Political Decentralization and Natural Resource Governance in Nigeria

December 2012

by Vanessa Ushie

Table of Contents

Page

Background and Rationale 1

Fiscal Federalism and Resource Revenue Management in Nigeria 7

Subnational Resource Revenue Management: 15 Evidence from the Niger Delta

Conclusion and Policy Suggestions 37

References 44

Abstract Nigeria has been described as a typical example of the so-called ‘resource curse’ – as a country rich in natural resources but struggling with poverty and weak institutions. The system of federalism in Nigeria has also thrown up an intriguing paradox of political decentralization with low subnational transparency; while states have fiscal autonomy, and states’ spending constitutes around half of consolidated public spending, not much is known about how they manage natural resource revenues. The project conducts a case-study of resource revenue management for two subnational governments in the oil-rich, but restive Niger Delta. The case-study reveals that the two subnational governments are highly dependent on volatile federal (oil) revenue allocations, poverty remains high as public expenditure is not adequately directed at the pro-poor social sectors, there is low budget transparency, and actual budget implementation is poor. Furthermore, there are no effective mechanisms for ensuring subnational fiscal discipline and political accountability. The paper sets out appropriate policy actions that can improve the subnational management of natural resource revenues. In sum, the findings of the study indicate that political decentralization within federal political systems may not necessarily result in improved natural resource governance. Local context – the nature of socio-political institutions, technical capacity in managing public finances, and the degree of political accountability, is important in determining how subnational governments manage natural resource revenues.

Background and Rationale

Natural resource abundance has been linked to slower economic growth and weak institutions, demonstrated in economic models of the ‘Dutch disease’ and ‘resource curse’.1 Nigeria is often held up as a classic example of the paradox of plenty. It is Africa’s highest oil exporter, and the world’s tenth highest oil producer. Nigeria’s economy is structurally dependent on natural resources: oil and gas constitute 96% of total exports, 80% of government revenues and around 40% of GDP.2 In spite of the economic potentials in Nigeria, it has been dogged by poverty. In 2011, Nigeria was ranked 157th out of 187 countries by the United Nations Human Development Index. Furthermore, the World Bank estimates that by 2010, 68% of Nigerians survived on less than US$1.25 a day.3 Likewise, a report produced by the Nigerian government noted that the country was unlikely to meet any of the UN Millennium Development Goal (MDG) targets by 2015.4 When placed alongside its resource endowments - as OPEC’s largest producer of the highly prized ‘sweet’ crude oil, holder of Africa’s largest natural gas reserves of 186 billion cubic feet, and highest proven oil reserves of 37 billion barrels,5 the contrast between natural resource wealth and poverty is startling.

In the scholarship on the resource curse in Nigeria, the causal channels are threefold. Firstly through resource-related volatility: as a resource dependent country with majority of its public revenues arising from oil and gas, Nigeria has been vulnerable to oil-related macroeconomic volatility arising from unstable global energy markets (see Figure 1 below), reflected in pro-cyclical fiscal policy, inflation and debt overhang.6 Second, Nigeria has grappled with the Dutch Disease – the overvaluation of the real exchange rate due to oil booms and the contraction of the non-booming tradable sector.

1 There is extensive literature on the paradox of plenty; notably, the influential studies by Humphreys, Sachs and Stiglitz (2007), Richard Auty who first coined the term ‘resource curse’ in 1993, and by Sachs and Warner (1995, 2001), which show from cross-country growth regressions, that resource-poor countries have performed better than their resource-rich counterparts. Collier and Hoeffler (2004) argue that the struggle for control over natural resource rents drives violent conflict. While the ‘Dutch disease’ and ‘resource curse’ are often used interchangeably, the ‘Dutch Disease’ is in a nutshell, the negative relationship between natural resource booms and the decline in non-booming economic sectors. Formal models of the Dutch disease were first developed by Corden and Neary (1982), van Wijnbergen (1984), Neary and van Wijnbergen (1986). Empirical studies on the existence of the Dutch disease in oil-producing developing countries include those by Gelb (1986, 1988), and Auty (1993, 1994). 2 Central Bank of Nigeria, Annual Report and Statement of Accounts (2011). GDP at current basic prices. 3 See World Bank data on poverty headcount and income distribution at http://data.worldbank.org/indicator/SI.POV.DDAY/countries 4 Government of the Federal Republic of Nigeria (2010) Nigeria Millennium Development Goals Report. In reflection of the role of subnational governments in creating opportunities for growth and development, the report states that ‘Nigeria's 2015 MDG targets cannot be achieved unless state and local governments take on their development responsibilities in a proactive, coordinated, effective and sustained way’. 5 Data from BP Statistical Review of World Energy (2012). 6 Budina and van Wijnbergen (2007), Sala-i-Martin and Subramanian (2003), Ushie et. al. (2012). 1

The long term decline of agriculture and manufacturing following the first oil boom in 1973 has been pronounced.7 Finally, resource-driven conflict and weak institutions: Nigeria’s dependence on oil rents is seen to be partly responsible for the emergence of predatory political structures, unproductive capital accumulation and the persistence of conflict and insurgency in the oil-rich Niger Delta.8

Figure 1 Nigeria: Oil Prices, Public Revenue and Expenditure (1970-2011)

50 120 Rev and Exp in percent GDP of inpercent Expand Rev 100

40 (US$) Prices Oil World 80 30 60 20 40

10 20

0 0

Total revenue (in % of GDP) Total expenditure (in % of GDP) World crude oil prices (current US$)

Sources: World Development Indicators Database 2011, CBN Annual Statistical Bulletin 2011, BP Statistical Bulletin of World Energy 2012.

Nigeria’s political economy is vibrant and complex. After almost thirty years of military rule, the return to democracy in 1999 hastened personal and religious freedom and an explosion of extreme politicking, that has been outpaced by the expansion of opportunities for state patronage, and power struggles between factions of the political elite. Against the backdrop of extreme poverty and enormous oil rents, these power struggles have manifested in zero-sum politics, emergence of ‘Godfather’ political magnates, ethno-religious tensions, and the subsequent decay of state institutions. The current regime of President Goodluck Jonathan is faced with the daunting challenge of fighting poverty and corruption, strengthening weak public institutions and prudently managing oil revenues. Nigeria’s federal structure has thrown up an intriguing paradox of political decentralization with low sub-national transparency; while states have fiscal autonomy, and states’ spending constitutes around half of consolidated government spending, little is known about how subnational governments use oil revenues.

7 Bienen (1983), Gelb (1988) and Illorah (2000) describe the experiences with the long-term management of oil windfalls in Nigeria, and the impact on the agricultural sector. 8 See generally, Lewis (2007) and Peel (2011). 2

The premise of this study is that given the political and fiscal clout of subnational governments in resource-rich federal countries such as Nigeria, addressing weaknesses in the subnational governance of resource revenues is vital to fighting the determinism of the resource curse. Furthermore, that the specific context for the practice of political decentralization in resource-rich federations is a principal factor in determining how natural resource wealth is managed.

Federations are comprised of multi-layered political institutions of governance – at the national and subnational (regional/provincial, local/municipal) level. Political decentralization refers to the ability of subnational or regional governments to take independent decisions that are constitutionally recognized by the national government.9 Given the multi-tiered political institutions in a federal system, political decentralization is intrinsic to the practice of federalism, although the powers granted to subnational governments vary across countries. Over the past 20 years, there has been a growing emphasis on the decentralization of political and administrative authority in developing countries, as a strategy for inclusive, participatory governance, since local governments are perceived to be closer to local communities. It is argued that the devolution of authority from national to subnational governments can facilitate ‘good governance’, efficiency and accountability in the pursuit of development, 10 and decentralization can empower local governments to be more effective in delivering public services. However, the empirical evidence from countries that have embraced various forms of decentralization (political, administrative or fiscal) questions this view.

In Indonesia, over 20 years of administrative and fiscal decentralization has not improved public service delivery, and weaknesses remain in the incentive structure for subnational revenue grants, subnational institutional capacity for expenditure and revenue management, and the absence of a civic culture which demands accountability from local public officers.11 Furthermore, decentralization of political authority in Indonesia has been associated with the flourishing of predatory, authoritarian political structures,12 which is contrary to the predictions of the advocates of decentralization. Path-dependency and local context may also determine the success of decentralization; in Thailand, contextual factors such as ‘a past tradition of centralization, bureaucratic polity, local political elitism’ are seen to constrain decentralization and local government reform.13 Political decentralization in Ghana and Uganda has also provoked a counter reaction towards recentralization, such that local government authority is weakened by

9 Schneider (2003). 10 See for example, the World Bank (1998, 2000), Bardhan and Mukherjee (2006), Balagun (2000), and Brillantes (2004). 11 Lewis (2010). 12 Hadiz (2004) 13 Haque (2010). 3 undue encroachment by central governments.14 These empirical studies point to the importance of local context in determining the effectiveness of political decentralization.

The push towards decentralization of political authority in developing countries has been mirrored by the decentralization of natural resource management functions to local institutions and communities, reflecting the rising presence of non-state actors in local decision-making. This trend is best captured through Community Based Natural Resource Management (CBNRM) frameworks15 that have proliferated across Africa, Latin America and Asia.16 CBNRM is seen to enhance participation and legitimacy for local communities in the management of natural resources, which may be lacking in state institutions that are distant, inefficient or driven by narrow political agendas.17 However, the evidence from countries that decentralized natural resource management through CBRNM shows that its effectiveness is heavily influenced by ‘local context’18 – the politics of power, cultural and structural factors that may lead to conflict within communities. The political motives of the central government and the level of infringement of the central government in local authority are also important factors in determining the effectiveness of CBNRM.19 This indicates the importance of channels through which democratic accountability is exercised,20 either through elections or informal institutions, and the motives of local administrators, which is linked to the credibility of electoral processes and civic engagement by local communities.

In federal countries that are dependent on natural resources, the outcome of political decentralization is very unpredictable, given the size of natural resource rents at stake, and the frictions that may arise between competing socio-political actors. The development of the natural resource sector, access to and allocation of resource revenues and management of regional inequalities are important policy issues that must be addressed in the governance of natural resources in federal countries. Accordingly, there is a growing body of work on the management of oil and gas resources in federal countries, which recognizes that federal political institutions play a critical role in determining how oil revenues are managed.21 Other authors have argued that the effect of federal systems on macroeconomic management is dependent on combined fiscal and political factors, such as geography, degree of fiscal decentralization, revenue

14 Awortwi (2010). 15 For a detailed review on the historical forces behind the emergence of CBNRM, see Brosius, Tsing and Zerner (2005). 16 Shackleton et. al. (2002). See also, Anderson, Gibson and Lehoucq (2004) for a comparison of decentralized forestry governance in Guatemala and Bolivia. 17 CBNRM has become the dominant approach to natural resource management within global policy circles. As an illustration, a report by the International Fund for Agricultural Development (2004) observes that over 80% of approved programs and projects between 2000 and 2004 were addressing aspects of CBNRM. 18 See for instance, Shackleton et. al. (2002), Larson and Soto (2008). 19 Shackleton et. al. (2002), Agrawal and Gibson (1999). 20 Andersson (2003), and Ribot, Agrawal and Larson (2006) argue that decentralization of natural resource governance is only effective in countries where there are democratic local institutions and instruments of political accountability. 21 Anderson ed. (2012:3). 4 autonomy of fiscal governments, and the organization of the political space, through the party system.22

Federalism can be a source of ethnic conflict and political turbulence, if competing ethnic and regional interests are not accommodated by the political system.23 In multi- ethnic resource-rich federations, the boundaries between political jostling for natural resource rents and ethno-regional competition may become blurred, especially if political institutions are too weak to mediate in such distributive conflicts without undermining the authority of the state. Thus, the relations between central and subnational governments, particularly in the management and distribution of natural resource rents are a critical element of natural resource governance in federal systems, in several ways.

Given the volatility of natural resource rents, managing resource-driven macroeconomic volatility requires intergovernmental policy coordination that does not completely erode the fiscal space of subnational governments. Furthermore, subnational governments can allocate sizeable portions of their expenditure to address regional/local needs that central governments may find difficult to do. Thirdly, subnational governments in resource-rich areas can play an important stabilizing function by developing independent resource revenue management tools such as investment and savings funds. Subnational governments can also manage the negative externalities arising from resource extraction by assuming environmental management functions, regulating extractive sectors, or resolving resource-driven conflicts in local communities. Perhaps the most important instrument for subnational resource governance in resource-rich federations is through the management of public revenues and expenditures. 24 This is because the judicious subnational use of public revenues can mitigate the negative outcomes predicted by the resource curse.

Existing scholarship on the ‘resource curse’ in Nigeria has been largely focused on the policies of the national government and corruption by the political elite. 25 Other studies have addressed the impact of fiscal decentralization on socio-economic outcomes, the relationship between taxation, revenue allocation and fiscal federalism, management of oil and gas resources and revenue sharing, and the politics of federalism in Nigeria.26 These studies often address a single element of natural resource governance (e.g. fiscal policy management or the politics of fiscal federalism) in Nigeria, without

22 Rodden and Wibbels (2002). 23 Hale (2004), Bakke and Wibbels (2006). 24 While the analysis of subnational revenue management in resource-rich federations is an evolving area of inquiry, a study by Freinkman and Plekhanov (2009) on fiscal decentralization in the Russian Federation argues that subnational governments in regions that rely heavily on intergovernmental transfers and natural resource rents face serious distortions in their incentive structure, and in effect, tend to be more ‘fiscally centralized’ than others. 25 See for instance, Lewis (2007), Sala-i-Martin and Subramanian (2003). 26 Akpan (2011), Salami (2011), Suberu (2010), Illedare and Suberu (2012). 5 necessarily recognising the role that subnational governments play within the federal system, and the implications for tackling the ‘resource curse’ in Nigeria. Thus, this project seeks to contribute to the growing knowledge on natural resource governance by providing evidence on the management of natural resource revenues by subnational governments in Nigeria. Research Question The question that the project addresses is; what is the relationship between political decentralization in the context of Nigeria’s federal system, and the governance of natural resources? The study will also engage with related critical policy questions, such as; can political decentralization be reconciled with the imperatives of transparency and accountability in the use of Nigeria’s natural resource wealth? What policy reforms are needed to support inter-governmental coordination in the governance of natural resources? These issues will be examined in the research project, with a view to building a narrative that addresses the relationship between political decentralization and the management of natural resource wealth in Nigeria. The topic of the study is timely indeed, given the striking poverty that exists alongside substantial oil rents which flow from the centre to the federating units in Nigeria, and the intensity of resource struggles to control the distribution of oil rents within the national political economy.

Research Approach – Methodology and Data The research method adopted by the study is qualitative analysis, based on a case study of subnational revenue governance. Thus, the study assesses subnational revenue and expenditure management for two oil-producing states in Nigeria’s Niger Delta region (Akwa Ibom and Bayelsa states), based on a descriptive analysis of data derived from state budgets – namely indicators of fiscal policy management, distributional implications of public spending, reflected in the percentage of recurrent vs. capital expenditure in state budgets, and budgetary allocations to pro-poor and social sectors. Akwa Ibom and Bayelsa states were chosen due to their position as the highest and lowest recipients of statutory revenue allocations from the federal government among Nigeria’s core oil-producing states in the Niger Delta, to provide a contrasting picture on subnational resource revenue management practices. The oil-rich Niger Delta region receives 35% of all revenues shared between the central and subnational governments, which is the highest among Nigeria’s six geopolitical zones.

Data on subnational revenue flows and expenditure was collected from key Nigerian federal agencies such as the Budget Office of the Federation, and the Central Bank of Nigeria. Individual state budgets were obtained from a civil society online platform in the 6

Niger Delta, government websites and personal contacts with state officials. Additional data on macroeconomic and fiscal operations was collected from published reports and databases (from the World Bank, IMF and Nigerian Bureau of Statistics). In general, there are constraints regarding the quality and availability of economic and fiscal data in Nigeria, and particularly in the Niger Delta. The project addressed this limitation by setting modest and realistic expectations on the coverage of the project, seeking data from multiple sources, and using personal contacts with local civil society groups. The timeframe of state budgets to be examined is from 2008 to 2012. Given the objectives of the study, coverage is restricted to an assessment of public/state utilisation of resource revenues in the Niger Delta. However, there are much broader issues within the context of natural resource governance in Nigeria on oil sector transparency, social equity and environmental sustainability, which are significant for the analysis presented here, but not directly examined by the study.

Outline The paper proceeds as follows. The introductory section of the paper presents the background and motivation of the study, the research questions to be addressed, the methodology and data to be used in the analysis. This is followed, in the next section, by a review of the practice of fiscal federalism and the management of oil revenues in Nigeria. In the third section, the case study of oil revenue management in the selected oil-producing Niger Delta states – Akwa Ibom and Bayelsa is presented. In the final section, the study concludes by drawing on the case-study findings to offer appropriate policy recommendations that can improve subnational management of natural resource revenues in Nigeria’s federal system.

Fiscal Federalism and Resource Revenue Management in Nigeria The Nigerian federation is comprised of three tiers of government - a federal government, 36 states and a federal capital territory (FCT) and 774 local governments. Each level of government in the federation has constitutionally defined functions (see Table 1 below). For the purposes of political expediency in the post-democracy era, Nigeria’s ruling elite created six geopolitical zones which conform to ethno-regional divisions, and have been useful instruments in the politics of distributive patronage. The three tiers of government exist independently, and are constitutionally entitled to a share

7 of centrally pooled Federation revenue accruing from oil and non-oil activities. 27 There is a clear separation of powers between the executive, judicial and legislative arms of government. Nigeria has a bicameral legislative system, with a lower federal House of Representatives, and a Senate. In turn, state governments have elected Houses of Assembly, elected governors and an executive cabinet, and an independent judiciary. Given that oil and gas constitutes over three-quarters of total federation revenue, ethno- regional competition over the allocation of these revenues has been a permanent fixture of Nigeria’s political space.

Figure 2: Administrative Map of Nigeria showing the 36 states, FCT and 6 Geopolitical Zones

Source: Federal Republic of Nigeria (2004).

27 The Revenue Mobilization, Allocation and Fiscal Commission (RMAFC), which is responsible for determining the tenets of Nigeria’s oil revenue sharing agreement between the federal and subnational governments, bases the states’ revenue entitlements on 10 economic and demographic indices, namely: horizontal equality of states (45.2%), population (25.6%), internal revenue generation (8.31%), land mass (5.35 %), terrain (5.4%), population density (1.45 %), rural roads and inland waterways (1.2%), potable water (1.5%), education indicators (3%), and health indicators (3%). 8

Table 1: Expenditure Assignment in the Nigerian Federation

Level of Government Expenditure Category Defense Foreign Affairs Federal International trade including export marketing Currency, banking, borrowing, exchange control Use of water resources Shipping, federal trunk roads Elections Aviation, railways, postal service Police and other security services Regulation of labour, interstate commerce, telecommunications, immigration Mines and minerals, nuclear energy, citizenship and national statistical system (census, births, deaths, etc.) Guidelines and basis for minimum education Business registration Price control Health, Social welfare

Federal-State Education (Post primary/technology) (Shared) Culture Antiquities Monuments, archives Statistics, stamp duties Commerce, industry Electricity (generation, transmission, distribution) Research surveys

Residual power, i.e., any subject not assigned to federal or local government level State only by the constitution Economic planning and development

Local Health services governments Land use Control and regulation of advertisements, pets, small business Markets, public conveniences Social welfare, sewage and refuse disposal, registration of births, deaths Marriages Primary, adult and vocational education Development of agriculture and natural resources.

Source: Akpan (2011:182-183)

9

Fiscal federalism is concerned with the fiscal relations between various tiers of government in a federation for the generation and assignment of revenues and expenditures and delineation of fiduciary powers.28 The evolution of fiscal federalism in Nigeria has been driven by political factors, including ethno-regional rivalries, the importance of state patronage as an instrument of personal accumulation, and the use of oil revenues to pacify marginalised ethnic groups, notably the impoverished oil communities of the Niger Delta. These factors have determined claims to federation revenues, and the share of revenues allocated to sub-national governments (see Box 1).

BOX 1: The Evolution of Fiscal Federalism in Nigeria 29

Fiscal federalism has evolved within the context of the transition from military to civil rule, and the popular response to buoyant state revenues from oil windfalls. Nigeria’s ethnic diversity and the ensuing competition for state patronage create intense distributive struggles at the sub-national level. A twin strategy of state expansion, by decentralizing political organisation and increasing the representation of minorities in the national government through the Federal Character (Proportionality) Principle, has been complemented by alterations in the formula for revenue distribution between the three tiers of government. The legitimacy of local rulership by community chiefs was recognized by the British colonial governments under the system of indirect rule, and retained after independence, with the emergence of four geo-political regions, which enjoyed extensive fiscal and political autonomy.

During the civil war in 1967, the Gowon military regime embarked on a state creation programme, leading to the division of the 4 regions into 12 states. The intention was to diminish the power of the regional governments, especially the secessionist South-Eastern (Biafra) region, and increase the share of minority ethnic groups in the distribution of petroleum revenues. Conservative Northern elements in the military and political elite were also keen to increase the distribution of revenues to their region, to counter the power and influence of Southern ethnic minorities. The application of the Federal Character principle in the allocation of state revenues, determination of appointments to national office and state-owned enterprises, military recruitment and public programmes, were collectively expected to accommodate the interests of Nigeria’s diverse ethnic minorities within the polity without disrupting the hegemony of the three largest ethnic groups; the Hausa-Fulani, Yoruba and Igbo.

The number of states grew to 19 in 1975, 21 in 1991, and by 1999, there were 36 states and a federally administered capital territory. A similar process was of political decentralization was replicated within the states, with the creation of a total of 774 local government councils which are also constitutionally entitled to revenue allocations from the central government. While the size of the surplus available to the Nigerian state for the creation of opportunities for distributive patronage was enhanced by the centralisation of oil rents, linking state creation to revenue allocation only elicited greater agitation for political accommodation and inclusion by various ethnic groups. As an illustration, between 1946 and 2003, the revenue allocation formula was altered eighteen times, or once in every three years.30 The failure of the state to incorporate multifarious demands for representation and greater share of federal revenues is interpreted as an attempt to exclude aggrieved ethnic minorities.

28 Anderson (2010) provides a comprehensive review of approaches to fiscal federalism in federal countries. 29 Excerpt from Ushie (2010:13-15). 30 Ross (2003:9). 10

Decentralization of political organisation, starting with the abolition of the regional governments in 1967, led to the modification of revenue distribution in favour of the federal government. After the civil war, the states were mandated to contribute their revenues to a federally administered Distributable Pool Account, which were allocated on the basis of need, population and other economic indices.31 The Derivation Principle, by which a fixed portion of revenues from economic activities were retained by the geographical area in which they originated, was increasingly deemphasized. In 1960, each region was allowed to retain 50% of derived tax revenues, but by 1970, the proportion of derived revenues had fallen to 45% and 20% in 1975. In 1982, the derivation principle was completely eliminated, and a special ‘development’ account allocated 1.5% of total government revenues to the oil producing states.32

Ethnic minority groups in the oil producing regions of Nigeria were the biggest victims of the decline of the derivation principle and the centralised distribution of oil revenues after 1967. The increasing tensions between the indigenes of the Niger Delta and oil companies operating in the region warranted the federal government to make concessions on the oil revenue entitlements of the oil-bearing states. In 1991, the Babangida military dictatorship increased the derivation allocation from 1.5 to 3%. By 1995, the situation in the Niger Delta had rapidly escalated into an insurgency by indigenous communities against the Nigerian state and multinational oil firms, and after the brutal execution of the environmental activist and author, Ken Saro-Wiwa by General Abacha in 1995, the Constitutional Conference increased the proportion of derived revenues allocated to the oil-producing areas to 13%.33

As a concession to the agitations of impoverished oil communities in the Niger Delta, the federal government re-introduced the Principle of Derivation. At the start of the new democratic era, the 1999 constitution ratified the 13% derivation provision. A landmark judgement by the Supreme Court in 2002 stipulated that the 13% derivation factor applied to all onshore oil deposits in the Niger Delta littoral states, and a proportion of offshore oil deposits. Collectively, both decisions strengthened the revenue entitlements of the states, relative to the federal government.34 After the deduction of the 13% provision for the oil producing states, the remaining 87 % of national revenue is distributed as follows; the federal government is allocated 52.7%, while the states get 26.7%, and local governments 20.6%. Thus, the historical revenue disparity between the North and South has been reversed, with the oil producing states now receiving the highest revenue allocations from the federal government.

The centrality of oil revenues in the Nigerian federation is reflected in social and economic indicators for the thirty-six states, as illustrated below in Table 2. The highest contributors to overall states’ GDP are the oil-producing states in the Niger Delta. Aside from the commercial hub of Lagos with 15%, the nine oil-producing states in the Niger Delta collectively account for 50% of aggregate states’ GDP. However, and in spite of the high per capita GDP in the leading oil-producing states, they paradoxically have higher poverty rates than non-oil producing states in Southern Nigeria, which also contribute less revenue to the Federation’s purse. The evidence suggests that even at the subnational level, there is a significant contrast between resource wealth and poverty.

31 Human Rights Watch (1999:42). 32 Frynas (2001:32-33). 33 Avuru (2005:205). 34 Ahmad and Singh (2003:9-13). 11

Table 2: Selected Socio-Economic Indicators of States in Nigeria

State Population 1 GDP GDP per capita 2 Percent of 2010 Poverty (in millions) (in millions (in Naira) total Incidence of Naira) states’ GDP (%)3 (%)

Abia 3,051,841 156,581.86 51,307 0.8 63 Adamawa 3,352,085 88, 296.94 26,341 0.5 81 Akwa Ibom 3,841,712 1,843,218.56 479,791 10.0 63 Anambra 4,459,236 91, 536.39 20,527 0.5 68 Bauchi 4,563,897 95,798.53 20,991 0.5 84 Bayelsa 1,788,957 1,212,867.01 677,974 6.6 58 Benue 4,390,184 792,405.51 180,495 4.3 74 Borno 4,044,366 269,473.62 66,629 1.5 61 Cross River 3,048,375 231,901.19 76,074 1.3 60 Delta 4,130,761 1,208,594.31 292,584 6.5 70 Ebonyi 2,317,922 57,568.38 24,874 0.3 80 Edo 3,463,629 142,784.30 41,224 0.8 73 Ekiti 2,449,007 97,551.83 39,833 0.5 59 Enugu 3,388,168 131,168.00 38,714 0.7 72 Gombe 2,374,698 105,286.06 44,337 0.6 60 Imo 3,963,039 205,609.17 51,882 1.1 80 Jigawa 4,585,695 574,713.28 125,327 3.1 57 Kaduna 6,276,729 558,386.58 88,961 3.0 79 Kano 9,266,314 797,251.26 86,038 4.3 73 Katsina 5,984,866 748,767.07 125,110 4.1 72 Kebbi 3,928,579 211,057.04 63,984 1.1 82 Kogi 3,424,637 63,348.45 18,498 0.3 81 Kwara 2,469,200 99,420.24 40,293 0.5 74 Lagos 9,131,112 2,935,593.30 321,494 15.9 74 Nassarawa 1,926,153 297,301.17 154,350 1.6 59 Niger 3,862,030 820,194.99 212,374 4.4 72 Ogun 3,721,345 115,791.01 31,115 0.6 44 Ondo 3,587,265 762,093.19 212,444 4.1 69 Osun 3,441,186 79,271.30 23,036 0.4 57 Oyo 5,505,815 194,182.18 35,269 1.1 48 Plateau 3,356,070 82,165.65 24,483 0.4 61 Rivers 5,084,192 3,333,507.68 655,661 18.0 80 Sokoto 3,822,365 716,154.16 187,359 3.9 59 Taraba 2,411,441 43,020.00 17,840 0.2 86 Yobe 2,232,186 73,308.50 32,842 0.4 76 Zamfara 3,305, 851 659,406.94 199,467 3.6 80 Abuja FCT 592,886 761,583.40 1,284,536 4.1 80

Source: 1 and 2/ UNDP Nigeria Human Development Report 2009, 3/ Nigeria Bureau of Statistics.

GDP figures are for 2007. State GDP is computed using a proxy derived from indicators of economic activity in the 36 states + FCT. Population data is based on the 2006 Census. Poverty incidence as derived from generalised household surveys, refers to the number of people living in the state classified as being absolutely ‘poor’. The four highest oil-producing states are highlighted in the table.

12

The decentralization of political power and privilege which accompanied democratic rule in Nigeria has created multiple opportunities for distributive patronage at the sub- national level within the context of the practice of fiscal federalism, and appears to have compounded historical challenges with managing resource wealth in Nigeria.35 The economic implications of the fiscal autonomy of sub-national governments in Nigeria include an explosion in public spending, public debt, fiscal deficits, and general macroeconomic instability, which have served to undermine economic growth. Buoyant oil revenues have led to a high dependence on federal revenue allocations. As illustrated in Figure 3, between 2000 and 2011, in the post-democracy era, an average of 70% of total state governments’ revenue originated from federal revenue transfers, including statutory revenue allocations (dominated by oil and gas receipts) and other intergovernmental fiscal transfers. On the contrary, less than 20% of all state governments’ revenue has been generated from non-oil internal economic activities.

Figure 3: Nigeria - Composition of State Governments’ Revenue (2000-2011)

2011 2010 2009 2008 2007 2008 2005 2004 2003 2002 2001 2000 0 10 20 30 40 50 60 70 80 90 Percent

Internally generated revenue (% of total states' revenue) Federal revenue allocations (% of total states' revenue)

NOTE: ‘Federal revenue allocations’ are an aggregation of statutory allocations to the 36 states and FCT, development grants, stabilization funds and other fiscal transfers from the central government.

Source: Data from the Central Bank of Nigeria Annual Statistical Bulletin 2011.

35 As an illustration, a report by Human Rights Watch (2007a) on local governance in Rivers state revealed several incidents of grand corruption at the grassroots - the allocation of a salary and benefits package of US$376,000 to the Khana local government chair in 2005 which was almost half of the total salary cost of the local council’s health workers, and the allocation of a US$300,000 security vote to the chair of Tai local council, which exceeded total capital spending on health and education. 13

Figure 4: Nigeria – State Governments’ Public Expenditure (2000-2011)

4,000,000 50

3,500,000 45 40 3,000,000 35

2,500,000 30 2,000,000 25

1,500,000 20 15 1,000,000

Billions Naira of Billions 10 500,000 5

0 0 %of total spendingFederal 2000 2001 2002 2003 2004 2005 2008 2007 2008 2009 2010 2011

Total states' expenditure Total states' expenditure (% of total federal expenditure)

Source: Data from the Central Bank of Nigeria Annual Statistical Bulletin 2011.

Likewise, spending by states has steadily risen between 2000 and 2011 (see Figure 4 above). Total expenditure by the states doubled from approximately N1 trillion (or US$6.4 billion)36 in 2004, to N2 trillion (US$ 12 billion) in 2007, and N3.5 trillion (US$ 22 billion) in 2011. In terms of the ratio of sub-national to overall Federation expenditure, the fiscal prowess of sub-national governments has also been on the rise. In 2000, the proportion of states to total federal spending was slightly above 30%. This ratio increased to a 47% in 2008, and followed by a slight fall in the next two years, to 45% in 2011. Given the difficulties in access to data on extra-budgetary spending by states, when this is taken into account, it is possible that over half of all aggregate public spending in the Nigerian federation is carried out by the states. This growing fiscal and political clout of Nigeria’s state governments could be seen as a demonstration of the workings of a federal system.

However, within Nigeria’s politicized fiscal federalism, powerful state governors sit atop lavish public exchequers and conduct their fiscal affairs out of the reach of the federal government, and also beyond the scrutiny of civil society, international donors, and local constituencies.37 As such, the size of (resource) revenues flowing from the centre

36 US dollar equivalent figures were converted from Naira using the current (November 2012) official Central Bank of Nigeria exchange rate of N155/US$1. 37 The era of sub-national profligacy and political corruption is best captured by the case of James Ibori, former governor of Delta state from 1999-2007. In early 2012, Mr. Ibori was sentenced in the United Kingdom to 13 years in prison for fraud, money laundering and convicted of siphoning around US$250 million from his state’s public purse. Mr. Ibori, a powerful member of the ruling PDP and champion of ‘resource control’, continually evaded prosecution in Nigeria. 14 creates low incentives for political accountability. Furthermore, state legislatures are compromised and unable to operate independently of the state executive, since they are also beneficiaries of lavish public spending, and local government administrators have been effectively corralled by the state governors and stripped of their functions and powers. Thus, the federation faces a serious dilemma whereby the actions of subnational governments could threaten macroeconomic stability, fiscal discipline, and transparent and accountable natural resource governance. In the next section, we will closely examine the management of public revenues in the oil-producing Niger Delta, to reveal the extent to which natural resource revenues are being governed for the benefit of the oil communities in the Delta.

Subnational Resource Revenue Management: Evidence from the Niger Delta The Niger Delta is one of the world’s largest wetlands, and the largest in Africa. It encompasses 75,000 square kilometres, with a geographical perimeter extending from the Benin River in the East to the Imo River in the West.38 The topography is deltaic, with rich oil-bearing sedimentary rocks, and the majority of onshore oil production is concentrated within the freshwater swamps and rainforests in the region.39 The ethno- linguistic diversity of the Niger Delta mirrors the profusion of cultural identities in Nigeria – the region is home to more than 40 ethnic groups, over 200 spoken dialects and 3,000 communities.40

The major ethnic group is the Ijaw (or Izon), who are collectively the 4th largest ethnic group in Nigeria, after the Hausa, Ibo and Yoruba. There are nine states in the region – the core delta states of Akwa Ibom, Bayelsa, Delta and Rivers, and the outlying Abia, Cross River, Edo, Imo, and Ondo states. The population of the Niger Delta is 31 million, representing about 23 percent of Nigeria’s total population,41 with a majority of the population engaged in subsistence agriculture, hunting and fishing.42 All of Nigeria’s oil and gas is derived from this fragile ecosystem. In 2010 alone, Nigeria’s oil exports were N9.15 trillion (or US$59 billion).43 However, there is widespread deprivation and social discontent. 68% of the residents of the Delta are classified as being poor, and the region’s unemployment rate of 27% is six points above the national average of 21%.44

38 Watts (2004b:57). 39 Omoweh (2005:132-133). 40 Niger Delta Development Commission, online, http://www.nddc.org 41 Based on the 2006 census data projections in the UNDP Niger Delta Human Development Report (2009). 42 Von Kemedi (2003:7). 43 Data on oil exports from the National Bureau of Statistics. 44 National Bureau of Statistics, based on state-level data for 2010. 15

Figure 5: States in the Niger Delta Region, Nigeria

Source: Niger Delta Working Group, http://ndwgnews.blogspot.com/p/national.html

The Niger Delta has been gripped by a popular insurgency as simmering grievances against the Nigerian state and multinational oil companies on environmental pollution, widespread poverty and political marginalization spiraled into violent conflict over time.45 The environmental damage is staggering - Nigeria has the second higest level of gas flaring in the world, after Russia. Up to two-thirds of natural gas in oil-producing areas is flared. In comparative terms - this quantity of natural gas ‘is equivalent to more than one third of the natural gas produced in the UK's North Sea oil and gas fields and would meet the entire energy requirements of German industry.’46 According to official estimates of the NNPC, approximately 2,300 cubic metres of oil are spilled in 300 separate incidents every year.47 The ecological impact of oil-related pollution has been the depletion of aquatic and marine life and the destruction of crops and agricultural land, disrupting traditional livelihoods.

Under military rule, the federal army was deployed to quell the uprising by the indigenous communities of the Delta.48 The militarization of the conflict, however, resulted in the emergence of a lucrative ‘conflict economy’, 49 with activities ranging from kidnapping for ransom, crude oil theft (or illegal oil bunkering), sea piracy, protection

45 Ukiwo (2011), Obi (2006, 2010). 46 A 2010 British media report on gas flaring by Shell in the Niger Delta notes that Nigeria’s gas flares are visible from space and burn more brightly than the lights of Nigeria’s largest commercial city, Lagos. http://www.independent.co.uk/news/world/africa/visible-from-space-deadly-on-earth-the-gas-flares-of-nigeria-1955108.html 47 Omeje (2006:52). 48 The origins of the Niger Delta conflict has been chronicled by Eberlein (2006), Omeje (2006), Watts (1999, 2004 a,b) and Obi (2010). 49 The terminology was first used by Ikelegbe (2005) in describing the patterns of conflict and crisis in the Niger Delta. 16 racketeering, urban and gangland crime. Political democratization under civil rule has created additional cleavages, with intense resource struggles by regional political actors to create and sustain networks of distributive patronage,50 leading to increased political violence and the proliferation of arms in the region,51 and the failure of social provisioning, reflected in a lack of basic amenities, high poverty and unemployment. It is estimated that around Nigeria’s crude oil output fell by about a quarter as a result of the Niger Delta crisis between 2005 and 2009. The Nigerian state offered an amnesty to Niger Delta militants starting in 2009, as part of a broader Disarmament, Demobilization, and Reintegration (DDR) programme, which has relatively improved stability in the region,52 and boosted Nigeria’s oil production and state revenues. However, the lack of jobs for rehabilitated militants, combined with lucrative opportunities in the ‘conflict economy’, high poverty and youth unemployment in the region collectively undermine peace and security. Oil bunkering is still very prolific. The national oil company, NNPC, estimates that Nigeria is losing between 150,000 to 180,000 bpd to bunkering and oil spills, amounting to US$7 billion per annum or 6% of the country’s total production, which exceeds the current daily oil output of Ghana.

A fundamental area which is often forgotten in the outcry over the crisis in the Niger Delta and the management of the oil and gas sector, is the role of sub-national governments. In other words, how state governments in the region, which are entitled to the largest share of subnational oil revenue allocations in the post-democracy era, have used their advantageous position to address the developmental needs of the local people. We turn to this question in the case study below.

Akwa Ibom State

Akwa Ibom state is located along the eastern coastline of the Niger Delta, with a landmass of 6,900 sq. km. The state has a population of 3.9 million (according to 2006 census figures), and is rich in natural resources, including hydrocarbons, solid minerals (such as limestone, aluminium and coal), and rich, fertile farmland. Economic activities are dominated by subsistence agriculture, hunting and fishing, small scale industry and artisanry, retail and service enterprises, public sector and government institutions and state-owned commercial enterprises. Akwa Ibom was created in 1987 out of the neighbouring Cross River State. By virtue of its onshore and offshore oil and gas deposits, and recent favourable boundary adjustment decisions that awarded the state

50 See generally, Ifeka (2000), Gore and Pratten (2003), Watts (2004) and Obi (2006). 51 For a discussion of arms proliferation as a result of the conflict and violence in the Niger Delta, see Human Rights Watch (1999, 2002, 2005 and 2007b). 52 A critique of the Niger Delta Amnesty is provided by Nwozor (2010) and Oluwanniyi (2011). Around 26,000 Niger Delta youths have benefited from the Amnesty programme, although there are concerns about its sustainability and the corruption in key institutions charged with implementing the programme. 17 additional oil wells from adjacent oil-producing states, it is currently the leading oil producer in the Nigerian federation. The state receives the highest statutory revenue allocations and 13% derivation payments for oil production within its territory.53 As an illustration, between January and September 2012, Akwa Ibom received N163 billion (US$1.03 billion) in revenues from the Federation account, or 9.4% of the total revenue allocated to all the 36 states.

With an estimated GDP of US$11.8 billion, the petro-based output of this small state is larger than those of several West African countries including Mali, Chad, Burkina Faso and Niger. Akwa Ibom is host to ExxonMobil, the partner in Nigeria’s second largest Joint Venture with the state oil company, NNPC, which produces around 900,000 barrels of oil daily from offshore oil concessions. Akwa Ibom state has been governed by the ruling People’s Democratic Party (PDP) since 1999, and its political elite hold important roles within the regional and national political landscape. Akwa Ibom has been relatively free of the unrest that plagued other states in the Niger Delta at the height of the insurgency in the region, since much of its oil production is offshore, and relations between local communities and oil companies operating in the state have not been as acrimonious as in neighbouring oil-producing states.

Table 3: Akwa Ibom State – Selected Poverty and Social Indicators

2010 Adult Literacy (%) 89.5 Unemployment (%) 27.7 Poverty Incidence (%) 63 Income Inequality (0 = perfectly equal; 1 = perfectly unequal) 0.44 Food poverty (%) 35.6 People living on US$1 per day, adjusted PPP (%) 53.6 Adequately fed infants (%) 2007 31.9 Children reaching Grade 6, total (%) 96.8

Source: Nigeria Bureau of Statistics Data Portal

Akwa Ibom state has one of the highest adult literacy rates in Nigeria, at 89%, and reasonably high primary school completion rates of 96%. In contrast, the unemployment rate of 27% is among the highest in the Niger Delta, and 63% of the population is considered to be ‘poor’, with 53.6% living on US$1 a day. The social indicators presented here are worrying, given the humongous fiscal transfers that steadily flow into the coffers of the state as a result of its oil and gas endowments.

53 According to the derivation principle, oil producing states should receive on a monthly basis, 13% of total oil revenues arising from onshore production within their domain from the federal government, in addition to their statutory revenue allocations. Revenues from derivation have boosted the fiscal and political clout of oil-producing states in the Niger Delta, but are a flashpoint for ethno-regional competition in the politics of fiscal federalism. 18

The current political leadership of the state has invested enormously in public infrastructure, with the construction of an international airport, seaport, and upgrading of major roads, hospitals and educational facilities. However, the extent to which public revenues have been prudently used to address poverty in the state is questionable. Looking at the state budgets for 2008-2012, public expenditures have been volatile, mirroring trends in Nigeria’s national budget arising from a pro-cyclical fiscal policy. Public spending also represents a significant share of the state’s nominal output. The scale of the sums involved is mind-numbing - in Naira terms, total public expenditure between 2008 and 2012 was N1.5 trillion, an average of N305 billion per year, or in US dollar terms, approximately US$9.8 billion in total (see Tables 4 and 5).

Table 4: Akwa Ibom State – Public Expenditure Profile 2008 -2012

2008 1 2009 2 2010 3 2011 4 2012 4

Billions of Naira Capital Expenditure 222,831,816,000 240,719,000,000 240,107,000,000 235,200,000,000 341,500,000,000

Recurrent Expenditure 36,330,000,000 43,094,000,000 48,727,000,000 52,207,000,000 66,244,000,000 Total Expenditure 259,161,816,000 283,813,000,000 288,834,000,000 287,407,000,000 407,744,000,000 Period Total 1,526,959,816,000 Period Average 305,391,963,200

Percent of state GDP Capital expenditure 12 13 13 13 19 Total expenditure 14 15 16 16 22

Annual percent change Capital expenditure - 8.03 - 0.25 -2.04 45.20

Recurrent expenditure - 18.62 13.07 7.14 26.89

Total expenditure - 9.51 1.77 -0.49 41.87

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget estimates

Sources: Calculated using data from the Akwa Ibom State Budget Analyses 2009-2011 of the Niger Delta Citizens and Budget Platform, http://citizensbudget.org/, Central Bank of Nigeria Annual Report 2011, budget speeches and proposals accessed through the Akwa Ibom State Government official website http://www.aksgonline.com/govPapers.aspx. State GDP data from UNDP Nigeria HDR 2009.

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Table 5: Akwa Ibom State – Public Expenditure Profile in US$ Millions (2008-2012)

2008 2009 2010 2011 2012 Capital Expenditure 1,437,624,619 1,553,025,806 1,549,077,419 1,517,419,355 2,203,225,806 Recurrent Expenditure 234,387,097 278,025,806 314,367,742 336,819,355 427,380,645 Total Expenditure 1,672,011,716 1,831,051,613 1,863,445,161 1,854,238,710 2,630,606,452 Period Total 9,851,353,652 Period Average 1,970,270,730

Source: USD equivalent of figures in Table 4. Converted using current CBN official ex. rate of N155/US$1.

Public revenues have mirrored trends in the state expenditure bill, in line with the growth in statutory fiscal entitlements (in Figure 6). However, this expansionary fiscal policy will inevitably result in budget deficits, as apparent in 2012. The state government funds its deficits from recurrent revenue surpluses, development bonds, donor grants and bank loans. If not managed, rising fiscal deficits can be potentially destabilising in the long- term, particularly if they are being financed through public debts and bank loans.

Figure 6: Akwa Ibom State – Public Revenue and Expenditure (2008-2012)

500,000,000,000

400,000,000,000

300,000,000,000

200,000,000,000

100,000,000,000 Billions Billions ofNaira 0 2008 2009 2010 2011 2012 Year Total Expenditure Total revenue

Source: Fiscal data from Table 5, above

The dependence on statutory (oil) entitlements has distorted incentives for the development of non-oil revenue sources. As shown below in Figure 7, between 2008 and 2012, less than 10% of budgeted revenue was generated from non-oil sources, and up to 90% of state revenues were funded from Federation account transfers. This situation makes the state very vulnerable to external oil price shocks and macroeconomic volatility, and underscores the importance of revenue management

20 tools such as natural resource funds and fiscal rules for resource-dependent states such as Akwa Ibom, implemented within a sound public expenditure management framework.

Figure 7: Akwa Ibom State - Internally Generated Revenue (IGR) Contribution (2008-2012)

9 8 7

6 5

4 Percent 3 2 1 0 2008 2009 2010 2011 2012

IGR as percent of total revenue

Source: Fiscal data from Table 5, above.

The share of capital spending in total outlays exceeded 80% in the last four years, with recurrent spending at the opposite end of the scale (in Fig 8), which is remarkable, and a direct contrast to the practice at the Federal level, where overall capital spending has been under 30% of the total budget during the same period.

Figure 8: Akwa Ibom State – Composition of Public Expenditure (%) 2008-2012

2012

2011

2010

2009

2008

0 10 20 30 40 50 60 70 80 90 100

Percent of Total Expenditure

Total Recurrent Expenditure Total Capital Expenditure Source: Fiscal data from Table 5, above. 21

In a context of high poverty and unemployment, resource revenues can stimulate growth if effectively channelled into pro-poor sectors. Thus, the prioritization of social expenditure should be consistent with the high share of capital spending in the state’s budget. In nominal terms, spending on social sectors including education, health, housing, agriculture and water supply has been significant. Capital projects in these social sectors typically involve the construction or renovation of infrastructure (classroom blocks, access roads, primary healthcare centres) and the purchase and supply of equipment (textbooks, medicines or farm inputs). For instance, between 2008 and 2011, the Akwa Ibom State government spent N 66 billion (US$427 million) on capital projects in the education sector, N37 billion (US$240 million) on healthcare, and N16 billion (US$103 million) on agriculture (data in table 6 below).

The transparency of budgeting practices at the sub-national level poses serious constraints for a thorough analysis of states’ social expenditure. For instance, the inclusion of the opaque ‘general administration’ category in the capital budget, which was allocated N244 billion (US$1.5 billion) from 2008-11, thereby exceeding the allocations to health, education and housing, is perplexing. This spending category appears to be overhead costs for public agencies executing capital projects, and should ordinarily be absorbed in the state’s recurrent budget. The cryptic ‘security votes’, which state governors can utilize at their discretion, is another loophole for political impunity. There is also evidence of self-interest by the executive – in 2011, the Akwa Ibom state government made an allocation of N18 billion (US$ 120 million) to the ‘Governor’s office’ in the capital budget. In a state where up to 60% of the residents are poor, such an open display of extravagance is disconcerting.

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Table 6: Akwa Ibom State - Capital Expenditure on Selected Social Sectors (2008-11) 2008 1 2009 2 2010 3 2011 4 Period Total In Billions of Naira

Education 15,858,600,000 15,785,000,000 18,450,000,000 16,100,000,000 66,193,600,000

Health 10,247,000,000 7,421,000,000 10,156,000,000 9,400,000,000 37,224,000,000

Agriculture 1,279,400,000 3,850,400,000 4,021,000,000 6,859,000,000 16,009,800,000

Urban water supply 5,000,000,000 3,500,000,000 3,500,000,000 2,000,000,000 14,000,000,000

Rural development and utilities 3,500,000,000 4,463,000,000 9,000,000,000 8,950,000,000 25,913,000,000

Urban electrification 5,450,000,000 2,360,000,000 2,780,000,000 3,100,000,000 13,690,000,000

General Administration 66,105,412,000 64,300,000,000 43,372,873,480 71,100,000,000 244,878,285,480

Security vote 6,000,000,000 n.a. n.a. 8,400,000,000 -

Governor's office 8,000,000,000 n.a. n.a. 18,700,000,000 -

In Millions of US Dollars

Education 102,313,548 101,838,710 119,032,258 103,870,968 427,055,484

Health 66,109,677 47,877,419 65,522,581 60,645,161 240,154,839

Agriculture 8,254,194 24,841,290 25,941,935 44,251,613 103,289,032

Urban water supply 32,258,065 22,580,645 22,580,645 12,903,226 90,322,581

Rural development and utilities 22,580,645 28,793,548 58,064,516 57,741,935 167,180,645

Urban electrification 35,161,290 15,225,806 17,935,484 20,000,000 88,322,581

General Administration 426,486,529 414,838,710 279,824,990 458,709,677 1,579,859,906

Security vote 38,709,677 - - 54,193,548

Governor's office 51,612,903 - - 120,645,161

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget estimates n.a. – not available Sources: Calculated using data from the Akwa Ibom State Budget Analyses 2009-2011 of the Niger Delta Citizens and Budget Platform, http://citizensbudget.org/, budget speeches and proposals accessed through the Akwa Ibom State Government official website http://www.aksgonline.com/govPapers.aspx. Ex. Rate N155/US$1.

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Table 7: Akwa Ibom State – Capital Expenditure on Selected Social Sectors (2008-2011)

Period 2008 1 2009 2 2010 3 2011 4 average Percent of annual capital expenditure Education 7.12 6.56 7.68 6.85 7.05 Health 4.60 3.08 4.23 4.00 3.98 Agriculture 0.07 1.60 1.67 0.37 0.93 Urban water supply 2.24 1.45 1.46 0.85 1.50 Rural development and utilities 1.57 1.85 3.75 3.81 2.74 Urban electrification 2.45 0.98 1.16 1.32 1.48 General Administration 29.67 26.71 18.06 30.23 26.17 Security vote 2.69 n.a. n.a. 3.57 Governor's office 3.59 n.a. n.a. 7.95

Annual percent changes Education - -0.46 16.88 -12.74 Health - -27.58 36.85 -7.44 Agriculture - -68.62 671.43 -51.32 Urban water supply - 200.95 4.43 70.58 Rural development and utilities - -30.00 0.00 -42.86 Urban electrification - 27.51 101.66 -0.56 General Administration - -56.70 17.80 11.51

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget estimates n.a. – not available

Sources: Calculated using data from the Akwa Ibom State Budget Analyses 2009-2011 of the Niger Delta Citizens Budget Platform, http://citizensbudget.org/, budget speeches and proposals accessed through the Akwa Ibom State Government official website http://www.aksgonline.com/govPapers.aspx.

In relative terms, the prioritization of various sectors is much more apparent (in Table 7). From 2008 to 2011, education, health and agriculture received approximately 7%, 4% and 4% of total capital expenditure respectively. Given the high poverty and unemployment in the state, by focusing more on these pro-poor sectors, natural resource revenues can be used to generate growth and employment and higher non-oil tax revenues, which can reverse the high dependence on federal transfers. The story is not much different for public spending on infrastructure – urban water supply, rural development and urban electrification programmes received less than 3% of total spending in the same period, respectively. Indeed, the amorphous ‘general administration’ category, which appears to be an overhead cost better suited in the recurrent budget, accounted for a whopping 26% of average annual capital spending.

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The budget allocation to the cryptic ‘security votes’ was 3% of total capital spending in 2011, greater than the individual allocations to agriculture, urban water supply and rural electrification. In addition, the government’s own provision for the ‘governor’s office’, was 7.95% of the total capital budget in 2011, which is slightly above the average share of education in total capital expenditure from 2008 to 2011.

Fluctuations in annual capital budget allocations to the core social sectors (sharp decreases and large upturns over the space of a single year) further reflects the poor quality of budgeting. Such sharp swings in public spending can undermine the impact of public programmes on target populations. A critical review of budget performance in Akwa Ibom state by a leading Niger Delta civil society group showed a litany of problems with the management of public revenues - duplicated items in the state budget, vague or dubious expenditure classification (such as the ‘general administration’ component of capital spending), unfinished and abandoned capital projects, an arbitrary budgeting process that does not involve state citizens, and failure to release fiscal data and budget information to the public.54

The case study of Akwa Ibom state has painted an intriguing picture of subnational natural resource revenue management. Given its massive oil revenue inflows, the state can significantly reduce poverty and create opportunities for inclusive growth, if such resource revenues are prudently utilised. Ostensibly, a greater part of the overall budget is allocated to capital or development spending. However, a closer examination of the fiscal data shows misplaced priorities in the allocation of (oil) revenues to fuel spurious expenses, and inadequate investment in critical areas such as education, healthcare, and agriculture. Given the poor quality of public expenditure management highlighted here, it is striking that Akwa Ibom is one of the four Nigerian states that has not begun the process of introducing a Fiscal Responsibility Act (other states are Borno and Enugu), and is the only oil-producing state in the Niger Delta without this important legislation.55 These poor budgeting practices could be a reflection of weak technical capacity of local institutions for public financial management, and the low absorptive capacity of a small state swamped by enormous oil rent transfers.

54 See generally, Niger Delta Citizens and Budget Platform, Budget Analysis for Akwa Ibom State (2009a,b, 2010, 2011a,c). NDCBP has published a number of critical reports on the effectiveness and accountability of public expenditure in Akwa Ibom state, as part of a broader annual budget analysis for the Niger Delta region. In a country where little is known about the use of oil revenues by political office holders, the work of the NDCBP has been instrumental in shedding more light on sub-national public expenditure management and fiscal transparency in the oil-rich Delta. 55 The importance of fiscal responsibility acts (FRAs) for oil-producing countries has been extensively discussed by the IMF (2007). See also Ushie (2010:25-26) for a discussion of the implementation of subnational FRAs in Nigeria.

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Bayelsa State Bayelsa state is located in the heart of the Niger Delta, with its southernmost tip bordering the Atlantic Ocean. Covering a landmass of around 11,000 square kilometres, the vegetation is an estuarine maze of mangrove swamps and narrow creeks that flow into larger rivers which empty their waters in the ocean. These estuarine creeks link a winding network of riverine communities that are predominantly engaged in subsistence agriculture and petty economic activities, from fishing, farming, petty trading and artisanry to palm oil milling, weaving and crafts, and logging. Much of the state is below sea level, and flooding caused by heavy rainfall is a typical occurrence.

Bayelsa state was created in 1996 from the neighbouring Rivers state, and is the only ethnically homogenous state in Nigeria, as its indigenes all belong to clans within the same Ijaw (Izon) ethnic group. It has a small population of 1.78 million (according to Nigeria’s 2006 census), but looms large in Nigeria’s economic and political landscape due to its oil and gas endowments, with a GDP of US$7.8 billion.The first commercial discovery of oil in Nigeria took place in 1956 in Oloibiri, Ogbia local government area of present day Bayelsa. The state is dotted with oil infrastructure - oil wells, pipelines, flow stations, liquefied natural gas plants, and major oil export loading terminals in Brass and Bonny. Oil multinationals with onshore and offshore concessions include Shell, ENI/Agip and ChevronTexaco.

Bayelsa has benefited from the massive oil rent transfers that accompanied the new era of fiscal federalism in post-democracy Nigeria. As an indication, the state received N98 billion (US$634 million) in statutory revenue transfers and derivation payments from the Federation account between January and September 2012, or 5.7% of total revenues distributed between the states. Yet, it has the lowest revenue allocation among the four core oil-producing states of the Niger Delta. Thus, given these antecedents, Bayelsa state provides for an interesting contrast with the oil juggernaut of Akwa Ibom in our analysis of the management of natural resource revenues at the subnational level.

Table 8: Bayelsa State – Selected Poverty and Social Indicators 2010 Adult Literacy (%) 74.9 Unemployment (%) 27.4 Poverty Incidence (%) 57.9 Income Inequality (0 = perfectly equal; 1 = perfectly unequal) 0.34 Food poverty (%) 23.3 People living on US$1 per day, adjusted PPP (%) 47.3 Adequately fed infants (%) 2007 30.2 Children reaching Grade 6, total (%) 97.1 Source: Nigeria Bureau of Statistics Data Portal

27

As shown in Table 8 above, Bayelsa performs relatively well in the areas of adult literacy, primary school completion rates, income inequality, and food poverty in comparison with Akwa Ibom. However, the unemployment rate of 27.4% is very high, and absolute poverty of almost 60% is consistent with regional trends. In general, the poverty profile of the state is at odds with its economic and political status as one of the core oil-producing states, and host to some of Nigeria’s most strategic oil facilities.

The political leadership in Bayelsa state recognises its peculiar constraints - given its location at the heart of the petro insurgency in the Niger Delta, its unique topography, which substantially increases the cost of providing public infrastructure, and the dependence on oil revenues to drive the activities of the state. Bayelsa was among the first states in Nigeria to introduce in 2009, a Public Procurement Law, and a Fiscal Responsibility Law. These reform measures were seemingly geared towards enshrining prudent management of oil revenues, and enhancing transparency in the fiscal activities of the state government.

The most significant reform was the creation of the Bayelsa State Expenditure and Income Transparency Initiative (BEITI), with technical and policy support provided by the global resource revenue transparency organization, the Revenue Watch Institute.56 The BEITI, the first and only of its kind in Nigeria, led to increased civil society engagement on sub-national fiscal transparency, and facilitated greater public access to the state’s fiscal data. However, four years after its inception, the BEITI Law has still not been ratified by the state legislature, and critics cite the unwillingness of state officials to open up their books, excessive red tape and lack of political commitment as undermining the effectiveness of BEITI in the state.57 On the surface, the political establishment in Bayelsa appears to recognize the importance of transparency and accountability in making prudent use of resource revenues. A detailed examination of state budgets will tell us if these laudable aspirations have been matched with concrete results.

56 Weate (2012) provides a review of the impact and effectiveness of the BEITI as an instrument of sub-national governance of natural resource revenues in the Niger Delta. The report shows that BEITI has not lived up to its expectations; mainly due to lack of political will in the Bayelsa state leadership, although it could be seen as a useful starting point for sub-national resource revenue transparency. 57 Niger Delta Citizens and Budget Platform (2011c:27-28)

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Table 9: Bayelsa State – Public Expenditure Profile (2008 -2012)

2008 1 2009 2 2010 3 2011 3 2012 4

Billions of Naira

Capital Expenditure 121,336,247,582 94,948,671,051 68,100,000,000 70,360,000,000 121,560,000,000

Recurrent Expenditure 64,104,000,000 65,940,655,998 119,400,000,000 90,910,000,000 90,250,000,000

Total Expenditure 185,440,247,582 160,889,327,049 187,500,000,000 161,270,000,000 211,820,000,000

Period Total 476,304,918,633

181,383,914,926 Period Average

Percent of state GDP

Capital expenditure 10 8 6 6 10

Total expenditure 15 13 15 13 17

Annual percent changes

Capital expenditure - -21.75 -28.28 3.32 72.77

Recurrent expenditure - 2.87 81.07 -23.86 -0.73

Total expenditure - -13.24 16.54 -13.99 31.34

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget proposal Sources: Calculated using data from the Bayelsa State Budget Analyses 2009-2011 and Bayelsa state 2012 budget speeches and proposals from the Niger Delta Citizens and Budget Platform, http://citizensbudget.org/, and Central Bank of Nigeria Annual Report 2011. State GDP data from UNDP Nigeria HDR 2009.

Table 10: Bayelsa State – Public Expenditure Profile in US$ Millions (2008-2012)

2008 2009 2010 2011 2012 Capital Expenditure 782,814,501 612,572,071 439,354,839 453,935,484 784,258,065 Recurrent

Expenditure 413,574,194 425,423,587 770,322,581 586,516,129 582,258,065

Total Expenditure 1,196,388,694 1,037,995,658 1,209,677,419 1,040,451,613 1,366,516,129 Period Total 5,851,029,514

Period Average 1,170,205,903

Source: USD equivalent of figures in Table 9. Converted using current CBN official ex. rate of N155/US$1.

29

The data presented here (in Tables 9 and 10 above) shows that Bayelsa’s public expenditure has been significant since 2008. In Naira terms, a total of N476 billion (or US$ 5.8 billion) was spent in this period. When expressed in terms of nominal state GDP, public spending averaged 15% of total output in the past four years. Annual changes in public spending reveal the effects of macroeconomic volatility passed through the dependence on federal oil revenue transfers. Total spending shrunk by 13% between 2008 and 2009, before rising by 16% in 2010, again falling by almost 14% in 2011 and growing by 31% in 2012. Such a volatile expenditure pattern undermines efforts to prudently manage oil revenues, and the effectiveness of public interventions in critical social sectors. As we observed in the first case study, exogenous oil price shocks and macroeconomic instability are simply transmitted into state budgets without any stabilising mechanisms to insulate local economies from oil-related volatility.

Figure 9: Bayelsa State – Public Revenue and Expenditure (2008-2012)

250,000,000,000

200,000,000,000

150,000,000,000

100,000,000,000

50,000,000,000 Billions Billions ofNaira 0 2008 2009 2010 2011 2012 Year Total Expenditure Total Revenue

Source: Fiscal data from Table 9, above.

The fiscal data also indicates that Bayelsa state is running considerable budget deficits. In 2008 and 2009, projected expenditures exceeded expected revenues by 33% and 22% respectively. Overall spending tracks revenue fluctuations on a year-to-year basis, again reflecting the pro-cyclicality of fiscal policy in states that are highly dependent on oil revenues. Given its avowed commitment to expenditure transparency, the Bayelsa government would do well to ensure that these fiscal deficits do not undermine the state’s economy in the medium term. The importance of revenue stabilisation funds and increasing the contribution of non-oil revenue in the state’s fiscal profile cannot be overstated. As noted in the earlier case study, the growing public debt profile of Nigeria’s states is a cause for concern, given the history with managing sovereign debts. Revenues used for debt servicing can be better directed at social sectors, so

30 long as the state cuts back on wasteful public spending. In terms of the composition of public spending, the results are mixed (see Figure 10 below).

Figure 10: Bayelsa State – Composition of Public Expenditure (%), 2008-2012

2012

2011

2010

2009

2008

0 10 20 30 40 50 60 70 Percent of Total Expenditure

Capital Expenditure Recurrent Expenditure

Source: Fiscal data from Table 10, above.

For instance, in 2010, recurrent spending was 64% of total spending, while capital spending was 36%, and in 2012, the reverse is the case, with recurrent spending making up 46% of total spending and capital spending representing 54% of the total. The high capital budget allocation is an encouraging trend and should be sustained, with a minimum of 60% of total budgets allocated to capital spending. In a small state such as Bayelsa where the economy is dominated by government activities, public spending should not be driven by the costs of running state institutions. Sustained, high investment in public infrastructure, agriculture, commerce and other economic sectors is needed to develop the economy and wean the state off its dependence on statutory oil revenue allocations. As demonstrated in Figure 11 below, the contribution of internally generated revenue in Bayelsa to overall state revenues is very low. Aside from 2009, the share of IGR has remained below 5%. The two case studies show that Nigeria’s oil- producing states are not doing enough to diversify their revenue and economic base to create a favourable setting for broad-based inclusive growth.

31

Figure 11: Bayelsa State - Internally Generated Revenue (IGR) Contribution (2008-2012)

10 9 8 7 6 5

Percent 4 3 2 1 0 2008 2009 2010 2011 2012

IGR as percent of total revenue

Source: Fiscal data from Table 10, above.

Looking closely at disaggregated capital spending for Bayelsa state from 2008 to 2012 (Table 11 below), in nominal terms, expenditure on critical social sectors such as education (N60 billion or US$388 million), health (N38 billion or US$250 million), and agriculture (N30 billion or US$195 million) shows that the state government recognizes the importance of providing funding to these pro-poor areas. The size of the allocation to ‘general administration’, again curiously featured in the capital budget as we saw in the previous state, which totalled N69 billion (US$446 million) in the past four years is troubling. This massive allocation trumps the expenditure on all the social sectors of the capital budget. Examining the relative distribution of social sector spending would give a more accurate picture of public expenditure on priority areas.

32

Table 11: Bayelsa State - Capital Expenditure on Selected Social Sectors (2008-2012)

2008 1 2009 2 2010 3 2011 3 2012 4 Period Total Billions of Naira

Education 10,159,807,513 11,866,127,479 7,989,090,913 6,400,000,000 23,728,979,952 60,144,005,857

Health 9,847,500,000 9,717,000,000 3,792,531,607 7,274,314,154 8,196,000,000 38,827,345,760

Agriculture and natural resources 4,031,414,000 15,810,500,000 3,144,259,200 3,384,377,069 3,931,200,000 30,301,750,269

Housing 6,459,059,017 2,574,206,753 860,830,000 4,330,000,000 3,762,764,987 17,986,860,757

Works and transport 37,750,000,000 24,610,962,255 16,724,663,064 38,533,574,430 41,296,745,280 158,915,945,029

Rural Development 2,025,137,811 2,800,000,000 5,901,516,513 516,613,384 - 11,243,267,709

Water Supply 4,360,000,000 4,536,164,869 1,264,559,517 1,200,000,000 2,051,680,000 13,412,404,386

Urban and regional planning 7,449,960,776 4,998,260,849 8,251,342,288 9,370,000,000 4,039,000,000 34,108,563,913

Environment 3,958,000,000 4,245,688,267 1,453,963,754 614,500,000 2,149,000,000 12,421,152,021

General Administration 10,652,227,482 19,496,148,754 9,009,044,792 8,225,960,012 21,777,317,192 69,160,698,231

Millions of US dollars Period Total

Education 65,547,145 76,555,661 51,542,522 41,290,323 153,090,193 388,025,844

Health 63,532,258 62,690,323 24,467,946 46,931,059 52,877,419 250,499,005

Agriculture and natural resources 26,009,123 102,003,226 20,285,543 25,362,581 25,362,581 195,495,163

Housing 41,671,348 16,607,786 5,553,742 24,275,903 24,275,903 116,044,263

Works and transport 243,548,387 158,780,402 107,901,052 266,430,615 266,430,615 1,025,264,161

Rural Development 13,065,405 18,064,516 38,074,300 3,332,990 - 72,537,211

Water Supply 28,129,032 29,265,580 8,158,448 7,741,935 13,236,645 86,531,641

Urban and regional planning 48,064,263 32,246,844 53,234,466 60,451,613 26,058,065 220,055,251

Environment 25,535,484 27,391,537 9,380,411 3,964,516 13,864,516 80,136,465

General Administration 68,724,048 125,781,605 58,122,870 53,070,710 140,498,821 446,198,053

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget proposal

Sources: Calculated using data from the Bayelsa state Budget Analyses 2009-2011 and Bayelsa state 2012 budget speeches and proposals from the Niger Delta Citizens Budget Platform, http://citizensbudget.org/, Central Bank of Nigeria Annual Report 2011. Ex. Rate N155/US$1.

33

From the data in Table 12 below, in relative terms, education, health, agriculture and water received on average, about 12%, 8%, 6% and 3% respectively, of annual capital expenditure from 2008 to 2012. Other critical areas such as housing and public works received on average, around 4% and 34% of the annual capital budget in the same period. The allocations to these social sectors are largely disappointing, particularly in light of the high poverty of almost 60%, and unemployment of 30% in Bayelsa state. The large allocation to public works is also contradicted by the social and poverty indicators for Bayelsa which show that the majority of residents are rural dwellers that lack basic amenities. High youth unemployment, with is linked with violence and unrest in the region, can be tackled by giving more priority to critical areas such as agriculture and education which provide opportunities for sustainable livelihoods that draw the youth away from criminal activities. The most intriguing element of the capital budget, once again, is the allocation to ‘general administration’. It is puzzling that the overhead costs of state agencies are included in capital budgets of subnational governments, and given a high share of capital spending. ‘General administration’ was allocated an average 14% of the capital budget between 2008 and 2012, which is even greater than the allocations to education, healthcare, water and the environment. Furthermore, in 2012, the Bayelsa state government did not make any provision for rural development in its’ capital budget.

Volatility in capital spending on the critical social areas is reflected in annual relative changes. For example, agricultural spending grew by almost 300% between 2008 and 2009, but sharply fell again, by 80% from 2009 to 2010. This volatile capital spending mirrors the overall instability in the state’s annual revenue and expenditure, and puts vulnerable groups such as women and children that depend on state-run utilities in peril, if infrastructure and equipment cannot be reliably supplied through public programmes.

Civil society watchdogs have criticised the budget and fiscal performance of the Bayelsa government on many counts – the high dependence on statutory oil transfers, duplication and misclassification of expenditure categories, uncompleted and abandoned capital projects, and worryingly, a very poor budget execution track record.58 As an illustration, in the first six months 2011, the Bayelsa state government had spent only N3.5 billion out of the total planned capital expenditure of N70 billion.59 For a state that has adopted the right tools, including a raft of public transparency laws, and the much-celebrated BEITI, the evidence on its use of oil revenues shows that the rhetoric on transparency and good governance is very far from reality.

58 Niger Delta Citizen’s and Budget Platform (2009c, 2010 and 2011b,c). 59 Niger Delta Citizens and Budget Platform (2011c:27-28).

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Table 12: Bayelsa State – Capital Expenditure on Selected Social Sectors (2008-2012)

Period 2008 1 2009 2 2010 3 2011 3 2012 4 average Percent of annual capital expenditure

Education 8.37 12.50 11.73 9.10 19.52 12.24

Health 8.12 10.23 5.57 10.34 6.74 8.20

Agriculture and natural resources 3.32 16.65 4.62 4.81 3.23 6.53

Housing 5.32 2.71 1.26 6.15 3.10 3.71

Works and transport 31.11 25.92 24.56 54.77 33.97 34.07

Rural Development 1.67 2.95 8.67 0.73 - 3.50

Water Supply 3.59 4.78 1.86 1.71 1.69 2.72

Urban and regional planning 6.14 5.26 12.12 13.32 3.32 8.03

Environment 3.26 4.47 2.14 0.87 1.77 2.50

General Administration 8.78 20.53 13.23 11.69 17.91 14.43

Annual percent change Education 16.79 -32.67 -19.89 270.77 Health -1.33 -60.97 91.81 12.67 Agriculture and natural resources 292.18 -80.11 7.64 16.16 Housing -60.15 -66.56 403.00 -13.10 Works and transport -34.81 -32.04 130.40 7.17 Rural Development 38.26 110.77 -91.25 - Water Supply 4.04 -72.12 -5.11 70.97 Urban and regional planning -32.91 65.08 13.56 -56.89 Environment 7.27 -65.75 -57.74 249.72 General Administration 83.02 -53.79 -8.69 164.74

NOTES: 1 Revised appropriation 2 Approved revised estimates 3 Approved budget estimates 4 Budget proposal

Sources: Calculated using data from the Bayelsa State Budget Analyses 2009-2011 and Bayelsa state 2012 budget speeches and proposals from the Niger Delta Citizens and Budget Platform, http://citizensbudget.org/, and the Central Bank of Nigeria Annual Report 2011.

35

The case study of Akwa Ibom and Bayelsa states presented in this section shows two similar contexts where the subnational government depends almost entirely on exogenous oil rent inflows for its income, fiscal policy is highly procyclical, public expenditure is not adequately addressing the needs of pro-poor social sectors that can generate growth and employment, the budgeting system is opaque, and actual budget implementation is very poor. Furthermore, even where transparency reforms are adopted (such as the BEITI), there is no significant change in the quality and effectiveness of subnational public expenditure. From this analysis, we can glean that contextual factors, notably technical capacity in public institutions responsible for managing resource revenues, and the nature of the political space, which determines the degree of public accountability, is vital for subnational governance of resource revenues. There is a significant challenge with managing sudden inflows of resource rents, which is highly destabilising even for a typical developing country. At the lower levels of government in a country that has been characterised by the mismanagement of natural resource wealth, avoiding the adverse effects of extreme resource dependence is an arduous task. Thus, the role of good political leadership in such settings cannot be overstated.

The case study also indicates that it is important to look beyond simple causal explanations associated with resource pessimism to find appropriate solutions to the complexities of governing natural resource revenues within Nigeria’s federal structure. As a multi-ethnic country with competing ethno-regional interests, it is inevitable that political authority in Nigeria will be decentralized to give some autonomy to subnational governments. Such political and fiscal powers must, however, be matched with strong checks and balances that prevent an explosion in distributive patronage and public corruption at lower levels of government. Intergovernmental fiscal transfers must also be delinked from ethno-regional rivalry, or the state is eventually reduced to yet another platform for the articulation of sectional agendas. The extent to which the Nigerian federation can successfully manage these economic and political dynamics is a delicate issue, because the economic rationale for prudently managing oil revenues is in conflict with the political imperatives of oil-driven distributive patronage. In the final section of the paper, we make specific policy recommendations that can improve subnational resource revenue management in Nigeria.

36

Conclusion and Policy Suggestions This research project has examined the subnational management of natural resource revenues within Nigeria’s federal system, based on a case study of two oil producing states in the Niger Delta region. The findings of the case study raise several important policy challenges – oil-producing states rely almost exclusively on federal transfers, public revenues and expenditures are highly volatile, budget execution and transparency is poor, given the poverty and developmental needs in the states, and there are no effective mechanisms for ensuring fiscal discipline and political accountability in subnational jurisdictions. Thus, it is imperative to strengthen the framework for subnational oil revenue management, fiscal discipline and political accountability. This calls for innovative ideas on resource revenue governance, intergovernmental fiscal relations, and broader political reforms that strengthen the accountability of subnational governments within the federal system.

Addressing volatility in subnational revenues and expenditure Subnational fiscal policy can be delinked from volatility in federal oil revenue transfers by adopting stabilization or investment funds that also set aside oil revenues for future use. Stabilization instruments can smoothen volatile expenditure and revenues, and investment funds can be used to finance the delivery public services and infrastructure for the benefit of local communities. Saved revenues can be used to develop non-oil industries that will diversify local economies and reduce the dependence on federal revenue transfers in the long-term.

Although several Nigerian states have set up revenue and investment funds,60 these are limited in scope. Oil producing states should be encouraged to participate in the newly established national Sovereign Wealth Fund (SWF) through higher revenue deposits into the Fund, or establish parallel state Resource Funds to be run by independent private financial operators. It is also important to reach an appropriate settlement on oil revenue assignment between the federal and subnational governments, given the implications of revenue instability for local growth and development. Due to the frequent reviews of revenue sharing formulas in Nigeria, driven by political sentiments, one alternative is the allocation of specific revenue bases (based on oil production, and not

60 Cross River state established a Reserve Fund in 2009 by saving N50 million monthly, and accumulated savings rose to N3.4 billion in April 2010. Rivers state has passed a law that requires N1 billion in oil revenue allocations to be saved every month. The Edo state government decided that 5% of their federation account receipts should be invested in shares and kept in reserve account, and in Borno State, 20% of the statutory receipts are transferred into a development account (with a 10% transfer to local governments) which is not to be spent until it reaches a certain threshold, while Katsina State has established an investment fund.

37 oil prices) to subnational governments, in a variant of the practice in other resource-rich federations, notably the United States and Canada.61 In the United States, states have sovereign ownership of the natural resources in their domain (except on federal landholdings), and share the income tax base with the federal government, while resource revenue bases are assigned to all the states. Alaska, where the majority of state revenue is derived from oil, created a stabilization fund in 1976 (the Alaska Permanent Fund) which has been instrumental in the prudent management of oil revenues for future use.62

The ensuing horizontal revenue inequality between oil-producing and non-oil producing regions can be bridged by a centralized equalization system, as practiced in Canada. Canada’s federal system assigns taxes on natural resources to provinces, which levy a range of taxes and royalties on natural resource activities. Since oil revenues are highly concentrated in a few provinces (mainly in Alberta63 and Saskatchewan), centralized revenue equalizing transfers to regional governments exclude the oil producing and relatively affluent provinces.64 Furthermore, provinces can set personal and corporate income taxes on federal tax base, which mitigates revenue volatility by providing a stable revenue source.65

By applying this principle to Nigeria, oil producing states would have the authority to directly levy taxes on various aspects of extractive activities – such as property taxes, corporate income tax on oil companies, royalties on oil production, tariffs and fines for environmental damage, and a proportion of tax revenues would be shared with the federal government. Such a radical reform in revenue sharing would be welcomed by advocates of ‘true federalism’ and ‘resource control’ in Nigeria, given the tragic history of the oil minorities in the Niger Delta.66 In order to maintain horizontal equality between states, oil producing states would receive no equalizing transfers from the federal government, thus compensating non-oil producing states for the fiscal disparity, while recognising the fiscal contribution of oil-producing regions. Such a reform would require

61 Ahmad and Mottu (2003:16). 62 http://www.apfc.org/home/Content/aboutFund/aboutPermFund.cfm. The present market value of the Alaska Fund is US$43.7 billion. A minimum of 25% of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue- sharing payments and bonuses received by the state are placed in a permanent fund, the principal of which may only be used for income-producing investments. The Fund invests in a diverse portfolio of public and private assets, and is independently managed by a state-owned corporation. 63 In order to prudently utilise its natural resource revenues, the Alberta province established the Alberta Heritage Fund, also in 1976. The value of the Alberta Fund is CAD$16.1 billion as of September 2012. 64 Ahmad and Mottu (2002:21). Paradoxically, the Canadian revenue sharing model has been described as being too decentralized, as heavy taxation on oil and gas activities in comparison with non-oil industry stifles growth and investment. There have been suggestions that natural resource taxes should be reallocated from the provinces to the centre. 65 Ahmad and Mottu (2002:22). 66 Resource control has been advocated on the basis of environmental justice for the extensive destruction of the livelihoods of communities in the Niger Delta as a result of petroleum extraction, whose benefits largely accrue to the national political elite. See for instance, Ikporuko (2004). The importance of addressing flaws in Nigeria’s fiscal federalism to reverse the neglect of oil-producing areas has been emphasized by Obi and Soremekun (1995), Ekpo (1999), and Mbanefoh (1993).

38 constitutional changes to the system of resource ownership and taxation, and enhanced capacity for public financial management at subnational levels. Revenue transfers would have to be matched with constitutionally determined expenditure assignment and state capacity.

At the opposite end of the spectrum is the alternative of making conditional grants to subnational governments, which will be isolated from oil price or revenue fluctuations, in return for the provision of essential services. The delivery of public services would be stable, consistent and not subject to oil-related volatility, based on legally binding expenditure principles agreed between the centre and states.67

Incentivizing subnational fiscal discipline and public transparency The case study of the oil-producing states shows that there are distorted incentives caused by high dependence on statutory oil revenue allocations. As such, it is important to create a new incentive structure that links fiscal transparency with subnational revenue transfers. Subnational oil revenue assignments should include ‘lump-sum’ rewards for fiscal transparency, backed by binding constitutional pacts on macroeconomic and fiscal policy convergence, and basic service delivery standards between the federal and subnational governments.

The first step is to reward states for making good use of statutory oil revenue allocations – certainly, there is a broad asymmetry in subnational public administration, with some non-oil producing states such as Lagos outperforming their counterparts. Fiscal consolidation can be facilitated by harmonizing federal and subnational public expenditure and debt management within the context of the revenue allocation framework. States with cleaner books, a better record on service delivery, and which choose to coordinate fiscal and macroeconomic policy with the federal government, can receive a reward by way of a fixed portion of Federation revenues. Sharp reductions in wasteful expenditure and other indicators of good revenue management (such as implementation of an oil-price-based fiscal rule or adherence to provisions of a state FRA) can also be rewarded with lump-sum fiscal transfers. By linking fiscal transparency with stable revenue transfers from the centre, a favourable setting is created for greater subnational accountability. This would require a review of revenue allocation indices to reduce the high weighting of population and demography (which results in political manipulation of population data) in favour of fiscal transparency. By rewarding states for improvements in fiscal discipline, badly performing peer states are

67 Ahmad and Singh (2003:24)

39 pressured to improve public expenditure and revenue management, in order to be at par with their peers and benefit from the fiscal incentives.

Incentivizing subnational fiscal transparency in Nigeria can be further emboldened by two important constitutional reforms. First of all, introducing a constitutional provision that is mutually binding on the federal and state governments for the coordination of macroeconomic and fiscal policies, and which ties this compact to the system of revenue allocation within the federation. Second, adopting a constitutional rule on the minimum standards for the delivery of public services by the federal and subnational governments, which is tied to expenditure assignments, and the stability pact. These suggested policy initiatives would require a central role to be played by the federal government, and strategic federal institutions such as the Ministry of Finance, Central Bank of Nigeria, Fiscal Responsibility Commission, and the Revenue Mobilisation, Allocation and Fiscal Commission.

Building state capacity and improving civic oversight: the role of the donor community Subnational governments require technical support for the management of public finances, in order to improve the effectiveness and impact of social spending on pro- poor sectors. Furthermore, better funding of innovative grassroots civil society transparency initiatives (e.g. using the web and social media) can create civic awareness within local communities on the accountability of public officials in using oil revenues.

Nigeria is a rare exception among African countries where foreign aid plays a minimal role in public finances. The share of net Official Development Assistance (ODA) in central government expenditure was 8.6% in 2008, and the ODA share in GNI was 1.1% in 2010.68 The sheer size of oil revenues in state budgets grants the political establishment the liberty to spend resources without being accountable to the public. Civil society activists are also at risk of being harassed or prosecuted by state law enforcement agencies for exposing political corruption. Nonetheless, the role of civil society in enhancing subnational accountability in the use of resource reevnues in Nigeria cannot be overstated. This research would have been impossible but for the remarkable efforts of the NDCBP in disseminating subnational fiscal data for oil- producing states in the Niger Delta through its website and publications.

68 Data from the World Development Indicators Database 2011.

40

Donor interventions should be focused on supporting innovative accountability initiatives at the grassroots through interactive platforms such as the Internet and social media, which can help build a civic culture in local cummunities. Since subnational expenditure has been rising, donor grants to the states are now playing an important role in public service delivery. This could be viewed as an opportunity to reduce overall dependence on federal transfers. Development partnerships with subnational governments should be on the basis of specific development projects and programs that can be monitored for impact and effectiveness, and provide opportunities for community participation and civil society oversight.

Furthermore, improving technical capacity in the areas of budgeting and financial management, and training and capacity building for strategic units in key ministries, departments and agencies at the subnational level would gradually strengthen the capacity of the states to deliver basic social amenities and manage fiscal and macroeconomic policies. The strategy for increasing public accountability should be based on incremental, progressive changes in resource governance by leveraging on favourable entry-points for behavioural change by strategic policy actors. This is because a radical shift in the culture of distributive patronage cannot be achieved without the commitment of Nigeria’s political leadership towards tackling impunity and public corruption.

Enhancing subnational political accountability Subnational political accountability can be improved through the credible election of political leaders that are committed to the rule of law and fighting corruption. The experience with BEITI in Bayelsa state shows that political will is vital for the adoption of good revenue management practices by subnational governments.

Political accountability can firstly be created through the ballot box, with the election of credible, competent leaders. However, elections in post-democracy Nigeria have been undermined by fraud and political violence, leading to a credibility gap for elected public officials. 69 Nonetheless, recent governorship elections in Ondo and Edo states showed that electoral practices are slowly changing, as two opposition party candidates with high popular support were reelected. By electing credible leaders who respect the rule

69 Electoral fraud and the instrumentation of political violence as an electioneering strategy in Nigeria have been extensively documented by Human Rights Watch (2002, 2005, 2007a,b). Suberu (2010:469) notes that electoral corruption has been the main determinant of the collapse of democracy in the past, and poses a significant threat to the survival of federalism in Nigeria. Kew (2010) writes of a transition in Nigeria’s electoral history from an ethnic contract, where elites were expected to appropriate state resources for their communities to a more personalised, ‘neopatrimonial’ political contract in the aftermath of democratic rule.

41 of law, and show commitment to the principles of transparent and accountable governance, the management of natural resource revenues would be greatly improved.

Political brinkmanship is also needed to navigate between the competing ethno-regional interests within the Nigerian federal system. The growing fiscal and political clout of state governments must be carefully managed by the central political leadership, to minimize the threats posed by a highly politicised fiscal federalism for macroeconomic stability and broad economic growth. A strong and transparent judicial system that can guarantee fair legal adjudication will further strengthen the legitimacy of state institutions by making them more accountable to the citizenry. Greater independence for anti- corruption institutions such as the Economic and Financial Crimes Commission (EFCC), and stronger penalties for public fraud and embezzlement can act as a useful deterrent on subnational corruption. Nigeria’s federal and state legislatures must live up to their constitutional role by checking the excesses within the executive, in order to address the culture of political impunity. Specific reforms to repeal legal provisions that impede subnational political accountability – notably, the constitutional immunity clause which has been used to shield incumbent state governors from prosecution, and state adherence to the rule of law can certainly make a difference in the quest for accountable political leadership.

Conclusion: to decentralize, or not to decentralize? Since July 2009, a growing Islamist insurgency in Northern and Central Nigeria has resulted in the deaths of around 1,500 Nigerians in a spate of suicide bombings and violent attacks.70 Coming so soon after the Niger Delta crisis, the Nigerian state appears to be battling fires on all fronts. The Arab Spring and rise of radical jihadist groups in nearby Mali have also caused anxiety for the rulers in Abuja. The United States is pursuing an aggressive strategy of exploiting shale oil which may launch it ahead of Saudi Arabia and Russia as the world’s largest oil producer by 2020.71 As the biggest market for Nigeria’s sweet crude oil, such a major shift in the global energy market would be devastating, except concerted efforts are made to diversify the economy and revenue base of the federation. Structural dependence on oil revenues has been further aggravated by political decentralization within the federal system, which, as we have seen in this study, has created more outlets for revenue mismanagement at the lower levels of government.

70 Human Rights Watch (2012:4-5). The Boko Haram insurgency has targeted Christians, police and other security agents, and Muslims accused of being ‘collaborators’. 71 This prediction was made by the International Energy Agency (2012) in its annual World Energy Outlook based on growth projections for US shale oil production.

42

For scholars of Nigeria’s administrative history, due to the instability that has been a fixture of the federal system, the death knell of Nigeria’s federalism has been sounded.72 Given Nigeria’s political history with managing ethno-regional cleavages, and the specific character of the national political economy, it would seem that greater political decentralization is the answer. However, the findings of the study suggest that a dose of pragmatism is required in the approach to decentralization within Nigeria’s federal system. What is urgently needed is to consolidate the framework of fiscal federalism so that it becomes a foundation for governing natural resource wealth for the collective benefit of all Nigerians, and not a mechanism for appropriating oil rents between factions of the ruling elite. Fighting corruption, political accountability and robust public institutions that respect the rule of law should be balanced by fiscal convergence between the federal and subnational governments.

Existing analyses of the ‘resource curse’ in Nigeria place much of the blame in mismanaging oil revenues at the doorstep of the national government. Not much is known about public transparency and fiscal discipline in Nigeria’s subnational governments, although they play a significant political and fiscal role within the country’s federal system. This study indicates that the searchlight of transparency and accountability should also be beamed at subnational governments. Given their proximity to the grassroots, the stakes are even higher for the prudent governance of natural resource revenues in a country that has been plagued by the contradiction between natural resource wealth and poverty.

In sum, the findings of the study suggest that political decentralization within federal political systems may not necessarily result in improved subnational natural resource governance. Local context – the nature of socio-political institutions, technical capacity in managing public finances, and the degree of political accountability, is important in determining how subnational governments manage natural resource revenues.

ACKNOWLEDGEMENTS: This report was produced for a research project on the governance of natural resources in Africa, during the NSI Helleiner fellowship program from April to December 2012. I am grateful to Joe Ingram, Rodney Schmidt, Pablo Heidrich, Tim Shaw and an anonymous reviewer for comments on early drafts of the report. Tarila Ebiede provided insights for the analytical framework of the study. All errors are mine.

72 Adamolekun (2005:383). The leading writer on federalism and public administration in Nigeria, Ladipo Adamolekun predicted in 2005 that on the basis of the dysfunctional character of Nigeria’s federal system, the only solution is to ‘devolve or die’.

43

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