Deploying synergistic federalism for sustained subnational IGR growth

As we gradually approach May 29, the expectations are running high on the most efficacious therapeutics to manage the country’s massive socio-economic catastrophe and successfully navigate out of its current morass. Over the past eight years, an unequalled dark cloud of insecurity and economic hopelessness prevailed nationwide. National indebtedness hit the rooftops in a dimension never experienced before now. State governments have also joined the debt-aggrandisement fray. As of February’s ending, about 17 state governments owed N2.1 trillion and US$1.9 billion, an embarrassing inheritance for several incoming governments. Most of these challenges have their tap roots sinking into the hearts of poor public financial management practices and less than desirable IGR expansion, partially accountable for the growing indebtedness. And because the vicious dynamic interactions of these forces have been quite devastating, in 2022, 63 percent of the country’s population became multidimensionally poor. It would have worsened by now, given the recent crisis of currency scarcity and mismanaged initiation of our society into a cashless one. Therefore, one need not be a genius to conclude that the outgoing administration did not perform very well on many fronts. Yet it has the credit for laying the foundations for synergistic federalism, a cooperative governance form possessing tremendous transformative power that can restore the country to prosperity.

Fiscal federalism presents enormous economic growth and development challenges despite its numerous benefits. First, it creates and sustains the opportunity for many state governors to abuse their offices. Because many state legislatures have technically become mere appendages of the governor’s offices, the latter operate unchallenged. Buoyed by the states’ constitutionally guaranteed independence, they self-arrogate a seeming imperial status. That substantially explains why many infringe on and brazenly rob local governments of their funds. The president confirmed sleaze and frontally accused state governors of the financial robbery. But this would not have been possible in the absence of fiscal federalism. Second, fiscal federalism by, according to each level of government, some substantial measure of independence also partially facilitates the creation of silos or prison walls among them. In many ways, it creates significant limitations in the multi-government-level interactions that should orchestrate sustained healthy socio-economic outcomes beneficial to society. Therefore, despite its seeming paternalistic posture, the federal government cannot dictate to other lower levels of government. In fact, on many occasions, the interests of the federal and the state governments are incongruent, resulting in recourse to painful judicial resolutions. This failure to achieve concertedness or productive synergy is a significant undoing of fiscal federalism.

Synergistic federalism fills this missing gap by providing opportunities for all tiers of government to work together ‘synergistically’ to achieve predefined outcomes. It is a model of holistic socio-economic prosperity where all stakeholders win in a give-and-take atmosphere. The State Fiscal Transparency, Accountability and Sustainability (SFTAS) Programme provided the base for this model. In summary, SFTAS has roots in efforts to strengthen subnational governments’ public financial management practices. As already argued, many state governors acting majorly like emperors have outstanding records of public financial management abuses stunting the growth and development of the second and third tiers of governments. It is without debate that if most subnational governments record solid performance in their PFM practices, the country will experience multiplicative growth and prosperity. But the federal government, blocked by fiscal federalism, cannot dictate how state and local governments should manage their finances. Neither can state governments do the same to the federal government. The only way out of this impasse is to use the carrot-and-stick approach.

In 2018, the federal government borrowed US$2 billion from the World Bank. Out of that sum, it extended a conditional grant of US$1.5 billion to state governments accessible over four years ending in November 2022. State governments must scale through the eligibility hurdle to participate and satisfy minimum performance expectations on about 13 disbursement-linked indicators [DLIs] to qualify and access various grant sizes relative to performance. These DLIs delineate the indicators and parameters for acceptable performance levels in subnational governments’ public financial management. The Fiscal Sustainability Plan [FSP] and the Open Government Partnership [OGP] agenda provided the framework for the disbursement-linked indicators. These DLIs are in four key result areas [KRAs]. They are:  increased fiscal transparency and accountability, strengthening domestic revenue mobilisation, increasing efficiency in public expenditure and strengthening debt management. The implementing agencies and partners include the Nigerian Governors Forum, the Debt Management Office (DMO), and the Public-service Institute of Nigeria, under the office of the Auditor-General of the Federation. PriceWaterhouseCoopers (PwC) supported the World Bank and the federal government in verifying and confirming that states achieved the DLRs under the agreed protocol.

Within these four years, SFTAS significantly improved subnational governments’ PFM practices. The first is the openness of government. A critical and measured expectation of participating states is the publication of their audited financial records and other vital documents enabling citizens to have a comprehensive view of what the state governments are doing. These pieces of information were to be on their official websites and accessible to citizens. Before the emergence of SFTAS, less than 25 percent of Nigerian state governments sufficiently opened the audited records of their activities for their citizens and all other concerned stakeholders to investigate and possibly interrogate. That significant revving of the transparency and accountability levels of the second tier of government was an essential step in the right direction. The second contribution was the increased growth pace in subnational governments’ independent revenue receipts. A comparison of the growth rates of internally generated revenue of state governments before and during the programme implementation showed that the speed of improvement was much higher during the programme implementation period. Thirdly, many state governments that previously owed their workforce several months’ salary arrears substantially cleared them. A reasonable proportion of the workforce in many states had groaned in pain about unpaid wages before introducing the SFTAS programme, which helped to lift the burden considerably. Although the programme orchestrated many more benefits, it seems that the most important of all is creating a seamless platform for the three tiers of government to work together cooperatively.

Sadly, these strategic benefits of revolutionising PFM culture and weaving productive hugs among the three tiers of government have come to a close. One implication is that the state governors may return to their old ways of doing things. The programme’s closure also meant that incentives for good behaviour have died. But the net benefits to various subnational governments and the economy as a whole are tremendous and not worth sacrificing. Several challenges may lead to the abandonment of the programme. The first is how to sustain the carrot. The programme was possible because the World Bank provided the credit facility, 75 percent of which the federal government gave out as a conditional grant. Even if the bank is willing to provide additional credit to keep the programme running, most Nigerians would not consider it a wise decision, given the frightening level of our national debt. A way out of this dilemma is for the federal government to transfer 7.68 percentage points (about 15%) out of its 52.68 percent share of national allocation to state governments participating in the programme in similar or slightly modified terms and conditions for accessing the grants. The proposed federal government take-over of the programme’s funding makes it automatically homegrown and sustainable. A second challenge is the blunted prioritisation of growth and development of the economy in the programme. Although excellent PFM practices should naturally result in enhanced economic expansion, it only achieves it with well-focused expenditure programmes, particularly those addressing the ease of doing business and quality of life. Including physical development as the fifth member of the portfolio of key result areas, will considerably manage this challenge. Target indicators for physical development include new cities’ growth and electricity and transport logistics infrastructure growth.

Perhaps, including the National Fiscal Responsibility Commission (NFRC) as one of the programme’s overseers will help strengthen states’ transparency and accountability standing. Many states have hurriedly enacted fiscal responsibility acts to satisfy part of the requirements for transparency. Yet, not more than 15 percent of them have set up proper institutional structures to drive the implementation. More so, to a considerable extent, it might have minimal effect on the governor’s emperor-like behaviour without some intervention from outside. The NFRC can help tame this by also becoming a hand-holder to the states’ equivalent of the commission, sharing their experiences and supporting them to perform creditably.

Effecting these modifications to the SFTAS framework will substantially result in a homegrown version of the model. It will also strengthen confidence in the federal government to demand the states’ performance in all key result areas and associated disbursement-linked indicators. The federal government will have purchased this right by parting with the whopping 7.68 percentage points of its 52.68 percent share of nationally collected revenue to state governments. Another view of this trading of this significant share of its revenue earnings is that state governments, by this understanding, have become extensions of the hands through which – at the very minimum – the federal government spends this 15 percent of its revenue allocation share. The resulting outcomes include rapid urbanisation and the growth of new cities. The Lagos State cosmopolitan city development experience shows that setting targets and planting new cities across a state, first as peri-urban and satellite towns, speeds up wholesale urbanisation, turning everywhere into a seamlessly strewn city. Such fast-paced new city development is also the most rapid way of growing the quality of life and the internally generated revenue over time. While that slowly builds up the progressive satisfaction of all the other disbursement-linked indicators directly, it creates tremendous opportunities for independent revenue expansion. A good example is the effects of improvements in electricity supply and transport logistics infrastructure, both of which strengthen the performance on the ease of doing business, expanded business activities and revenue yield. Luckily, the recent devolution of powers on the national grid system will soften the ground in this area.

Given our recent unappetizing socio-economic experience, the time has come when all government levels must cooperate and synergistically work together to create a new and progressive Nigeria. Fortuitously, the SFTAS programme provided the bulwark on which it could stand. Factoring in the proposals in this essay will domesticate the programme and give us its ownership and accelerate wholesale development and prosperity across the country. The incoming administration must include this singular opportunity in its portfolio of new agenda items.

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