Financial autonomy of each level of government. (Agba, et

al; 2014). The above points were emphasized by Wheare (1943) in

Olowononi (1998). Wheare (1943) argued that all tiers of government are coordinate in status. Consequently, the obvious financial subordination of the state and local governments in the Nigerian experience from 1999 to date makes a mockery of federalism. Though questions on how to generate, expand and share revenue has always been an issue in the Nigerian politics and governance since the amalgamation of 1914, it began to raise serious national debate from 1946 following the fusion of fiscal operation in the country with the coming into effect of the Richards constitution. The constitution provided for Legislative council for the whole country and Regional councils with large devolution of powers and functions. As a result, various Revenue Allocation commissions were set up at different times to examine and settle the issue of revenue allocation among the three tiers of government, the Federal, State and Local.

Adesina (1998), notes that until Nigeria’s independence the most contentious aspect of the nation’s federalism, revenue allocation, remained the responsibility of the colonial masters. According to Agba et al (2014), fiscal federalism became deepened during the military incursions between 1966 and 1990, following the creation of states and local government, perhaps as a means of spreading development across the country and satisfying agitations from potential ethnic groups. The military started with the creation of twelve states in 1967. The manner in which the states and local governments were created in 1967 and the circumstances necessitating their creation were such that compelled the states and local governments so created to depend on the federal government. That pattern and sequence was followed by successive military regimes to bring the states to thirty six (36) and local governments in Nigeria, to seven hundred and seventy four (774).

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From 1946 to 2000, nine commissions, six military decrees, one act of the legislature and two Supreme Court judgments have been resorted to in defining and modifying fiscal relationships among the component parts of the federation (Egwaikhide and Isumonah; 2001). Among these commissions are Philipson Commission (1946), Hicks-Philipson commission (1951), Louis Chick Commission (1953), Jeremy Raisman Commission (1958), the Binns Commission (1964), Dina Commission (1968), the Aboyade Technical Committee on Revenue Allocation (1977), the Okigbo Commission (1980), and Danjuma Fiscal Commission, (1988) (Ekpo, 2004; Jimoh, 2003, Akindele, 2002; Udeh, 2002; Olowonomi, 1998; Ovwasa, 1995).

CONTROL OF LOCAL GOVERNMENT FINANCE IN NIGERIA Constitutional: To ensure prudent management, transparent administration and control of local government finance in Nigeria, the 1999 constitution of the Federal Republic of Nigeria provides for the establishment of State Joint Local Government Account in each state of the federation where funds from the Federation Account are lodged before disbursement to the local government councils in the state. The state government quickly took advantage of this arrangement to impose undue dominance on the local government councils. The state governments use this medium to starve the local government councils in the state of the funds they so much needed to implement developmental projects. The chairman of the Revenue Mobilization Allocation and Fiscal Commission (RMAFC), Mr. Mbam bemoaned this when he observed that information at the disposal of the commission show unethical practices in the disbursement of funds from the State Joint Local Government Account in various states of the federation. The chairman maintained that allocations from the Federation Account, most times do not actually reach the local government councils. Such allegations of manipulation of the Joint Account at the point of disbursement abound. It is generally believed that states hardly make their own contributions as stipulated by section 162 (7) of the constitution of the Federal Republic of Nigeria. In view of the above challenges, the RMAFC chairman opined that local governments should be granted fiscal autonomy by paying statutory allocations from the Federation Account directly to their coffers in which case, the State Joint Local Government Account should be abolished through appropriate reforms.

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Legislative Control: Under this democratic regime, the legislative arm of the

government is meant to control expenditure even at the local government level. The legislature, in keeping with their constitutional functions is meant to guide the disbursement of funds in the system. The local governments in Nigeria, by the provisions of the 1999 constitution, operate under the federal, state and local legislative frameworks. These include the National Assembly, State Assembly and the legislative councils. These institutions, in one way or another, serve as checks and control measures on the disbursement of funds at the local government level. This ought to be felt more with the Legislative Councils which are directly responsible for the budget of the councils and implementation of the local government financial vision. These notwithstanding, poor funding and poor management of funds remains the bane of policies and implementation at the local government level.Budgeting and Budgetary Control:

Budgeting and budgetary control is another strong means of controlling local government funds in Nigeria. Budgeting entails financial plan. It involves a clear articulation and stimulation of expected income and expenditure of a local government within a stipulated time frame (usually a fiscal year). Budgetary control is a mechanism used to ensure viable financial plan which must layout expectations of the local government council, in terms of income and expenditure within a stated period of time. It is usually based on precedence and anticipations. Budgeting involves comparison of the past with the present to enable reliable propositions. It is usually anchored on the prevailing financial regulations in the country.

To ascertain the level of budget performance, Budget Monitoring and Budget Evaluation comes in as a veritable instrument. This helps to ascertain the level to which the actual income of the local government within the stipulated period meet the expected income and also the extent to which actual expenditure conform to the proposed expenditure. The budget monitoring and evaluation juxtaposes projects with budget propositions. The results of periodic budget monitoring and evaluation help the local governments that embark on such to ascertain in concrete terms, the budget performance. This therefore provides relevant statistical input for the preparation of a better functional and viable budget in the subsequent year. However, the level of compliance

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to budgetary controls in Nigeria is abysmally low. ‘Primarily, the greatest challenge facing the country is lack of full implementation of its budget” (Nkwede; 2013). Local governments in the country disburse funds based on political needs instead of appropriation. Appropriation legally authorizes expenditure within a given period of time. Non-utilization of funds allocated to various projects under different sub-heads results to Virement which may be a cumbersome process. Virement simply put is the movement of funds from one subhead or project to another through due legislative process and approval in form of supplementary appropriation. Strict adherence to these budgetary control procedures ensures that funds are utilized only for the purpose for which they are allocated in the budget.

FACTORS AFFECTING LOCAL GOVERNMENT FINANCE IN NIGERIA

Among the contending factors identified by both scholars and practitioners as affecting local government finance in Nigeria include;Inequality in resource allocation. Absence of fiscal autonomy None-viability Corruption

Inequality in Resource Allocation: The structural imperfections that characterize the Nigeria’s federal system impacted negatively in the creation of local governments. Obviously, after the First Republic, states and local governments’ creations in Nigeria were all done by the military regimes, superintended by the Northern military leaders with undisguised ethnic sentiments. The successive military regimes that created states and local governments in the country were also too much in a hurry, and driven by certain political interests, to consider equality of resources while creating the local government. More attention was given to achieving the desired political advantage that correlate population, landmass with the number of states, local governments and constituencies basically to guarantee political dominance of the North and also ensure that large chunk of the resources accruing to the Federation Account goes to the Northern part of the country.

1. Absence of Fiscal Autonomy: Local governments in Nigeria lack fiscal autonomy given the constitutional provision of a State Joint

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Account with the local governments wherein fund from the federation account must be lodged in for onward disbursement to the local government councils. Some state governments take undue advantage of the local government councils via this measure, to limit the local governments’ access to fund and moderate the pace of financial activities at the local government councils. This has led to the clamour for local government autonomy in Nigeria.

2. Non-Viability: Mabogunje (1995) maintained that locality clamouring for a local government unit must be mature and must demonstrate readiness to sustain the local government through sufficient internally generated revenue. Most of the local governments in Nigeria are not economically viable. They absolutely depend on the statutory allocations from the federation account for survival. According to Agba etal (2014), “there are only very few local government councils (mostly urban located) in the country that are economically viable, thus, survive without financial allocation from the Federation Account”. This seriously detracts from the status and operations of local government. The non-viability of local government relocates its loyalty and accountability from the people at the grassroots, which it is meant to serve, to other levels of government which determines its access to fund. This affects the nature of programmes embarked upon by the local government, composition of the local governments, staffing and mode of operation.

3. Corruption: Corruption is a major albatross of the local governments in Nigeria. Corruption, though manifest in other levels of government, is very pronounced at the local government level. This may be so, owing to the fact that local government is one closest to the people. On account of this, Ogundiya (2009) noted that corruption has been the bane of legitimacy, democratic stability and socio-economic and political development in Nigeria. Indeed any attempt to understand the tragedy of development and the challenges to democracy in Nigeria must come to grips with the problem of corruption and stupendous wastage of scarce resources. The scholar argues that the dearth of development at the local government level and the challenges of democracy in our society are tied to the issue of corruption. This is the precarious situation in which our local government found itself. Funds

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voted for (fictitious) projects are siphoned. Budget implementation is near zero level. The treasury is in the hands of rogues parading as public officers. Their antics are simply innumerable.

4. Inadequate and Poor Budgetary Process: Budgeting, being the pivot upon which effective financial management in both public and private organizations is based undergo a certain process. Onah (2005) and Adamolekun (1983) agree that a budget is a financial plan that shows in detail the proposed estimate of revenue and expenditure for a defined period, usually one year. Budget is a very powerful instrument for effective financial management and control. In Nigerian local governments however, experience has shown that compliance to budgeting principles is very poor. A budget in Nigeria’s local government, which stipulates the financial objectives of the local government for a period of one year and set out strategies for their accomplishment are mere formalities. Spontaneous and unbudgeted expenditures which are often done to service certain political interests most times overtake the supposedly careful plan of income and expenditure for a local government council within a fiscal year. Also, poor attitude to compliance to the budget provisions deprive the budget of due diligence and expertise input. This detracts on the scale of revenue generation by the Nigerian local governments.

5. Ineptitude to work and Low quality manpower: Public Funds at the local government level are controlled by the councils principal officers like the Treasurer, Head of Personnel Management, Internal Auditor, The Council Chairman and Local Government Service Commission. Experience over the years have shown that these public officers entrusted with the public funds at the local government level are often found wanting in the discharge of their duties either by error of omission or commission. It is a common knowledge that the aforementioned principal officers of Nigeria’s local government councils engage more in bureaucratic politics geared towards siphoning of funds through frivolous activities and fictitious contracts. Aside, local governments in Nigeria have a knack for cheap labour. This predisposes them to recruitment of low quality staff. Also, the minimum educational qualification for Chairman and Councillorship positions is post primary education. Thus, those piloting the affairs of

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the councils are semi-illiterates and are pre-occupied by trivial economic gains than enduring legacies in the councils.

6. Administrative Inefficiency: Corollary to the low quality manpower prevalent in the Nigeria’s local government council, they suffer from administrative inefficiency and ineffectiveness. The trickle effect of this include poor motivation of staff, poor work attitude, poor work environment, poor dedication to duty, poor input etc. Obviously, administrative efficiency is determined by availability of qualified staff who are adequately motivated under an inspiring leadership within an encouraging work environment. All these cardinal features of administrative efficiency are lacking at the local government level, leading to gross inefficiency at that level of government.

REFERENCES

Adamolekun, L. (1983). Public Administration: A Nigerian and Comparative Perspective. New York: Longman Inc.

Adedokun, A.A (nd). Local Government Tax Mobilization and Utilization in Nigeria: Problems and Prospects http://visar.csustan.edu/aaba/Adeokun/pdf.Retrievedon1/12/13

Adewunani, A. (1999). The Studies in Comparative of Administration Lagos: African Education Press.

Agba, B.M., Ogwu, S.O & Chukwuwrah, D.C (2013). An Empirical Assessment of Service Delivery Mechanism in Idah Local GovernmentArea of Kogi State Nigeria (2003-2010). Mediterrahean Journal of Social Sciences, 4(2): 621-635.

Ajayi, K (2000): Theory and Practice of Local Government. Ado-Ekiti: University of Ado-Ekiti.

Akindele S.T., Olaipa, O.R and Obiyan, A. Sat. (June, 2009). Financial Autonomy and Consistency of Central Government Public Towards Local Governments. International Review of Administrative Sciences, 75:311-332.

Akindele,. S.T and Olaopa (2002): Fiscal Federalism and Local GovernmentFinance in Nigeria http://unpan1.un.org/intradoc/groups/public/documents/CAFRAD/UNPAN008121.pdf.Retrieved on7/12/13.

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Akpan, N. (1965): “The Development of Local Government in Eastern Nigeria” Journal of Local Government Overseas 4(2).

Alo, E.N (2013). Fiscal Federalism and Local Government Finance in Nigeria. World Journal of Education 2(5): 19-27.

Aluko, M. (2006). “The Fight Between Federal and State Governments Over Revenue Allocation” New Age Online.

Atakpa, M. Ocheni, S. & Nwankwo, B.C (2012). Analysis of Options for Maximizing Local Government Internally Generated Revenue in Nigeria, International Journal of Learning and Development, 2(5): 94:104.

Bello-Imam, I.B. (1990): “Local Government Finance in Nigeria” Ibadan: NISER.

Dang, D. Y (2013): Revenue Allocation and Economic Development in Nigeria: An Empirical Study.http://sgo.sagepub.com/content/3/3/2158244013505602.Retrievedon6/12/13.

Egonwani, J.A (2000). Principle and Practice of Local Government in Nigeria. Benin City, SMO Press.

Egwaikhide, F.O (2004). “Intergovernmental Fiscal Relations in Nigeria” In Egwaikhide, F.O (eds). Intergovernmental Relations in Nigeria, Ibadan: Programme on Ethnic and Federal Studies, 1-23.

Ekpo, A. (2003). Fiscal Federalism: Nigeria Post-Independence Experience 1960-90, World Development Vol. 22, (8), 65-71.

Ekpo, A. (2004, August 10-12). Intergovernmental Fiscal Relations: The Nigerian Experience. Paper Presented at the 10th Year Anniversary of the Financial and Fiscal Commission of South Africa, Cape Town, South Africa.

Federal Republic of Nigeria (1999). “Constitution” Abuja: Federal Government Press.

Jimoh, A. (2003, October 7-9). Fiscal Federalism: The Nigerian Experience. Paper Presented at the Ad-Hoc Expert Group Meeting- Economic Commission for Africa, UNCC, Addis Ababa, Ethiopia.

Kalu, K.I. (2011). Fiscal Federalism in Nigeria. Practices and Issues. Being 2011 Uyo Retreat Papers. http://www.rmafc.gov.ng.Retrievedon6/12/13.

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Mabogunje, A. (1995). “Local Governance the Concept of Social Capital”. Workshop on Governance and Democratization in Nigeria, Ile-Ife, Obafemi Awolowo University Conference Center. Malthouse Press Ltd.

Nkwede, J.O. (2013). Budget Imlementation And Sustainable Development – A Critique of Nigeria Democracy. Journal of Policy and Development studies, Vol. 7 No.1

Nyong, M. (1999). Fiscal Federalism, Revenue Allocation Formula and Economic Development in Nigeria. Nigerian Financial Review, 7(3): 33-37.

Ogundiya, I. S. (2009). Political Corruption in Nigeria: Theoretical Perspectives and Some Explanations. Anthropologist, 11 (4): 281 – 292.

Okeke, M. (2004). “The Politics of Revenue Allocation and Resource Control in Nigeria: A Critical Analysis of the Niger Delta Crisis” Ph.D Seminar Paper, University of Nigeria, Nsukka.

Olaye, C.O (2008). “A Review of Revenue Generation in Nigerian Local Government” A Study Ekiti State International Business Management 3(3): 54-60.

Onah, F.E (2007). Fiscal Federalism in Nigeria. Nsukka: Great AP Publishers Ltd.

Ovwasa, O.L (1995). Fiscal Federalism in Nigeria: A Historical Analysis. Transafrican Journal of History, 4, 70-83.

RMAFC Canvasses for Direct Funding of LGA.s http://www.rmafc.gov.ng/RMAFC%20CANVASSES%20FOR%20DIRECT%20FUNDING%200F%20LGAs.pdg.Retrievedon3/12/13.

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CHAPTER NINETEEN

FUNDAMENTALS OF MARKETING THEORY AND PRACTICE

BY

BEN NNADI Lecturer,

Department of Accounting Institute of Management and Technology (IMT) Enugu

Learning objectives:This chapter will help you to:1 Define what marketing is;2 trace the development of marketing as a way of doing business;3 appreciate the importance and contributions of marketing as both a

business function and an interface between the organization and its customers;

4 understand the scope of tasks undertaken in marketing, and the range of different organizational situations in which marketing is applied; and

5 summarize the structure of this chapter.

INTRODUCTIONWe are exposed to marketing in some form every day of our

lives. Every time you use a product, buy a product, go window shopping, watch an advertisement, listen to friends telling you about a wonderful new product they’ve tried, or even when you go to the library to look at a company’s annual report for an assignment, you are reaping the benefits (or being a victim) of marketing activities. When marketing outputs are so familiar, it is easy to take it for granted and to judge and define it too narrowly by what you see of it close to home. We cannot dismiss marketing as `just advertising’ or `just selling’ or `making people buy things they don’t really want’.

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This chapter is intended to show you what marketing does, in fact, it covers a very wide range of absolutely essential business activities that brings you the products you do want, when you want them, where you want them, but at prices you can afford, and with all the information you need to make informed and satisfying consumer choices. And that’s only what marketing does for you! Widen your thinking to include what marketing can similarly do for organizations purchasing goods and services from other organizations, and you can begin to see why it is a mistake to be too cynical about professionally practiced marketing. The outputs of marketing, such as the packaging, the advertisements, the glossy brochures, the enticing retail outlets and the incredible bargain value prices, look sleek and polished, but a great deal of management planning, analysis and decision-making has gone on behind the scenes in order to bring all this to you. By the time you go through the chapter, you should appreciate the whole range of marketing activities, and the crucial functions of marketing.

Definitions and Basic Concepts In MarketingFirst, let’s look at currently accepted definitions of marketing,

then the history behind those definitions.

What Marketing MeansHere are two popular and widely accepted definitions of

marketing. The first is the definition proffered by the UK’s Chartered Institute of Marketing (CIM), while the second is the one offered by the American Marketing Association (AMA)

Marketing is the management process which identifies, anticipates, and supplies customer requirements efficiently and profitably. (CIM)

Marketing is the process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchange and satisfy individual and organizational objectives (AMA, 1985)

Both definitions make a good attempt at capturing concisely what is actually a wide and complex subject. Although they have a lot in common, each says something important that the other does not emphasize.

Both agree on the following points.

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Marketing is a management processMarketing has just as much legitimacy as any other business

function, and involves just as much management skill. It needs planning and analysis, resource allocation, control and investment in terms of money, appropriately skilled people and physical resources. It also, of course, needs implementation, monitoring and evaluation. As with any other management activity; it can be carried out efficiently and successfully or it can be done poorly, resulting in failure.

Marketing is about Giving Someone What They WantAll marketing activities should be geared towards this. It

implies a focus on the customer or end consumer of the products or services. If customer requirements are not satisfactorily fulfilled, or if customers do not obtain what they want and need, then marketing has failed both the customer and the organization.

The CIM definition adds a couple of extra insights, as follows;

Marketing Identifies and Anticipates Customer RequirementsThis phrase has a subtle edge to it that does not come through strongly in the AMA definition. It assets that the marketer creates some sort of offering only after researching the market and pin-pointing exactly what the customer will want. The AMA definition is ambiguous by beginning with the `planning’ process which may or may not be done with reference to the customer.

Marketing Fulfils Customer Requirements Efficiently And Profitably

This pragmatic phrase warns the marketer against getting too carried away with the altruism of satisfying the customer! In the real world, an organization cannot please all of the people all of the time, and sometimes even marketers have to make compromises. Efficiency implies working within the resource capabilities of the organization, and in this case, specifically working within the agreed budgets and performance targets set for the marketing function.

Profitability is a little more questionable as marketing is now an accepted philosophy within many non-profit-making organizations, such as Nigerian National Insurance Scheme. That important context aside, most commercial companies exist to make profits, and thus profitability

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is a legitimate concern. Even so, some organizations would accept the need, occasionally, to make a loss on a particular product or sector of a market in order to achieve wider strategic objectives. As long as those losses are planned and controlled, and in the longer run provide some other benefit to the organization, then they are bearable. In general terms, however, if an organization is consistently failing to make profits, then it will not survive, and thus marketing has a responsibility to sustain and increase profits.

The AMA definition goes further.

Marketing offers and exchanges ideas, goods and servicesThis statement is close to the CIM’s `profitably’ but a little

more subtle. The idea of marketing as an exchange process is an important one, and was first proposed by Alderson (1957). The basic idea is that I’ve got something you want, you’ve got something I want, so let’s do a deal. For the most part, the exchange is a simple one. The organization offers a product or service, and the customer offers a sum of money in return for it. Nigerian Breweries NBL offers you a can of malt and you offer payment; you sign a contract to offer your services as an employee, and the organization pays you a salary; the hospital offers to provide healthcare and the individual, through taxes or insurance premiums, offers to fund it.Pricing, promotion and distribution of ideas, goods and services

In saying that marketing involves the conception, pricing, promotion and distribution of ideas, goods and services, the AMA definition is a little more specific in describing the ways in which marketers can stimulate exchanges. It suggests a pro-active seller as well as a willing buyer. By designing products, setting sensible, acceptable and justifiable prices, creating awareness and preferences, and ensuring availability and service, the marketer can influence the volume of exchanges. Marketing can be seen, therefore, as a demand management activity by the selling organization.

Both the CIM and the AMA definitions of marketing, despite their popular usage, are increasingly up to the criticized as failing to reflect the role and reality of marketing in the mid and to late 1990s. The two main criticisms centre around the concept of the passive consumer in a discrete exchange, and a failure to address the social context of marketing.

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Relationship marketingThe traditional definitions of marketing tend to reflect a view

that the transaction between buyer and seller is primarily seller orientated, that each exchange is totally discrete, and thus lacking any of the personal and emotional overtones that emerge in a long-time relationship made up of a series of exchanges between the same buyer and seller. Turnbull and Valla (1986) particularly highlight the importance of enduring buyer-supplier relationships as a major influence on decision-making in international organizational markets.

In some circumstances, however, the traditional non-relationship view is perfectly appropriate. A traveler on an unknown road passing through a foreign country may stop at a wayside café, never visited before, and never to be visited again. The decision to purchase is thus going to be influenced by the ease of parking, the décor and the ambience rather than by any feeling of trust or commitment to the patron. The decision, in short, is based on the immediate and specific marketing offering. Well-lit signs, a menu in your own language, and visibly high hygiene standards will all influence the decision to stop. Such a scenario does not, however, describe the reality in many consumer and organizational markets. As consumers, we often say stay loyal to a small number of familiar brands, retailers and suppliers over a number of years. In organizational markets, relationships can be even longer lived. Guinness, for example, has supplier relationships which have lasted for over 40 years.

Easton and Araujo (1994) emphasize that in organizational markets buyer-seller exchanges can no longer be viewed as one-off, discrete, economic transactions, totally uninfluenced by either the social context in which they take place or consideration of past and future transactions between the same two parties.

Exchange processes are embedded in the dense fabric of social relations and economic exchange is rarely able to rid itself of non-economic exchange baggage such as social exchange, kinship and friendship networks, altruism and gift giving and a host of other psychological and sociological elements not liable to be reduced to the standardized metric of money.

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Although this statement was made strictly in the context of organizational markets, it also has a lot of truth in consumer markets.

Social Marketing`Social marketing’ is a fascinating and thought-provoking

phrase that is used by a number of writers (Kotler and Zaltman, 1971; Robin and Reidenbach, 1987, for instance). Social marketing is concerned with ensuring that organizations handle marketing responsibly, and in a way that contributes to the well-being of society. It acknowledges that marketing both draws from what it has contributed to the society within which it operates, in other words it is not about purely unemotional economic transactions. In order to work, it has to interact with people, it has to reflect what they want and what concerns them and in turn, marketing images and values become absorbed into popular culture through a synergistic process. On the other hand, for example, it could be argued that marketing, particularly through advertising, encourages people to aspire to things they cannot really afford, and that it encourages materialism and dissatisfaction with what one has. If that is true, then it is certainly a negative social process. At the best, it could be argued that by developing and opening up mass markets, marketing has brought goods and services that would otherwise only be affordable by few, within the reach of many, and thus marketing is a positive social process. Marketing can also make a positive contribution to the furtherance of altruistic and social causes. The increasing use of marketing techniques by organizations in fast food industry such as Shoprite in Enugu, Celebrities for instance, has had a positive impact in bringing `issues’ to a much wider public and precipitating action even though such food are discouraged by real dieticians.

So definitions of marketing should be moving away from a narrow, organization-focused perspective, and exchange alone is too narrow a concept for today’s approaches and applications of marketing. Further dimensions relating to social contexts and longer-term strategic relationship building are necessary to provide a full understanding of the power of marketing and the influences that shape it.

A definition that includes the important elements of both the AMA and CIM definitions, but perhaps more overtly captures what marketing in 1990s Europe is all about, is offered by Gronroos (1990):Marketing is to establish, maintain and enhance long term customer relationships at a profit, so that the objectives of the parties

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involved are met. This is done by mutual exchange and fulfillment of promises.This definition still reflects a managerial orientation towards marketing, but emphasizes the mutually active role that both partners in the exchange play. It does not list the activities that marketers undertake, but instead is more concerned with the partnership idea, the concept of marketing is about doing something with someone, not doing something to them. Of course, not all transactions between buyers and sellers can be considered to be part of a relationship, especially where the purchase does not involve much risk or commitment from the purchaser and thus there is little to gain from entering a relationship (Berry, 1983). This was clearly shown in the wayside café example cited earlier. Overall, however, marketing is increasingly about relationships. In many organizational markets, the seller or buyer might even adapt their technology, products or production processes to meet the needs of the other party better, and both parties will gain from the stronger relationship formed (Hallen et al., 1987; Pettitt, 1992).

The idea of fulfilling promises is also an important one, as marketing is all about making promises to potential buyers. If the buyer decides, after the event, that the seller did not live up to those promises, the chances are that they will never buy again from that seller. If, on the other hand, the buyer decides that the seller has fulfilled their promises, then the seeds of trust are sown, and the buyer may be prepared to begin a long-term relationship with the seller.

Between them, therefore, the three definitions offered say just about everything there is to say about the substance and basic philosophy of marketing. Few now would argue with any of that, but marketing has not always been so readily accepted in that form, as the next two subsections show.

The Development of MarketingThe basic idea of marketing as an exchange process has its roots in very ancient history, when people began to produce crops or goods surplus to their own requirements and then to barter them for other things they wanted. Elements of marketing, particularly selling and advertising, have been around as long as trade itself, but it took the industrial revolution, the development of mass production techniques and the

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separation of buyers and sellers to sow the seeds of what we recognize as marketing today.

In the early days of the late nineteenth and early twentieth centuries, goods were sufficiently scarce and competition sufficiently underdeveloped that producers did not really need marketing. They could easily sell whatever they produced (`the production era’ in which a `production orientation’ was adopted). As markets and technology developed, competition became more serious and companies began to produce more than they could easily sell. This led to `the sales era’, therefore, lasting into the 1950s and 1960s, in which organizations developed increasingly large and increasingly pushy sales forces, and more aggressive advertising approaches (the `selling orientation’).

It was not really until the 1960s and 1970s that marketing generally moved away from a heavy emphasis on post-production selling and advertising to become a more comprehensive and integrated field, earning its place as a major influence on corporate strategy (`marketing orientation’). This meant that organizations began to move away from a `sell what we can make’ type of thinking, in which `marketing’ was at best a peripheral activity, towards a `find out what the customer want and then we’ll make it’ type of market-driven philosophy. Customers took their rightful place at the centre of the organization’s universe. This finally culminated in the 1980s, in the wide acceptance of marketing as a strategic concept, and yet there is still room for further development of the marketing concept, as new applications and contexts emerge.

Historically, marketing has not developed uniformly across all markets or products. Retailers, along with many consumer goods organizations, have been at the forefront of implementing the marketing concept. The financial services industry, however, has only very recently truly embraced a marketing orientation, some ten years or more behind most consumer goods. Knights et al. (1994), reviewing the development of a marketing orientation within the Nigerian financial services industry, imply that the transition from a selling to a marketing orientation was `recent and rapid’.

The Marketing Concept in the OrganizationWhat does the philosophy of marketing as a way of doing

business mean to a real organization? In this section we explore the practicalities of implementing the marketing concept, showing just how

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fundamentally marketing can influence the structure and management of the whole organization. First, we look at the complexity of the organizational environment, and then think about how marketing can help to manage and make sense of the relationship between the organization and the outside world. Second, we examine the relationship between marketing and the internal world of the organization, looking, for example, at the potential conflicts between marketing and other business functions. To bring the external and the internal environments together, this section is summarized by looking at marketing as an interface, i.e. as a linking mechanism between the organization and various external elements.

The Organizational EnvironmentFigure 1 summarizes the complexity of the external world in which an organization has to operate. There are many people, groups, elements and forces that have the power to influence, directly or indirectly, the way in which the organization conducts its business. The organizational environment includes both the immediate operating environment and the broader issues and trends that affect business in the longer term.

Current and Potential CustomersCustomers are obviously vital to the continued health of the

organization. It is essential, therefore, that it is able to locate customers, find out what they want and then communicate its promises to them. Those promises have to be delivered (i.e. the right product at the right time, at the right price in the right place) and followed up to ensure that customers are satisfied.

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Customers

Competition

Intermediaries

Our organizati

on

Suppliers

FIGURE 1: THE MARKETING ENVIRONMENT


CompetitorsCompetitors, however, make the organization’s liaison with

customer groups a little more difficult, since by definition, they are largely pursuing the same set of customers. Customers will make comparisons between different offerings, and will listen to competitors’ messages. The organization, therefore, has not only to monitor what the competitors are actually doing now, but also to try to anticipate what they will do in the future in order to develop counter-measures in advance. European giants Nestle and Unilever, for example, compete fiercely with each other in several consumer universal markets.

IntermediariesIntermediaries often provide invaluable services in getting

goods from manufacturers to the end buyer. Without the co-operation of a network of wholesalers and/or retailers, many manufacturers would have immense problems in getting their goods to the end customer at the right time in the right place. The organization must, therefore, think carefully about how best to distribute goods, and build appropriate relationships with intermediaries. Again, this is an area in which competition can interfere, and organizations cannot always obtain access to the channels of distribution that they want, or trade on the terms that they want.

SuppliersAnother crucial link in the chain is the supplier. Losing a key

supplier of components or raw materials can mean that production flow is interrupted, or that a lower quality or more expensive substitution has to be made. This means that there is a danger that the organization will fail in its promises to the customer, for example, by not providing the right product at the right time at the right price. Choice of suppliers, negotiation of terms and relationship building all, therefore, become important tasks.

This overview of the organization’s world has implied that there are many relationships that matter and that need to be managed if the organization is to conduct its business successfully. The main responsibility for creating and managing these relationships lies with the marketing function.

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Marketing and Other Business FunctionsAs well as fostering and maintaining healthy relationships with

external groups and forces, the marketing function has to interact with other functions within the organization. Not all organizations have formal marketing departments, and even if they do, they can be set up in different ways, but wherever the responsibility for the planning and implementation of marketing lies, close interaction with other areas of the organization is essential. Not every business entity, however, operate with the same kind of focus, and sometimes there can be potential conflict where perspectives and concerns do not match up. This subsection looks at just a few other functions typically found in all but the smallest organizations and some of the points of conflict between them and the marketers.

FinanceThe finance function, for example, sets budgets, perhaps early

in the financial year, and expects other functions to stick to them. They want hard evidence to justify expenditure, and they usually want pricing to cover costs and to contribute towards profit. Marketing, on the other hand, tends to want the flexibility to act intuitively, according to fast-changing needs. Marketing also takes a longer, strategic view of pricing and may be prepared to make a short-term financial loss in order to develop the market or to further widen strategic objectives.

In terms of accounting and credit, i.e. where finance comes into contact with customers, the finance function would want pricing and procedures to be as standardized as far as possible, for administrative convenient. An accountant would want to impose tough credit terms and short credit periods, preferably only dealing with customers with proven credit records. Marketing, however, would again want some flexibility to allow credit terms to be used as part of a negotiation procedure, and to use pricing discounts as a marketing tool.

PurchasingThe purchasing function can also become somewhat

bureaucratic, with too high a priority given to price. A focus on economical purchase quantities, standardization and the price of material, along with the desire to purchase as infrequently as possible, can all reduce the flexibility and responsiveness of the organization. Marketing prefers to think of the quality of the components and raw

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materials rather than the price, and to go for non-standard parts, to increase their ability to differentiate their products from that of the competition. To be fair to purchasing, this is a somewhat traditional view.

ProductionProduction has perhaps the greatest potential to clash with

marketing. It may be in production’s interests to operate long, large production runs with as few variations on the basic product as possible, and with changes to the product as infrequently as possible, at least where mass production is concerned. This also means that production would prefer to deal with standard, rather than customized, orders. If new products are necessary, then the longer the lead time they are given to get production up to speed and running consistently, the better. Marketing has a greater sense of urgency and a greater demand for flexibility. Marketing may look for short production runs of many varied models in order to serve a range of needs in the market. Similarly, changes to the product may be frequent in order to keep the market interested, marketing, particularly when serving industrial customers, may also be concerned with customization as a means of better meeting the buyer’s needs.

Research and development and engineeringLike production, research and development and engineering (R,

D &E) prefer long lead times. If they are to develop a new product from scratch, then the longer they have to do it, the better. The problem is, however, that marketing will want the new product available as soon as possible, for fear of the competition launching their version first. Being first into a market can allow the organization to establish market share and customer loyalty, and to set prices freely, before the effects of competition make customers harder to gain and lead to downward pressure on prices. There is also the danger that the Research, Development and Engineering (R,D & E) may become focused on the product for the product’s sake, and lose sight of what the eventual customer is looking for. Marketing, in contrast, will be concentrating on the benefits and selling points of the product rather than purely on its functionality.

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Marketing as a Business PhilosophyThe previous subsection took a pretty negative view,

highlighting the potential for conflict and clashes of culture between marketing and other internal functions. It need not necessarily be like that, and this subsection will seek to redress the balance a little, by showing how marketing can work with other functions. Many successful organizations such as Guinness ensure that all functions within their organization are focused on their customers. These organizations have embraced a marketing philosophy that permeates the whole enterprise and places the customer firmly at the centre of their universe.

What must be remembered is that organizations do not exist for their own sake. They exist primarily to serve the needs of the purchasers and users of their goods and services. If they cannot successfully sell their goods and services, if they cannot create and hold customers (or clients, or passengers, or patients or whoever), then they undermine their reason for existing. All functions within an organization, whether they have direct contact with customers or not, contribute in some way towards that fundamental purpose. Finance, for example, helps the organization to be more cost effective; personnel helps to recruit appropriate staff and make sure they are properly trained and remunerated so that they are more productive or serve the customer better. Research and development provides better products; and production obviously give out the product in the required quality and quantity specifications to meet market needs.

All of these functions and tasks are interrelated i.e. none of them can exist without the others, and none of them has any purpose without customers and markets to serve. Marketing can help to supply all of those functions with the information they need to fulfill their specific tasks better, within a market-orientated framework. Those interdependencies, and the role of marketing in bringing functions together and emphasizing the customer focus, are summarized in a simplified example in Fig. 2.

Although the lists of items in the boxes in fig 2. are far from comprehensive, they do show clearly how marketing can act as a kind of buffer or filter, both collecting information from the outside world then distributing it within the organization, and presenting the combined efforts of the various internal functions to the external world. The

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customers box in the figure contains just a few of the issues that concern customers.

Customer ConcernsCurrent product needs: To satisfy current needs, production has to know how much is required, when and to what quality specification. Production, perhaps with the help of the purchasing function, has to have access to the right raw materials or components at the right price. Keeping current products within as acceptable price band for the customer involves production, purchasing, finance and perhaps even R,D & E. a sales function might take orders from customers and make sure that the right quantity of goods is dispatched quickly to the right place. Marketing brings in those customers, monitoring their satisfaction levels, and brings any problems to the attention of the relevant functions as soon as possible so that they can be rectified with the minimum of disruption.Future needs: Marketing perhaps with the help of R,D & E, needs to monitor what is happening now and tries to predict what needs to happen in the future. This can be through talking to customers and finding out how their needs are evolving, or working out how new technology can be commercially exploited, or through monitoring competitor’s activities and thinking about how they be imitated, adapted or improved upon.

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FIGURE 2

Marketing as an Interface Inevitably, there is a planning lead time, so marketing needs to bring in ideas early, then work with other functions to turn them into reality at the right time. Finance may have to sanction investment in a new product; R, D & E might have to refine the product or its technology; production may have to invest in new plant, machinery or manufacturing techniques; purchasing may have to start looking for new suppliers, and personnel may have to recruit new staff to help with the development, manufacture or sales of the new product.

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Customers* current product needs* future product needs* price* information needs* product availability

Intermediaries* quantity* demand* price* sales support* logistics* timing

Suppliers* pecifications* quality* quantity* logistics* price

Marketing environment* sociocultural change* technological change*conomic/competitive Change* political/legal change

Production R, D & E

MARKETING

Finance HRM

OUR ORGANISATION

Competition* current products* future products* target markets* communication strategy* distribution* suppliers


When R, D & E and marketing do share common goals and objectives, it can be a very powerful combination. Marketing can feed ideas from the market that can stimulate innovation, while R, D & E can work closely with marketing to find and refine commercial applications for its apparently pointless discoveries.

Desired pricing levels: It is rare to find an organization that can price its products exactly as it wishes without reference to external pressures. Marketing needs to establish what price level the market will bear, and then liaise with production, purchasing and finance to make sure that the organization can produce the product at that price and still make an adequate profit. If the organization wants a higher price, then marketing has to make sure that the customer understands and values the benefits they are getting from the product to justify the premium price.

Information needs: If customers do not know about a product or do not understand what benefits it offers then they are not going to buy it, and all the internal efforts of the organization in producing the product would have been wasted. Marketing, therefore, has to liaise with customers to find out what their information needs are and how they fit into the competitive context, and then work with various internal functions to make sure that accurate and timely information is provided.

Product availability: Customers want products to be in the right place at the right time. Marketing, therefore, needs to work closely with those responsible for sales and dispatch to ensure that a distribution network is set up that matches the customer’s requirements. This involves both the recruitment of appropriate intermediaries (specific wholesalers and retailers for a consumer product, for example), and the efficient transport of goods from A to B so that they arrive when and where they are wanted and in good condition. Again, marketing can identify the initial needs, in terms of the required geographic spread of distribution, the preferred intermediaries, and the timing of supply, and then can also help in negotiating the implementation of those needs.

These examples show briefly how marketing can be the eyes and ears of the organization, and can provide the inputs and support to help each function to do its job more efficiently. Provided that all employees remember that they are ultimately there to serve the customers’ needs, then the truly marketing oriented organization has no problem in accepting marketing as an interface between the internal and

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external worlds, and involving marketing in the day- to- day operation of its functions.

Marketing Management Responsibilities This section outlines specifically what marketing does, and

identifies where each of the areas is dealt with in this chapter.All of marketing tasks boil down to one of two things:

identifying or satisfying customer needs in such a way as to achieve the organization’s objectives for profitability, survival or growth.

Identifying Customer NeedsImplicit in this is the idea of identifying the customer. The

development of mass markets, more aggressive international competition and the increasing sophistication of the customer have taught marketers that it is unrealistic to expect to be able to satisfy all of the people all of the time. Customers have become more demanding, largely, it must be said, as a result of marketer’s efforts, and want product that not only fulfill a basic functional purpose, but also provide positive benefits, sometimes of a psychological nature.

The basic functional purpose of a product, in fact, is often irrelevant as a choice criterion between competing brands – all fridges keep food cold, all brands of cola slake thirst, all cars move people from A to B, regardless of which organization supplies them. The crucial questions for the customers are how does it fulfill its function, and what extra does it do for me in the process? Thus the choice of a Toyota over a Volkswagen may be made because the purchaser feels that the Toyota is a better designed and engineered car, gets one from A to B in more comfort and with a lot more style, gives one the power and performance to zip aggressively from A to B if one wants, and the Toyota name is well respected and its status will reflect on the drive, enhancing self-esteem and standing in other peoples’ eyes. The Volkswagen may be preferred by someone who does not want to invest a lot of money in a car, who is happy to potter from A to B steadily without the blaze of glory, who values economy in terms of insurance, running and servicing costs, and who does not feel the need for a car that is an overt status symbol. These profiles of contrasting car buyers point to a mixture of product and psychological benefits, over and above the basic function of the cars that are influential in the purchasing decision.

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This has two enormous implications for the marketer. The first is that if buyers and their motives are so varied, it is important to identify the criteria and variables that distinguish one group of buyers from another. Once that is done, the marketer can then make sure that a product offering is created that matches the needs of one group as closely as possible. If the marketer’s organization does not do this, then someone else’s will, and any `generic’ type of product that tries to please most of the people most of the time will sooner or later be pushed out by something better tailored to a narrower group. The second implication is that by grouping customers according to characteristics and benefits sought, the marketer has a better chance of spotting lucrative gaps in the market than if the market is treated as a homogeneous mass.

Proper Identification of customer needs is not, however, just a question of working out what they want now, but goes far to include what they would want tomorrow, and identify the influences that are changing customer needs.

Satisfying Customer NeedsUnderstanding the nature of customers and their needs and

wants is only the first step. However, the organization needs to act on that information, in order to develop and implement marketing activities that actually deliver something of value to the customer. The means by which such ideas are turned into reality is the marketing mix. Figure 3, summarizes the areas of responsibility within each element of the mix.FIGURE 3: Marketing Mix

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Product* New product development* Product management* Product Features/benefits* Branding* Packaging* After-sales services

Promotion* Developing Promotion mixes* Advertising management* Sales promotion management* Sales management* Public relations management* Direct marketing

Price* Costs* Profitability* Value of money* Competitiveness* Incentives

Place* Access to target market* Channel structure* Channel management* Retailer image* Logistics


First defined by Borden (1964), the marketing mix is the combination of four major tools of marketing otherwise known as `the 4Ps’ (product, price, promotion and place). This creates an offering for the customer. The use of the words mix and combination are important here, because successful marketing relies as much on interaction and synergy between marketing mix elements as it does on good decisions within those elements themselves. Yogurt ice cream, for example, is a perfectly good, quality product, but its phenomenal success only came after an innovative and daring advertising campaign that emphasized certain adult-oriented product benefits. A good product with bad communication will not work, and similarly a bad product with the glossiest advertising will not work either. This is because the elements of the marketing mix all depend on each other, and if they are not consistent with each other in what they are saying about the product, then the customer, who is not stupid, will reject it all..We now look more closely at each element of the marketing mix.

ProductIt is about not only what to make, but when to make it, how to

make it, and how to ensure that it has a long and profitable life. Furthermore, a product is not just a physical thing. In marketing terms, it includes peripheral, but important elements, after- sales service, guarantees, installation and fitting – anything that helps to distinguish the product from its competitors and makes the costumer more likely to buy it.

Particularly with fast – moving consumer goods (fmcg), part of a product attractiveness is, of course, its brand imagery and its packaging. Both of these are likely to emphasize the psychological benefits offered by the product. With organizational purchases, however, the emphasis is more likely to be on fitness for functional purpose, quality and peripheral services (technical support, delivery, customization e.t.c.) Although much of the emphasis is on physical products, it must also be remembered that service markets are an increasingly important growth area of many national and international economies.

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Price Price is not perhaps as clear-cut as it might seem at first glance,

since price is not necessarily a straight-forward calculation of costs and profit margins. Price reflect, issues of buyer behaviour, because people judge `value’ in terms of their perceptions of what they are getting for their money, what else they could have had for that money and how much that money meant to them in the first place.

Pricing also has a strategic dimension, in that it gives messages to all sorts of people in the market. Customers, for example, may use price as an indicator of quality and desirability for a particular product, and thus price can reinforce or destroy the work of that other elements of the marketing mix. Competitors, on the other hand, may see price as a challenge, because if an organization prices its products very low it may be signaling its intention to start a price war, whereas very high (premium) prices may signal that there are high profits to be made or that there is room for a competitor to undercut and take market share away.

Overall, price is a very flexible element of the marketing mix, being very easy to tinker with. It is also, however, a dangerous element to play around with, because of its very direct link with revenues and profits, unless management think very carefully and clearly about how they are using it. The focus of the pricing therefore, is on the factors that influence price setting, the short-term tactical uses of pricing in various kinds of market and the strategic implications of a variety of pricing policies.

Place Place is a very dynamic and fast-moving area of marketing. It

covers a wide variety of fascinating topics largely concerned with the movement of goods from A to B and what happens at the point of sale and from one channel to another.

These Channels are not only about the movement and transfer of goods. They are also about power, control, manipulation and competitive advantage.

For consumer goods, the most visible player in the channel of distribution is the retailer. Manufacturers and consumers alike have to put a lot of trust in the retailer to do justice to the product, to maintain stocks, and to provide a satisfying purchasing experience. Retailers face many of the same marketing decisions as their types of organization,

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and use the same marketing mix tools, but with a slightly different perspective. They also face unique marketing problems, for example, store location, layout and the creation of store image and atmosphere. Retailing is, therefore, very cardinal in marketing function

PromotionThis is all about communicating to end users the products of an

organization. Communication is often seen as the most glamorous and sexy end of marketing. This does not mean, however, that marketing communication is purely an `artistic’ endeavour, or that it can be used to wallpaper over cracks in the rest of the marketing mix. Communication, because it is so pervasive and high profiled, can certainly make or break a marketing mix, and thus it needs wise and constant analysis, planning and management.

PeopleServices often depend on people to perform them, creating and

delivering the product as the customer wants. A customer’s satisfaction with hairdressing and medical services for example, has as much to do with the quality and nature of the interaction between the customer and then service provider as with the end result. If the customer feels comfortable with a particular service provider, trust them and has a rapport with them, the, that is a relationship that a competitor would find hard to break into. Even where the service is not quite so personal, sullen assistance in a shop or a fast food outlet, for example, does not encourage the customer to come back for more. Thus people add value and a dimension to the marketing package far beyond the basic product offering.

ProcessManufacturing processes, once they are set up, are consistent

and predictable and can be left to the production management team, and since they go out of sight of the customer, any mistakes can be weeded out before distribution. Services, however, are `manufactured’ and consumed live, on the spot, and because they do involve people and the performance of their skills, consistency can be rather more difficult than with normal manufacturing. The marketer, therefore, has to think carefully about how the services are delivered, and what quality controls can be built in so that the customer can be confident that they know

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what to expect each time they consume the service product. This applies, for example, to banks and other retailers of financial services, fast-food outlets hairdressers and other personal service providers, and even to professionals, such as engineers and management consultants.

Process can also involve queuing mechanisms, preventing waiting customers from getting so impatient that they leave without purchase; processing customer details and payment, as well as ensuring the high professional quality of whatever service they are buying.

Physical EvidenceThis final area is of particular relevance to retailers (of any

type of product), or those who maintain premises from which a service is sold or delivered. It singles out some of the factors already mentioned when talking about retailers within the place element of the traditional 4Ps (price, product, place and promotions) approach, such as atmosphere, ambience, image and design of premises. In other service situations, physical evidence would relate to the aircraft in which you fly the hotel in which you stay, the stadium in which you watch the big match, or the lecture theatre in which you learn.

The particular combination of the 4Ps used by any one organization needs to give it competitive edge, or differential advantage. This means that the marketer is creating something unique, that the potential customer will recognize and value, that which distinguishes one organization’s products from another’s. In highly competitive, crowded markets, this is absolutely essential for drawing customers towards your product. The edge or advantage may be created mainly through one element of the mix, or through a combination of them,

Strategic VisionIt is clear that individual marketing activities must be looked

at within the context of a coherent and consistent marketing mix, but achieving that mix has to be an out of a wider framework of strategic marketing planning, implementation and control.

Strategy is concerned with looking into the future and developing and implementing the plans that will drive the organization in the desired direction. Implicit in that is the need for strategy to inform (and be informed by) marketing. Strategic marketing thinking also needs a certain amount of unblinkered creativity, and can only be

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really successful if the marketer thinks not in terms of product, but rather in terms of benefits or solutions delivered to the customer. The organization that answers the question, `what business are you in?’ with the reply, `we are in the business of making gloss paint’ is in danger of becoming too inwardly focused on the product itself and improving its manufacture (the production orientation). A more correct reply would have been, `we are in the business of helping people to create beautiful rooms’ (the identification of customer needs). The cosmetics executive who said that in the factory they made cosmetics but in the chemist’s shop they sold hope, and the power tool manufacturer who said that they did not make drills, they made quarter-inch holes, were both underlining a more creative, outward looking, problems, and if the product does not solve the problem, or if something else solves it better, then the customer will turn away.

The organization that cannot see this and defines itself in product rather that market terms could be said to be suffering from marketing myopia, a term coined by Levitt (1960). Such an organization may well be missing out on significant marketing opportunities, and thus may leave itself open to new or more innovative competitors who more closely match customer needs. A classic example of this is slide rule manufacturers. Their definition of the business they were in was `making slide rules’. Perhaps if they had defined their business as `taking the pain out of calculation’, they would still exist today and be manufacturing electronic calculators. Green (1995) discusses how the pharmaceutical companies are thinking about what business they are in. The realization that patients are buying `good health’, rather than `drugs’ is broadening the horizons of such herbal medicine like Deep Root in Ezeagu, Enugu.

Therefore, the distinction between the product and the problem it solves matters, because marketing strategy is about managing the organization’s activities within the real world in which it has to survive. In that turbulent and dynamically changing world, a marketing mix that works today may not work tomorrow. It your organization is too product focused to remember to monitor how customer needs and wants are changing, then it will get left behind by competitors who do have their fingers on the customer’s pulse. If your organization forgets why it is making a particular product and why the consumer buys it,

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how can it develop marketing strategies that strike a chord with the customers and defend against the competition?

What the texts are saying here is that it is not enough to formulate a cosy marketing mix that suits the product and is entirely consistent with itself. That marketing mix is only working properly if it has been thought through with due respect to the external environment within which it is to be implemented. As well as justifying the existence of that marketing mix in the light of current internal and external influences, the strategic marketer has to go further by justifying how that mix helps to achieve wider corporate objectives; explaining how it is helping to propel the organization in its longer-term desired direction, and finally, how it contributes to achieving competitive edge.

Summarily, competitive edge is the name of the game. If marketers can create and sustain competitive edge, by thinking creatively and strategically about the internal and external marketing environments, then they are well on the way to implementing the marketing concept and fulfilling all the promises of the definitions of marketing with which this chapter began.

Marketing ScopeMarketing plays a part in a wide range of organizations and applications

Consumer GoodsThe consumer goods field, because it involves potentially large and lucrative markets of so many individuals, has embraced marketing wholeheartedly, and indeed has been at the root of the development and testing of many marketing theories and concepts. Consumer goods and markets will be a major focus of this text, but certainly not to the exclusion of anything else. Since we are all consumers, it is easy to relate our own experience to the theories and concepts presented here, but it is equally important to try to understand the wider applications.

Industrial GoodsIndustrial or organizational goods ultimately end up serving

consumers in some way, directly or indirectly. The limestone in Ebonyi State extracted and sold to cement manufacturer would ultimately end up as bags of cement at New market, Enugu. The buying of goods, raw materials and components by organizations is a crucial influence on what can be promised and offered, especially in terms of price, place and product, to the next buyer down the line. If these inter-

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organizational relationships fail, then ultimately the consumer, who props up the whole chain, loses out; which is not in the interest of any organization, however far removed from the end consumer.

Service GoodsService goods, include personal services (hair dressing, other

beauty treatments or medical services, for example) and professional skills (accountancy, management consultancy or legal advice, for example), and are found in all sorts of markets, whether consumer or organizational. As already mentioned services have differentiated themselves somewhat from the traditional approach to marketing because of their particular characteristics. These require an extended marketing mix, and cause different kinds of management headaches from physical products. Many marketing managers concerned with physical products are finding that service elements are becoming increasingly important to augment their products and to differentiate them further from the competition. This means that some of the concepts and concerns of services marketing are spreading far wider than their own relatively narrow field.

Non-Profit MarketingNon-profit marketing is an area that has increasingly asserted

itself in the economic and political climate in recent times, hospitals, schools, universities, the arts and charities are all having to compete within their own sectors to obtain, protect and justify their funding and even their existence. The environment within which such organizations exist is increasingly subject to market forces, and altruism is no longer enough. This means that non-profit organizations need to think not only about efficiency and cost effectiveness, but also about their market orientation – defining what their `customers’ need and want and how they can provide it better than their rivals.

Small Business MarketingSmall business marketing also creates its own perspectives.

Many of the marketing theories and concepts have been developed with the larger organization, relatively rich in management resources, in mind. Similarly, the implementation of these concepts is often discussed under the assumption that the organization does have the expertise, flexibility and resources available to do whatever the market

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dictates to a high and idealistic marketing standard. Many small businesses, however, simply cannot live up to this. They often have only one or two managers who have to carry out a variety of managerial functions; such businesses often come into existence as a result of the owner/manager’s manufacturing skills, and therefore have a production rather than marketing orientation; the manager/s have enough to do managing the day-to-day operation of the business without getting bogged down in strategic planning; they have very limited financial resources for investment in researching new markets and developing new products ahead of the rest. These are a few of the many constraints and barriers to the full implementation of the whole range of marketing possibilities.

International MarketingInternational marketing is a well-established field, and with

the opening up of Europe as well as the technological improvements, it implies that, it is now easier and cheaper to transfer goods around the world. Issues of market entry strategies, whether to adapt marketing mixes for different markets and how, and the logistic of serving geographically dispersed markets all provide an interesting perspective on marketing decision making.

Marketing PerspectivesSome marketing perspectives can be integrated to underline the need for clear strategic marketing thinking as a way to developing the market mix. I also spoke to graduate trainees about why and how they began their careers in marketing. The chapter ends with a few thoughts on the processes involved, values, and guide to better marketing approaches on emergent issues.

Marketing is a Process That Involve Exchange of Services, Goods, Values/Money

It identifies what potential customers need and want now, or what they are likely to want in the future, and then offering them something that will fulfill those needs and wants. You thus offer them something that they value and in return, they offer you something that you value, usually money.

Marketing in some shape or form has been around for a very long time, but it was during the course of the twentieth century that it made its most rapid developments and consolidated itself as an

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important business function and as a philosophy of doing business by the late 1990s. All types of organizations in the USA and Western Europe had adopted a marketing orientation and were looking for ways to becoming even more customer focused, for example through relationship marketing. Emerging markets, such as those in Africa and indeed Nigeria are still tending to think in terms of production or selling, but are rapidly aspiring to the Western model of marketing orientation.

The marketing orientation has been a necessary response to an increasingly dynamic and difficult world. Externally, the organization has to take into account the needs, demands and influences of several different groups such as customers; competitors, suppliers and intermediaries, who all exist within a dynamic business environment. Internally, the organization has to co-ordinate the efforts of different functions, acting as an interface between them and the customer. When the whole organization accepts that the customer is absolutely paramount and that all functions within the organization contribute towards customer satisfaction, then a marketing philosophy has been adopted.

The main tasks of marketing are centered on identifying and satisfying customers’ needs and wants, in order to offer something to the market that has a competitive edge or differential advantage, making it more attractive than the competing product(s). These tasks are achieved through the use of the marketing mix, a combination of elements that actually create the offering.

Marketer has to ensure that the marketing mix meets the customer’s needs and wants and that all its elements are consistent with each other, otherwise customers will turn away and competitors will exploit the weakness. Additionally, the marketer has to ensure that the marketing mix fits in with the strategic vision of the organization, that it is contributing to the achievement of longer-term objectives, or that it is helping to drive the organization in the desired future direction.

Marketing principles and strategies should focus towards satisfying customers’ needs in a profitable level to the business entity that offers such services.

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REFERENCES

Baker, M.J. (1981): Marketing, an Introductory Text, London, Macmillian Press Ltd.

Bamossy, G.J. and Semenik, R.J. (1993): Principles of Marketing, Global Perspective, South Western Publishing Company .

Bell, M.L. (1966): Marketing Concepts and Strategy, Great Britain Macmillan and Company Ltd.

Bolt, G. (1994): Marketing and Sales Forecasting, London, Kogan Page.

Boone, L.E., Kurtz, D. (1992): Conteporary Marketing, New York, Dryden Press.

Day, G. S. (1984): Strategic Marketing Planning, St Paul.

Drucker, P.F. (1973): Management Tasks Responsibility, Practice, New York, Harper & Row.

Jobber, D. (1998): Principles and Practice of Marketing, Europe, Mcgraw-Hill Book Company.

Lancaster, G. and Massinghan, L. (2005): Marketing Management, London, McGraw – Hill Publishing Company.

Piercy, N. (1991), Market –Led Strategic Change, London.

Shaughnessy, J.V. (1992): Competitive Marketing, London, Routledge.

Weitz, B. A. and Wensley, (1988): Strategic Marketing, N. Y. Dryden.

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CHAPTER TWENTY

FUEL SUBSIDY FUND MANAGEMENT AND THE NIGERIA ECONOMY: AN APPRAISAL OF SUBSIDY RE-INVESTMENT

AND EMPOWERMENT PROGRAM [SURE-P]

BY

CASMIR CHUKWUMA ANYANWUDept. of Political Science/Public Administration

Tansian University, Umunya, Anambra State

IntroductionIt was Victor Hugo who said that no man can withstand the

strength of an idea whose time has come. The decision to abolish Nigeria’s fuel subsidy has been an issue of public discourse in contemporary Nigeria society and this became more pronounced since the assumption of the present civilian administration. In 2011 alone, Nigeria’s fuel subsidy cost the country an estimated $8 billion and the price tag for 2012 was even anticipated to be greater. This does not even take into account the country’s losses due to market distortions as a result of the subsidy. While politically costly in the short run, if Nigeria’s government can implement transparent and well-structured reforms, the funds from the fuel subsidy program could be put to far greater use.

With an estimated 37.2 billion barrels of proven oil reserves, Nigeria is one of the world’s largest oil producers. However, the country’s mineral riches have not resulted in a significant improvement in the quality of life for the majority of Nigeria’s citizens, 54 percent of whom live below the national poverty line. In 2010, Nigeria earned $59 billion from oil exports (www.bloomberg.com/news). Therefore, Nigeria does not lack the resources to reach its development goals, rather its resources have been utilized inefficiently.

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In the wake of the global financial crisis and increasing sovereign debt risk, financing for development is drying up and developing countries must now look inward to finance their growth and development needs.

Crisis times require bold reforms and President Jonathan of Nigeria has the ability to take on one of the most difficult problems in the country. But in order to succeed, he will also have to take on another challenge – transparency in the use of the $8 billion fuel subsidy funds. The government must utilize these resources more efficiently to create social welfare and infrastructure improvement programs that will not only improve the quality of life for Nigeria’s poorest but also put the country on track to meet its development goals.

The focus of this paper is to appraise the subsidy reinvestment and empowerment program in the context of fuel subsidy fund management and the Nigeria economy. The paper has been structured into several sections; following this introduction is a background critical and comparative overview of Nigeria crude oil production and revenue generation profile. This section is believed to provide substantial facts needed by Nigerians to question the rationale for subsidy removal in the first instance. Other sections of the work will crisscross the basic issues of oil subsidy itself and other allied matters, such as its benefits, challenges, the management of SURE-P, its programs and achievements; problems, recommendations and conclusion.

Nigeria’s Petroleum Production Capacity and Revenue Generation Profile in the Context of Subsidy: a Critical and Comparative Overview

Relying on information from the National Bureau of Statistics(NBS) and from the Nigerian National Petroleum Corporation (NNPC), and in some other analysis and inferences with respect to global oil and gas distribution, usage and pricing, as well as population figures, we will rely on information from the Oil and Gas Journal, the United States Central Intelligence Agency (CIA) World Fact book, and several other Documents to fast track proper comprehension of Nigeria petroleum revenue generation profile comparative to other petroleum exporting countries. Such information and facts will place our background

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knowledge base on a better pedestal pursuant to effective appreciation of our subject matter.

According to information from the NBS and the NNPC Annual Statistical Bulletin (ASB), 899,403,074barrels {2.46million barrels per day (bpd)} of crude oil was lifted in year 2010. Out of this, the Joint Venture Companies (JVC), and the indigenous Oil Firms lifted 510,616,311(57% or 1.399millionbpd) while the NNPC lifted 388,786,763 barrels (43%), averaging 1.07millionbpd. Of the total quantity lifted by the NNPC, export for the Federation Account was 257,333,705barrels. If we are to multiply this quantity with the US$90 per barrel projected by the Jonathan Administration in the Subsidy Reinvestment and Empowerment Program (SURE-P) Policy Document, it will amount to US$23.2billion or N3.4trillion. The remaining 131,453,058barrels (360,145bpd), lifted by the NNPC was earmarked for domestic refining, but only 34,700,973barrels (95,071bpd) was supplied to the 4 Refineries {since they are operating below 30% of their 445,000bpd installed capacity due to their moribund state occasioned by sabotage and diversion of Turn Around Maintenance (TAM) funds by the contractors and their government apologists}. And by the way, Nigeria needs much less than 360,145bpd for local consumption; as a matter of fact, this country needs 140,066-215,396bpd only for local consumption as we shall show shortly. The balance of 96,752,085barrels (265,074bpd) of unprocessed crude was exported but the NNPC didn’t say where the proceeds went to, and if we multiply this quantity by government projected US$90 per barrel, it will amount to US$8.7billion or N1.3trillion.

In the preceding year 2009, available information from the NBS and the NNPC ASB indicated that the NNPC alone lifted 335,279,899barrels (42.5% or 0.92millionbpd) for both domestic utilization and export. From this, total exports for the Federation Account was 173,095,152barrels. When we multiply this quantity by the government projected US$90 per barrel, we have US$15.6billion or N2.3trillion. The remaining 162,184,747barrels (444,342bpd) out of the total quantity lifted by the NNPC was allocated for domestic refining, but only 19,633,555barrels (53,791bpd) was supplied to the Refineries, and the balance of 142,551,192barrels (390,551bpd) of unprocessed crude was exported, but again, the NNPC didn’t state where the proceeds went to, and if we are to multiply this by the government

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projected US$90 per barrel, it will amount to US$12.8billion or N1.9trillion.

All of this analysis reveals that the Nigerian government makes a whopping US$28.4-US$31.9billion or N4.2-N4.7trillion from the NNPC alone, not to mention what it generates from gas production and what it makes from its controlling share of the JVCs and others. Besides, it is not only from oil and gas that Nigeria generates its revenue; it also generates about 15%-30% of its revenues from other sectors of the economy. Also, State governments across the Federation make substantial money from Internal Generated Revenue (IGR) and other sources. Information available from various banks reveals that Lagos State alone for instance makes between N17-N22billion (US$115-US$149million) IGR monthly. How then, can the Jonathan Administration be telling Nigerians that the country is broke?

Second, information from the NBS and the NNPC ASB revealed that 8,476,990,000litres (53,314,402barrels or 140,066bpd; 159Litres=1Barrel) of petroleum products in year 2010 was distributed nationally averaging a daily consumption of 17.41millionlitres of Premium Motor Spirit (PMS) or gasoline (Petrol), 2.41millionlitres of Automotive Gas Oil (AGO), 1.83millionlitres of Household Kerosene (HHK), and other by-products whose daily consumption statistics are not documented. However, total PMS distribution of 6,353,517.99litres, according to the NBS and the NNPC ASB, was about 33% lower than 2009 total volume due to non availability of figures from two major products retailers, MRS and Oando which accounted for 16% of total PMS distribution in 2009. In the preceding year 2009, a total of 12,500,520,000litres (78,619,623barrels or 215,396bpd; 159Litres=1Barrel) of petroleum products, as revealed by the NBS and the NNPC ASB, was distributed or sold nationally, averaging a daily consumption of 26.04millionlitres of PMS, 3.10millionlitres of AGO, 1.93millionlitres of HHK, and other by-products whose daily consumption statistics are not also mentioned.

In addition, data from the NBS and the NNPC 2011 first and second Quarter Petroleum Information shows that crude oil lifting averaged 2.51millionbpd and 2.39millionbpd respectively which is still consistent with the 2.46millionbpd of oil production in the country. Moreover, the NBS and the NNPC data reveals that the total value of imported petroleum products for year 2010 was US$5.5billion (N814billion) and that of year 2009 was US$4.8billion (N710billion).

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This critical analysis tells us that Nigeria only need 140,066-215,396bpd (22.3million-34.2millionlitres; 1Barrel=159Litres) of refined petroleum products for daily consumption based on government own data, and that equally means that if the 4 Refineries in the country (with a total installed capacity of 445,000bpd) are working optimally, they can refine enough petroleum products for local consumption and still have enough left for exportation. This analysis also tells us that the Nigerian government spends less than N1trillion annually for importation of petroleum products based on its own data. And since the petroleum products are sold and not distributed for free to Nigerians, it presupposes that the government spends a lot less than half of these amounts for subsidies if indeed there are any. In short, it is our estimate that the government spends less than N200billion for such. Besides, government generates a lot of revenue which we cannot quantify here from the distribution and sale of these petroleum products from the Oil marketers in terms of road tax, contribution to the Petroleum Equalization Fund (PEF) and others. For example, between 1993 and 1998, when the General Sanni Abacha Military junta was in power, N3 for every liter of fuel sold was remitted to the defunct Petroleum Trust Fund (PTF), and the price of oil per barrel then at the International Market in that given period was between US$11 and US$20 yearly average, and the pump price of PMS in that same period, in this country never rose above N11. How is it then that the Jonathan Administration claims that Nigeria consume 35-40millionlitres of PMS alone daily, and that it spends over N1.13trillion yearly for fuel subsidy (Bear in mind that the term “Fuel” comprises not only petrol or gasoline but every other petroleum product and other substances that are combustible and that can be consumed to produce energy or serve as a source of energy or heat) when Diesel and LPFO (Low Pour Fuel Oil) is fully deregulated by government already?

Third, let us consider the issues of subsidy and arbitrage objectively. A number of countries, particularly oil-rich countries, according to information from the Oil and Gas Journal, the CIA World Fact book and other sources; subsidizes the cost of gasoline (Petrol) and other petroleum products (although, it discourages fuel efficiency if not properly managed). Almost all, if not all of Organization of Petroleum-Exporting Countries {(OPEC)-Algeria, Angola, Libya, Nigeria, Iraq, Iran, Kuwait, Qatar, Saudi Arabia, United Arab Emirates (UAE),

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Ecuador and Venezuela} subsidizes the cost of petroleum products for their citizens, and among OPEC, Nigeria is the sixth largest Exporter of crude oil, and the World 12th largest producer of crude oil (2.46millionbpd), with 4 epileptic Refineries, maintaining the pump price of gasoline (petrol) before January 1, 2012 at US$0.44 (N65); effective January 1, 2012, jacked up petrol pump prices to US$0.97 (N143) per liter, which resulted in the Occupy Nigeria Mass Protests and Strikes, and government subsequently reduced it to US$0.66 (N97) per liter.

It is nevertheless disheartening to note that Nigeria is apparently the poorest in terms of living standards among OPEC with inefficient and erratic power (energy) supply, poor transportation system and lack of basic infrastructure. The other OPEC countries with very good infrastructure and sufficient, and stable power (energy) supply, still maintains petrol pump prices at very low rates, with some subsidizing it to almost zero level. Algeria, for instance is the World 15th largest producer of crude oil (2,125,000bpd) with 5 Refineries, and it maintains petrol pump price at US$0.41 (N61); Libya (as at early 2011, before Muammar al-Qaddafi death), the World 17th largest producer of crude oil (1,79millionbpd), with 5 functional Refineries maintains petrol pump price at US$0.17 (N25); Iraq, the World 13th largest producer of crude oil (2.4millionbpd), with 11 functional Refineries, maintains petrol pump prices at US$0.38 (N56); Iran, the World 4th largest producer of crude oil (4.2millionbpd), with 9 functional Refineries and having the World 10th largest Refinery (Abadan Refinery, refining 450,000bpd), maintains petrol pump price at US$0.65 (N96); Kuwait, the World 10th largest producer of crude oil (2,49millionbpd) subsidizes petrol at US$0.22 (N33); Qatar, the World 20th largest producer of crude oil (1.2millionbpd), maintains petrol pump price at US$0.22 (N33); Saudi Arabia, the World 2nd largest producer of crude oil (8.8millionbpd), with 9 functional Refineries and having the World 5th largest Refinery (Ras Tanura Refinery, refining 550,000bpd), subsidizes petrol for its citizens at US$0.16 (N24); the UAE, the World 8th largest producer of crude oil (2.8millionbpd), with 4 functional Refineries maintains petrol pump prices at US$0.48 (N71); Ecuador, the World 30th largest producer of crude oil (485,700bpd), maintains petrol pump price at US$0.44 (N65); and Venezuela, the World 11th largest producer of crude oil (2.47millionbpd), with 12 functional Refineries, and having the World 2nd largest Refinery (Paraguana Refinery, refining

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940,000bpd), maintains petrol pump prices at US$0.02 (N3). These countries are all OPEC members.

However, the soaring cost of crude oil in recent years led some other countries (not OPEC members) to cut down subsidies, moving inflation from the government debt to the populace, often resulting in political unrest. On December 2010, for instance, the Bolivian government issued a decree removing subsidies and hiking prices as much as 83% with the argument (as is also claimed by the Nigerian government), that illegal exports (contraband) to neighboring countries was harming the economy. After widespread strikes, the Bolivian government cancelled all planned hikes, and maintains a pump price of US$0.54 (N80) per liter. And it is instructive to note that Bolivia is the World 66th largest producer of crude oil (47,050bpd) with 5 functional Refineries. Malaysia equally had the same issue, but it found a constructive way around it. Malaysia, a country of some 28.3million people, and the 27th World largest producer of crude oil (693,700bpd) with six functional Refineries, spends US$14billion (N2.1trillion) subsidizing petrol, diesel and gas each year.

In 2008, the Malaysian government hiked petrol prices by 40%, but it also announced a yearly cash rebate to Malaysian citizens, and plans to set up separate petrol pumps stations at its borders to sell fuel to foreigners at market rates so that only Malaysians can benefit from subsidized petrol and these petrol pumps at its borders targets Singaporeans and Thais who make day trips across the border to fill their tanks with cheaper fuel there. Since then, fuel prices in Malaysia has dropped about six times and increased only twice. The Malaysian government still maintains petrol prices at US$0.61 (N90) per liter. But then, the country has basic infrastructure, stable power (energy) supply, good transportation network and other social amenities, and Nigeria has none of these things.

In Indonesia, a nation with a population of 237.6million, and the World 21st largest producer of crude oil (1,023,000bpd) with 10 functional Refineries, the government spends US$10-14billion on fuel subsidy and maintains a pump price of PMS at US$0.59 (N87). One of the steps the Indonesian government has taken around this issue is to suggest that private car owners who are wealthy in Indonesian terms be excluded from subsidies entirely, with the cheap fuel limited to public transport and motorcycles. But again, Indonesia also has good

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infrastructure and stable power (energy) supply. Mexico, a country of 112.3million people and the World 7th largest producer of crude oil (3,001,000bpd) with 7 functional Refineries also subsidizes petrol for its citizens.

Some other countries with fuel subsidies, to mention but a few, are Egypt, US$0.31 (N46), the World 28th largest producer of crude oil (680,500bpd) with 9 functional Refineries, and a population of 81.2million; Brunei, US$0.39 (N58), the World 47th largest producer of crude oil (146,000bpd), and Trinidad and Tobago, US$0.64 (N95), the World 44th largest producer of crude oil (151,000bpd). Even the United States, the World 3rd largest producer of crude oil (7.8millionbpd), the World 3rd largest population (312.8million), and having the World fourth largest Refinery in Texas (refining 572,500bpd) and having about 153 other functional Refineries cutting across several States (with about 26 in Texas, 20 in California and 16 in Louisiana), whose gasoline (petrol) pump prices are not regulated, still provides about US$4billion or so in subsidies to oil and gas companies yearly, and pump prices ranges between US$0.80 to US$1 per liter in the US, depending on the State. All of these countries mentioned have sufficient and stable power (energy) supply and good infrastructure.

It is imperative therefore, that the Jonathan Administration can learn from these countries, especially the OPEC ones and shelve further comparisons between Nigeria and neighboring West African countries of Ghana {World 88th largest producer of crude oil (7,081bpd)}, Chad {World 50th largest producer of crude oil (115,000bpd)}, and Benin Republic that has insignificant or no oil production and yet have sufficient and stable power (energy) supply.Fourth, it is not at all true as the Jonathan Administration purport that the Nigerian masses have never enjoyed the so-called fuel subsidy. On the contrary, it is the only commodity out of the collective commonwealth that the Nigerian people enjoy, even if minimal. The average Nigerian uses gasoline (petrol) to power generating sets to generate his or her electricity (due to the national grid epilepsy), both at work and at home, and also uses it for transportation purposes. Again, the argument by the officials of the administration that the pump price of petrol will fall down when deregulated, and using the Telecom Industry as an example does not hold any water, because for over seven years now, diesel and LPFO has been deregulated, yet their prices keep skyrocketing, and had never come down. It has in fact led to massive

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closure of industries, and lay-offs, especially in the textile and automobile industries because these industries use diesel and LPFO to power their equipment and they just could not cope with the rising costs.

It must further be debunked as untrue that if Nigeria does not fully deregulate the downstream sector of the petroleum industry and remove fuel subsidy, as the Jonathan administration has continually harped, that the economy will go down in about five years time, and that Nigeria, as a nation will be worse off than the Greek situation. In the first instance, the Grecian economy is the 32nd largest in the world by nominal gross domestic product (GDP) and the 37th largest at purchasing power parity (PPP), according to data by the World Bank for the year 2010; per capita, it is ranked 33rd by nominal GDP and 31st at PPP according to the 2010 data (World Bank, 2010). Nigeria does not even come close. Greece is a developed country; Nigeria is still a developing country. There are no parallels at all. More so, in terms of subsidy between the Grecian economy and the Nigerian economy; the only parallel is that of institutionalized corruption.

The economic crisis in Greece was chiefly occasioned by corruption and the associated issue of poor standards of tax collection, which is a primal obstacle in overcoming the country’s financial problems. Its uncontrolled government spending and doctored reports on the economy, coupled with its ratio to savings exceeding 100%, and its history of loan default in 1826, 1843, 1860 and 1893 led to a crisis in International confidence on Greece ability to repay its sovereign debt. But the country also has a lot going for it, like its strong workforce among Organization for Economic Co-operation and Development (OECD) countries, and it has a high standard of living (29th in the world).

In 2010, Greece was the European Union (EU) largest producer of cotton, 2nd in rice, 3rd in figs, tomatoes, water melon, 4th in tobacco, and has wonderful Tourism and Shipping Industries. Agriculture contributes 3.3% of the country’s GDP, and employs 12% of the country’s workforce. It is self-sufficient in power (energy) supply, besides having 81 Airports as at 2010. Greece also has at least 10million barrels of proven crude oil reserves and it’s the World 89th largest producer of crude oil (6,779bpd). As have been stated earlier, the only parallel between the Greek situation and the Nigerian situation is blind and ruthless corruption, and Greek government officials cannot even

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equal or come near the Nigerian government officials in corruption at all.

The corruption index in Nigeria is legendary, and the manner in which it is carried out is very ruthless indeed. Government officials are singularly and collectively corrupt, inept and without popular support. Why, for instance, is the pump price of Household Kerosene (HHK) which is still subsidized to zero level in this country selling for US$1 (N150) when the Petroleum Products Pricing Regulatory Agency (PPPRA) has pegged its retail pump price at US$0.34 (N50) despite several outcries? And why has the Jonathan Administration refused to do anything about it? Now lets take a look at these facts, about US$6.8million (N1billion) is budgeted for food alone in the Presidency for 2012. Today, about 17,000 public officials (elected and appointed political office holders), across the federation earns US$9.5billion (N1.4trillion), which is a third of the national budget in a nation of 162.5million people. Information from the Budget Office reveals that members of the National Assembly alone gulp 26% of the nation’s recurrent expenditure. A Senator of the Federal Republic earns about US$2.8million (N420million), with the Senate President earning about US$4.1million (N600million), while their counterpart in the House of Representatives earns about US$2.4million (N360million). This is monumental fraud and blind looting of the commonwealth of the Nigerian people.

In fact, the Nigerian government is the most subsidized government in the world. Paraphrasing what one Nigerian wrote a few days ago, “When a Nigerian pays…for imported fuel rather than locally refined fuel, he is subsidizing the incompetence of government. When a Nigerian has to buy a generator, petrol and diesel because of lack of power supply, he is subsidizing the incompetence of government. When a Nigerian has to drill a borehole, buy pure water or bottled water because there is no potable water supply provided by government, he is subsidizing the incompetence of government. When a Nigerian has to maintain 3 Phone Lines or 3 different Internet subscriptions because of poor call quality and a crippled bandwidth, he is subsidizing the poor regulation by government. When a Nigerian pays to secure his life and property; he is subsidizing the inability of government to protect him. We also subsidies the government when we visit the roadside mechanic more often than usual or sometimes with our lives due to bad roads. We

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can go on and on about the poor educational system, healthcare delivery, the environment, etcetera.

Government does not do us a favour when it does the work of governance; let the Jonathan Administration prune itself by putting an end to uncontrolled spending, reducing its Ministries, Special Advisers and reducing the wastage in government, as well as revamping our Refineries, building new ones, providing electricity, potable water, good transportation system and basic Infrastructure before talking about the removal of petrol subsidy, because on the flipside, there is really nothing wrong with deregulation in the literal sense of the word. Deregulation simply means freeing a trade, business activity, etcetera from certain bureaucratic rules and controls, and may indeed open up the market and encourage investors in the downstream sector.

Cost of the Fuel Subsidy and Rationale for Subsidy RemovalThe cost of the fuel subsidy has continued to grow

exponentially. This is partly due to the rising cost of fuel—which meant that the government had to spend even more to keep domestic prices low— and also due to Nigeria’s increasing population— which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable. The price of crude oil increased from 30.4 dollars per barrel in 2000 to 94.9 in 2010 over the same period Nigeria’s population increased from about 123 million to 158 million. By 2011, the fuel subsidy accounted for 30 percent of the Nigerian government’s expenditure and it was about 4 percent of GDP and 118 percent of the capital budget. Nigeria’s fuel subsidy continues to crowd out other development spending. By comparison, Nigeria’s total allocation for education is about $2.2 billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. In 2004, it was estimated that only 15 percent of the country’s roads were paved. The $8 billion from the fuel subsidy could help to address some of these issues.

In addition, keeping the domestic price of oil artificially low with the fuel subsidy has discouraged additional investment in Nigeria’s oil sector. This is especially problematic given that the oil sector is the lifeblood of the Nigerian economy. Since 2000, Nigeria has issued at least 20 refinery licenses to private companies. However, not one

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refinery has been built because investors could not recoup their investment under the artificially low price structure.

Who Benefits the Most from Subsidy? In debating the merits of Nigeria’s fuel subsidy it is important to

understand who benefits the most from the program. Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy. Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.

Sustaining Reforms amidst Unrest One legitimate criticism against the Nigerian government is that

it has done a poor job in planning for the subsidy removal and in communicating the huge costs of the fuel subsidy and the benefits of its removal to the population. In a country where there is already a lack of trust between the people and government, communication is critical. The real challenge the government faces is winning the trust of the people. Working Nigerians are hurting and their livelihoods are in danger with the doubling of petrol prices. They want to know that the government has a credible plan and the protests represent a call for the government to quickly implement post-subsidy programs. Some form of social protection must be launched immediately to protect the most vulnerable. This could include measures to reduce the cost of public transportation in the short and medium term.

The Nigerian government must implement a transparent system for redirecting and monitoring the use of funds from the fuel subsidy program so that its citizens can review and scrutinize the expenditure. The government has announced its intention to redirect the funds from the subsidy into infrastructure, support for small businesses and safety net programs. This is a step in the right direction, but the success of these programs rests on having proper oversight and participation of civil society. Unlike the fuel subsidy itself, these programs should be targeted toward helping the poor including programs to reduce maternal and infant mortality and improve road quality and access. Most importantly, the programs must be tied to Nigeria’s overall development

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goals. The government and the proposed civil society oversight committee must prioritize sustainable investments that will have a long-term development impact.

Rationale for SURE-P as a Development AgendaOne of the pillars of the Transformation Agenda of the Federal Government is the progressive deregulation of the petroleum industry. In January, 2012, the decision to remove the subsidy on Premium Motor Spirit (PMS) was announced by government, with the following as the official explanation for instituting the policy.(a) The subsidy regime in which fixed prices are maintained irrespective of market realities has resulted in a huge unsustainable subsidy burden.(b) Fuel subsidies do not reach the intended beneficiaries. Subsidy level is directly correlated with household income, as richer households consume larger quantities of petroleum products. Consequently, the subsidy benefits mostly the rich.(c) Subsidy administration is beset with inefficiencies, leakages and corruption.(d) Subsidy has resulted in the diversion of scarce public resources away from investment in critical infrastructure, while putting pressure on government resources.(e) Subsidy has discouraged competition and stifled private investment in the downstream sector. Due to lack of deregulation, investors have shied away from investment in the development of refineries, petrochemicals, fertilizer plants, etc. It is important to note that since the year 2000, government has issued 20 licenses for new refineries, none of which has resulted in the construction of new refineries.(f) The deregulation of the downstream sector of the petroleum industry will lead to rapid private sector investment in refineries and petrochemicals, which will generate millions of jobs and lead to increased prosperity for our people.(g) Huge price disparity has encouraged smuggling of petroleum products across the borders to neighboring countries, where prices are

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much higher. Nigeria therefore ends up subsidizing consumption of petroleum products in neighboring countries

Establishment, Mandate and Terms of Reference of the SURE-P Committee

In order to ensure the proper management of the funds that would accrue to the Federal Government from the partial withdrawal of subsidy, Government decided to inaugurate a committee for the purpose. Accordingly, the President set up a 20 member Subsidy Reinvestment and Empowerment Program [SURE-P] Committee, made up of the following; 1. Dr. Christopher Kolade, CON Chairman 2. Gen. Martin Luther Agwai (Rtd) - Deputy Chairman3. Hon Minister of Finance/CME Member4. Hon. Minister of Petroleum Resources Member5. Hon. Minister National Planning Member6. Hon. Minister of State Health Member8. Prof. Kunle Ade Wahab (Convener, Mass Transit) - Member9. Mazi S. Ohuabunwa (Convener, Niger Delta (East-West Rd)) - Member10. Dr. Mrs. Ngozi Olejeme (Convener, Public Works (Ferma))- Member11. Alh. Najeem Usman Yasin Member12. Alh. Kassim I. Bataiya (Convener, Roads & Bridges)- Member13. Mr. Kiri Mohammed Shuaib Member14. Dr. Fatima L. Adamu (Convener, Maternal Child Health) - Member15. Mr. Audu Maikori (Convener, CSWYE) - Member16. Alh. Mohammed Garba (Convener, Communications) - Member17. Mrs. Amina Az-Zubair Member18. Comrade Peter Esele (Convener, Vocational Training) - Member19. Barrister Mrs. Halima Alfa (Convener, Culture & Tourism, M&E) - Member20. Mr. Chike Churchill Okogwu (Convener, Railway) - Member

Presidential MandatePresident Goodluck Ebele Jonathan inaugurated the SURE-P

Committee on the 13th of February 2012. The mandate from the President to the SURE-P Committee is to `deliver service with integrity’ and `restore people’s confidence in the government’. The Committee has therefore expressed its desire to ensure that the use of the fuel

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subsidy savings to deliver the program mandate is done with utmost probity, transparency and accountability.The Subsidy Reinvestment and Empowerment Program were designed along the line of the transformation agenda of the President, the life span of which is 2012 – 2015. Subsidy Reinvestment and Empowerment Program (SURE-P) aims to reinvest the Federal Government’s share of the savings arising from the reduction of subsidies on petroleum products into programs and initiatives that would go a long way to ease the pain of subsidy removal and create a better life for Nigerians.

Sure -P therefore ensures that the Federal Government’s part of the savings from fuel subsidy removal or reduction is applied on critical infrastructure projects and social safety net programs that will directly ameliorate the sufferings of Nigerians and mitigate the impact of subsidy removal.

Terms of ReferenceThe terms of reference are as follows:(a) Determine in liaison with the Ministry of Finance and Ministry of Petroleum Resources, the subsidy savings estimates for each preceding month and ensure that such funds are transferred to the Funds' Special Account with the Central Bank of Nigeria.(b) Approve the annual work plans and cash budgets of the various Project Implementation Units (PlUs) within the Ministries, Departments and Agencies (MDAs) and ensure orderly disbursement of funds by the PlUs in order to certify and execute projects;(c) Monitor and evaluate execution of the funded projects, including periodic Poverty and Social lmpact Analysis (PSIA);(d) Update the President regularly on the program; e. Periodically brief the Federal Executive Council (FEC) on the progress of the program;(e) Appoint Consulting firms with international reputation to provide technical assistance to the Committee in financial and project management;(f) Appoint external auditors for the fund;

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(g) Do such other things as are necessary or incidental to the objectives of the Fund or as maybe assigned by the Federal Government;(h) The Committee is supported by a Secretariat that will also be responsible for communication and press briefing.

Subsidy Removal as a Restructuring StrategySubsidy withdrawal is a far-reaching restructuring strategy. It tackles existence of distortions in the Nigerian Economy. This country, or any other, cannot survive alone in a globalized cashless economy in the new age of globalization. You may subsidize agriculture but not fuel because it has far-reaching negative effect on stratification of society, which is vital for spiritual harmony aside from creating soft money for the smart and privileged people, this time the retired Generals, who could buy up the privatized institutions.

What subsidy does to Nigeria is to create an imbalance in the economy allowing everyone to go into bunkering, raising private armies, jetty ownership, private jets and every other endeavor antecedent to it. They build private refineries in foreign countries employing as much as 20000 foreigners while our own refineries remain less competitive going by the subsidy we pay outsiders. It explains why Nigerians have developed the economies of neighboring African countries where electricity is more stable because it helps to sustain their refineries so they could smuggle in the products or sell to us at high prices thereby requiring higher and higher subsidies.

SURE-P SecretariatThe Secretariat was created to provide technical, administrative

and information support to the Committee. The Secretariat is located on the First Floor Phase 3 of the Federal Secretariat complex and is made up of the following functional units; Administration and Finance, Performance and Results, Communications, and the Committee Support.

Program StructureIn the SURE-P operational structure, individual projects are

managed by ProjectImplementation Units (PIUs) that is located within Federal Government Ministries, Departments and Agencies (MDAs). To perform its oversight responsibility, the Committee has divided itself into sub-

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committees, each made up of 3 to 4 members. The subcommittees act on behalf of the main committee to provide direct supervision to the projects. Sub-committees carry out site inspection, and are required to sign certificates that assure the main committee that the work that is claimed is fully verified. The Committee also has a Secretariat for technical and administrative support, and for providing information to stakeholders and the general public.

Sub-CommitteesThe SURE-P Committee is comprised of six Sub-Committees, each headed by a Convener; they are as follows;(i) Roads and Bridges: The Sub-Committee provides leadership and vision for the PIUs and the Technical Teams to enable project progress.(ii) Niger Delta: This Sub-Committee ensures that the execution of the East-West Road dualization contract is fast-tracked with SURE-P funds to completion.(iii) Vocational Training / Public Works: The Sub-Committee of this PIU serves as the custodian of the mandate of the Committee in all projects under Vocational Training/ Public Works through program initiation, verification and approval.(iv) Maternal Child Health: The Maternal and Child Health (MCH) Sub-committee is responsible for the oversight of all MCH program. The Sub-committee reviews all projects, and deliberates on the best decisions that would be most beneficial for the successful completion of the MCH program and also in the best interest of citizens of Nigeria. The Sub-committee serves as representatives for SURE-P at all MCH events at the Zonal, State and Local levels.(v) Community Services Women and Youth Empowerment: The CSWYE Sub-Committee was set up in March 2012 and charged with the responsibility to oversee the Community Services, Women and Youth Employment (CSWYE) Program which has broad focus on Youth related programming. The program has the following major components – Community Services Scheme (CSS), Graduate Internship Scheme (GIS), Public Works (FERMA) and Vocational Training (VT). Subsequently, as the actual implementation of the program components commenced and became intensified, the Sub-Committee was split into two sub-committees, the erstwhile CSWYE Sub-Committee and the

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new Public Works (FERMA) and Vocational Training (PW/VT) Sub-Committee.(vi) Railways/ Mass Transit: Sub-Committee on Railways and Mass Transit oversee and supervise the activities of SURE- P Railway Team Lead in achieving the vision and mission of SURE- P.Each of the Sub-Committees comprises members from the full Committee and serves to fast-track, monitor and validate the programs and projects of SURE-P.

Procedure for Project ImplementationIn the opinion of the Federal Government, SURE-P is neither

duplication nor a replacement of the normal activity of each relevant Ministry. Rather, the intervention of SURE-P is intended to achieve three major outcomes, viz: (i) Given that SURE-P funds are derived directly from the savings from fuel subsidy withdrawal, the intervention supplements the normal budgetary allocation so that higher-level results can be delivered on each project;(ii) SURE-P methods ensure the faster delivery of project outcomes by employing procedures that are designed to shorten the time between project implementation and authentication (the program eliminates systemic bureaucratic bottleneck in implementation procedure);(iii) Contractors and other stakeholders get paid directly, and without undue delay, thus encouraging beneficiaries to deliver outcomes on time, and to avoid the possibility of project abandonment.

One additional feature of the SURE-P intervention is that, while the responsibility for the day-to-day management of projects located within the respective MDAs rests with the PIUs’, their staff may also include consultants and other capable professionals brought in from the private sector.

Program Monitoring and EvaluationMonitoring and Evaluation (M&E) of all SURE-P projects is the responsibility of an M&E Unit under the direction of the appropriate department of the Ministry of National Planning. The Unit is complemented, where necessary, by experts and consultants of international reputation. Such consultants are secured through the assistance of a number of foreign donor agencies.

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Partnership with Ministries, Departments and AgenciesThe Program Implementation Units (PIUs) have the overall

responsibility for the day-to-day management of all SURE-P funded projects, and are located within the respective Ministries, Departments and MDAs. The PIU staff are from the host Ministries, but may include consultants and other capable hands brought in from the private sector.

Subsidy Reinvestment Fund ManagementTo put to rest the ensuing mass protest that followed the subsidy

removal the government reintroduced a partial subsidy and set up a fund into which the saved money from the partial subsidy removal would be funneled. This fund was called the Subsidy Reinvestment and Empowerment Program (SURE-P) and it was charged with using the subsidy savings to invest in infrastructural projects and social empowerment initiatives that, in theory, would benefit all Nigerians.

The partial removal of the fuel subsidy by the Federal Government in January 2012 was aimed at conserving and maximizing the oil wealth of Nigeria. This in specific terms saw the emergence of a fiscal formula for the sharing of the accrued subsidy savings. In 2012, the Federal Government’s share is 41 per cent of the savings while the States and Local Government shared the remaining 59 percent.

The SURE-P Committee in carrying out the mandate trusted upon it by the President identified few critical infrastructure and social Safety nets that will ameliorate the sufferings of Nigerians following the partial discontinuation of the petroleum products subsidy. In overseeing and ensuring the effective and timely implementation of the projects to be funded in 2012, with the savings accruing to the Federal Government from the subsidy, some programs and projects were earmarked.

Following the approval of its 2012 budget by the Executive and the National Assembly, SURE-P established a fund management structure that seemingly ensures probity, transparency and accountability. After the Committee has approved payments for projects, the Chairman signs the approval, the Director General Budget Office, as Accounting Officer to SURE-P processes the approvals. He then authorizes the Central Bank of Nigeria (CBN) to make payments directly to the bank accounts of beneficiaries.

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The Director-General, Budget Office of the Federation (DG Budget Office) is designated Accounting officer for all SURE-P activities as a means of providing the check-and-balance arrangement that guarantees the probity of the SURE-P process. It also insulates the officials of SURE-P and the Project Implementation Units (PIUs) from direct contact with contractors on financial matters. The SURE-P fund is managed by The Infrastructure Bank (TIB). The bank is responsible for monitoring the loans and payment to suppliers and operators.

The government claims that the subsidy removal was necessary to end the vast corruption taking place under the subsidy regime, and promised to reinvest the saved money into infrastructure, health and education, and to support social security programs related to issues such as women and youth empowerment, unemployment, and community service. But how exactly SURE-P’s money is being spent remains unclear.It’s been over a year and a half since SURE-P was established and with $2.5 billion having flowed into its coffers – and a further $1.6 billion coming its way in 2014 – what has SURE-P actually achieved?

For example, when the National Assembly asked SURE-P in November 2012 to produce its 2012 budget expenditure analysis, lawmakers were dismayed to hear that lots of the things SURE-P committee members pointed to were projects already being carried out by the Federal Government via routine budgetary allocations (www.vanguardngr.com/2012/11).

For instance, the SURE-P board claimed to have spent N16 billion ($100 million) on the Benin- Ore- Shagamu road – a project for which the Federal Government had already awarded a N65.2 billion ($400 million) contract in September 2012 (www.vanguardngr.com/2012/09)– and said it had contributed N9.3 billion ($57 million) to the Lagos-to-Ibadan railway – a development for which a $1.4 billion contract was signed between the Federal Government and the China Civil Engineering Construction Corporation (CCECC) in August 2012 (www.allafrica.com/stories/201208300300.html).“In all of these you will see that they are not in any way financing any new projects”, lamented Senator Danjuma Goje, a member of the Senate Committee on Petroleum. “They are not initiating any new projects; they only put money into existing projects.”

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Meanwhile SURE-P has also come under suspicion of succumbing to corruption. In June this year, for example, the Kaduna State House of Assembly ordered the suspension of SURE-P in the state and constituted a nine-man committee to investigate the implementation of SURE-P’s state projects and activities. Allegations of dubious transactions and high-level misappropriation were levelled against the program coordinators with a reported N560 million ($3.1 million) missing from the Kaduna State SURE coffers (www.vanguardngr.com/2013/06).Indeed, while hopes were high when SURE-P was implemented that it would funnel resources into much-needed projects to help Nigeria’s economic and social development, many now fear it has fallen victim to Nigeria’s culture of corruption, mismanagement and inefficiency.“The SURE-P appeared well thought through”, Olumide Abimbola, Nigerian anthropologist and editor of Nigerians Talk, told Think Africa Press. “The list of projects they are supposed to tackle looked impressive, but the problem in Nigeria is often not the lack of good ideas and policies, but their execution” (www.thinkafricapress.com).Political analyst Raymond Eyo agrees with this final assessment but believes the seeds of SURE’s disappointments were sown from the start. “SURE-P was a hastily-packaged initiative, designed to assuage the masses’ hard feelings against the fuel subsidy removal”, he said. “It wasn’t well thought out and its implementation has been unsurprisingly inefficient”. Asked if SURE-P can succeed in Nigeria’s current socio-political climate Eyo responded: “absolutely not. If pension funds or aid money for basic education or healthcare cannot survive in Nigeria’s web of corruption, what more can be expected of funds freely, and ambiguously, disbursed to the various governments from programs such as SURE?” (www.vanguardngr.com/2013/11)

An Unsure Future under SURE-PWhile attempts have been made by government officials to

trumpet the achievements made by SURE-P since its inception, the truth of its lackluster performance is becoming ever more apparent. A senate ad-hoc committee on September 22 once again summoned the then Chairman of SURE-P, Christopher Kolade, and expressed its concern at the implementation of SURE programs (www.punchng.com/news/2013/09).

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“All of you in the committee were appointed because there was the need to commit the huge funds towards projects”, Chairman of the ad-hoc committee, Abdul Ningi, said to representatives of SURE-P. “However, as it is now, Nigerians can only see your efforts, they cannot see results.”

It has thus become increasingly clear to politicians and the public that despite the large amounts of funds being ploughed into it by the government SURE-P is lacking in direction, oversight and accountability.

As Dele Olawole, founder of social media site Nigerians against Corruption, told Think Africa Press: “We have a government that talks big and Nigerians have heard it all before yet we continue to suffer. There are no records of money being spent on projects and you hardly see the implementation or physical structure. All we ask for is honesty and transparency.”

Indeed, with the government seemingly unable to plug financial leakages in the various sectors of the economy, it seems that SURE-P simply provides yet another crack to tape over.

Matching Policy with Action: Appraisal of SURE-P Implementation In spite of all the beautiful thoughts in the minds of many

Nigerians about how transformed country would become, should the SURE-P program come to fruition, something still bothered me about an aspect of how Okonjo Iweala and her group were making their case. They did not sound as though the development of Nigeria was the responsibility of elected officials, especially the president. Instead they sounded like they were merely doing Nigerians a favor predicated on subsidy removal. It baffles this writer that they refused to acknowledge that all the projects listed under SURE-P, including those they did not bother to catalog, were projects the government owe Nigerians a duty to execute whether there was subsidy money or not. They seemed to be saying that without subsidy money, government does not owe Nigerians any responsibility of rebuilding roads, bridges, rail lines and creating jobs. That is highly pathetic!

As Nigerians pondered where this whole thing was going, the President injected a familiar caveat. During his speech at the 58th National Executive Committee (NEC) of the People’s Democratic Party (PDP) held on February 20, he said that his administration would not be able to fully implement SURE-P because subsidy removal was not total.

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In other words, unless he is allowed to impose 100% hardship on Nigerians, he is not willing to look for other ways to modernize Nigeria! By this new twist, President Jonathan Goodluck is proving to Nigerians that he is no different from those before him. All the talk about growing up poor, not having shoes was campaign rhetoric aimed at garnering votes.

It seems like Nigerians saw this coming when the program was originally announced. Many were very skeptical because they have been through many governments that made high and dizzying promises only to renege and divert Nigeria’s money into their pockets and bank accounts. In fact, many Nigerians were very vocal about their skepticism which led the administration to appoint a respected former diplomat, Dr. Christopher Kolade, as the person to oversee the use of the subsidy money ab initio. He was christened the Chairman of Subsidy Reinvestment and Empowerment Program. By the appointment, the president was merely seeking to assure Nigerians that the money accruing from oil subsidy removal would be used judiciously and be properly accounted for.

Unfortunately, Dr. Kolade’s appointment may not necessarily douse the skepticism of Nigerians. He has now thrown his own “monkey wrench” into the mix. During a speech at the Nigeria Leadership Forum, he told attendees that “his committee would only monitor the use of about 47 per cent of the total subsidy savings which was the amount accruable to the Federal Government, but that it was necessary for state and local governments to put systems in place to ensure that the amounts that accrued to them were judiciously spent in order to get Nigerians to trust government” [Punch, February 26, 2012]. This implied that the rest of the 53% of the subsidy money would just be handed over to the states and local governments to manage, apparently unaccounted for.

For the record, this writer is a firm believer that development must start from bottom up not top down. In advanced countries, Local Governments or equivalent arms of government have better understanding of needed developments in their enclave and so do a better job of implementing and monitoring development in their various enclaves. This is because they are closer to the people at the grassroots. Similarly, States are closer to the citizens than the federal government so they understand the needs of the citizens better than the central

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government and so would do a better job of handling development in the states than the federal government. Having said this, one need to point out that Nigeria has a peculiar problem. State governors use state funds, like the so-called security votes, as their personal “petty cash” funds without accountability.

As I write this article, I recalled that former Governor James Ibori had pleaded guilty in a London Court for stealing N38 billion from his state during his 8 years in office. The reader may marvel at this and wonder why he was not caught while in office. His case is not even peculiar because those currently in office are also robbing the nation blind. They use the so called security vote funds to run their reelection campaigns, giveaway to their cronies for running elections and buy rice, abada and bikes to bribe people to vote for them. Others use it to spend on unnecessary items like fleets of cars purportedly bought for government work. With this type of irresponsibility and theft on the part of governors, why would we be handing them another blank check by way of subsidy money to spend as they deem fit? This is unearthing the thoughtlessness in the SURE-P program. Unless a strict reporting mechanism is created, it will be another waste of scarce funds that will produce no projects. Furthermore, Dr. Kolade is talking about handing some of the funds to Local Governments. This is a nation where some governors, to this date, have not held Local government elections and hence control every activity in their states. Handing money to Local Government caretakers in these areas is akin to giving the money to governors whom they serve. Even where local government elections have been held, the chairmen are usually the cronies of the governors and hence report to them. These are the people that Dr. Christopher Kolade is going to send more money to for development. They will simply, as before, use the money for private projects. In the end, the states and Local Governments will remain as backward as they have always been.

With all the above issues, SURE-P is in danger of going the way of other proposed programs that came before it. The president is already trying to wiggle himself out of the program by saying that he will have no money to fully implement the programs. The truth is that if this president wants to accomplish all the projects he proposed under SURE-P, without even touching the subsidy money, he can do it. Start by ensuring the repatriation of the billions that politicians, including past presidents, stole. Start standing down the billions that the Federal

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government spends for just food and entertainment. Trim the bloated cabinet that is paid for doing nothing. Mean the restriction on foreign travels for government officials that collect government money in estacode like they are collecting water. The millions spent in overseas meetings could be saved by using Skype or WebEx to conduct meetings.

More so, government can sell off the fleet of expensive vehicles that government buys and maintains where some officials have several cars assigned to them. Develop vehicle fleet systems where officials sign out vehicles from the central pool only when they need it for official travels. Enforce bans on the use of convoys by government officials- one man one car. Sell off the airplanes the government accumulates like they are toys and drastically reduce the billions paid to lawmakers that really make no meaningful laws except enrich themselves. No government official in Nigeria, considering what they do, should earn more than N20 million a year. Money saved from all these cuts will help. When you add that to the money that will accrue from partial subsidy removal, it will go a long way. If there is still a short fall, get some help from our external reserves. After all, this is the money that politicians have been siphoning into their pockets for years. It will not be so bad to use some of it for modernization of Nigeria and provision of employment for youths.

Where are the Gains from the Removal of Subsidy? Nigerians are worried because they cannot see any

infrastructures established with the funds the Federal Government derived from the removal of petrol subsidy in spite of all the juicy promises made by President Goodluck Jonathan, the governors and some of his ministers. Before the partial removal of petrol subsidy, President Goodluck Jonathan explained that after consultations with segments of the society, “many have now been appreciative of the need to totally deregulate the economy so as to open it for investment as well as stimulate development from the proceeds”. At the 2011 Christmas Carol held at the Banquet Hall of the Presidential Villa Abuja, President Jonathan said the removal of fuel subsidy would bring only temporary pains, which will fade as Nigerians begin to reap the benefits of the removal. He said, “I promise that the pains will not be the way people

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are thinking. The pains will be temporary, and after few weeks or months, Nigerians will be better off, the economy will be repositioned”.

The governors under the Nigerian Governors’ Forum said subsidy removal “will create employments and begged Nigerians to “sacrifice” and “trust” them to properly utilize funds that would be saved through the policy. The then Chairman of the Nigerian Governors’ Forum and Governor of Rivers State Rotimi Amaechi said, “It is a sacrifice that we must make as a nation for the country to move forward”. However, it was later revealed that the governors only backed the removal of petrol subsidy so they could have more money to control since the Federal Government would no longer need to make deduction from their share of the Excess Crude proceeds to fund the subsidy scheme.

Dr.Ngozi Okonjo- Iweala said the removal of petrol subsidy was to safeguard the future of Nigeria and her children. According to Iweala, if Nigeria didn’t take the measures, the country would be forced to experience such hardship “that would frustrate the future of our children and we will be like some countries like Greece which kept on borrowing until they got to the crisis situation that they have found themselves”. She went further to say, “The Federal Government has decided to channel its own share of the budgetary savings from the elimination of fuel subsidy into a combination of specific programs that will stimulate the economy and alleviate poverty through the provision of the following: critical infrastructure-the proposed infrastructure projects are: “specifically, TAM for the Port Harcourt Refinery will be carried out in the First Quarter of 2012, Niger Delta development projects; road projects, water and agriculture development, irrigation, rail transportation projects; electrical power focusing on hydropower and Greenfield petroleum sector projects to be located in Bayelsa, Kogi and Lagos States: safety net projects; maternal and child health services, public works/youth empowerment programs, urban mass transit scheme and vocational training scheme. The Federal Government is launching a SURE Program that encapsulates all these alleviating programs. Structures have also been developed to guarantee adequate oversight, accountability and implementation of the various projects”.

When Nigerians doubted President Goodluck Jonathan’s sincerity on the proper use of the funds from the removal of petrol subsidy as previous governments have in the past, increased the prices of petroleum products with the same promises to use the proceeds to

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provide infrastructures but failed to keep their promises after such increases, Dr. Iweala said, “….. We plead for patience. The impact of this will begin to show soon. We intend to start publishing the amount we are saving from this withdrawal of oil subsidy monthly and also where we are directing them. Nigerians will be participants in this process. In few months prices will begin to come down depending on market forces”. President Jonathan claimed subsidy had gulped N1.43 trillion by 2011 end. He said the government would realize N1.134 trillion from the removal of petrol subsidy. Thus, as petrol now sells at N97, which is 50 percent increase from the previous price of N65, the Federal Government would have raked in about N1 trillion in the past one year!

Nevertheless, after one year of making these promises, there is nothing on ground to show for almost one trillion naira the Federal Government has realized from the removal of petrol subsidy! For instance, the Turn around Maintenance of the Port Harcourt Refinery scheduled for the First Quarter of 2012 has not yet began. The construction of eight major roads, two bridges, six railways, 19 irrigations, healthcare centers for three million pregnant women, etc. are yet to record any significant improvement.Now, it is time to ask questions and the questions Nigerians are asking are: (a) where are the eight constructed major roads located? (b) Where are the two constructed major bridges sited? (c) Where are the healthcare centers for the three million pregnant women located? (d) Which part of the country are the 19 irrigation projects situated? Nigerians want President Jonathan, the governors, Minister of Petroleum, Mrs. Diezani Alison Madueke, Minister of Finance and Coordinating Minister for the Economy, Dr. Ngozi Okonjo Iweala and the Central Bank, to answer these questions as the champions of the cause to remove petrol subsidy!

When the Federal Government removed petrol subsidy and promised to use the proceeds to provide the above mentioned infrastructures, Nigerians made it known to the government that the absence of infrastructures in the country was not as a result of lack of money but due to corruption because every year budgets are made for them. Also, Nigerians doubted the sincerity of government to use the proceeds from the removal of petrol subsidy for the above mentioned infrastructures since previous governments have also removed subsidy

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on diesel without anything to show for the money the government received. But Dr. Ngozi Okonjo Iweala assured Nigerians of the judicious use of the funds.

In the final analysis, with the elimination of petrol subsidy, the standard of living of ordinary citizens of this country has fallen drastically because the price of everything has gone up. A sachet of pure water now cost N10 as against the previous price of N5. Small and large scale businesses are folding up due to high cost of operation; leading to increase in unemployment rate. A development program can only make sense if it has a trickle down effect on the living standard of the common citizens of this country rather than making more cash available for the institutionalized looters in public offices. Subsidy reinvestment can only make sense when the programs and projects have direct impact on the masses both in the short, medium and long term.

RecommendationsNigeria as a low cost producer of crude oil should be able to set

aside enough for local consumption which can be refined both locally and internationally, throw open the imports of petroleum products to all interested Importers pending such a time when there are enough local Refineries and when the present ones are retool to optimal working condition, take care of all costs, guarantee fair profit margins for Marketers and other Players, make enough profit for government through the addition of reasonable tax revenue.

Government must also diversify the economy by focusing on other natural resources and other sectors. Nigeria has one of the world’s largest deposits of bitumen and other solid minerals. This country used to produce cocoa, groundnut and oil palm. Some years ago, Malaysia came to this nation to learn and take our oil palm seedling to grow their economy. And today, Malaysia is a Net Exporter, and we have become Net Importer.

If Nigeria really wants to grow its economy, then it must, as a matter of urgency focus on agriculture. Agriculture is crucial and very strategic to the growth of the African continent. It is the leading economic sector, constituting 30% of GDP and over 70% of employment, and it equally has enormous growth potentials, considering the growing demand for food crops from emerging markets. But rejuvenating agriculture in this country will not be possible until the transportation system (roads, sea and rail) and electricity generation

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issue are addressed, and appropriate funding for research and the Universities of Agriculture provided. All of these measures will enable the agricultural sector to sufficiently produce to feed the nation, export and meet the intermediate input requirements of the Manufacturing Sector (brewery, flour milling, sugar producing…) to reduce costs.

REFERENCES

NNPC (2011), Annual Statistical Bulletin (ASB)-2009 and 2010 Copies.

NNPC (2011), First and Second Quarter Petroleum Information.

National Bureau of Statistics (NBS) of NigeriaOil and Gas Journal (2010), Pennwell Publishing.

US CIA (2011). World Fact book.

US Department of Energy (2010) Refinery Rankings.

CITAC Africa LLP (2010), A Study of Oil Refining in Sub-Saharan Africa.

NACS (2011), Annual Fuels Report (2004 and 2006 Copies)

FSDH (2011), Weekly Nigerian Capital and Money Market Reports

FSDH (2010), Yearly Economic and Financial Market Review and Outlook. United Nations (2004 and 2006), Analytical Report for the Revision of World

Population Prospects.Department of Economic and Social Affairs, Population Division (2011),

World Population Prospects; 2010 Revision-United NationsDemographic Internet Staff (2009), International Programs Centre. Census.gov

World Bank (2010), Gross Domestic Product 2010

World Bank (2010), Gross Domestic Product, PPP.

Fitch Complete Sovereign Rating History (2011, July)

OECD (2013), Economic Surveys (Greece)

SURE-P 2012 Annual Report

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CHAPTER

TWENTY ONE

FUND ACCOUNTING

BY

AGBACHI VINCENT ONYENEKELecturer,

Department of Public Administration of Accountancy

Overview Non-profit organizations and government agencies have special

requirements to show, in financial statement and report, how money is spent, rather than how much profit was earned. Unlike profit oriented business, which use a single set of self-balancing accounts (or general ledger), non profits can have more than one general ledger (or fund), depending on their financial reporting requirements.

An Accountant for such an entity must be able to produce reports detailing the expenditure and revenue for each of the organisation’s individual funds, and reports that summarize the organisation’s financial activities across all of its funds.

A school system, for example, receives a grant from the state to support a new special education initiative, another grant from the Federal government for a school lunch program, and an annuity to award teachers working on research projects. At periodic intervals, the school system issues a report to the state about the special education program, a report to a Federal agency about the school lunch program, and a report to another authority about the research program. Each of these programs has its own unique reporting requirements, so the school system needs a method to separately identify the related revenues and expenditures. This is done by establishing separate funds each with its own chart of Accounts.

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Concepts of Fund AccountingFund Accounting is specifically meant for non-profit oriented

organizations, clubs, government and student societies etc. The Fund theory of Accounting was developed by Vatter (1974). He felt that both the proprietary and the entity views had unacceptable weaknesses. Consequently, he proposed that the reporting unit should be defined as the fund. And thus, a fund is, a fiscal and accounting entity with a self balancing set of Accounts recording cash and other financial resources together with all related liabilities and residual equities or balances and charges therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations (Government Accounting Standards Board 1984 section 1300).

Fund Accounting is therefore, a system of Accounting used primarily by non-profit or government organizations. For these and other similar organizations, it is more important for them to keep a record of how their money was spent, rather than how it was earned, unlike corporations. Their Accounting record takes the form of collection of funds, and each fund has a distinct purpose ranging from operating expenses to funding the various activities of the organization (www.alison.com/Accounting Courses).

Fund Accounting thus emphasizes more on accountability rather than profitability, used by non-profit-making organizations and government (en.wikipedia.org/wiki/Fund Accounting).It is also a system of Accounting used primarily by non-profit or governmental organizations (www.brighthub.com/office/finance/article/ 82289.aspx).

Fund Accounting system is utilized by government, in which resources are classified for Accounting and reporting purposes, in accordance with donor objective and government broad guidelines (www.yourdictionary.com/Fund Accounting).

The Fund Accounting method focuses on how organizations meet their business objectives without large concern over garnishing a great profit return (www.Fundservice.net Accounting).

Therefore, owing to above review, Fund Accounting is a method of Accounting and presentation whereby assets and liabilities are grouped according to the purpose for which they are to be used (www.ventureline.com).

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Fund Accounting involves a self-balancing set of Accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations. However, funds are used to account for assets held in trust by the government for the benefit of individual or other entities.Types of Funds

The funds outlined below are some of the funds which are duly reported upon by the Accountant General of the Federation when in use and they are grouped into two categories namely:- the Federal Fund group- the trust funds groupFederal Funds group1. General Fund - This cover the fund set aside to finance the general administration costs of the government. The general fund is used to account for receipts and payments that do not belong to another fund. 2. Special Fund is similar to the special revenue fund used by state and local government, earmarked for a specific purpose (other than business – like activities). E.g (Enugu State Housing Scheme).3. Revolving Funds – are similar to the proprietary fund used by state and local governments for business – like activities. The term, revolving, means that it conducts a continuing cycle of activity. There are two types of revolving funds in the Federal fund group (i.e public enterprise funds and intra governmental revolving fund).4. Public Enterprise Fund are similar to the enterprise Funds used by state and local governments for business – like activities conducted primarily with the public. The postal service fund is an example of a public enterprise fund. 5. Intra governmental revolving fund are similar to the Internal service funds used by state and local government for business – like activities conducted within the Federal government.Trust Funds group:-1. Trust Fund – are earmarked for specific programs and purposes in accordance with a statute that designates the fund as a trust. Its statutory designation distinguishes the fund as a trust rather

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than a special fund. The Highway Trust Fund is an example of trust funds.

2. Trust Revolving Fund – are business – like activities, designated by statute as trust funds. They are, otherwise, identical to public enterprise revolving funds.

3. Deposit Funds – are similar to the agency funds used by state and local governments for assets belonging to individual and other entities, held temporarily by the government. State Income taxes withheld from a Federal government employee’s pay, not yet paid to the state, are an example of deposit funds.

Other types of funds1) Capital Project Fund – This is the fund earmarked for the acquisition of Capital Facilities like construction of bridges, dams, roads, and general capital infrastructures. An Example is the Capital Development Fund.

2) Contingency Fund – Unforeseen but anticipated expenses of an unknown amount are provided for through this funds. Such events include floods, erosions, refugee problems and epidemics etc.

3) Debt Service Fund – These are specialist funds set aside to account for the resources earmarked for the payment of interest and principal on long term general obligation of the government.

4) Enterprises Fund – These fund exists to account for utilities provided to the public like Electricity, water etc.

5) Selve Liquidating Funds – As the name suggests these funds are transitional Funds into which resources are transferred periodically and out of which any fund remaining must be transferred to a current fund.

6) Treasury Funds – By virtue of the finance (control and management) Act of 1958 as amended in 2004, the following treasury funds deemed to be public funds and worthy for mentioning here:-

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i. Treasury Clearance Fund – This is set up to provide for acceptance and repayment of deposit and non-personal advance and to provide for repayment on behalf of other administrations.ii. Personal Advances Funds – This fund in particularly setup for political purposes to take care of advances lawfully made to members of the National Assembly.

iii. Government Clearance Fund – This takes care of transactions between the Federal and various state governments.

Classification of Fundsa) Government Fund – These are funds made up of resources derived from the general revenue powers of the government created by the Constitution and set aside to meet the general administration expenses of the government.Examples include; Consolidated Revenue Fund and Development fund etc.

b) Proprietary Fund – Sometimes governments get involved in business like operations where accretions take place. These are common in independent parastatals, and likely to increase with recent moves on privatization and commercialization. Proprietary funds are used to account for these.

c) Fiduciary Fund – Frequently government holds some resources or Funds belonging to the whole public arising from very peculiar circumstances. Such circumstances include the difference between the (New Petroleum products). The Petroleum (special) Trust Fund (PTF) was established to take care of these resources. This and other such resources are held in the Fiduciary Funds.

REFERENCES

Earl Wilson, Jacqueline Reck Susan Kattels (2006) Accounting for Government & Non Profit Entities 14th Ed. P. 163 McGraw – Hill ISBN 0 -07 – 310095 – 1

Jonas, Elmerraji (2007, June 1) “investopedia Cracking non Accounting Code profit” Forbes. Com.

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Leon, E. Hay (1980) Accounting for Governmental and Non profit Entities, Sixth ed. Page 5, Richard D. Irwin, Inc, Homewood.

Vatter, W.J. (1974) in Emma I. Okoye and Wilson Ani (2004) Annals of Government and Public Sector Accounting 2004 1st Ed. Anambra, Rex Charles and Patrick Limited, Nimo.

en.wikipedia.org/wiki/Fund Accounting. Retrieved 11/2/2014

www.alison.com/Accounting Course. Retrieved 11/2/2014

www.brighthub.com/office/finance/article/82289. aspex Retrieved 11/2/14

www.fund service.net Accounting. Retrieved 11/2/14

www.ventureline.com. Retrieved 11/2/14.

www.yourdictionary.com/Fund Accounting. Retrieved 11/2/14

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http://www.yourdictionary.com/Fund%20Accounting.%20Retrieved%2011/2/14


CHAPTER TWENTY TWO

FINANCIAL MARKETS IN NIGERIA

BY

OGOCHUKWU CHINELO OKANYA Principal Lecturer,


Introduction A financial market is an arrangement or mechanism that brings

together buyers and sellers of financial commodities and assets. Financial markets provide an avenue necessary for the transmission of funds and assets from those who have enough to lend out to those who are in need of funds. At any given point in time, there are persons who have enough to lend out, these are called the savings surplus units who then make funds available to the savings deficit units. Financial markets play the crucial role of providing the means through which needs are met and financial assets are exchanged. Not only do financial markets provide the means to enable the sale of new financial assets and instruments, it also makes the exchange of old or already existing assets possible. A major feature of financial markets is that profit is sourced primarily through transactions in financial assets. Types of Financial Markets

There are two main classifications of financial markets, namely; money and capital markets. This classification is largely based on the type of services they offer and by the products/instruments traded. The money market is that which facilitates the sale and purchase of short-term debt instruments, thereby enabling those in need of short term financing to source funds. On the other hand, the capital market is the market for long term funding. For example, imagine that two different companies have the following financial needs- company A needs funds to clear its goods and containers held at the wharf. Company A expects that within three months, it would be able to have sold off its goods and

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also repay fully the amount borrowed. Company B on the other hand has needs to diversify its product base and so needs to borrow. It needs to expand from its current line of production and this would require extensive market research, product development and then marketing. Company B understands that it needs between four and six years before it can repay the loans. From these two scenarios, we can immediately see that while Company A’s needs fall into the short term category, Company B’s needs fall into the long term category. This simple example best illustrates the differences between money and capital markets.

As already stated, the money market is the market for short-term loans. Institutions and/or persons who have need to borrow on a short term basis can approach those willing to fulfill this need. The money market does not have a particular geographic location as site from which it operates. Rather the market is made up of institutions that operate therein. Commercial banks, merchant banks, the central bank and even finance and discount houses are some of the institutions that are found in the money market. Traded instruments range from treasury bills to the commercial bills of firms and it is generally possible to find both individuals and governments raising and investing short term funds, which can be liquidated at quick notice when the need to do so arises.

As stated previously, the capital market is the market for long term loans. Unlike the money market which does not have any one given geographical location, the capital market is characterized by a physical location. As it were, the epicenter of the capital market is the stock exchange market and there are two types of stock markets, namely; the primary stock market and the secondary stock market. The first time a stock is sold to the public through what is called an initial public offering (IPO), it is sold through the primary stock market. Subsequently, all sales concerning that particular stock will be conducted through the secondary stock market, which is the market for already existing shares. Bond markets are capital markets because through the sale of bonds, bond markets provide funding for governments and large businesses that need an inflow of funds on a long term basis. Indeed, capital markets serve a crucial need by mobilizing debt and equity finance on a long term basis which ultimately improve the financial structure of businesses and governments and also improves a country’s financial system. Capital markets’ loans exceed one year

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duration while money market facilities are usually less than one year. Another example of a financial market is the foreign exchange market, which is a market where a country’s currency is exchanged with currencies of other countries. Foreign exchange markets are crucial for trade and exchange between countries.

Major Parties in Financial Markets There are several key parties found in financial markets. These

include brokers and dealers, financial intermediaries and the stock exchange. We shall discuss a few of these major parties;

Brokers Jalloh (2009) defines a stockbroker as a member of a stock

exchange who is authorized to buy and sell shares and other financial securities. Brokers are thus commissioned agents who act on behalf of a principal. They facilitate trade by serving as a vital link between the buyer and the seller of a financial asset. The stockbroker earns a commission from the sale or purchase of shares. Essentially, what the broker does is to collect the shares from the owner and then scout around for a prospective buyer. After a buyer has been found, the broker facilitates the transfer of the deed to the asset from the seller to the buyer, who then subsequently pays the full value of the shares purchased. The payment is made through the broker who then transmits the money to the seller of the asset. The broker earns a commission for his efforts.

Dealers Dealers like brokers facilitate the exchange of financial assets

between buyers and sellers. A dealer can and in fact usually buys and sells securities on his own account with the aim of selling at a higher price and making a profit. In other words, a dealer in anticipation of a profit would seek out assets when the price appears attractive. The dealer would then wait for the price to be ‘high enough’ and then sells thereby making a capital gain. The price at which the dealer buys an asset is called the “bid price’ while the price at which the asset is sold is called the ‘asked price’. The difference between the asked price and the bid price is called the ‘bid-ask’ spread and is the dealer’s gain for facilitating the exchange.

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Financial Intermediaries Financial intermediaries are institutions involved in the process

of financial asset transformation. Intermediaries exist principally because there are savings surplus units looking for avenues to safely invest their money for some returns and the savings deficit units who are looking for available funds to borrow. Financial intermediaries are able to serve both groups efficiently by purchasing assets from the surplus units and then transforming the asset (sometimes even breaking up the acquired asset into smaller units) and then subsequently selling the asset to the borrowers.

Unlike the previous two groups (brokers and dealers), financial intermediaries engage in financial asset transformation. In Nigeria, the common types of financial intermediaries include depository institutions like commercial, merchant and microfinance banks, finance houses, insurance companies and specialized institutions like the federal mortgage bank of Nigeria.

In Nigeria from 2001, when the concept of universal banking took root, most of the institutions mentioned above were able to engage in the activities that were previously the exclusive domain of other institutions. Most institutions were simply “financial supermarkets” or “one shop wonders” where it was possible to get all your financial needs met in one establishment. Commercial banks for instance were able to serve not only as depository institutions but could in fact provide insurance, mortgage and even underwriting services. However in the wake of the economic crises that ensued starting 2008, it became quite clear that Nigerian banks being allowed to perform all these functions would extend rather unnecessarily the risk exposure of banks and so the Central Bank of Nigeria, being the primary regulator of the Nigerian banking system encouraged all banks to divest their ownership in any concerns that were not strictly their immediate or direct assignment. It is noteworthy to mention that since 2009 when the Central Bank organized a stress test to gauge the strengths and weaknesses of Nigerian depository institutions, there has been an increase in the number of institutions.

Functions of Financial Institutions Some of the functions of financial institutions include but are

not limited to:

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1. Risk Sharing: Financial institutions facilitate risk sharing. This is done by allowing risk to be shared through risk pooling. It encourages risk sharing by enabling persons to diversify their portfolios and also by creating and selling assets with low risk and then using those assets to buy other assets with more risk.2. Reduction of transaction costs: Financial institutions perform a critical function of reducing transaction costs. In the absence of financial intermediaries, bridging the gap between lenders and borrowers would be near impossible. Given that potential lenders and borrowers do not walk around with sign-posts to identify their status, it would be difficult to get sufficient savings to trigger investment, which are truly crucial to the process of capital accumulation and hence economic growth. Consequently, financial institutions help by linking borrowers and lending and by reducing the search costs.

Major challenges facing financial intermediaries include adverse selection, asymmetric information and moral hazard.

Functions of Financial Markets Transfer of funds: Financial markets make it possible for funds to be transferred from one group (surplus units) to the other (deficit units) for the purpose of satisfying diverse needs. People need funds for either consumption or investment purposes. The government needs money to build new roads, the family needs more funds to send a sick child for medical treatment in India, businesses require funds to expand an existing product line, and all these would be served by financial markets.

Facilitation of Economic Growth: Financial markets facilitate economic growth by providing the avenue through which businesses seeking funds for investment purposes are able to secure funds which can then stimulate further production, and even stimulate demands in the market. By channeling savings to more productive uses, financial markets are able to foster trade and industry. Simply put, financial markets are able to mobilize resources and subsequently divert them into productive channels thereby facilitating economic growth.Given the relative scarcity of funds that face not only individuals but governments as well, the public sector usually also needs funds to undertake projects. Most governments adopt a deficit budgeting style,

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which often requires that government borrows in order to meet the shortfall between projected revenue and expenditure. Financial markets are thus important because it is its ability to provide a market for bonds which is a crucial source of financing that government all over the world use. The government can then effectively use the secured funds to construct roads and generally provide infrastructure crucial to the production process. This paves the way for wealth creation on a national basis and encourages the attainment of long term development goals. The ability of financial markets to provide much needed liquidity is a major function.

Price Determination: Financial markets provide the avenue through which financial assets are appropriately priced. Both new and existing financial assets are priced based on some indicators like the perceived strength of the company whose stocks are being offered for public subscription.

Promotion of Savings and Investment: Economists believe that savings S is crucial for the productive process. They proffer that it is sufficient savings that encourage the attainment of investment I. The role of financial markets in this regard is that savings and investment are encouraged. In the absence of well structured financial markets, savers are unable to actively pursue savings and potential investors may embark upon investing in wasteful and unproductive ventures and in consumption that may be unnecessary.

Regulation of Financial Markets in Nigeria We live in a time where every facet of our existence is regulated

and financial markets are not exempted. In Nigeria there are several agencies created to monitor and regulate activities of financial markets. These regulators include the Central Bank of Nigeria (CBN), the Nigerian Deposit Insurance Corporation (NDIC), the Security and Exchange Commission (SEC), Federal Mortgage Bank of Nigeria FMBN and NAICOM, the regulator of the Insurance industry.

The Central Bank is the most visible of all regulators being the apex banking institution. It regulates activities of most of the depository financial institutions in Nigeria. The CBN was established in 1958 but started operations on the 1st of July 1959. Main objectives of the CBN include issuing legal tender, promotion of monetary and price stability as well as working to ensure that a sound financial system is in place.

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Others are maintaining external reserves and effectively managing the nation’s currency.

The CBN has supervisory functions over both banks and other financial institutions and this is managed by two separate departments namely:1. Banking Supervision Department2. Other Financial Institutions Department

Using both off-site and on-site supervision methods, the CBN regulates activities of these institutions. The ability of the CBN is strengthened by several Acts of the Nigerian Legislature. Essentially, the CBN examines the books of the institutions and ensures that all reserve requirements are satisfied and that the confidence of the banking public is not misplaced.

The NDIC was established in 1988. It is largely based on the US model of Deposit Insurance Scheme. Its mandate essentially is to work with the CBN in supervising and examining banks in Nigeria. When a bank eventually fails, the NDIC has the responsibility of liquidating the bank. The NDIC operates by insuring deposits and insures deposits up to an amount of N50,000 per depositor. To discourage moral hazards and insider dealings, the NDIC does not insure the deposits of staff and directors of institutions and is mostly designed to benefit savers who lack the requisite skills in detecting poor banking performance and sound risk management skills in knowing which banks to avoid.

Another regulator is the Securities and Exchange Commission SEC. it performs oversight functions on the Nigerian Stock Exchange. Its presence makes it imperative that all activities at the NSE remain above board. The SEC insists that all companies listed on the Stock Exchange disclose all information and works to regulate procedures for trading in futures markets. In a bid to maintain investor confidence, SEC restricts insider trading.Summarily all regulators seek to ensure the soundness of the institutions which they regulate.Revision Questions1. What is a financial market? List and discuss the types of financial markets found in Nigeria 2. Discuss the major players in financial markets in Nigeria?

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3. Why is there a need for the financial market to be regulated? List and discuss the institutions charged with the responsibility of regulating activities of financial institutions.

REFERENCES

Jalloh, M. (2009), The Role of Financial Markets in Economic Growth, conference paper presented at the Waifem Regional Course on Operations and Regulation, July 27 – 31, 2009.

Agu, C.C. (187), ‘Financial Institutions and Economic Development: The experience of Nigeria’, The South African Journal of Economics, 54 319 – 331.

Okigbo, P.N.C. (1981), Nigeria’s Financial System: Structure and Growth, Burnt Mill, Harlow, Essex, Longman Group Ltd.

Olofin, S. and Afangide, U.J. (2008), “Financial Structure and Economic Growth in Nigeria”, Nigerian Journal of Securities and Finance Vol, 13 No. 1 pp 47 – 68.

Olofin, S.O. and Udoma, J.A. (2008), “Financial Structure and Economic Growth in Nigeria: A Macro Econometric Approach”, Nigerian Journal of Securities and Finance Vol. 13 (1).

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CHAPTER TWENTY THREE

ADMINISTRATION OF EMPLOYEES RETIREMENT AND BENEFITS IN NIGERIA

BY

NGWU GABRIEL OKECHUKWU Senior Lecturer,

Department of Public Administration Institute f Management and Technology IMT) Enugu

INTRODUCTIONEmployee retirement and benefits has become one of the thorny

issues in Nigeria today. Issue in employee retirement and benefits concern all of us if we remember that at a time in our life we must defect from primary activity of business, industry or active service as full time employee and ask for retirement benefits. This have not altercated the commitment of the government of various tiers, and attention of workers and employers respectively. Retirees to frustrations encumbered as a result of under delay and sometimes denial of gratuity and pension allowances.

Nigeria Government inherited an unfunded Defined Benefit Pension Scheme (DBPS) pay as you go (PAYG) from the colonial government. As a result the government accumulated pension arrears put at 2.56 trillion naira in 2008- under DBPS, retirees are exposed to untold hardship and death as payment of pension and gratuities are delayed thereby making retirement something that is dreaded by workers.

It is against this backdrop that this chapter seeks to examine employee retirement and benefits in Nigeria. It will equally analyze the content of the Pension Reform Act (PRA) 2004, which introduced Defined Contributory Pension Scheme in the country together with the extant retirement and pension laws in Nigeria.

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CONCEPTUAL CLARIFICATIONRETIREMENT

Retirement is a specified time in an employee’s employment life, which signifies the detachment from primary activity in business, industry or active service as full time employee. Eme and Ugwu (2011) defined retirement as the withdrawal or giving up of office or work. We think that retirement is a form of decision making especially in developing nations like Nigeria where public servants falsify age and continue to work beyond retirement age, due to family and economic circumstances. Many public servants in Nigeria refuse to retire even when their physical conditions do not allow the person to work anymore. Eme and Ugwu (2011) while citing Nwajagu (2007) noted that “a person who is retired is one who has given up office completely”. Retirement is therefore the act of stopping ones regular work especially because one has reached a particular age: the event of retiring or state of having retired from work, (The Oxford Dictionary 8 edition).

TYPES OF RETIREMENTRetirement generally, takes three forms; namely:

iv. Voluntary retirementv. Statutory retirementvi. Compulsory or forced retirement

i. VOLUNTARY RETIREMENTEme and Ugwu (2011) contend that, “this type of retirement is self-imposed. In other words, a person may consider by himself to retire or to remain in the service and make it his life career”. From the writers perspective, voluntary retirement is a process of decision making whereby the employee considers the prospects in the service and where he/she lacks job satisfaction, such employee is at liberty to retire whether he/she has attained the mandatory retirement age or not. An employee must serve up to ten or fifteen years to become entitled to payment of pension and gratuity. Many people choose to retire voluntarily at a point when they will receive these benefits. This is only applicable under the old defined benefit pension scheme as pension earned in an organization is not transferable to another organization if change of job becomes imminent. Under the defined contributory scheme the reverse is the case.

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ii. STATUTORY RETIREMENTUnder statutory retirement it is envisaged that the “standard” retirement age is fixed by law. This age varies from country to country but it is generally between 55 and 70 years. In Nigeria, under the old pension scheme, civil servants retire from service at 60 years, 70 years of age for court judges and professors of Nigeria Universities and 65 years for academic staff of Nigeria universities below the rank of professors and academic staff of polytechnics. Similarly, the law requires that an employee who worked for 35 years must retire irrespective of age.

Statutory retirement is either by age or year of service, whichever comes earlier. However, the new pension scheme (Defined contributory plan) empowers contributors to withdraw from the scheme on the attainment of 50 years. Under the old pension scheme, Nigerian workers dreaded retirement and continue to work beyond the standard retirement age specified by the law.

iii. COMPULSORY RETIREMENT This type of retirement is also referred to as forced retirement because it is abnormal and unexpected in the sense that the employee is compelled to retire against his/her wish. It is argued that compulsory retirement is done for public interest but usually viewed negatively by the employee because he/she is ill-prepared. Compulsory retirement is normally witnessed in the public sector during rationalization; like the federal government’s policy on right-sizing and down-sizing. In Enugu State of Nigeria “Disengagement” was used for this policy. Other reasons for compulsory retirement include; Inefficiency, falsification of age (old age), physical condition or ill health and indiscipline.

PENSION Pension is a fixed amount other than wages, paid at regular intervals usually in monthly installments to a person or to the persona’s surviving dependents in consideration of past services, age, merit, poverty, injury or loss sustained. Nwedufu (2006) defined pension as a social security arrangement whereby workers draw retirement benefits for service rendered in the past pension is therefore a benefit, usually money paid regularly to retired employees or their survivors by private business and Federal, state and local governments. Employers are not required to establish pension benefits but do so to attract qualified employees. According to Ozor (2006) pension plan may be contributory or non

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contributory; fixed or variable benefits; group or individual; insured or trustee; private or public and single or multi-employer.

Pension plan is generally divided into two categories. Defined Benefit Plan (DBP) and Defined Contributory Plan (DCP). A defined benefit plan provides a set amount of benefit to a pensioner. In defined contributory plan, the employer places a certain amount of money in the employees name into the pension funds and makes no promises concerning the level of pension benefits that the employee will receive upon retirement. Pensions in Nigeria according to Ugwu (2006) is classified into four: namely.a. Retiring pension b. Compensatory pension c. Super-annuating pension d. Compassionate allowance

Retiring Pension: This type is usually granted to a worker who retired statutorily from service after putting in 35 years of service while super-annuating pension is given to a worker who retires at the prescribed age of 60, 65 and 70 respectively.Compensatory pension is a type given to a worker whose permanent office is abolished and government is unable to provide him with suitable alternative employment. A good example is the compensation granted to PHCN workers in 2013 for outright privatization of the company. On the other hand, compassionate allowance according to Amujiri (2009) occurs when pension is not admissible or allowed on account of a public servants removal from service for misconduct, insolvency or incompetence or inefficiency.

GRATUITY Gratuity is one time payment made to employees or their surviving dependents on retirement upon death or on total incapacitation while at work. The amount of gratuity is based on the salary received and the number of years of service. Gratuity is the lump sum of money a person receives in gratitude for his/her services. It is the same as a “Tip” given to a restaurant server, Cab driver or hair dresser. It has lock in-period of five years or more.

Gratuity is customarily designed to ensure that patrons receive the best service possible. The custom allows service providers to be rewarded for providing good service and lets patrons penalize those who provide poor service. Gratuity is therefore older than pension. Some

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workers receive gratuity only, while some may be entitled to both gratuity and pension.

EVOLUTION OF EMPLOYEE RETIREMENT BENEFITS IN NIGERIA

The first ever known pension plan was originated in England in 1770 while in United States, the first pension plan was evolved by the American Express Company in 1775. Therefore, a few organizations and governments began to offer pension plans shortly. The genesis of pension scheme or policy in Nigeria dates back to the colonial government. The first pension scheme in Nigeria was enacted in 1951 tagged the pension ordinance of 1951 with retroactive effect from January 1, 1946. This pension scheme covered the public sector only and was primarily designed to minimize the agitations of the expatriate officers who held top offices in her majesty’s service in the colony and protectorate of Nigeria. The scheme empowered the Governor-general to grant pensions and gratuity to expatriate officers who were moved from one protectorate to another within the vast British empire, maintain continuity of service wherever they were posted.

However, after independence in 1960, the law became applicable to indigenous staff with limited application as no indigenous officer by the law had automatic right to pension and gratuity.

Ugwoke (2004) noted that pension and gratuity was not automatic right to indigenous staff as it could be withheld or reduced at the flimsiest reason. Nigeria continued with the application of 1951 passion scheme until 1977, when the government discovered that this ordinance never addressed the aspirations and demands of Nigerian workers but promoted the values, interest and welfare of expatriate officers.

In 1977, the local government pension scheme was established by military fiat while in 1979 the Federal Government, promulgated the Basic Pension Decree No. 102 and the Armed Forces Pension Scheme created underh Decree 103. These were popularly known as “The pension Act of 1979, which Odum (2003) argued that it was designed by the elite in the bureaucracy and the Armed forces to favour them. The pension Right of Judges Act No. 5 of 1985 was created later to cater for judges in the country as amended by Amendment Decree Nos. 51 of 1988, 29 and 62 of 1991. The Police and other Agencies Pension

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Scheme Decree No: 75 of 1993 which took retroactive effect from 1990 represented another landmark development in the history of Nigeria Pension Scheme. The essential defect of these extant pension scheme decrees include: poor coverage of the entire Nigeria workforce, inadequate funding and administrative inefficiency.

The first private sector pension scheme in Nigeria was set up for the employees of the Nigerian Breweries in 1954. United African Company (UAC) began to offer pension plans shortly thereafter in 1957. The Federal Government in 1961 created the National Providence Fund for the non-personable private sector employees. According to Eme and Ugwu (2011) the national providence fund was largely a savings scheme, where both employers and employees would contribute a sum of four Naira (N4) each on monthly basis. The Nigeria Social Insurance Trust Fund was established by Decree No 73 of 1993 to take over the National providence fund scheme and provide enhanced pension scheme to private sector employees.

However, in 2004 the Federal Government introduced the most recent legislation in Nigeria pension scheme. The Pension Reform Act (PRA 2004) was introduced to repeal the old pension scheme. The PRA 2004, was a shift from non-funded and non-contributory Defined Benefits Pension Scheme (DBPS) pay-as you-go inherited from colonial government in 1960.

The Pension Reform Act 2004 introduced defined contributory scheme in Nigeria for the first time. As the name suggests, it is contributory in nature, fully funded, based on individual accounts that are privately managed by Pension Funds Administrators (PFAs) with assets held by Pension Fund Custodians (PFCs).

CHALLENGES OF THE OLD PENSION SCHEMES IN NIGERIA

Some of the challenges of Defined Benefits pension scheme in Nigeria are listed below;1. General rot and corruption.2. Over-dependence on budgetary provisions from various

tiers of government for funding 3. Inadequate funding 4. Weak institutional framework for pension administration.5. very tedious payment procedure 6. Poor courage etc.

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THE PENSION REFORM ACT 2004 (PRA 2004)The point has already been made that the Pension Reform Act 2004 introduced the Defined Contribution Pension Scheme (DCPS) in Nigeria to replace the Defined Benefits Pension Scheme-pay-as-you-go inherited from the colonial administration. The PRA 2004 for the first time in the history of Nigeria introduced a uniform pension scheme for both public and private sectors.

SIGN POSTS AND LANDMARKS Section 3 Sub-section (2) of the PRA Act 2004 summarized the objectives of the Act as thus.1. To ensure that every person in either the public service or civil service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due.2. To assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.3. To establish a uniform set of rules, regulations and standards for the administration and payment of retirement benefits for the Public Service of the Federation, Federal Capital Territory or Private Sector.

PROVISIONS OF PRA 2004Prior to 2004, Pension Administration has been a system that is very ineffective, largely weak and cumbersome. The Old Pension Scheme became largely unsustainable due to lack of adequate budgetary provision. The tide changed to better with the introduction of Pension Reform Act 2004. the Act ushered in the Operation of Defined Contributory Pension Scheme with the following Provisions:1. The PRA 2004 mandated all public servants in Nigeria and the private sector where the total number of employee is 5 or more to join the contributory scheme. The Act exempted persons and worker who had three (3) years or less to retire in accordance with the terms of their contract of employment.2. The PRA 2004 established National Pension Commission (PENCOM) to regulate, supervise and license Pension Fund Administrators (PFAs) to manage the scheme, while the custody of the Pension Fund assets are provided by licensed Pension Fund Custodians (PFCs)

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3. The approved monthly contributory rate by employers and employees are as follows: The employers in public and private sectors must contribute a minimum of 7.5% (percent) of their workers monthly emoluments on their behalf and their employees contribute also 7.5% (percent) of their monthly salary. In the case of the Military, the government contributes 12.5% (percent) of their monthly emolument on their behalf and 2.5% (percent) from the military personnel.4. Sub-Section 4 of the PRA 2004, allowed for additional voluntary contributions by Self-employed and those working in organizations with less.5. Employee account to be tax deductible if the amount contributed or part thereof is withdrawn before five years after the first contribution was made 6. The PRA 2004 mandated each employee to open a “Retirement Savings Account” with any Pension Fund Administrator (PFA) licensed by Pencom. This individual Account is transferable to another organization if the employee changes organization or choose another Pension Fund Administrator. The ownership of individual account resides with the employee.7. The employee retirement age is assumed by law to be 50 years. It therefore empowered the employee to withdraw a lump sum from this account at the age of 50 or upon retirement thereafter. The law also empowered the employee to withdraw a lump sum of 25% or less amount of the balance standing to the credit of his retirement savings account if he/she retired before 50 years and could not secure a new job after six months.8. The PRA 2004 abolished all Public and Private Pension Schemes existing Prior to 2004.9. Any organization or employer will specify the number of employees and that failure to comply will attract sanction.

BENEFITS OF PRA 2004 IN NIGERIAIt will be too presumptuous on the part of this chapter to state that PRA 2004 is largely a catalyst for sustainable social welfare programme. Neither is it empirically tenable to conclude that the fact that for the reform is fully funded, the frustrations the retirees encountered before PRA 2004 is totally eliminated. It is important also to note that for, the fact that defined contributory schemes have garnered success stories in different countries does not guarantee this success in Nigeria bearing in

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mind the general rot and corruption that have eaten deep into public financial management in the country.However, if properly enforced, the PRA 2004 holds good for the country. These benefits includes:1. The Defined Contributory Pension Scheme is a catalyst for sustainable social welfare scheme. The delays and denial of retirement benefits payment will be minimized.2. The PRA 2004 will reduce the continued escalation of cost of governance in Nigeria since budgetary provision will longer be made for Pension Scheme.3. The Scheme will enhance long-term national savings and capital accumulation, which if immensely utilized, shall lead to the economic development of Nigeria.4. The PRA 2004 can eliminate the general rot and corruption characterized by the older national pension scheme.5. The PRA 2004 provides extra security to the workers, as dismissed officers will not lose all their benefits, as their contribution would be returned to them. In the other words, Pension earned in any organization is transferable to another organization if mobility of labour becomes imminent.6. In the scheme under individual, “Retirement savings account” there is the possibility of the contributor or employee collecting his principal contributions plus the interest accruing to it.

COMPARISM OF THE OLD AND NEW PENSION SCHEMES IN NIGERIA1 The old Pension Scheme was

largely Defined Benefits Pension Scheme (DBPS)

1 The New Scheme is purely Defined Contributory Scheme (DCPS)

2 Operated on unfunded DBPS-pay-as-you-go (PAYG)

2 Adequately funded through contributory Pension Scheme

3 Supported by annual budgetary provisions

3 Supported by previous contributions from the employers and employee respectively and voluntary contributions by individual employees

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4 Voluntary to private organization

4 Mandatory to public and private organizations with five (5) or more employees

5 Largely unsustainable and unpredictable

5 A system that is sustainable, guaranteed and predictable

6 Influenced by Governmentand Employers union

6 Private Sector driven

7 Managed by Head of serviceof the Federation or the state

7 Managed and administered by the Pen Com through PFAs and PFCs

8 Benefits could be reduced or withheld altogether

8 Benefits cannot be reduced or withheld even under cases of dismissal

9 Pension earned in any organization is not transferable to another organization if mobility becomes necessary

9 Pension earned in any organization is transferable

ORGANS OF THE NEW PENSION SCHEME The Pension Reform Act 2004 introduced a single authority the National Pension Commission (Pen Com) to regulate and supervise all pension matters in the country. The scheme is being managed by Pension Fund Administrators (PFAs) and the custodian of the pension fund assets provides b Pension Fund Custodians (PFC) both licensed by Pen Com.THE NATIONAL PENSION COMMISSION The commission as a single authority shall:i. Issue guidelines for the investment of pension fund ii. Approve, license, regulate and Supervise Pension fund Administrators (PFAs) Pension Fund Custodians (PFCs) and other institutions relating to pension matters from time to time.iii. Regulate and supervise the scheme established under the PRA 2004.iv. Establish standards, rules and guidelines for the management of the pension funds under the PRA 20004.v. Receive and investigate complaints of impropriety leveled against any Pension Fund Administrator (PFA), Pension Fund Custodian (PFC) or employer.

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vi. Ensure the maintenance of a National Data Bank on all Pension Matters.vii. Promote capacity building and institutional strengthening of pension fund administrators and custodians (PFAs and PFC).viii. Perform such duties, which in the opinion of the commission, are necessary for the discharge of its functions under their act.

PENSION FUND ADMINISTRATORS The PRA 2004 enumerated the functions of the Pension Fund Administrator in the new scheme. These included the following: i. Opening of retirement savings account for all individual employees of public and private organization with a personal identity number (PIN) attached.ii. Invest and manage pension funds assets in accordance with the provision of the Pension Act 2004.iii. To maintain book of accounts on all transactions relating to pension funds.iv. To provide regular information on investment strategy, market returns and other performance indicators to the commission and employees or beneficiaries of the retirement saving accounts.v. Provide customer service support to workers including access to workers account balances and statement on demand.vi. Responsible for the determination of retirement benefits.vii. To ensure that retirement benefits are paid to employees in accordance with the provisions of the Pension Reform Act 2004.viii. To carry out other functions as may be directed from time by the Pen Com.

PENSION FUND CUSTODIAN The Pension Reform Act 2004 provides that the pension funds and assets shall only be held by pension fund custodian licensed by the PenCom. The role of PFC under PRA 2004 includes;i. Receive the total contributions remitted by the employer under the Section 11 of this Act on behalf of the Pension Fund Administration with 214 hours of the receipt of contributions from any employer.

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ii. To notify the Pension Administrator within 24 hours of the receipt of the contributions from any employee.iii. To hold Pension Fund and Assets in safe custody on trust for the employee and beneficiaries of the retirement savings account.iv. To settle transactions and undertake activities relating to the administration of Pension Fund investments including collection of dividends and related activities on behalf of Pension Fund Administrators.v. Report to the Pen Com on matters relating to the assets being held on behalf of any Fund Administrator at such intervals as may be determined from time to time by the Pen Com.vi. To undertake statistical analysis on the investments and return on investment with respect to pension funds in its custody and provide data and information to the pension fund administrator and the PenCom.vii. To execute in favour of the pension fund administrator relevant proxy for the purpose of voting in relations to the investment.

REFERENCESAmadi, A. O (1991): Preferring and Managing your Retirement Owerri: Dolf

Madi International Limited.

Nwedufu, (2006): Retirement Planning for the Rainy Days. Abakaliki: Innarrok Syndicate.

Eme, O. and Ugwu, S.C. (2011): “The Laws and Administration of Retirement in Nigeria: A Historical Approach. Kuwait: Arabain Journal of Business and Management Review.

Federal Republic of Nigeria (2004): Pension Reform Act, Government Press Lagos.

National Pension Commission I Pen Com (2007): How the Pension Scheme Works, Government Press Lagos.

Ahmed, M.K (2010 July 27): The Nigeria Pension System. Nigeria Tribune. Retrieved November 7, 2013 From http://www.tribune.com.Ng/index.Php/tribune.

Odum, W. (2003 October 6): The imperative of Pension Policy Reform in Nigeria, this Day pp 36.

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http://www.tribune.com.Ng/index.Php/tribune


CHAPTER TWENTY FOUR

ECONOMIC AND FINANCIAL DEVELOPMENT PLANNING IN NIGERIA

BY

AGU CHINONYELUM F.Lecturer,

Department of Political Science, Caritas University, Amoji-Nike Enugu

INTRODUCTIONDevelopment is the desire of every nation, big or small. This concept cuts across all facets of national life, which may include among others; variables and decisions to coordinate the activities of the state, direct control and influence, the level of growth in principal economic activities (income, consumption, savings import and export). It therefore, follows that plans must be drawn to achieve these set objectives. This is referred to as” development planning" or economic planning in which is the deliberate governmental attempt to co-ordinate economic decision- making over a long period of time; ten(10) to fifteen(15) years or more.Economic plans may be comprehensive or partial. A comprehensive plan sets out its targets to cover major aspects of the National economy. While the partial plan covers specific areas of the national economy – industry, agriculture, public sector etc. Over the years Nigeria has been engaging in economic and financial development planning. Planning bridges the gap between where we are and where we desire to go. It makes it possible for things to happen which ordinarily would not have happened.According to Sen (1999), development is the process of expanding the real freedoms that people enjoy. Focusing on human freedom contrasts with narrower views of development, such as identifying development with the growth of gross national product or with the rise in personal income or with industrialization or with technological advancement or

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with social modernizations. Growth of Gross National Product (GNP) or individual income can of course be very important as means of expanding the freedoms enjoyed by members of the society. But freedom also depends on other determinants such as social and economic arrangements as well as political and civil rights. Similarly, industrialization or technical progress or social modernization can substantially contribute to expanding human freedom, but freedom depends on other influences as well.

Economic PlanningThere is no agreement among scholars with regards to the meaning of “economic planning.” The concept has been used loosely in economic literature. It is often confused with communism, socialism or economic development. Any type of state intervention in economic affairs has been treated as “planning”. Planning is a technique, a means to an end being the realization of certain pre-determined and well defined aims and objectives laid down by a central planning authority. The end may be to achieve economic, social and political objectives. According to Lewis (1954) this can be used in six different senses “first, there is an enormous literature in which it refers only to geographical zoning of factors, residential buildings, cinemas and the like. Sometimes this is called town planning and sometimes just planning. Secondly “Planning” means only deciding what money the government will spend in future, if it has the money to spend. Thirdly, “Planned economy is one in which each production unit (or firm) uses only the resources, men, material and equipment allocated by quota and disposes of its products exclusively indicated to it by Central order. Fourthly, “Planning” sometimes means any setting of production targets by the government, whether for private or public enterprises. Most government practice this type of planning if only sporadically and if only for one or two industries or services to which they attach special importance. Fifthly, here target are set for the economy as a whole, purporting to allocate all the country’s labour, foreign exchange, raw materials and other resources between the various branches of the economy. And finally, the word ”Planning” is sometimes used to describe the means which the government uses to try to enforce upon private enterprises, the targets which have been previously determined.Zweig (1961) maintains that “Planning” is planning of the economy, not within the economy. It is not a mere planning of towns, public works or

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separate section of the national economy, but of the economy as a whole. Thus planning does not mean piecemeal planning but overall planning of the economy.He goes further to insist that economic planning consists of the extension of the functions of public authorities to organizations and utilization of economic resources … planning implies and leads to centralization of the economy.According to Robbin (1966) economic planning is the collective control or suppression of private activities of productions and exchange. While Hayek (1958) views it as “the directions of productive activity by a central authority”.Lordwin (1966) contends that economic planning is a scheme of economic organization in which individual and separate plans, enterprises and industries are treated as coordinate units of one single system for the purpose of utilizing available resources to achieve the maximum satisfaction of the people’s needs within a given time.Dickinson (1957) opines that economic planning is “the making of major Economic decisions; what and how much is to be produced, how, when and where it is to be produced, to whom it is to be allocated, by the conscious decision of a determinant authority, on the basis of comprehensive survey of the economic system as a whole.Economic planning can therefore be seen as the ordering of men and material by a central authority to achieve predetermined course of action.

Financial PlanningThis is the technique of planning in which resources are allocated in terms of money. Finance is the key to economic planning. If sufficient finances are available, it will not be difficult to achieve physical targets. But without the stipulated financial resources it will not be possible to carry out the plan to its logical conclusions. Financial planning is essential in order to remove maladjustments between supplies and demand and for calculating costs and benefits of the various projects. The essence of financial planning is to ensure that demands and supplies are matched in a manner which exploits physical potentialities as fully as possible without major and unplanned changes in the price structure (Lewis, 1966). Financial planning is fixed in terms of money and the estimates are made on the bases of various hypotheses regarding the

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growth of the national income, consumption, import etc to cover this outlay by taxation, savings, and the increase in the cash hoarding. This consists in establishing an equilibrium between the incomes of the population- wages, incomes of peasants and others, and the amount of consumer goods which will be available to the population. Further it must establish equilibrium between that part of incomes of the population which will be used for private investment and the amount of investment goods made available to private investors.Finally, in the public sector a balance must be established between the financial funds made available for investment purposes and the amount of investment goods which will be produced or imported. Financial planning is thus thought to secure or balance between demand and supplies, avoid inflation and bring about economic stability.

Limitations of financial planning(1) The measures to mobilize financial resources through taxation may adversely affect the propensity to save.(2) In underdeveloped economy, there is a vast subsistence non-monetized sector and a small organized money sector. Thus there is bound to be an imbalance between the two sectors. This will lead to shortages in supplies and to an inflationary rise in price. As a result, physical targets are likely to be upset.(3) It is possible that supplies can be increased through imports, but they will lead to balance of payments difficulties from which underdeveloped countries already suffer.(4) To be successful financial planning must be free from the bottlenecks, especially inflationary rise in prices.(5) Financial planning is unsuited to an underdeveloped economy where this means not merely loss of potential income but also a threat to the character of balanced social development because it results in an insufficient provision of employment at average wages relative to the increase in the population and thus increase inequality between those who are privileged to obtain employment and those whose needs both for work and income necessarily remain unmet.According to Thomas (2010) Economic planning may be described as a deliberate governmental attempt co-ordinate economic decision over the long run and to influence, direct and in some –cases control the activities of the state.

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The Rationale for Planning: One of the principal objectives of planning is to increase the rate of economic development. In the words of Gadgil (2007), planning for economic development implies external direction or regulation of economic activity by the planning authority, usually identified with the government of the state, in Nigeria – National Planning Commission. It means increasing the rate of capital formation by raising the levels of income, savings and investment. This is beset with a number of challenges:- The people are poverty-ridden. Their capacity to save is extremely low, due largely to low level of income and high propensity to consume. As a result, the rate of investment is low which leads to capital deficiency and low productivity. Low productivity means low incomes, and the vicious circle is completed. (1) To improve and strengthen the market mechanism. Planning arises to improve and strengthen the work of market mechanism. The market mechanism works imperfectly in under developed economies like Nigeria because ignorance are unfamiliarity with it. A large part of the economy comprises the non-monetised sector. The products, factor, money and capital market are not organized properly. Thus the price system exists in only a rudimentary form and facts to bring about adjustments between aggregate demand and supply of goods and services. To remove market imperfections, to mobilize and utilize effectively the available resources, to determine the amount and composition of investment and to overcome structural rigidities, the market mechanism is required to be perfected in developing economies through planning.(2) To remove wide spread unemployment and disguised unemployment in such economies. Capital being scare and labour being abundant, the problem of providing gainful employment opportunities to an ever increasing labour force is a difficult one. It is only a centralized planning authority which can solve this. In the absence of sufficient enterprise and initiative, the planning authority is the only institution for planning the balanced development of the economy. For rapid economic development, underdeveloped economies require the development of the agricultural and industrial sectors, the establishment of social and economic overheads, the expansion of the domestic and foreign trade sectors is a harmonious way. All these require

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simultaneous investment in different sectors which is only possible under development planning.(3) The need for developing the agricultural sector along with the industrial sector arises from the fact that agriculture and industry are interdependent. Reorganisation of agriculture releases surplus labour force which can be absorbed by the industrial sector. Development of agriculture is also essential to supply the raw materials need of the industrial sector. This can only be done through proper planning.(4) The agricultural and industrial sectors cannot however develop in the absence of economic and social overheads. The building of canals, roads, railways, power stations etc. So are the training and educational institutions, public health and housing for providing a regular flow of trained and skilled personnel. It, therefore, devolves the state to create social and economic overhead in a planned way.(5) Similarly, the expansion of domestic and foreign trade requires not only the development of the agricultural and industrial sectors along with social and economic overheads but also the existence of financial institutions. Money and capital mortgages are underdeveloped in developing economy. This factor acts as an obstacle to growth of industry and trade. Such maladjustment can only be removed by the state through planning. It is the planning authority which can control and regulate domestic and foreign trade in the best interests of the economy. Planning for development is indispensable for removing poverty of nations; for raising national and per capita income, for reducing inequalities in income, and health, for increasing employment opportunities. For all round development, and maintaining their newly won national independence, planning is the only path open to under developed countries.Development planning is meant to develop the economy as a whole. It involves “the application of a rational system of choices among feasible courses of investment and other development actions. For this, it relies to a large extent on the market mechanism. The government formulates a development plan for the whole economy, it includes consideration of the most important economic aggregates such as total savings, investment, output, government expenditure and foreign transactions. It also explores sectoral relationships in the overall framework of the economy. In particular, it lays down investment, public investments cover the whole infrastructure of the economy including investment in health, education and training. The private sector is considered as

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partner in the development efforts of the economy. The government does not use force on the private sector to get the plan implemented. Rather it provides incentives through monetary, fiscal and direct control measures. At the same time, the government adopts measures to restrict unproductive activities so that private investment is channeled into productive activities.Development planning is primarily related to the development activities of underdeveloped countries. Such countries have a number of economic, social and political obstacles to development, it is not possible to make development planning a success even by the best policies. As Lewis (1966) posits “Good policies help, but do not ensure success”.

Plan Formation and Requisites for Successful Planning 1) Planning commission: The first prerequisite, for a plan is the setting up of a planning commission, which should be organized in a proper way. It should be divided and sub-divided into a number of divisions and sub-divisions under such expert- economists, social scientists, statisticians, engineers, etc dealing with various aspect of the economy. In Nigeria, there is National Planning Commission, which is the agency of government that oversees Economic Planning in the country.2) Statistical Data: A prerequisite for sound planning is a thorough survey of the existing potential resources of a country together with its deficiencies. As Baykov (1972), puts it “every act of planning in so far as it is not mere fantastic castle building presupposes a preliminary investigation of existing resources”. Such a survey is essential for the collection of statistical data and information with regard to the total available material, capital and human resources of the country. Data pertaining to the available and potential natural resources along with the degree of their exploitation, agricultural and industrial output, transport, technical and non-technical personnel etc. are essential for fixing targets and priorities in planning. It therefore, requires the setting up of a central statistical organization with a network of statistical bureaus for collecting statistical data and information for the formulation of the plan. In Nigeria this is called Bureau of Statistics with offices all over the federation.

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3) Objectives:- The plan may lay down the following objectives: to increase national income and per capita income; to expand employment opportunities; to reduce inequalities in income and wealth; and concentration of economic power; to raise agricultural production; to industrialize the economy; to achieve balanced regional/state development; to achieve self-reliance etc. The various goals and objectives should be realistic, mutually compatible and flexible enough in keeping with the requirements of the economy.4) Fixation of targets and priorities: The next problem is to fix targets and priorities for achieving the objectives laid down in the plan. They should be both global and sectoral. Global targets must be held and cover every aspect of the economy. They include qualitative production targets, so many more million tons of food stuffs, coals, steel, fertilizers, etc. So many kilowatts of power capacity, so many meters of railways and roads, so many additional trainings institutions, so much increase in national income, savings, investment etc. There are also sectoral targets pertaining to individual industries and products in physical and value terms both for the private and public sectors. Global and sectoral targets should be mutually consistent in order to attain the required growth rate economy. This necessitates determining priorities, priorities should be laid down on the basis of short-term and long-term needs of the economy, keeping in view the available material, capital and human resources. Such schemes or projects which required to be executed first should be given top priority while the less important should have a low priority. The scheme of priorities should not be rigid but may be changed according to the requirements of the country. Thus “sound governmental planning consists of establishing intelligent priorities for public investment programme and formulating a sensible and consistent set of public policies to encourage growth in the private sector”.5) Mobilization of resources, a plan fixes the public sector outlay for which resources are required to be mobilized. There are various internal and external resources for financing a plan. Savings, profits of public enterprises, net market borrowings, taxation and deficit financing are the principal internal sources of finance for the public sector. Net budgetary receipts corresponding to external assistance relate to the external sources of financing the plan. The plan, should lay down such policies and instruments for mobilizing resources which fulfill the financial outlay of the plan, inflationary and balance of

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payments pressures. At the same time, they should encourage corporate and household savings of the private sector.6) Balancing in the plan: A plan should ensure proper balances in the economy, otherwise shortages or surpluses will arise as the plan progresses. There should be balance between saving and investment, between the available supply of goods and the demand for them, between manpower requirements and their availabilities, and between the demand for imports and the available foreign exchange.Aggregate savings come from various sources such as voluntary savings, taxation, profits of public enterprises, foreign remittances by diasporized nationals etc. These must equal planned aggregate investment in fixed capital assets and inventories in the economy. The balance between the supply and demand for goods requires balancing of the available supply of consumption goods with their demands, for the supply of capital goods, materials and inventions with their intermediate demand, and the progressed requirements of exports of goods with their supplies. Balances are also required between demand and supply of manpower, between import requirements and available foreign exchange during the plan periods.In fact, two kind of balance must be secured in a plan, the first is the physical balance which consists of balancing the planned increase in output of various goods with amounts and types of investment. It also requires the balancing of the outputs of the various sectors of the economy. This is achieved through the input-output technique, because the output of the sector or industry is the input of the other for producing its output. Physical balancing is essential for the internal consistency of the plan, otherwise such physical obstacles as lack of raw materials, manpower, etc, will develop the economy. The second is the monetary or financial balance which consists of balancing the incomes of the people with the amount of goods available to them for consumption, the funds used for private investment and the amount of investment goods available to private investors, the funds used for public investment and amount of investment goods produced by the public sector, and the balancing of foreign payments and receipts. Lack of these financial balances will lead to disequilibrium in the supply and demand for physical goods thereby leading to inflationary and balance of payments pressures during planning.

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7) Incorruptible and Efficient Administration: A strong efficient and incorruptible administration is the sine qua non for successful planning. But this is an underdeveloped country lack the most. Lewis (1966) regards a strong, competent and incorruptible administration as the first condition for the success of a plan. The Central Cabinet in an underdeveloped country should not take important economic decisions hurriedly without getting them properly examined from technical advisers, competent administrative staff should be appointed in various ministries which should first prepare good feasibility reports of proposed projects before starting a project, keeping it on schedule, amending it in case of some unexpected snages and evaluating it from time to time. Without such administrative machinery, development planning has no focus in an underdeveloped country. Lewis (1966) is very emphatic when he writes, “In the absence of such an administration, it is often much better that governments should be laisez faire than they should pretend to plan. The phenomenal success of development planning in Russia can be attributed to a highly trained and disciplined priestly order of communist party “in making a plan” writes Lewis (1966) “technique is subsidiary to policy. Hence, although the basic techniques are displayed, the emphasis is throughout on policy. The economies of development is not very complicated; the secret of successful planning lies more in sensible political administration”8) Proper Development Policy: The state should lay down a proper development policy for the success of a development plan to avoid any pitfalls that may arise in the development process. According to Lewis (1954) the main elements of such a development policy are: (i) investigation of development potentials, survey of national resources, scientific research, market research (ii) provision of adequate infrastructure (whether power, transport and communications), whether by public or private agencies, (iii) provision of specialized training facilities, as well as adequate general education, thereby ensuring necessary skills; (iv) improving the legal framework of economic activities, specially laws relating to land tenure, corporation and commercial transactions (v) helping to create more and better markets, including commodity markets, security exchanges, banking, insurance and credit facilities (vi) seeking out and assisting potential enterprises both domestic and foreign; (vii) promoting an increase in savings, both private and public. The success of a development plan can be tested mainly by examining various proposals under each of these heads. (viii)

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promoting better utilization of resources, both by offering inducements and by control against misuse.9) Economy in administration: Every effort should be made to effect economies in administration, particularly in the expansion of ministries and state departments, “the people must feel confident that every fadden that they pay to the government through taxation and borrowings is properly spent for their welfare and development and not dissipated away.10) An Education base: For a clean and efficient administration, a firm educational base is essential, planning to be successful must take care of the ethical and moral standards of the people. One cannot expect economy and efficiency in administration unless the people possess high ethical and moral values. This is not possible unless a strong educational base is built up whereby instructions are imparted both in the academic and technical fields. Without creating honest and efficient human beings in the country it will not be feasible to undertake economic planning on large scale.11) A theory of consumption: According to Galbraith (1966) an important requirement of modern development planning is that it has a theory of consumption. Underdeveloped countries should not follow the consumption patterns of the more developed countries. The theory of consumption should be democratic and prime attention must be accorded to goods that are within the range of model income that can be purchased by typical family. Cheap bicycles in a low income country are thus more important than cheap automobiles. An inexpensive electric lighting system for the villages is better than a high capacity system which runs equipment, the people cannot afford. Inexpensive radio sets are important, television belongs to another day. Above all nothing is so important as abundant and efficiently produced food, clothing and shelter for these are the most universal requirements.12) Public cooperation: Above all, public cooperation is considered to be one of the important levers for the success of plan in a democratic country. Planning requires the untainted cooperation of the people. Economic planning should be above party politics, but at the same time, it should have the approval of all the parties. In other words, a plan should be regarded as national when it is approved by the representatives of the people. For without public support no plan can be a success.

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Economic and Financial Development Planning in Nigeria: Historical perspectiveDevelopment planning in Nigeria can be said to have started in 1946 when the ten – year plan of development and welfare first came into operation. The initiative of the secretary of state for the colonies resulted in the formulation of integrated development plan for 1946-1956. This plan came to a premature end in October 1954 when the federal system of government was introduced. This was followed by 1955-1960 development plan which was revised and extended to 1962 and was launched in April, 1955. (Olewe, 1995).

National Development Planning in NigeriaThe first National Development Plan (1962-1968)This was the first national development plan after independence had been won. This six-year plan was estimated to cost N2.4 billion. The following objectives were expected to be achieved by the plan.(i) To raise the growth rate of GDP from 3.9 percent to 4 percent and if possible increase it above 4 percent.(ii) To achieve “a” above through the investment of (15%), fifteen percent of GDP each year.(iii) To develop as rapidly as possible opportunities in education, health and employment and improve access of all citizens to those opportunities.(iv) To achieve a co-ordinate economy consistent with the political and social aspirations of the people. This would be achieved through: (i) creation of more employment. (ii) Modernization of agriculture. (iii) creation of more managerial opportunities. (iv) provision of necessary infrastructure (v) maintenance of a reasonable measure of stability through appropriate fiscal and monetary policies.

The Second National Development Plan (1970-1974): The military coup of 1966 and the civil war which started in 1967 disrupted the first plan. At the end of the war however and being eager to consolidate the unity just regained and to reconstruct the war torn economy. General Yakubu Gowon; introduced the Second National Development, estimated to cost N3.3billion. The objectives of the plan were:- To achieve:(a) A united strong and self-reliant nation.

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(b) A just and egalitarian society(c) A free and democratic society(d) A land bright and full of opportunities for peopleIn order to achieve these objectives, the plan sought to bring about:(i) A substantive rate of growth of the economy(ii) A reduction in personal income disparities through equitable distribution.(iii) Creation of opportunities which would help to realize the potentials and development of the personality of every Nigerian.(iv) A situation of expanding opportunities for employment, education and self fulfillment.

High on the priority of the agenda included:(a) The construction of facilities damaged by the war or fallen in disrepair.(b) The rehabilitation and resettlement of persons displaced by the war.(c) The rehabilitation and resettlement of demobilized armed forces personnel.(d) The establishment of efficient administrative systems and appropriate economic infrastructure especially in the new states.(e) The achievement of a rate of growth of per capita output sufficiently high to bring about a doubling of real income per head before 1975. An average growth rate of 6.6 percent was the minimum target.(f) Creation of job opportunities(g) The production of high level and intermediate manpower(h) The promotion of balanced development between the urban and rural areas(i) Rapid improvement in the level and quality of social services provided for the welfare of the people.

The Third National Development Plan (1977-1980):Due to the oil boom windfall, the Federal Military Government could develop a Third National Development Plan estimated to cost a whooping N53.3 billion and with the following objectives:

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(a) The rapid growth in per capita income, which was expected to increase on the average by 6.6 percent per annum, assuming that the rate of growth of the population could be kept at 2.2 percent (2.2%).(b) A more even distribution of income, being spread out to bring about marked improvement in the standard of living of the majority of the people.(c) Adequate supply of all categories of manpower required for sustained economic growth.(d) Reduction in the level of unemployment.(e) Increase diversification of the economy through rapid expansion and broadening of industrial activities.(f) Balanced development to ensure simultaneous development of all the country’s geographical areas.(g) Indigenization of economic activities.

The Fourth National Development Plan (1981-1985): The second republic administration of Alhaji Shehu Shagari in 1981 introduced the fourth plan estimated to cost N82 billion which had the following objectives:-(a) Increase in the real income of the average citizens. (b) More even distribution of income among individuals and socio-economic groups.(c) Reduction in the level of unemployment(d) Increase in the supply of skilled manpower(e) Balanced development.(f) Increase participation of citizens in the ownership and management of productive enterprises.(g) Development of technology(h) Reduction in rural- urban migration(i) The promotion of a new national orientation conducive to greater discipline, better attitude to work and cleaner environment.The Fifth National Development (Rolling) Plan (1990-1992)In a rolling plan every year three new plans are made and acted upon. First, there is a plan for the current year which includes the annual budget and foreign exchange budget. Second, there is a plan for a number of years, say three, four or five. It is changed each year in keeping with the requirement of the economy. It contains targets and

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techniques to be followed during the plan period along with price relationships with price policies. Third, a perspectives plan for ten (10), 15; 20 years or even more years is presented every year in which the broader goals are stated and the outline of future development are forecast. The annual- one year plan, is fitted into the same new year’s, three, four, five or more years plan and both framed in the light of the perspective plan. The broad aim and objective are laid down in the 20years perspective plan. The five year plan for 1992 – 1996 will roll on for the subsequent year shedding each previous year so as to become a plan for 1992 – 1994, 1996 – 2002 etc, the plan is revised since plan is a continuous process every year the plan is revised in the light of new information, improved data and improved analysis.(Abah, 2000).The Babangida administration introduced the fifth National Development Plan, otherwise known as the first National Rolling Plan. Unlike the four earlier plans which were meant to last for five years or more, the first rolling plan was expected to last for three years (1990-1992).In introducing the plan, the government made it clear that the plan was aimed at removing the weaknesses of earlier plans because, according to Babangida “the economic crisis that faced the nation since 1983 has revealed that fixed five – year plan were not best suited to cope with attendant problems of economic management and adjustment under conditions characterized by numerous uncertainities, fairly rapid changes as well as pressing issues that called for urgent solution.” The plan was estimated to cost N144.2 billion and had the following objectives.(a) To consolidate the achievement made so far in the implementation of the Structural Adjustment Programme.(b) To deal with pressing problem of inflation, unemployment, the sluggish performance of the productive sectors, particularly the manufacturing sector, and the inadequate availability of foreign exchange to service the economy at higher level of overall capacity utilization due to external debt burden and slow growth of non oil export.(c) To provide solution to socio-economic problems such as high growth rate of population, low level of productivity and threat to the environment.

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(d) To provide solution to anti-social behaviour such as armed robbery and drug abuse.High on the priority of the regime included:(i) Agricultural development(ii) The provision of infrastructural services(iii) Giving priority to the programmes that would benefit segments of the society that have been adversely affected by the economic down-turn.(iv) Streamlining public expenditure to give priority to the completion of critical on-going projects. Other regimes capsulated this rolling plans into their administration. The Abacha regime captioned his own vision 2010; meaning that by 2010, Nigeria would have achieved economic development, reduced poverty and inequality and redistribute income, create employment and improve agriculture and rural development. The administration could not achieve much following death of Abacha. Abubakar’s administration did not introduce any new national plan since it was a transition government that brought the civilian government of Obasanjo into power in 1999. The government of Obasanjo between 1999 and 2007,introduced, “The National Economic Empowerment and Development Strategies” (NEEDS) which is in line with the rolling plan introduced in 1992. The plan has the primary objectives of pursuing strong, virile and broad based economy with adequate capacity to absorb externally generated shocks. According to Donli (2004), the new plan is aimed at the development of an economy that is highly competitive, responsive to incentives, private sector-led, diversified, market-oriented and open, but based on internal momentum for its growth. NEEDS is described as Nigeria’s plan for prosperity. It is a four year medium term plan for the period 2003-2007.NEEDS is a federal government plan, which also expected states and local governments to have their counterpart plans- the State Economic Empowerment and Development Strategy (SEEDS) and the Local Economic Empowerment and Development Strategy (LEEDS),respectively. It is a comprehensive plan that seeks to include not only all levels of government towards moving in the same direction, but also seeks all and sundry, namely; private sector, non-Governmental Organizations (NGOs) and the general public in cooperative activity in pursuit of developmental goal. NEEDS as a plan, contain all the envisaged policies and programmes of federal government for the period 2003-2007and far beyond and serves as the fountain of the much

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touted Obasanjo’s reform. NEEDS is not only a macro-economic plans document, but also a comprehensive vision, goals and principles of a new Nigeria that would be made possible through re-enacting core Nigerian values like respect for elders, honesty, and accountability, cooperation, industry, discipline, self-confidence and moral courage. While the Musa Yar’adua’s administration called his own, seven(7) point agenda which bordered on Wealth creation, employment generation, poverty reduction, good governance, transparency and accountability. The country also introduced vision 20: 2020 meaning that by the year 2020 Nigeria would have become one of the twenty most industrialized nations of the world. The Jonathan administration tagged his own transformation point agenda which has been running since 2011 till date.

ConclusionNigeria as a developing nation has before independence embarked on Economic and financial development plan, but unfortunately these planning have not yielded the expected result of which is the transformation of the Nigerian economy to ensure development and creation of wealth for the teeming population.

REFERENCES

Abah, N. C. (2000): Development Administration: A Multi-disciplinary Approach. Enugu: John Jacobs Classic Publishers Ltd.

Baykov, J. (1972): The Development of Soviet Economic System. New York: University Press.

Dickson, E. (1957): Principles of Economic Planning. London: University Press.

Donali, C. J. (2004): The Economic Development in Nigeria Issues, Problems and Prospect. Ibadan: University press.

Gadgil, D.R. (2007): Planning and Economic Policy in India. New-Delhi Macmillan Publisher Ltd.

Galbraith, J.K. (1962): Economic Development in Perspective. New-Jersey: Macmillan Publisher Co. Ltd.

Hayek, F.W. (1958): Road to Serfdom. Oxford: Oxford University Press.

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Lewis, W.A. (1954): The Principles of Economic Planning, Oxford: Oxford University Press.

Lewis, W.A. (1966): Development Planning Oxford: Oxford University Press.

Olewe, B. N (2005): Development Administration. Enugu: Panaf Publishers Ltd.

Robbin, L.. (1966): Economic Policy and International Order. London: University Press.

Sen, A. (1999): Development as Freedom. Oxford: Oxford University Press.

Thomas, A. N. (2010): Paraxis of Development and under development. Benin city: Ethopie Publishers Ltd.

Zweig, F. (1964): The Making of Free Societies. New-York: University Press.

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CHAPTER TWENTY FIVE

THE HISTORY AND SYSTEM OF INSURANCE BUSINESS IN NIGERIA

BY

ODOH LINUS A.Lecturer,

Department of Insurance and Risk Management Institute of Management and Technology (IMT) Enugu

GENERAL INTRODUCTION AND BACKGROUND OF INSURANCE INDUSTRY IN NIGERIA The British colonial government introduced insurance business into Nigeria in 1910. Traditionally, though some forms of social insurance society long before their arrival was in form of mutual and social schemes, which evolved through the extended family system, age grades and clans unions are typical of African cultures.This simple form of social insurance was practiced by means of cash donations, organized collective labour of assisting one another and the entire community, who suffer mishap.The people in the community, especially those of the same age bracket collects funds periodically just in the same manner as the industrial life insurance premiums are collected.

Right from the on set, Nigerian cultures and indeed African people have seen the reason to contribute funds to assist members who may suffer mishap such as illness, important ceremonies as child naming, marriage, funeral and all kinds of social obligations.

The enactment of Workmen’s Compensation Ordinance of 1942 and the Road Traffic Act of 1945, both contributed to the meaningful take-off of insurance industry at that time. Against the backdrop of the fact that Nigeria economy in the 60’s was dependent on agriculture, marine insurance was popular for external trades to promote export.

Fire insurance was never popular and the expatriates mainly held mortgage security policies.

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However, the parliament in the first republic set up Obande Commission (1961) to review the situation in insurance industries and was to come up with recommendations. The outcome of Obande Commission gave rise to the establishment of Insurance Companies Act of 1961. Arising from this Act, by 1969, Nigeria had registered close to 50 insurance companies, though with foreign domination. The foreign domination was so serious that both Great Nigeria Insurance Company (GNIC) owned by Western Region and African Alliance Insurance (AAI) company had a meagre share of operation when compared with the overall volume of business in the entire industry. This unfavourable trend persisted for a long time that the Federal Government of Nigeria became skeptical as to what future holds for the then insurance industry that was generally dominated by foreigners. Nigerians were not allowed to hold sensitive positions which would have equipped them for managerial or technical responsibilities in the industry.

Out of the 25 insurance companies that existed in 1960, only 7 were indigenous and there total market share was far below 10% as the bulk of the business went to the foreign owned companies.

The Nigerian business and economic life was dominated by foreigners. The fallout from this was the heavy drain of Nigeria foreign exchange earnings. As a result of these problems, a parliamentary committee was therefore; set up in 1964, under the chairmanship of honourable 1 Obande, for another time, to carryout the following enquiries:

- To look into the possibility of introducing governmental control for motor vehicle insurance premium;

- To find out about premiums charged for the insurance of motor vehicles in Nigeria, for comprehensive covers and the third party so as to know the extent to which rates have increased since 1950;

- To know whether the rights of the insurance clients are appropriately covered;

- To make recommendations to the state.In the end Obande committee recommendations could not go

beyond sensitization of government over the danger inherent in the foreign domination of insurance industry in Nigeria.

The Nigerian agents were given power of attorney to transact insurance business such as insurance of cover and service on behalf of the London principals. Throughout this period, insurance focused more

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on marine insurance and trade rather than overall development of the economy.

The situation was as disenchanting to Nigeria as trading companies were being granted licenses to operate as insurance companies especially to supervise claims and to issue cover on marine insurance. For example in 1919 the Africa and East trade companies were both established as Royal Assurance Agency, which later metamorphosised into a full blown insurance companies brand in 1922. This even then opened up the flood gate for Peterson Zochonis (PZ). General Insurance Liverpool, London and Law Union and Rock to mention just a few. It is pertinent to say that all of these companies were wholly owned by the British and for the major purpose of providing insurance service for their trading activities.

However, in 1985 the African Insurance Company Limited, emerged as the first wholly indigenous insurance company. Between 1985 and 1990, there was an upsurge and a phenomenal increase in the number of insurance companies operating in Nigeria. This proliferation accounted for over 110 companies operating in the market during this period. The need for control and timely intervention of the government led to the formation of the National Insurance Corporation of Nigeria (NICON), which was later transformed into NICON Plc. As at 1969, as an apex company, NICON was further empowered to act as the nation’s re-insurance company with other Nigerian insurance firms and shedding compulsory shares of their business to the corporation. In compliance with provisions of the Nigerian Enterprises Promotion Decree of the Federal Government in 1975, NICON was chosen to participate in the equity shares of 14 foreign owned insurance companies to the tune of 49%. In 1977 the indigenous participation increased to 60% and the control of insurance market by the foreigners began to decline and thus NICON for a long time assumed the monopoly role of government insurer.

The first remarkable risk business of NICON in the insurance industry came up when an ADC. 10 aircraft, newly acquired by the Nigerian Airways and insured by NICON crashed at Iju Lagos State on 25th November, 1989.

The 89 persons on board were reportedly killed in the crash. NICON demonstrated its insurance ability by the settlements of the huge claims. Shortly after this episode, there was a phenomenal increase

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in the number of insurance companies in Nigeria financial market. This was coupled with the fact that in 1986. Structural Adjustment Programme (SAP), brought about the emergence and proliferation of financial institutions, especially commercial banks, and insurance companies. To streamline insurance business activities and stem the upsurge of the mushroom insurance companies; insurance capital base was raised from 1.2 million. Fallout from this event was that only 57 out of 152 insurance companies qualified for registration.

This was coupled with tighter control of the industry over request for provision of licensing and control of insurance intermediary. Generally, sanity was restored in the insurance market through legislation and the control of insurance intermediaries.

REGULATIONS OF INSURANCE IN NIGERIAThe first major step at regulating the activities of insurance

business in Nigeria was the report of J.C. Obande commission of 1961, which resulted in the establishment of Department of Insurance in the Federal Ministry of Trade and which was later transferred to the ministry of finance. The report also led to the enactment of Insurance Companies Act 1961, which came into effect on 4th May, 1967.

The 1961 Act focused mainly on the activities of direct insurers, made provisions for registration and record keeping. In 1968, insurance companies regulations was put in place to facilitate the implementation of Act No 58 which grouped business into different classes for registration purposes and relevant forms for record keeping.

Insurance Decree No 59 of 1976 was enacted putting together the provisions of the various laws. The 1976 Decree among others made the following provisions;

- Condition for authorization of insurance- Mode of operation- Amalgamation and transfer- Administration and enforcement- Penalties.

The Insurance Decree No 59 of 1976 constituted the first All-embracing law for the regulation and supervision of insurance business in Nigeria.

In 1968, concern was given to life insurance business and it led to the enactment of Decree No 40 of 1988, which made provisions

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among others for assignment of life insurance policy, named beneficiary on life insurance policy document.

The federal government of Nigeria promulgated the Insurance Special Supervision Fund (ISSF) Decree No 20 of 1989 to strengthen the manpower need of the Insurance Supervisory Board.

That decree mandated all insurance companies to contribute 1% of their gross earnings to the fund.

Decree No 58 of 1991 was enacted improving provisions of Decree No 58 of 1979 and No 40 of 1988. The major highlights of 1991 Decree include;

- Increase paid-up share capital of insurers and re-insurers in respect of non-life business and life business, respectively.

- Compulsory membership of Trade Association.- Management of security fund by NIA- Practice of No-premium- No-cover.

In 1992, the Insurance Special Supervisors Fund Decree No 62 was enacted, establishing a body known as National Insurance Supervisory Board, bringing out insurance supervision outside core civil service, changing designation of Chief Executive from Director of Insurance to Commissioner for Insurance and setting up the Board of Directors to oversee the affairs of the established body. All this provisions were made to attract high level manpower.

The provisions of Decree No 62 of 1992 and 58 of 1991 were reviewed for effective supervision and efficient insurance market, bringing into enactment Decree No 1 & 2 of 1997, National Insurance Commission and Insurance Decree, respectively.

The following provisions were made in reviewing decree No 62 of 1992, Decree No 1 of 1997 change of name from National Insurance Supervisory Board to National Insurance Commission, establishment of source and application of funds, control and management of failed and failing insurance companies, supervisory functions and powers.

Decree No 58 of 1991 was improved upon with decree No 2 of 1997 in the following areas; By raising the paid-up share capital for different categories of insurance companies qualification of chief executive, insurance of government properties and so on.

The industry has had its share of criticisms till date. Stakeholders who believed that insurance operators are not doing

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enough feel the business should rather go to some progressive operators and as such set-up a parallel industry or diversify existing industries to take over business traditionally transacted by insurers.

NATIONAL INSURANCE COMMISSION AS A REGULATORY BODY

National Insurance Commission, (NAICOM 2005), specified guidelines which insurance firms must meet, alongside with the new capital bases. According to the guidelines, insurance firms handling life assurance businesses will have N2 billion capital bases, while those ones in composite business attract N3 billion insurance firms in reinsurance business would have to raise their capital base to N10 billion.

Using 2005 as base year these increments represent 1233% for life insurance and 275% for reinsurance business. At various fora, NAICOM has reaffirmed the need for re-capitalization of insurance sector so that they would be financially strong to effectively cover all risks associated with the development efforts in the economy. This need becomes more important in view of recapitalization that has taken place in the Nigerian banks. The study is convinced that given certain operational conditions, there exists an optimal production scale that must be met by insurance companies. Ability to recognize this optimum scales, scope and the most efficient cost frontier will assist both insurance companies in shedding light on what constitute optimal production process and market structure in insurance industry. Many works in the literature, have suggested various avenues through which a business organization could experience cost efficiencies. Among such avenues include; organizational structure, executive compensation, market concentration, mergers and acquisition, common stock performance and risk-taking (Kwan, 2001).

There is no doubt that the central role of insurance company is taking risk to cover investor or would be investors for risk-bearing investment decision, by these insurance managers. Insurance companies like banks also operate in competitive environment with heightened competition, whether and how insurance companies may survive in the emerging environment depends in part on how economies of scale and scope impact on their operations.

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Statement of the Problems and JustificationIn spite of remarkable development in Nigeria insurance

markets, the proportion of the insurance markets are small due to low premium income compounded by the generally poor attitude of the people towards insurance services.

Arising from the above, the industry is under-capitalized, hence, most insurance companies find it extremely difficult to retain a reasonable percentage of large risk undertaken by them. Majority of insurance companies, especially small scale ones operate under a scale of inefficient situation; commissioned agents who are the majority marketers of insurance product are not adequately remunerated, hence, low rate of turnover.

On the basis of the above reasons, it might be important to determine the optimal cost efficiency level for the production of insurance services in the economy.

The main problems have been poor performance and the Nigerian people’s attitudes toward demand for insurance services have been lukewarm. This assertion is further corroborated by Erhabor (2007) when he asserts that market statistics show that the Nigerian insurance industries cover CS% of the nations insurance population. Many insurance companies have multiple products and multiple branches than what they could cope with operationally. Hence, they have poorly delivered services. Recapitalization of the insurance industry in Nigeria has no doubt recorded a huge volume of business, the sector was able to pull an aggregate gross premium income of N90 billion in 2006, over 18% more than what was obtained in 2005.

The specific objectives are to:- investigate optimal production scale in the Nigerian insurance industry.- access the significance of entrepreneurial price on business performance

in Nigeria insurance industry.

Emergent Trends in Nigerian Insurance Industry As many economies of the world now tend towards a free

market, evidence from available literatures, such as the works of Sejal, Resko etc. indicate that insurance is a multi-product firm since, it produces more than one services.

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As at the time of this study, Nigeria has a total premium of 100 and 23 insurance companies, 5 registered re-insurance companies, 396 registered brokerage services and 29 registered lost adjusters companies.NAICOM (2003) reported that apart from about 30 insurance company whose operations were partial, insurance companies in Nigeria can be segmented into 3 major sizes, 20 belong to large size firms, 29 to the medium size firms, while 46 belongs to the small size category.Furthermore, it was introduced to benefit from European traders who traded on the west coast of Africa. The traders brought finished goods to Nigeria and in exchange took away raw materials such as cocoa, groundnut, tin, coal, palm kernel, cashew nuts etc. for which they required some form of insurance against perils of the sea, and other fortuitous events or loss.

Liljadu (1987:2) recalled that “in order to fulfill this needs, British insurance firms sent their agents to Nigeria to issue cover notes to traders while the actual policy documents were prepared by the parent companies in England.

This study consequently submits that mobilization of premium income is not enough to enhance insurance performance what is much more important is the ability to reinvest pooled premium income into high yielding investments, such that the rate of returns obtainable can supersede the level of risks associative of such mobilized premium income.

THE PREMIUM INCOME GENERATED IN NIGERIA

INSURANCE SYSTEMInsurance as a formidable financial sector in Nigerian economy

has grown by leaps and bounds in terms of market size and premium income generation. For instance a gross premium income generation (GPI) of N124 million was realized in 1975, but rose to N189 million in 1977. Although, the gross income increased also to N372 million in 1988, it fell to N364 million in 1979 (CBN, 2005). The performance of Nigerian insurance industry in the last two decades has been remarkable; increasing its gross premium income market was dominated by 118 and 299 insurance brokers.

The gross premium for the first ranked insurance company, NICON was close to N2 billion and the total gross premium income for the entire industry was well above N42 billion (NICON, 1969-1994, but this amount grossly fall short of enormous risk businesses which

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insurance companies have undertaken in the economy. Arising from the above facts, Nigerian insurance market is free but not operating optimally. The new entrants are always ready to float a new business and further deepen the competition. The foregoing therefore, suggests that despite the numerical growth and to some extent, expansion in the insurance industry in Nigeria, the insurance market requires a thorough empirical investigation to determine the cost structure and optimal production levels in which an insurance company can efficiently operate. The knowledge of this cost efficiency study serves to help insurance regulators, practitioners and the industry to identify the policies and strategies that could be deployed to salvage the industry and make the insurance sector contribute effectively to financial market development of the Nigerian economy.

In the event of deregulation policy, especially restructuring and recapitalization in the financial sectors of the Nigeria economy, most financial institutions have had to operate in an increasingly competitive environment. The trend might subsist for long as government policy is geared towards competitive market based on privatization, commercialization and deregulation.

The need to meet up with capitalization requirements of the Central Bank had engendered consolidation process, which in turn, has brought about mergers, acquisition and raising of more capital through, the stock market.

Another sub-sector similarly affected in Nigeria is the insurance industry (CBN, 2005).

INDUSTRY OFFSHOOTSThe dismembering of the insurance industry in the country started way back in the 80s, when various efforts culminated in the establishment of the National Health Insurance Scheme (NHIS) in 1991.

This was followed by the dismembering of pension business and creation of a new industry to transact the business of pension in Nigeria. Similarly, workmen’s compensation business was taken away from the industry.

HEALTH INSURANCE

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In order for every Nigerian to have access to good healthcare services, the federal government set-up the National Health Insurance Scheme (NHIS) with the Act 35 of 1999 as its enabling law.

PENSION SCENARIOThe Pension Reform Act 2004 was the result of efforts by the federal government to address the persistent problems of old age, poverty, accumulation of pension arrears and corruption in the system.Recommendations Insurance companies in Nigeria should handle most importantly the issue of labour. The competition for the best worker in the labour market of finance industry requires attractive remuneration which most insurance companies could not meet up with, hence, mediocre dominated their staffing.

Finally, that insurance firm like banks can also engage in multi-product business to enjoy the scope of the economies.

REFERENCES

Lajadu Y. (1985, July 22) The Responsiveness of the Insurance Industry in Nigeria to Societal Industry in Nigeria To Social Needs, Lagos, Business Times.

Eche, A.U. (2000), Introduction to Insurance, Enugu Immaculate Publication Ltd.

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CHAPTER TWENTY SIX

GLOBAL FINANCIAL MARKETS: LESSONS FOR POSITIONING AFRICA'S ECONOMIES IN AN ERA OF

OPPORTUNITY

BY

ANYANWU, CASMIR CHUKWUMALecturer,

Department of Political Science/Public AdministrationTansian University, Umunya, Anambra State.

IntroductionIn mid-March 1998, the United States House of Representatives

passed the Africa Growth and Opportunity Act, a bill that is in many ways revolutionary. It radically redefines the economic relationship between Africa and the United States. Among its provisions is a clause that grants goods manufactured in Africa duty free access to American markets. It also provides incentives and support for American firms doing business on the continent.

The importance of the bill lies in its capacity to provide the platform for Africa's economic transformation into a group of high performance economies, posting double-digit growth rates. On the back of this bill will come a significant influx of foreign investment, especially American, transforming Africa into something paralleling East Asia's miracle economies. The possibilities, once the right set of investment decisions and government policies are put in place, are phenomenal.

However, before the investment drive begins, it is vital that African policy makers locate their thinking about the future within the current architecture of the global financial system and the lessons it yields up today. The goal of this paper is to help them do just those. We will review the state of private capital flows today, the nature, extent and drivers of these flows, and the lessons they provide. An examination of Africa's current experience within that system would occur in order to develop a perspective on how African heads of states and governments or policy makers can initiate changes that would

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enable them to maximize the benefits that the Growth and Opportunity Act is expected to yield, and avoid the pitfalls highlighted by the recent East Asian financial crisis.

This paper attempts to address the worry nurtured by the writer concerning Africa’s present backseat positioning in matters concerning global finance and competitiveness. This situation has been attributed to a number of internal and external constraints. However, opportunities are found to abound in existing as well as emerging institutional frameworks for integration and growth. The writer relying on these myriad opportunities, challenges African leaders and policy makers to key into available opportunities, draw from relevant experiences lessons that are imperative to growth economies and enforce necessary reforms to usher in an era of growth and economic development on the continent. Private Capital Flow Facts in 1998

A financial revolution of sorts is underway in global markets. The nature and extent of capital flows has undergone significant transformation since the crisis field days of the 1980s. Today, private flows outnumber official flows by a factor of 5. In 1996, net private capital flows exceeded $260 billion. At that level, it was six times greater than the value for 1990 and four times the historic peak of 1978-82.

Of all the aforementioned flows, developing country share in global foreign direct investment stands at 40 percent, a remarkable rise from 15 percent in 1990. At the same time, developing country share of global portfolio equity currently stands at 30 percent of all flows, an astronomical jump from 2 percent in 1990. In addition, the share of foreign capital in emerging market domestic investment is 20 percent in 1996, a jump from 4.1 percent in 1990. Second, the composition of capital flows has also evolved at the same time. Currently, foreign direct investment plays a much more compelling role than it did a decade ago, while traditional bank lending has fallen at the same time. Third, the recipients are now increasingly private sector actors and not government. However twelve leading emerging markets account for 80 percent of flows in 1990-95, while new entrants (140 out of 166 developing countries) have access to the remaining 20 percent of flows. Fourth, flows of capital have withstood the Mexican and Asian

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crisis well, and even though American interest rates rose after Mexico, we have not seen a home coming of capital. Forces Shaping the Revolution

What are the forces driving the changes seen since 1990? Surprisingly enough, it is largely the same forces as in the past. First, investors are still searching for higher returns, that controlling for multiple risks, exceed those available from United States TreasuryBills. The range of returns appears to average 16 - 18 percent in all developing countries, and almost 30 percent in Africa. Second, investors are looking to diversify their risks, and in so doing raise the probability of a high returns on investment.

There are two additional forces that the World Bank identifies as playing a significant role. These are internal and external financial deregulation in most countries. Most countries since the debt crisis have been undergoing some of the most extensive deregulation process in the recent economic history. Immediate examples include the transition economies, sub-Saharan Africa, East Asia, and Japan (the proposed Big Bang). Second, advances in communication technology, information technology, and financial instruments have supported the deepening of global financial flows. For example, telephone systems are more extensive and cheaper and telephony rates have risen. The age of electronic mail is today. On Wall Street, the emergence of firms such as DE Shaw, an investment bank, that employs advanced computers and software to conduct arbitrage trading has also played a key role. Spillovers from the development of Silicon Valley; the invention of new financial instruments that provide more sophisticated investment opportunities, and betters ways of hedging risk such as derivative instruments; and equally important; the proliferation of numerous infrastructure financing opportunities have also supported the process. Together, these changes have created a new phase of structural changes that is driving the integration of global markets.Beyond Integration: The Benefits and Costs

Economic actors around the world have chosen to tap into the financial flows for a variety of reasons. To briefly review, they include: (i) to raise investment, (ii) diversify risks, (iii) smooth consumption and investment,

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(iv) extract knowledge spillovers, (v) develop more efficient resource allocation, and(vi) strengthen their domestic financial sector. The experience has however not being without its costs. As the recent Asian crises demonstrate in chilling fashion, when investor confidence evaporates, the speed and depth of capital flight can be brutal. And integration into global financial markets can expose distortions and institutional flaws of an economy with consequences akin to Mexico's peso crisis. Cast in positive light, what these experiences have taught governments and policy makers, are the real causes of financial problems. Today, the body of knowledge about the origins of financial crashes is unquestionably more robust, thus ensuring that if governments act rationally, they can prevent many problems. Below, we examine some of the causes of volatility in financial flows.When Integration Goes Sour: The Sources of Volatility

While the costs of integration are obvious, especially to those facing the prospects of capital flight when investor confidence disappears, to avoid these, it is important that policy makers and governments spend some time understanding the sources of investor doubt, flight of fancy, or skittishness. It is important to understand the sources in order to control or minimize their occurrence. There are therefore two main sources of volatility, international and domestic. (I) International Factors

Changes in international interest rates and other asset returns, and terms-of trade changes can trigger capital outflow. If Alan Greenspan were to authorize an American rate increase, it could trigger an inflow of funds back into the United States, especially into US T-Bills. Regarding terms of trade, case in point is oil; for mono economies like Nigeria, the price of crude oil may fall or experience serious fluctuations. For an exporting country, such a severe shift in terms of trade (ratio of export to import prices), since price of imports have not fallen, is cause for concern. Levels of uncertainty will rise among investors as to the country's ability to pay its import bills; investor expectation that a budget deficit will ensue might lead to capital outflow. Exit takes place perhaps because of concern as to how the government will finance the deficit: by printing currency (driving up inflation), borrowing on domestic or international markets. The role of foreign investors cannot also be ruled out in the equation of

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determinants of volatility of capital flow. Erratic investor behaviour has also been identified as a cause of volatility. Case in point is Southeast Asia where investors fled from Singapore, Hong Kong and Korea, once Thailand and Indonesia developed liquidity problems following currency devaluation. At that stage, investor ability to differentiate between markets starts to diminish, and investors start viewing markets as one and the same.(II) Domestic Factors

Domestic real shocks (sectorial shocks; sudden changes in weather conditions; the impact of El Nino on cocoa and coffee; cold snaps on orange juice.) can trigger capital outflow. Another driver, domestic policy shocks, (sudden, unexplained shifts in government policy such as moving from a free float to fix exchange rate; or suddenly re- instituting capital controls to stave off capital flight; will lead to fluctuation in capital inflows. Volatility's Discriminatory Nature

However not all economies experience volatility in the flows of capital. Some economies possess certain structural traits that exacerbate investor reaction to whatmay be short shocks. The World Bank (1997) identifies four such traits that magnify volatility. a. Weakness in financial markets: such weakness may take the form of poor banking practices such as seen in Indonesia, China and Thailand, over-extension of the financial system leading to a proliferation of bad loans on the books, sectorial over lending, and absence of depth to the financial system. b. Weakness in capital market structure: non-existence or inadequacy in the capital market structure, forcing investors to raise funds only in commercial bank. It also means that the market for commercial paper is weak. c. Emerging markets are marginal in international investors’ portfolios: when all is said and done, visualize the size of a typical emerging economy, then compare it to the American economy; or think about firms like Fidelity Mutual Funds, whose Magellan Fund manages about $59 billion. That fund alone exceeds the size of many developing country gross domestic products.

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d. Asymmetric information problems between foreign and domestic investors: sometimes there is an information gap between domestic and international investors with one group having more extensive access to data than other groups. We see this quite acutely in Indonesia, and Thailand. There is some evidence available that some domestic investors were privileged as to the dire straits in which their central banks were, the state of foreign reserves, and the level of bad loans in the financial system, and thus made adequate adjustments, namely liquidated assets before the currency collapse. The Sources of Financial Blessing

Then, what determines a country's access to private capital flows? There are numbers of metric on which a potential investor would evaluate an economy. If successful on all, it is more likely than not that a positive investment decision will be made. According to World Bank research, these include: i. Open markets: transparency in labor, input, output, and financial markets is useful. In addition, an outward orientation does not appear to hurt either. ii. Minimal regulation: the less bureaucracy heavy an economy is, the better. This argument is based on Anne Krueger and Jagdish Bhagwatis work that demonstrates that extensive regulation of an economy creates opportunities for rent seeking and distortionary economic activity. iii. Good infrastructure facilities: the existence of a good transport and communication system is vital. For example, one of the reasons investors cite about not doing significant levels of business in Africa is the fact that there are more telephones per person Manhattan than in the entire African continent outside of Republic of South Africa. Low production costs: transaction costs must be kept to a minimum in order not to cut into the profits that nominally should come from economic activity. If manager have to spend up to 70% of their time lobbying government officials as they do in Russia, and some other former Soviet economies, it creates additional costs that raise the cost of the product and must be passed into the final price tag, or extracted from profits.iv. Political stability: economic activity is notoriously difficult to carry out in the midst of civil strife. If a society is stable, with

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predictable government activity, clear costs and expectations, then investors do not have to think twice before locating there. v. Consider this thought experiment: where would you be more willing to invest, Afghanistan under the Taliban, with warfare in the background, or Singapore with a government that is the least corrupt, most transparent and technocratic in the world?The African Case: Evidence

Having discussed the theory, let's examine the case of the world’s most controversial region when it comes to the question of capital inflows. The Africa evidence, at least as gathered from the World Banks recent survey is fascinating. First, countries with positive per capita growth received the largest flows. Second, growing economies showed improved aggregate flows. Third, the patterns of capital flow are differential; CFA countries, who suffered massive capital flight during the 1980s, have not fared well of late. Cote d'Ivoire is however the exception. Non-CFA countries that faced similar balance of payments challenges and capital flight in the 1980s, have recovered faster than the CFAs since 1990. The Africa evidence becomes even more instructive when broken down by type of capital flow. A. Foreign direct investment: FDI has increased especially in non-CFA countries with positive per capita growth. Angola, Botswana, Ghana, Mozambique and Uganda are leading recipients. In 1994-95, FDI as a percentage of GDP compared favorably with Latin Americaand Asia. In addition, the rate of FDI return during 1990-94 averaged 24 - 30 percent; for all developing countries, it was 16 -18 percent. B. Private Loan: Private loans from banks are still low or negative. After the debt crisis of 1980s, most commercial banks are not lending yet. They are trying to recover the ones they lent before. It should however be emphasized that African economies with the exception of Nigeria and Cote d'Ivoire borrowed mostly from multilateral organizations such as the IBRD. The reason for the dearth of commercial bank loans can be seen in country level credit ratings. These are still low; most African banks have junk bond or BBB rating. There are very few triple-A ratings. The implications are clear: when you borrow, you will need to pay a significant premium above the London Interbank rate.

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C. Portfolio equity flows: Portfolio flows are still small but growing. Their growth is a powerful signal of rising investor interest and confidence. Since 1994, 12 Africa oriented funds have emerged to manage over $1 billion in asset. Examples include the Morgan Stanley Africa Growth Fund, the New Africa Investment Fund, and The Calvert Africa Fund. In addition, the focus of these funds has expanded from South Africa to Botswana, Cote d'Ivoire, Ghana, Kenya, Mauritius, Zambia, and Zimbabwe.Benefits of Portfolio Equity Flows For African economies, the benefits are clear: (i) improved liquidity, (ii) greater incentives for privatization, (iii) increased incentives for policy reforms, and (iv) improvement of financial infrastructure.Why Has Africa Been Wanton in Investment Flows?Having extolled the progress thus far in deepening private capital flows into Africa, it is even more important that we understand why flows have been weak. Factors that Constrain Investor Enthusiasm These include; (i) political instability and weak macroeconomic fundamentals, (ii) weak or low growth, (iii) the size of markets, and(iv) a high degree of inward orientation. Structurally, factors that inhibit investment include; (i) heavy regulations, (ii) corruption, (iii) slow progress on privatization, (iv) limitations on number of listed private firms, (v) limited pool of investable assets poor infrastructure, (vi) high production costs, (vii) and high indebtedness (overhang effect).

Reversing the Season of Financial Anomie To ensure that Africa continues to attract private investment, it is vital that African leaders and policy makers claim as their own a reform agenda that among other things, call for the following: A. Micro reforms:

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Micro reforms that reduce transactions costs also reduce corruption. For example, (i) Efficient Securities Trading System: There is a keen need for

computerization of clearing system that would allow securities to clear within hours. A number of countries have already embarked in that direction. (ii)A Significant Amount of Legal Reform: This also needs to take place, in order to ensure that transactions distortions are minimized. For example, corporate laws need to be reformed to allow more transactions like mergers and acquisitions, bankruptcies, and leveraged buyouts. The broader goal is to improve the transparency of property rights laws. (iii)Explore Listing on International Exchanges: For the long term, African governments should encourage their best firms to explore listing on international exchanges, who often have more stringent disclosure and accounting requirements. Aside from exposing these firms to global best practice, it creates knowledge spillovers, and broader investor perception of the listing firms’ home economy. B. Macro reform African leaders and policy makers on the macro reform level need to; (i) put more emphasis on raising output growth, (ii) deepening openness, (iii) ensuring relative stability of real effective exchange rate (by using

floating exchange rates), and (iv) maintaining low external debt. These are conditions that foster high investment rates by domestic and international investors. At the same time, African governments need to embark on wider privatization of state-owned enterprises. Far too many investors complain that enough has not been done to reduce the role of the state in the economy. This is a truism. African economies stand to gain the most from a big bang approach to reform relative to a gradualist approach; too many opportunities for growth have been squandered while awaiting gradualist outcomes to reform; African economies need to undertake speedy policy and structural reforms to attract private investors. Here the issue is one of shock therapy versus gradualism. Some countries believe you extract the best returns if you move slowly and take all stakeholders with you. A second school of thought argues that in order to reduce potential for manipulation and corruption you must push it through; also you reduce transaction and transition costs -

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the adjustment is swift and briefly painful, rather than spread out over years, during which external shocks could deepen costs even further. Nigeria is a classic case in point. Before the Transformation, Learn the Lessons of East Asia In terms of experience with recourse to economic reforms, Asia seems to stand far ahead of Africa. This is why the lessons from Asia's financial crisis are important to Africa? To the cynics, Asia's experience since July 1997 is proof of the dangers associated with an export-led growth strategy. While interesting, that analysis misses the point. The real lesson Asia offers is this: export-led growth (in its various permutations) is successful so long as countries never forget the first principles of running a successful economy.In essence, do countries run into problems because investors are irrational, or if the weakness of country-specific fundamentals deepened vulnerability to speculative attacks? Why does balance of payments crisis occur? It appears that balance of payments crisis, triggered by self-fulfilling speculative currency attacks, take place with multiple equilibria. Often triggered by one economy's weakness (e.g. Mexico, or Thailand), they spread to other economies only if these economies also exhibit fundamental weaknesses. This spreading is what is known as the Tequila (or contagion) effect. For an economy to become infected, its immune system must exhibit weakness. Thus, Sachs et al (1995) put forward a hypothesis: vulnerability to balance of payments crisis can be anticipated by examining three fundamental variables. These are; (a) a large appreciation of the real exchange rate, (b) a weak banking system and (c) low levels of foreign exchange reserves. A real exchange rate appreciation during periods of high capital inflow automatically generates expectations of a subsequent devaluation. The weakness of a banking system (low supervision and examination) can become problematic following a surge in loans as expectations rise that risky projects would have been financed. In the event of a capital outflow, investors are likely to convert liquid domestic assets into a convertible currency, prompting additional capital flight.As African states reform their economies to attract a higher percentage of global private capital flows, it is important that we keep in mind the lessons of two recent financial crises, Mexico and Asia. In the wake of the Mexican crisis, Harvard's Jeffrey Sachs and a group of other

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economists came up with a model of financial crisis that can give one a pretty good handle on why Asia is experiencing its difficulties. The paper is somewhat technical but useful for clear thinking about financial crisis. In discussing it, we will present anecdotal evidence from the recent Asian crisis to illustrate. Sachs et al (1995) argue that three central factors gave rise to Mexico (and arguably Asia's financial crisis).i. Overvalued real exchange rate: reports quietly sent to the Thai and Indonesian during 1996 and early 1997 made it clear that their currencies where overvalued by as much as 30 -60 percent. They chose to ignore the data, preferring to be brazen and defend the currency. At the same time, government spending continued to mount, further driving up the deficit, much of it financed by dollar denominated loans. ii. A recent lending boom in the financial sector (hints at less

rigor in determining credit worthiness): A number of banks in Southeast Asia had obtained loans denominated in dollars and lent them out to borrowers in local currency terms, often in economies where exchange rates and interest rates are fixed. That is fine so long as the risk profile of the loans is minimal. Unfortunately in an effort to make large profits, many bankers in Southeast Asia began to make loans to the real estate sector, a sectors with overvalued asset prices. Once prices in the sector began to collapse (responding to pure demand and supply pressures), they could no longer repay their loans. Since local borrowers cannot repay, international lenders cannot be repaid either. Naturally, the contagion spreads and the rest is history. iii. Low foreign reserves to defend a fixed exchange rate: depending on your school of thought, a fixed exchange rate is dangerous. I do not like them as it means that when the markets believe devaluation is coming, they will go 'short' on your currency. If you decide, like Hong Kong did to defend it, you will merely hand a free $25 billion to traders who went short on you. For a variety of other reasons, its best to stick to a floating rate. Lessons from AsiaAre there any useful lessons that sub-Saharan African economies can learn from the East Asian crisis? Four potential lessons all linked to the efficient functioning of the financial system. a) First, if a government senses that her financial institutions are developing problems, she should not hesitate to decisively tackle the

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problem before it leads to an implosion of the relevant economy. For example, take Nigeria's recent decision to close insolvent banks. One would argue it was a wise decision. Their poor performance will hamper the effectiveness of other well run banks. What is central is that a financial system allocates credit efficiently. If we have to liquidate badly functioning banks that contribute to the system's allocative inefficiency, then there is good reason for so doing. In the medium to long term, the citizens will be the winners because their hard won savings will be channeled to investments that yield the highest returns and not those that politicians say they should go to. (b) A second lesson centres on the question of central bank independence: The ability of central bankers to focus on single objectives such as price stability (and inflation control) is virtue that feeds into maintaining general macroeconomic stability. Equally importantly, it signals to investors and other economic actors that the government's capacity to intervene in economic management for a variety of reasons is severely constrained. (c) A third lesson is on the need for an efficient financial system regulatory infrastructure: One of the strengths of the American financial system is the regulatory excellence of the Federal Reserve Bank System. Using numerous teams of bank examiners and regulators, they quickly spot flaws in the financial system that could be detrimental to the U.S economy, and potentially the global economy. One of the criticisms leveled against Southeast Asia's economies is the weak regulatory structure for monitoring bank activity. In the presence of a better regulatory system, the maturity, and interest mismatch, and numerous bad loans that plagued these institutions may have been spotted much earlier before they wrecked havoc. In too many countries, the need for well trained and capitalized bank regulators and examiners is underestimated until the financial system approaches collapse under the weight of bad loans. It is an unnecessary risk that African countries should not expose themselves to given the linkages between the financial system and the broader economy. (d) Fourth, so long as one is willing to dispassionately examine the evidence, it becomes clear that balance of payments crisis is often self-induced: Blaming the IMF will do no good. The central lesson: clean up your house; do not leave an economic mess. And perhaps most importantly, the old logic of the market will ensure that laggards are

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forced to shape up. Corruption and cronyism, poor judgment of credit worthiness, and the sheer incredulity of attempting to defend a fixed exchange rate will break a country's economic back. Tough lessons but one that, increasingly, a number of countries are learning. Concluding RemarksThe world is starting to rethink Africa's role in global markets. A new excitement is developing. The new interest and its associated optimism are captured in a recently released report edited by Harvard economist Jeffrey Sachs and Klaus Schwab, President of the World Economic Forum. Ranking the economies based on data generated from measures of transparency in decision making, good governance, financing, labour, infrastructure and institutions, the report demonstrates that small, dynamic, stable economies with solid export bases perform best." Or put another way, the economies that emulate the conditions undergirding the East Asian miracle. Thus, if their success is to be guaranteed in the medium to long term, it may be wise to internalize the lessons of the problems we see in Asia to prevent a repeat performance down the road.The challenge African economies and technocrats will be facing the years ahead is this: (i) how to exploit the growing investor interest in their markets to

create a virtuous cycle of growth, and (ii) how to strengthen the institutional architecture of economies to prevent capital flight and minimize its consequences when it does take place. To effectively tackle these challenges, it may be useful to keep in mind the strategic lessons World Bank (1997) researchers have noted:i. That developing countries need to pursue policies that would allow them to efficiently tap into global financial integration; that initial reactions to capital inflow will largely shape the patterns of future response;ii. that there is wisdom to curbing lending booms associated with capital inflows while redesigning the institutional structure of the financial system;iii. that it is wise to develop a well functioning financial system to reduce the risks of potential instability as well as attract global portfolio investment;

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iv. that developing countries need to build better shock absorbers and develop mechanism to respond to instability because they will remain highly vulnerable to external shocks for a while to come;v. that international cooperation between regulators and adequate disclosure of information at all levels are increasingly important to ensuring safe and efficient markets

REFERENCES

Sachs, J. D., Aaron, T. and Andres, V. (1995), "Financial Crisis in Emerging Markets: The Lessons from 1995” Brookings Papers on Economic Activity, 1:1996.

IMF (1998, Jan. 12), “Prospective Link With EMU Poses Challenge For CFA Franc Zone” IMF Survey 15-16.

World Bank (1997), Private Capital Flows to Developing Countries. New York: Oxford University Press.

Ikeme, J. (2009), Africa and Global Competitiveness: The Neglected Perspective.

Accessed online at http://www.mogamji.com/online

Mohamed D. O. (2009), “Targeting Development Programs in Africa: Analysis of Policy Requirements,” International Journal of EconomicDevelopment Policy. 3 (IX)

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CHAPTER TWENTY SEVEN

NIGERIA FINANCIAL SYSTEM

BY

IYIDA, M.N.

IntroductionThe Nigeria financial system, no doubt constitutes a fundamental element of Nigeria economic and socio-political system. This sector constitutes crucial component of the governance process and governments; past and present attach great interest to the operational efficiency of this sector of the economy. Every economic activity in Nigeria revolves around the financial system as it forms the bedrock for their successful operation. This chapter therefore, summarizes the nature, growth, development, operations, functions as well as emerging reforms in the Nigeria financial system. The paper also reviews issues of regulation and control of the various financial institutions in Nigeria. Proper understanding of these issues and processes are considered sine qua non in any analysis of public financial management anywhere in the world.

What is Financial Institution/System?According to Chigbu (2014), financial institutions are all business establishments that deal on financial transactions such as holding money and other values for individuals and institutions, taking out loans, exchange of currencies etc. the Nigeria financial system/ institutions is composed of organizations such as banks, trust companies, insurance companies and investment dealers.

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Types of Financial InstitutionsThere are two broad divisions of Financial Institutions. They include; (a) Banking: A banking financial institution is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds etc.(b) Non banking financial institutions: These are organizations that do not accept customer cash deposits but provide all financial services except bank accounts. They trade on financial instruments such as shares, bonds and bills.

Banking financial institutions (deposit type financial institutions) are classified into:(i) Central Bank of Nigeria(ii) Commercial Banks(iii) Development Banks(iv) Merchant Banks(v) Savings Banks(iv) Mortgage Banks, etc.

Non-banking financial institutions (non-deposit-type financial institutions) are classified into:

(i) Insurance Companies(ii) Hire purchase Companies(iii) Building Societies

We shall now proceed by first examining the various banking financial institutions as above enumerated, by pointing out their features/characteristics and functions in the Nigerian financial system before delving into the non banking financial institutions.

Central Bank of NigeriaCentral bank is the highest financial institution for the primary purpose of fostering monetary policy and stability of government. It

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acts as banker to the government and commercial banks. Central bank is responsible for economic activities of the country through the means of controlling and regulating the supply of money. Central bank was established in 1958 in Nigerian after West African Currency Board was abolished.

Features/Characteristics of Central Bank1. Central Bank is only one operating in the country.2. It is the highest or the apex of all the financial institutions.3. It is owned by the government4. They are establishment by the Act of parliament.5. They are not made for profit making.6. Their duty is to print and mint money.7. It regulates the activities of other financial institutions, particularly the banking sector. It also regulates the volume of money in circulation to ensure micro and macro economic stability in an economy.

Functions of Central Bank1. Issuance of Currency: It is the duty of central bank to mint and control the circulation of money in the society. They help to maintain the value of currency and arrange the withdrawals of old currency and replace it with new currency whenever the need arises. It enhances fund mobilization and facilitates healthy competition among banks and non banking financial institutions.2. Banker to Government: Central bank keeps government money and other valuables for safety reasons. It keeps the government accounts and deals with government payment and receipts. They equally obtain loan on behalf of the government.3. Banker to Banks: Central bank keeps the account of the commercial banks in order to facilitate clearing of cheques. Deposits from the commercial banks count as part of their cash reserves.

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Through this means, central bank can settle inter-bank indebtedness through bankers clearing house.4. Lender of Last Resort: Central banks render financial assistance to banks when they have financial crisis. They accommodate commercial and merchant bank at the point of liquidation through rediscounts and collateral advances. 5. Manages and Controls Foreign Exchange: Central bank holds the foreign reserve of a country, they engage in this exercise so as to control purchase and sell of foreign currencies. For example, in the year 2013, central government restricted and controlled the floating of foreign currency at the hand of the public. They succeed in this exercise by issuing order to the banks not to give out foreign currency sent through foreign transactions (Western Union) unless the customer has a domiciliary account. Before the money is issued out to the recipient, it has to be converted to naira and issued out in Nigeria Currency (naira). 6. Formulation of Monetary Policy: It is the duty of Central bank to initiate and execute the monetary policy so as to ensure a stable economy. 7. Management of National Debt: Central bank manages the country’s debt, both domestic and external debt.8. Promotes economic development: Central bank promotes economic development through development of money and capital markets and to finance the various development projects. It helps in promoting price stability.

Commercial BanksCommercial bank is a financial institution usually established as a joint –stock company with the aim of making profit. It usually grants short term and medium term loans. In other words commercial banks are financial institutions that engage in accepting of money and other valuables from the public for safekeeping. Commercial banks are usually owned by private individuals, institutions or government.

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Unlike other financial institutions, commercial banks accept cheques drawn by their customers on their demand deposits. Examples of commercial banks are Union Bank of Nig. Plc, First Bank of Nig. Plc, and Diamond Bank Plc. Etc.

Features/characteristics of Commercial Banks1. They are Limited Liability Company.2. They are profit oriented.3. Commercial banks take directives from Central bank.4. They deal with the public.5. They are incorporated.6. They are members of the money market.7. Commercial banks are usually owned by private individuals.8. They accept deposits and other valuables.

Functions of Commercial Banks(a) Acceptance of deposits and other valuable: Commercial banks accept deposits as money and other valuables for safe keeping. This deposit is accepted under current account, fixed accounts and savings accounts. (b) Providing loans and overdraft: Commercial banks grant loans and overdraft to their customers for the aim of making profit. These loans are deposit made by other customers who are drawn together and given out as loans or overdraft.(c) Discounting bills of exchange: Discounting bill of exchange is a financial service, where the bank purchases promissory notes (bill of exchange) from credit institution (money market) at less than its face value; therefore, the bank will collect their full value of exchange when payment comes due.

In other word, while discounting a bill, the bank buys the bill (bill of exchange or promissory note) before it is due and credits the value of the bill after a discount charge has been deducted from

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the customer’s account. However, the discount charges represent the interest of the bill paid by the bank from the date of purchase until the bill is due for payment. (d) Agent of payment: Commercial banks can act as agent of payment on behalf of their customers. They act as agent of payment by accepting cheques issued by their customers to their creditors. In other words, through operation of current account, customers settle their debts through commercial banks by issuing cheque to their creditors. (e) Transferring money: Commercial banks transfer money to other banks and branches of their wish. However, this function reduces the risk involved in moving large amount of money from one place to another.(f) Provision of Financial advice: Commercial banks provide expert advice to their customers on the best way to invest their money for more profit and when to buy shares etc.(g) Issuance of Bank Statement: Commercial banks prepare and send bank statements to their customers to enable their customer to have full details and knowledge of their transactions with them. (h) Foreign Exchange Transaction: Commercial bank provides foreign exchange transaction to their customers and society at large. They do this so as to facilitate foreign trade and also sell foreign currencies to enable the society use their desired currency.(i) Safe Keeping of Valuables: Commercial banks help in safekeeping of valuable goods for their customers. Examples of such valuables are will, certificates, jewelries etc. (j) Execute the order of an Attorney and act as Executors and Trustee: Commercial banks perform these functions through safeguarding a dead man’s assets and distributing them among his heirs, according to his will. (k) Purchase stocks and shares for their customers: Commercial banks sell stocks and sell shares to their customers.

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Types of Bank AccountsThere are three major types of bank accounts operational in the Nigeria financial system. They include the following:1. Current Account: Current account is account on which cheques are drawn. A depositor can pay his creditors through his account by issuing cheque to them. This withdrawal can be done severally in a day, this result in commercial bank placing charges on the depositor. 2. Fixed Account: (Time deposit account). This is a method by which a customer deposit some amount of money for a specific period of time and the deposit can be withdrawn on a specified date agreed upon. However, it is usually operated by people who can afford to keep their money in the bank for reasonable long period of time without making any withdrawal from the account. Presently the time interval can fall from one year and above. The depositor is usually issued with certificate of deposit and notice is made before the withdrawal is made. People fix money at this present time to make sure that the money is intact without misusing it for other irrelevant purpose. Individuals, firms and government use fixed deposit account for keeping money they do not need at present. The interest rate for fixed money is not encouraging unlike before.3. Saving Account: Savings account is designed to promote savings. This type of account is operated with the use of passbook or saving voucher; but today it is predominantly operated with the use of ATM card, as part ongoing reforms in the financial system. Interests are being issued to the owners if not subsequent withdrawals are made.

Development BanksDevelopment banks are financial institutions established to provide medium and long-term loans or credit facilities to the industrial and

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agricultural sectors of the economy for capital projects. Examples of development banks in Nigeria include the following:

(a) Nigeria Industrial Development Bank (NIDB) established (1946)(b) Nigeria Bank for Commerce and Industry (NBIC) established (1973)(c) Nigeria Agricultural and Co-operative Bank (NACB) established

(1973)(d) Federal Mortgage Bank of Nigeria (FMBN) established (1977).(e) The Infrastructure Bank (TIB) established (2012) to manage Subsidy

Re-investment and Empowerment Program.

Features and Characteristics of Development Banks1. They provide medium and long-term loans.2. Development banks are owned by government.3. They do not accept deposit from public.4. They do not issue cheques just as central bank.

Functions of Development Banks1. Finance Project: Development banks provide long-term loans for capital projects that are aimed at promoting the socio-economic development of Nigeria. 2. Supervision of Development Projects: They participate in supervision and selection of projects in order to ensure orderly development and success.3. Mobilization of Funds: Development banks help to mobilize funds from within and outside the continent.4. Provision of Technical Assistance: Development banks provide technical assistance to public and private sector organizations in area of project appraisal, finance and execution.5. Provision of Basic Services: It has involved itself in activities and services aimed at improving the welfare of the people, provision of basic amenities and reduction of unemployment.

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6. Render Special Advice: Development banks provide advisory services to industrialists on the best way to invest their money.

Merchant Banks (Acceptance Houses)Merchant banks are financial institutions that specialize on wholesale banking, provision of medium and long term loans, acceptance of bills of exchange, issuance of new shares and loans for foreign trade transactions, advisory and brokerage services, issuing houses for equities, assist firms and government to invest in other countries and acceptance of deposits. The merchant banks in Nigeria can be called Investment bank and they are as follows: Nigeria Acceptance Limited (NAL), Fidelity Merchant Bank etc.

Functions of Merchant Banks1. Merchant banks accept and discount bills of exchange.2. They underwrite new issues of shares by taking up all the unsubscribed shares which are left unsold. Thus buy and sell them when there is a higher demand for it.3. They act as advisers to investors by telling them the best way to invest on their business.4. They assist companies to lease their equipment when necessary5. They issue loans to foreign trade transactions.6. They accept large deposits from their customers.

Mortgage Bank: A mortgage bank is a financial institution that specializes in granting long term loans to individuals and corporate bodies for building purposes. Such loans are repaid by installments and can be spread over several years.

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Functions of Mortgage Banks1. They provide long-term loans to facilitate corporate bodies and individuals.2. They encourage and promote the development of mortgage institutions at rural, local, state and federal levels. 3. They control and supervise the activities of mortgage institution.

In the above presentation we have made frantic efforts to bring to light, in a very precise and simple language that facilitates general comprehension; the fundamental issues of banking financial institutions. The points given are germane to the effectiveness of Nigeria financial system. It is on this note that we shall proceed to throw further light on non-banking aspect of financial system in Nigeria. In the sections that follow, we shall bring to the fore the following: Insurance companies, and the Financial markets, which is broken into; money market and capital market.

Insurance Companies Insurance companies are financial institutions, which undertake the contract between an insurer and an insured under which an insurer (insurance company) promises to compensate the insured against any loss which he may encounter in future. The money paid by the insured to the company upon which the company will reinstate him/her is called premium. In other words, insurance companies are concerned with the covering of risk. The risks include burglary or theft, accident, untimely death etc.

Types of Insurance include:(a) Fire Insurance(b) Accident Insurance(c) Marine Insurance(d) Life Assurance, etc.

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Financial MarketsFinancial market is a market that brings buyers and sellers together to trade in financial assets such as stocks, bonds, commodities, derivatives and currencies.

Financial markets are classified into two namely,1. Money market (cash Investment)2. Capital Market

Money Market This is a segment of financial market which trade on short

term loans between banks, individual and other financial institutions. In other words, financial market deals in the borrowing and lending of short term loans generally for a period of one year or less. However, it is a good place to source funds that are needed in a shorter period of time, (in between 365 day)

Moreover, there are several institutions that are operating in money market and most of these institutions belong to the banking financial institutions. They are as follows:

1. Central banks2. Merchants Banks (acceptance houses)3. Commercial banks4. Financial Companies5. Discount House etc.

Features and Characteristics of Money Market1. Money market has buyers and sellers in the form of borrowers and lenders.2. It deals with short –maturity credit instruments, like commercial bill, treasury bill etc.3. It has a price in form of rate of interest which is an item of cost to the borrower and return to the lender.

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4. It is a heterogeneous market; meaning that it is not a single homogenous market but consist of several sub-markets, each market dealing with a specific short term credit e.g. call money market, trade bill market etc. Functions/Importance of Money Market1. Ensure profitable investment: Money market enables the central bank to use their savings to make a profitable investment. For more clarity, Central bank earns income from its savings (money market) by lending it out in order to make profit and also meet up with cash demands of their depositors in order to avoid liquidation.2. Financing Trade: Money markets provide adequate finance to trade (internal and international). Similarly it also provides facility of discounting bills of exchanges for trade.3. Financing Industries: Money market helps industries in securing short term loans to meet their working capital requirement through the system of financing bills, commercial paper etc. 4. Maintain monetary equilibrium: Money markets strike a balance between the demand for and supply of money for short term monetary transactions.5. Promote economic growth: They promote economic growth of the country by making funds available to various units in the economy such as agriculture, small scale industries etc. 6. Implementation of monetary policy: Money market provides a mechanism for an effective implementation of monetary policy.7. Liquidation Funding: It helps in providing liquidation funding for the financial institutions.

Money Market SecuritiesMoney market securities are an essential document or

certificate of debt (ious, i.e. I owe you) issued by governments,

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financial institutions and large corporations specifying terms of transactions they made with their customers.

Types of Money Market SecuritiesThere are four types of money market securities existent in Nigeria financial system. Below they are enumerated and briefly discussed;1. Bills of Exchange: A bill of exchange refers to documents (promissory note) which specify the amount of money borrowed by the debtor and the date the money will be paid, normally between the intervals of 90 days.2. Commercial Paper: Commercial paper is a money market security in form of promissory note issued or sold by corporations or banks which will help them to borrow money to meet up their short term debt obligations. 3. Treasury Bills: Treasury bills are debt financial instruments issued by the central bank of a country which assist the government to borrow money from the money market on short-term basis.4. Bankers Acceptance: Bankers acceptance is a promissory note or time draft which is guaranteed by a bank specifying the amount of money, the date and the person to which the payment is done. Hence, the draft will help the holder to borrow money from money market on a short term loan.

Capital MarketCapital market, according to Chigbu (2014) is a financial market in which funds for medium and long term investments are borrowed or lent. Capital market provides funds to industries and government to meet their long term – capital requirements such as financing for fixed investments, buildings, plants, bridges etc.

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The instruments used in the capital markets are as follows:1. Shares: These are financial instruments utilized in the capital market for long term investments. A share is the portion of a limited liability company owned by an investor. 2. Bonds: A bond is a long term financial security used to source for funds. In other words, a bond is an instrument of indebtedness i.e., a debt security in which the issuer owes the holder a debt and interest is payable at a fixed interval of one (monthly or years). Bond may be issued by firms, financial institution or governments. Bonds that are issued by the government are generally regarded as very safe. 3. Treasury Certificates: Treasury certificates are government financial securities for medium term borrowing which mature after one or two years. They are issued by the government through the central bank to either borrow or lend money in the capital market.4. Debenture: Debentures are secured loans raised by a company usually with fixed interests and some times fixed redemption dates. In other words a debenture is an acknowledgement of debt issued by a company and has a fixed rate of interest which would be paid yearly or semi annually. Hence, debenture holders are known as the creditor company.

Functions and Importance of Capital Market1. Provision of Avenue for long term loan: Capital market provide long-term loans to the private and public sectors through bringing together of buyers and sellers of securities to ensure proper investment. 2. Encourage investment: Capital market facilitates productive investment by providing facilities like share, securities, bonds etc., through banks and non bank financial institutions to aid financing of consumption loans.

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3. Entrance Reduction on borrowing: Capital market enhances reduction on borrowing by improving the monetary transaction of domestic corporate sector.4. Promotion of Economic Growth: Capital Market boosts the economic growth of the country through expansion of business trade and industry in both public and private sectors.5. Mobilization of Savings: Savings are mobilized and divided to productive investment in the country.6. Stabilization of values of Securities: Capital Market helps in registering and monitoring of stock prices.7. Protection against inflation: Capital market provides depositors with better protection against inflation and currency depreciation.8. Capital Formation: Capital market improves the efficiency of capital by providing market measure of returns on capital.9. To facilitate the transfer of enterprises from the public sector to the private sector.

Types of Capital MarketThere are two types of capital market: these are as follows;1. Primary Market2. Secondary Market

Stock Exchange MarketStock exchange is a market for purchase and sale of securities. It provides an environment for buying or selling of securities and it operates under two segments as follows:1. Primary market or first-tier securities2. Secondary or second tier securities market

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Primary MarketPrimary market is a security market where new securities are

being bought or sold, examples are shares, stock, bonds etc. it is a market for securities that are being traded for the first time. However, it is a market for new long term equity capital and also because securities are sold for the first time; it is called the New Issue Market (NIM). In primary market, securities are issued by the company directly to the investors.

Features of Primary Market1. It is a market for new long term capital2. Securities are issued by the company directly to the investor.3. They use it to set up a new outstanding of business.4. Primary market helps to build up capital for economic growth.5. In primary market assets can only be claimed by the first hand owner.

Secondary MarketSecondary market is also called after market. It is a market

for trading second hand assets. In other words it is a financial market where old (used goods or assets) securities and financial instruments such as stock, bonds etc. are bought and sold.Secondary market is more like an existing asset which has an alternative use. In the secondary market, securities are sold by and transferred from one investor to another. In this market securities are converted into cash.

Functions of Stock Exchange1. Provision of market for securities: Stock exchange provide a ready market for buying and selling of securities.2. Encourage Capital formation: Stock exchange market enable the government and firms to raise capital through the functions of brokers and jobbers.

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3. Evaluation of Economy: Stock exchange market shows the level of economic condition of a country because the economy of the country is reflected in the prices of shares. Hence, the rise or fall in the price of shares indicates the fall or rise of the economy.4. Promotion of investment: Stock exchange market promotes attractive opportunities of investing different securities. Hence, the stock exchanges provide a way for people in any sector of the economy of his/her choice.5. Contributes to employment opportunities: Stock exchange market provides employment for brokers, clerks, jobbers and others.6. It leads to increase in the standard of living: The more the investors invest in their business, the more the effect of it improves the standard of their living.7. Provision of Information to Investors: Stock exchange help in the provision of necessary information to the investors.

Role of Nigeria Capital Market in Economic GrowthIn line with the trend of economic reforms embarked upon by

many nations of the world to restructure their economies, and position such national economies strategically to take advantage of the globalized market, successive governments in Nigeria have made one attempt or the other, since the days of the Structural Adjustment Programme introduced by the Babangida administration to date, to carry out structural changes in our economic life as a nation.The structural changes have come in form of monetary policies, fiscal policies, exchange rate policies, trade export and import policies in order to achieve desirable macroeconomic stability that will engender growth and development. Interestingly, since the coming of the Obasanjo administration in 1999, the conceptualization and implementation of economic reforms have taken a fairly more focused and serious pattern.

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By and large the Obasanjo administration laid a foundation that can be viewed as placing Nigeria in the take-off stage of Rostow’s (1961) economic growth model. A characteristic feature of this stage is an increase in social infrastructure to support economic activities and the broadening of the economic opportunity space for private investment both by local entrepreneurs and foreign entrepreneurs.

The obvious from the foregoing happenings is that a changing and growing economy like Nigeria needs enormous amount of funds to fully explore the opportunities opened up by the reforms which were anchored on the National Economic Empowerment and Development Strategy blueprint and now the Vision 20-2020. This is where the capital market’s role comes in as it is expected to play the traditional role of financial intermediation by pulling financial resources from surplus units to deficit units and end-users for productive economic purposes even at this time of unpredictable revenue from crude oil being a fall-out the global financial crisis.

The capital market indeed has significant roles and has been playing significant roles in Nigeria’s economic environment till date. It is true that in recent times the global financial crisis has impacted negatively on the capital market resulting in asset bubbles hence the objective of this write-up is to suggest ways of forestalling the negative impact of such internationally induced distortions by addressing the problems inherent in the operation of Nigeria’s capital market and her operators.

The Imperatives of Capital Market Operations in Nigeria’s Business Environment

Considering the needed magnitude of growth in real resources and their allocation within an economy, financial markets are germane to the quest for growth not minding the claim that sometimes asset valuation may not adequately reflect the rate of return in investment in productive capacity. The fact is that the

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capital market cannot be overlooked nor wished away by any nation that is serious about achieving economic growth. The failure of state directed credit to achieve economic growth makes it imperative for the capital market to take the lead.

Also the fact that bank financial investment is often not enough makes the capital market important considering the quantum of funds in dollar conversion of what is needed for development projects after the naira devaluation and the global competitiveness of foreign direct investment quest by developing countries around the world. Moreover, retained profits are no more sufficient for expansion in the face of the present information technology revolution. The situation has been further worsened with the endemic crisis in the banking industry.

The capital market thus among others help in financing the savings-investment gap both domestically and internationally as well as finance other activities that can result in economic growth. Ordinarily the need for long term finance makes the capital market relevant to our development drive. It is common knowledge that in Nigeria in the last few years as a consequence of the liberalization, privatization and re-capitalization policies of the government that has swept across the telecommunication, energy, manufacturing, banking and insurance sub-sector, the capital market has played enviable roles in the attainment of the objectives of the government in pushing up the growth figures and enhanced human welfare coupled with the redistribution of income and benefits within the Nigerian business environment.

Levine et al (1997), in their study on the compatibility of stock market development with financial intermediaries and economic growth posited that stock market development is positively correlated with the development of financial intermediaries and long

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term economic growth. In Nigeria in recent times, the bank re-capitalization exercise was facilitated by the capital market.The increasing activity of the capital market according to the Security and Exchange Commission resulted in an average annual percentage growth of about 81% in the new issue market between year 2000 and year 2005.

Also taking a sincere look at the success recorded through the operations of the capital market, there is no gainsaying the fact that the foreign direct investment attracted to Nigeria has increased considerably in the last four years. Recently the Central Bank of Nigeria reported that in the year 2006, $2.5 billion as foreign direct investment was attracted into the Nigerian economy while in the same year the size of the capital market grew sevenfold to the tune of five trillion naira. How does this impact on the economy we may ask? Bosworth and Collins (1999) in their study found that foreign direct investment by raising total factor productivity raises a country’s rate of output growth.

Regulatory Agencies of the Nigeria Capital Market Regulatory Agencies are those bodies or agencies that develop and regulate capital market activities. They are follows;1. Securities and Exchange Commission (SEC)2. The Nigeria Stock Exchange3. Central Bank of Nigeria4. Federal Ministry of Finance.

Securities and Exchange Commission (SEC)The Securities and Exchange Commission (SEC) is the

highest regulatory institution of the Nigeria capital market. It regulates the activities of obligation. However, their activities are supervised by the Federal Ministry of Finance. SEC came into existence to supersede the operation of Capital Issue Commission which was inefficient. Therefore, in order to cope with emergent

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challenges on capital market, Financial System Review Committee set up by the Federal Government, established the Securities and Exchange Commission in 1978 through an enabling decree promulgated in 1979.

Functions of Securities and Exchange Commission (SEC)1. Investor protection: Security and exchange commission (SEC) ensures that transactions are transparent, through prevention of fraudulent practices such as false claims, deceit and price manipulations, which can destabilize market.2. Regulation of capital market: They develop and regulate a capital market that is dynamic, fair, transparent and efficient so as to contribute to the growth of the country.

3. Ensures economic growth: Capital market gears towards development and enhancement of socio-economic growth and development.4. Government Advisers: They are principal advisers to the Nigeria government on capital market issues.5. Ensures thorough Supervision: They examine properly parties that apply to operate in the capital market and license those considered suitable.

6. Rule making: Security and Exchange Commission makes rules, creates and reviews general procedures of capital market as the occasion demands.7. Enforcement: The Commission has the responsibility of ensuring that participants in the market comply with the Securities’ law. Therefore, they have the power to penalize any one found guilty of any violation.

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Regulatory Agencies of the Nigeria Money Market1. Central Bank of Nigeria2. The Nigeria Deposit Insurance Corporation (NDIC)3. The Federal Ministry of Finance (FMF)4. The Nigeria Insurance Supervisory Board (NISB)

Central Bank of Nigeria (CBN)Central Bank is one of the agencies that regulate the

activities of money market. However, it serves as the principal regulator and supervisor in the money market, as well as the activities of other financial institutions. They perform a number of functions to money market financial institution;

Functions of CBN to Money Market1. It facilitates profitable open market operations in the money market.2. It develops the money market by enhancing the effectiveness of the monetary policy.3. CBN makes the money market instrument attractive.4. They also regulate and exercise control over Bureau de change.

Nigeria Deposit Insurance Corporation (NDIC)Nigeria Deposit Insurance Corporation (NDIC) is a parastatal

under the Nigeria Ministry of Finance. It was established by Decree 22 of 1988 and presently replaced with Nigeria Deposit Insurance Act No 16 of 2006; NDIC is presently headed by the Managing Director /CEO, named Alhaji Umaru Ibrahim Mni. They are members of the Financial Reporting Council of Nigeria and they also

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compliment the regulatory and supervisory role of the Central Bank of Nigeria (CBN).

Functions of Nigeria Deposit Insurance Corporation (NDIC)1. They protect the right and interest of depositors at the event of liquidation.2. They promotes and contributes to the stability of the financial system (money market) 3. They promote competition and innovation in the banking system.4. They also provide financial and technical assistance to a distressed bank in the interest of depositors.5. They assist monetary authorities (CBN) in the formulation and implementation of banking policy so as to ensure sound banking practice.

Nigeria Insurance Supervisory Board (NISB)The Nigeria Insurance Supervisory Boards was established by Decree No. 62 of 1992 by the Insurance Special Supervision Fund. However, the name was later changed to National Insurance Commission (NAICOM) by Decree No. 1 of 1997 with the responsibility of discharging effective administration, supervision, regulation and control of the business of insurance in Nigeria.

Functions of Nigeria Insurance Supervisory Board (NISB)1. They help to establish standard measures for the conduct of insurance business in Nigeria.2. They determine the rate of insurance premiums to be paid in all levels of insurance business.3. Nigeria insurance supervisory board also approves the amount of commissions to be paid in respect of all classes of insurance business.

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4. They ensure proper security to government assets and other public properties. 5. They supervise and regulate transaction between insurers and reinsurers both inside and outside Nigeria.6. They advice the federal government on issues concerning insurance.7. They ensure protection to insurance policy holders.8. They publicize an annual report to the public in effect to insurance industry.9. They give financial support to the educational programmes of the Chartered Insurance Institute of Nigeria.10. They permit conditions and warranties practicable to all insurance business.

Nigeria Financial System: Overview of Existing/Ongoing ReformsIn recent years, considerable changes have taken place in domestic and international financial systems: deregulation, disintermediation, the creation of new financial instruments, the use of futures markets, a blurring of frontiers between financial intermediaries, computer-based instant dissemination of information and arbitrage operations closely linking markets, instruments and currencies.In many respects, these changes were advantageous and represent a positive trend. Under the pressure of competition, the cost of financial services to potential users was reduced. Individuals, enterprises and countries were enabled to find at any time financial instruments tailored to their own requirements. The large-scale internationalization of capital markets and banking activities has brought about benefits in terms of access, transaction costs and an efficient and market-based allocation of resources.

But these changes have created an environment in which emerged new problems, both domestically and internationally, as exemplified by periodic defaults, failures, and rescue operations in

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the interbank money or currency markets and in other markets which were made more fragile by the rapid development of new financial instruments (e.g. floating rate notes, highly leveraged transactions, swaps). More fundamentally, the growing interconnection between markets may lead to the proliferation of a crisis originating in a specific market with cumulative and mutually reinforcing downward adjustments in all markets on a worldwide basis -- such as in the 1987 market crash. All these conditions have increased the potential for systemic risks.

As a consequence, shifts by major countries may have large -- and disproportionate -- repercussions on emerging financial markets, banking systems and development strategies in developing countries and on the management of economic policy in small and open economies, which may see their domestic stabilization efforts impaired by developments in international capital markets and their currencies being overwhelmed by excessive capital flows.

Central banks and other regulators have already taken measures to enhance their capacity to deal with any such crisis in the new financial environment through better, more appropriate and coordinated regulation: the Basle concordat allocating supervisory responsibilities, the internationally agreed capital adequacy requirements (the "Cooke ratios"), the new relationship between bank regulators and market regulators domestically and between market regulators internationally, the coordinated responses to international liquidity crises (e.g. through collective endeavours in exchange rate management and in the common response of central banks to provide liquidity to the system in the 1987 crisis).

Some of these developments have, by themselves, raised new concerns, notably at end-1987 a risk of an oversupply of liquidity fueling inflation or current fears -- which might prove exaggerated -- of overcautious lending policies by banks ("credit crunch"). This

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occurs at a time when new challenges have to be addressed: a need to increase savings and financial flows to meet the requirements of developing countries, Eastern and Central European countries, and Gulf reconstruction; a need to restore access to the market for countries emerging from debt rescheduling; a need to aim at greater transparency and stability in futures markets, including oil future markets, with their growing importance for both oil-producing and consuming countries.

Banking Sector ReformPrior to reforms, the Nigerian banking sector was

weak and fragmented, often financing short-term arbitrage opportunities rather than productive private investments. The roots of the financial sector weakness may be traced to its poorly managed liberalization during the structural adjustment program of the 1980s (Okonjo-Iweala and Osafo-Kwaako, 2007). The financial system was repressed before the structural adjustment program largely because of the imposition of interest rate ceilings that resulted in negative real interest rates. Initial attempts at financial liberalization, however, yielded poor results. Supervision remained weak and there was evidence that many banks had bad balance sheets. Many banks conducted only limited lending to the private sector while engaging predominantly in more lucrative short-term arbitrage foreign exchange “round tripping” activities. Consolidation and improved supervision of the sector became imperative to strengthening the financial sector.

Consolidation of the financial sector is a part of the economic reform programs aimed at strengthening the processes of financial

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management and control system, mitigate the costs of doing business and integrate various operational dimensions of running the organization for greater accountability, profitability and efficiency. Therefore, consolidation of financial institution is referred to as the joining together of two or more companies in agreement to meet a specific requirement as stipulated by the law. Consolidation of financial institutions causes great changes in the financial system and also accelerates policy development.

Reform MeasuresTo strengthen the financial sector and improve

availability of domestic credit to the private sector, a bank consolidation exercise was launched in mid-2004. The Central Bank of Nigeria requested all deposit banks to raise their minimum capital base from about US$15 million to US$192 million by the end of 2005. Banks failing to meet the new requirements were expected to merge or else have their licenses revoked. Implementation of the consolidation exercise triggered various mergers in the banking sector and reduced the number of deposit banks in Nigeria from 89 to 25. Moreover, in the process of meeting the new capital requirements, banks raised the equivalent of about $3 billion from domestic capital markets and attracted about $652 million of FDI into the Nigerian banking sector.

Reform of the insurance sector was similarly initiated to strengthen the industry. The expectation is that the 103 insurance businesses will consolidate to about 30 with a capitalization of about $1.6 billion by February 2007. The Ministry of Finance together with the industry regulator, the National Insurance

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Commission (NAICOM), has revised upwards the required minimum paid-up capital for the various categories of insurance businesses. As an example, life insurance businesses are required to increase capital to about $15 million from only $1.2 million while general insurance businesses must raise their capital base to $23 million from $1.5 million.

Reform of the banking and an insurance sector is complemented by improved regulatory oversight of the central bank. The central bank’s supervisory powers are being strengthened with a migration from a prudential supervision system to a risk-based approach within the framework of the Basel-II Accord (Okonjo-Iweala and Osafo-Kwaako, 2007).

To strengthen the capacity of central bank officials, various training programs in risk assessment tools have been organized and supervisory software used by officials has been upgraded. The central bank is also reviewing a new Draft Code of Conduct and of Corporate Governance with stakeholders in the financial sector and is also adopting a zero-tolerance approach on issues related to misreporting and lack of transparency in the banking sector. Various measures were similarly implemented to ensure a smooth liquidation of banks that failed to meet new capitalization requirements. As a precautionary measure, contingency plans have been drawn up to ensure the smooth handling of merger breakdowns, if they occur in the future.

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Three important pieces of legislation have been developed to strengthen the banking sector and its supervision: (a) The CBN/BOFI Act Amendment Bill will improve autonomy of the central bank in its monetary policy decisions; (b) The Nigeria Deposit Insurance Corporation (NDIC) Act establishes a comprehensive framework for addressing the case of private depositors who may be affected by the liquidation process;(c) A new Microfinance Act seeks to support development of the microfinance industry in Nigeria.

Borenztein et al (1998) also found that foreign direct investment adds to capital accumulation and raises the efficiency of investment. In addition, foreign direct investment facilitates technology transfer which is much needed in our present day Nigeria. One of the evidences that an economy is growing is that the capital market is growing and till now this is the Nigerian experience. However, it is instructive to state that other criteria by which the performance of the capital market is measured include: (a) the volume or number of securities listed;(b) efficiency of the operational procedure vis a vis the rate at which transactions are concluded at the floor of the exchange and information dissemination efficiency. (c) how efficient are the regulations and controls at the stock exchange.(d) market capitalization or size of the market. (e) all share price index(f) allocative efficiency in respect of how resources are channeled to the most efficient users.

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(g) pricing efficiency as it concerns the interplay of demand and supply(h) The number of new issues and the size of the new issues to gross fixed capital formationMarket capitalization which is the total value of all equity securities listed on the stock exchange is an important measure of assessing the size of a capital market and this is largely influenced by factors such as the price of securities in the market, size or volume and value of securities traded, the efficiency of the flow of information, the activities of market speculators, the existence of and activities of market makers or jobbers who are considered as specialists as well as the role of specialized portfolio managers. Talking about the size of new issues as it relates to gross fixed capital formation, essentially the size of the new issues to gross fixed capital formation is an indication of investor’s confidence in the market and the comparative or alternative cost implication of raising similar funds by other means. Gross fixed capital formation is the total investment in fixed assets in an economy. According to literature and in practice it is expected that the relationship between new issues of stock and total investment in fixed assets will give a clear picture of new investments funded by new issues of stock.

In respect of the information availability, how well the market makes available and respond to market information is important. Consequently, a market is said to be efficient when prices fully reflect available information and this is being witnessed in the Nigerian capital market as at now. Prices fully and speedily reflect available information.Generally the capital market has been contributing to Nigeria’s economic growth even as it has served as a source of funds for many States of the federation seeking to embark on capital projects. There have been remarkable activities both in the primary market and the

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secondary market with attendant redistribution of wealth through dividends earned by even previously small investors despite the recent lull in the market which is argued to be a passing phase in the cycle of global capital market operations.

Translating Financial System Reforms to Economic Growth The ultimate aim of the present reforms in the financial

system is to achieve economic growth, however if the benefits of the operations of the financial institutions will translate into the much more desired growth many of the problems confronting the system should be addressed. These problems include: (a) the unstable macro-economic environment and policy instability;(b) insider abuse in the system;(c) use of the institutions to launder funds abroad resulting in illiquidity;(d) inadequate regulation and supervision;(e) disincentive to foreign capital inflow due to interference with the price determination mechanism that infringe on the transaction of a free market framework;(f) exorbitant cost of raising funds through the capital market arising from high fees paid to operators, professionals and regulatory bodies as well as to advertising cum marketing agencies.

To strengthen the operations of the financial system, there must be a reliable legal institution that protects investments, a relatively stable currency, policy consistency and predictability, regulation and controls should be effective because the problem of inefficient capital allocation which is common to banks are a result of imperfect information is not supposed to be allowed in the financial system and operators and participants must scale up their skills and competencies from time to time.

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ConclusionWith the gradual shift from bank- dominated credit to capital

market enhanced funds, it has become obvious that the capital market is key in achieving economic growth and development. Irrespective of the argument put forward by respected scholars who subscribe to bank finance over capital market finance in Nigeria, contemporary issues and reality has made us realize that the capital market can not be wished away if truly Nigeria desires enviable economic growth. It is gladdening to know that as a consequence of the growth in the activities and interest in the financial system, its significance in public financial management process cannot be underestimated.

REFERENCESBorenztein, et al (1998): Foreign Direct Investment and Capital

Formation.

Bosworth and Collins (1999), “Capital Flows to Developing Economies: Implication for Saving and Investment” Brookings Papers on Economic Activity

Chigbu, E. F. (2014), A Mirror of Economics for Schools and Colleges, Enugu: The Lords Favour Press.

Financial Standard (2007, July 9), Issuing Houses: Providing anchor for economic growth. Financial Standard, pp. 10-12

Levine, R. (1997), “Financial Development and Economic Growth: Views and Agenda” Journal of Economic Literature, vol.35, pp 688-726

Ojo, A. (1997), The rationale for stock market promotion for Africa’s development.

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Rostow, W (1961), The Stages of Economic Development: A Non-Communist Manifesto. Cambridge: University Press

Rotberg, E. (1991), “Stock Market Not a Priority for many Developing Countries” Speech at a Seminar on “Emerging Stock Markets” at IMF Visitor’s Center, Washington D.C. (Reported in IMF Survey, December 2, 1991, pp.354)

Ikhide S. I., and A. A. Alawode, (2002), “On the Sequencing of Financial Liberalization in Nigeria,” South African Journal of Economics, 70(1): 95-127

Lewis, Peter and Howard Stein (2003), “Shifting Fortunes: The Political -Economy of Financial Liberalization in Nigeria,” World Development, 25(1):5-22

Okonjo-Iweala, N. and Osafo-Kwaako, P. (2007, March), Nigeria’s Economic Reforms Progress and Challenges, Global Economy and Development Program, The Brookings Institute, Washington DC.

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A

Abacha, 347, 414Abuja, 21, 41, 155, 158, 180, 193, 194,

232, 295, 301, 312, 367Accounting period, 38Adjusted Profit, 39Administration, 1, 4, 14, 15, 17, 47, 53,

69, 70, 71, 85, 103, 125, 160, 161, 162, 163, 180, 193, 194, 197, 207, 231, 232, 233, 247, 289, 297, 311, 343, 345, 346, 347, 350, 352, 353, 358, 373, 387, 393, 397, 398, 408, 420, 427

Administrative, 19, 171, 310, 311Adoption, 156, 192Ajaokuta steel complex, 20Alimony Allowance, 32Allowable expenses, 37America, 204, 247, 251, 433Armed Forces, 391Assembly, 6, 129, 190, 307, 362Assessable Profit, 39Attributes of a good Government

Budget:, 61

B

Babangida, 174, 180, 413, 457Balanced development, 412Basic characteristics of budget, 7Britain, 53, 247, 249, 251, 342Budget Monitoring, 6, 307Budgeting, 8, 21, 54, 61, 62, 65, 66,

160, 162, 233, 234, 240, 307, 310

C

Canon of Elasticity, 49Capital gains tax, 3, 11Central Bank of Nigeria, 9, 71, 83, 84,

91, 92, 101, 102, 168, 282, 286, 357, 361, 382, 384, 442, 460, 462, 463, 467

Chargeable Assets, 41Chargeable gain, 41Classifications of Government

Expenditure, 51Collection of taxes, 35Colony, 24Commissioner, 25, 151, 152, 218, 219,

421Committee, 120, 129, 154, 157, 172,

176, 181, 187, 251, 306, 356, 357, 358, 359, 360, 361, 362, 364, 461

Company income tax, 3, 11, 33Company Income Tax Act (CITA) 1979,

26Conclusion, 209Concurrent, 184, 185Constitutional, 171, 172, 306Corruption, 90, 160, 161, 162, 308,

309, 313, 364, 439Cost – Benefit Analysis, 210

D

Decree, 25, 26, 40, 45, 71, 158, 172, 180, 391, 392, 419, 420, 421, 462, 463

Deficit Budget, 5, 67, 68Democratic Party, 364

476


Derivation, 173, 176, 179, 180, 188, 195, 301

Development, 4, 26, 32, 42, 52, 60, 84, 88, 92, 93, 100, 101, 102, 152, 159, 160, 161, 162, 174, 189, 194, 231, 232, 248, 258, 260, 265, 311, 312, 313, 321, 326, 351, 355, 376, 377, 386, 399, 404, 405, 408, 410, 412, 413, 414, 415, 416, 440, 442, 447, 448, 449, 458, 472

Development Administration, 232, 415, 416

Development Planning, 410, 415Dina Commission, 306Discounted Techniques, 221, 229

E

Economic, 4, 21, 52, 61, 75, 82, 83, 84, 92, 93, 100, 101, 102, 160, 161, 192, 194, 199, 253, 268, 288, 312, 313, 351, 371, 383, 386, 399, 400, 401, 402, 405, 409, 410, 414, 415, 416, 429, 439, 440, 455, 457, 458, 470, 471, 472

Economic development, 52Economic Planning, 61, 400, 405, 415Economy, 17, 27, 48, 82, 84, 100, 102,

159, 160, 161, 171, 189, 193, 287, 369, 409, 457, 472

Effectiveness, 210, 214, 215, 217Efficiency, 17, 161, 171, 317Elements of Public Expenditure, 48Emeka Odumegwu Ojukwu, 172England, 76, 280, 391, 424Establishment, 152, 205, 356Europe, 247, 249, 291, 320, 340, 341,

342

Executive, 99, 155, 159, 179, 251, 301, 357, 361, 364, 421

Expenditure budget, 55Export duties, 3, 177, 299

F

Federal character, 187Federal Character, 187, 190, 192, 193Federal character principle, 187Federal Republic of Nigeria, 25, 71,

158, 178, 187, 232, 299, 300, 306, 312, 398

Federalism, 84, 102, 165, 171, 172, 183, 185, 192, 193, 194, 195, 297, 311, 312, 313

Finance, 1, 14, 21, 26, 46, 52, 69, 79, 82, 83, 91, 92, 93, 94, 100, 101, 126, 129, 150, 152, 155, 158, 159, 160, 161, 162, 180, 193, 251, 258, 265, 286, 288, 297, 298, 301, 302, 311, 312, 325, 327, 329, 356, 357, 358, 369, 386, 401, 448, 460, 462, 467

Financial Planning, 401Fiscal Policy, 10Forms of Direct Tax, 11France, 91, 247, 249, 251French, 283Functions/Benefits of Budget, 61

G

Germany, 91, 184Ghana, 350, 433, 434Government, 1, 3, 4, 8, 10, 14, 19, 20,

21, 25, 50, 51, 52, 53, 56, 57, 58, 61, 63, 68, 69, 71, 83, 85, 92, 93,

477


95, 98, 101, 120, 125, 126, 127, 128, 129, 130, 131, 132, 134, 135, 137, 138, 139, 140, 141, 144, 150, 151, 152, 153, 154, 155, 158, 159, 160, 162, 172, 173, 175, 178, 179, 181, 182, 187, 188, 190, 192, 193, 194, 195, 199, 200, 211, 213, 214, 216, 217, 220, 222, 226, 227, 231, 232, 280, 286, 289, 291, 292, 293, 295, 297, 298, 301, 302, 303, 306, 310, 311, 312, 313, 352, 353, 355, 356, 357, 358, 360, 361, 362, 365, 366, 367, 368, 369, 370, 374, 377, 387, 391, 392, 396, 398, 411, 418, 419, 443, 461

Government budget, 1, 63Government Expenditure, 3, 52, 129,

131Government income and expenditure,

1Government Revenue and

Expenditure, 3Governor, 64, 204, 366, 368, 391Grants, 19, 60, 69, 303

H

Head of service, 294, 396history of taxation in Nigeria, 24House, 6, 14, 21, 84, 102, 129, 135,

160, 352, 362, 427, 451

I

Implementation, 207Import duties, 3, 177, 299Indigenization, 13, 82, 412Instruments of monetary policy, 76Irwin (1953), 16

J

Jurisdiction, 177, 193, 299

K

King, 312

L

Legal Reserve Ratio, 77, 79Legislative, 135, 305, 306, 307Liberalization, 472Lord Lugard, 25

M

Macpherson, 172Management, 232Marginal tax rate, 33Marketing budget, 55Minimum tax, 33, 36Monetary Policy, 9, 71, 73, 78, 83,

101, 444

N

National Assembly, 6, 25, 135, 175, 190, 307, 352, 361, 362, 376

National Planning, 356, 360, 403, 405Nigerian Economy, 84, 101, 358Nnamdi Azikiwe, 84, 102NNPC, 204, 295, 344, 345, 346, 371

O

Obiagbaoso (2008), 16objectives of fiscal policy, 72Objectives of government budget:, 7

478


Objectives of Public Sector Budgeting, 62

Oil industry, 190Open Market Operation, 77, 78, 79Osubor (2006), 15

P

Parliament, 6Pensions for self employed persons,

32Personal income tax, 3, 11, 29, 32, 132Personal Income Tax Act 1993, 26Personnel Management, 310Petroleum Profit Tax Act (PPTA) 1959

as amended, 26PHCN, 390Philosophy, 327Power, 80, 194Principle of Balanced Budget, 49Principle of Maximum Social Benefits,

49Principles of Taxation, 17Private Sector, 393, 396Profitability Index, 221, 225, 227Progressive tax, 11, 12Project budget, 55Project Management, 232Proportional tax, 12, 30Public Administration, 231Public finance, 1, 70, 125, 126, 129,

131, 198, 203public financial management, 1, 2, 5,

126, 129, 133, 197, 198, 199, 200, 201, 202, 203, 394, 441, 471

Public revenue, 15, 129

R

Railway, 356, 360Raisman commission, 24Recurrent Revenue Budget, 57Refinancing Facilities, 13, 82Regressive tax, 12Revenue budget, 55, 57

S

Sectoral Allocation of Credit, 13, 82Self-assessment, 36Social Development, 181Stamp duties, 3, 11, 177, 299Statistics, 266, 344, 371, 405Statutory Allocation, 300Supervision, 152, 385, 421, 448, 461,

463, 466Systems of Budgeting, 65

T

Tangible Benefits, 212Tax base, 16, 29Tax rate, 16, 33, 46tax. Education, 23taxable citizen, 24Taxation, 1, 10, 15, 16, 17, 18, 21, 26,

28, 31, 46, 84, 89, 102, 127, 131The Budgetary Process, 5Theory, 21, 46, 83, 100, 101, 160, 161,

162, 193, 194, 278, 280, 311Third National Development Plan, 411Transportation, 38, 39, 42Treasury, 79, 94, 136, 138, 140, 143,

151, 152, 249, 376, 429, 453, 454Types of taxes, 11

479


V

Value added tax, 3, 35, 44, 132

W

Western Region, 418Withholding tax, 26, 35World Bank, 20, 133, 160, 161, 162,

247, 248, 250, 251, 254, 256, 257, 258, 259, 260, 261, 263, 264, 265, 266, 351, 371, 429, 431, 432, 433, 439, 440

World War I, 257World War II, 257

Y

Yakubu Gowon, 410

Z

Zero- Based Budgeting (ZBB), 66

480

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