Reign of Error: The Public sector

 

In the last article, (Facts Dont Lie:Reign of Error)I made a data driven case that Nigeria’s economy is already diversified; among other issues.

This following part shows that government revenue is sadly undiversified and the public sector is in shambles.

The constant moaning by the federal government about the decline in revenue is a harsh and common reality. It is a product of a long term (structural) and short term (cyclical) impact on our public sector.

The federal government derived, at least till the end of 2014, 70% of her revenue from oil and its related products. From 1970, the Nigeria government had been an exploitative (pun intended) government, directly involved in exploring and exploiting natural resources in the country. The military government of those years passed multiple laws (Decree 13 of 1970, Decree 9 of 1971, Decree 6 and 7 of 1975) that accreted all the oil resources to the center, to serve certain hegemonic interest.

Unfortunately the foundations of our perennial public sector debacle were laid then, by men who are still very much around.

OIL GOVERNMENT: Every Nigerian government treats oil as inexhaustible and an ever dispensing ATM. The current president, for all his talk about diversifying federal government revenue sources, still firmly implanted himself as the ultimate oil czar.
This fixation on oil is a symptom of unimaginative leadership. Almost every Nigerian administration has wasted our oil resources.

If Nigerians were more economically savvy, they would have wondered why in the past 10 years of relatively stable oil price, the federal government ran budget deficits in all but 3 years (2008, 2013 and 2014). Countries like Kuwait, Saudi Arabia, UAE, Angola, etc ran high budget surplus (between 5.4% of GDP to 28% of GDP) around same period. The budget surpluses of 2013 and 2014 in Nigeria were meager 1.1% of GDP and 0.1% of GDP respectively.

Nigeria governments ran budget deficits, despite high oil prices and scant spending on the Nigerian people. The federal government expenditure in Nigeria was just 5% of GDP, yet they could not muster reasonable budget surplus in a regime of high oil price. Only profligacy and corruption can explain this.

To give perspective, the countries I previously mentioned, with huge budget surplus in same period (Kuwait, Saudi Arabia, UAE, Angola etc) spent between 19.7% of GDP to 45.5% of GDP on their people. And still ran huge budget surpluses. They spent significantly higher share of their GDP on their people and still had significant budget surplus. Nigeria government spent significantly little on her people and still ran deficit budgets, in an era of high oil price. Think about that.

But that is not the biggest problem with our oil government. The biggest issue is the way we all treat the oil revenue. Oil and Gas in the ground is wealth. When you sell the oil and gas, you gain income. What now matters is what you spend the income on. If it is invested, it creates wealth that can replace the already lost wealth from the ground. If you share it, as the Nigerian constitution stipulates, you end up consuming the income on recurrent (i.e. recurring) expenses.

We have been treating oil wealth like a replenishing resource. We should have been treating it like a depleting resource. Extracting oil and selling it for current consumption, as Nigeria does, is like a man selling one of his father’s houses every year to finance his consumption. One day, he will run out of houses and will have to rent, or worse, squat.

We should have been putting 70% of oil revenue into a statutory fund. The fund can only finance free education, free health care, unemployment insurance and pension for the poor. In other words, oil funds should have been dedicated to investing in the development of the human capital that could really grow our economy beyond oil.

Rather what Nigeria has done is to deplete her wealth and spend it on salaries and inflated contracts.

Also as a country that derived almost all its forex and most of its government revenue from oil, we never critically studied the global oil market. Nigeria was among the 12 member OPEC cartel that believed that if oil price is dropping, you cut production marginally, make lots of noise about it and wait for price to shoot up. In economics, this approach is considered supply side. Nigeria and most OPEC oil ministers only consider the supply (production) in their oil equation. This is understandable because it has worked in the past.

But every critical economist looks at supply and demand. In the oil market, the only OPEC minister that seriously considered demand was Ali al-Naim, the 80 year old Saudi oil minister. He alone critically pointed out to the other OPEC members that the global oil intensity, which is a measure of oil demand was in sharp decline.

The global oil intensity measures the quantity of oil per day needed to produce a trillion dollar economy.

In 1990, it took about 2.7 million barrels per day to produce a trillion dollars of GDP. By 2015, it took only 0.93 million barrels of oil per day to produce a trillion dollar GDP.

This is because as oil price kept going higher, the western world had the incentive to keep investing in more efficient processes and alternative energy sources. The higher the oil price, the bigger the investment (and returns) in alternative and efficient energies.

When you combine this drop off in oil intensity and the new shale production in the US, you can see why the world is in oil glut now. Add Iran that is opening up its entire taps to make up for lost time.

The Saudi minister has consistently refused to cut production because he reasons that the three digit oil price of the recent years allowed shale production to be profitable (he is correct) and encouraged the western world to invest in alternative energies (he is correct here also).

At the current 40 USD price, shale production is unprofitable. This is already impacting Oklahoma, the shale capital of United State.

Likewise companies that were already gaining market share from internal combustion industry are seeing their shares collapsing. A case in point is Tesla.

In practical terms, the Saudi oil minister has helped Nigeria and other OPEC countries to prolong the oil age by allowing oil price to come down and put some of these high cost alternatives in peril.
Nigerian government lacked the vision and understanding to appraise the 2 trillion dollars global oil industry.

We should thank the Saudi for the low oil price, as it would allow us another 2 decades of generating revenue from oil. This is the
time to bring fundamental reforms to the oil sector. We have to stop using oil to fund salaries and sundry spending. We also have to directly compensate the oil communities with resource control (at least 30%).

CIVIL SERVICE: Nigeria civil service is bloated, aging and inefficient.
The federal, state and local government staff strength is about 3.2 million. About 1.2 million people were in the federal civil service, while about 1.0 million people are employed in the state civil service. Local government employs about 800,000 workers. To this, you can add about 18000 political officer holders and 20000 staff in FCT.

A study by the public service reform team headed by Mallam Nasir El-Rufai, governor of Kaduna State, discovered that the average age of civil servants was 42 years and that only 12% hold university degrees. This is not surprising, considering that federal character and quota are the primary criteria of recruitment into the civil service.

It is a measure of the pedestrian views of the former military leaders in Nigeria, that they saw the civil service as a tool for affirmative action, rather than as the agency for delivering governance.

By using the civil service to do affirmative action, they ingrained the culture of nepotism and killed professionalism, and it is not about to change anytime soon.

Is it not instructive that all civil service reforms attempted since the 70s have failed? It is only when we jettison federal character and dedicate to building a truly professional civil service that we can expect reforms to yield result. The civil service needs to be leaner, more professional and more efficient. They also need to be paid much better after abolishing federal character and doing critical right sizing.

TAX REVENUE: Nigeria’s tax base as a percentage of GDP is the smallest of all countries published by World Bank.

Our net tax is about 1.093 trillion naira, according to NBS. This stands at 1.21% of GDP. This is corroborated by the World Bank figures. There is no doubt that Nigerians pay little or no tax.

The Nigerian government already takes huge funds directly from oil, which is an indirect tax on Nigerians. However, in the matter of declared taxes, Nigeria is the lowest in the entire world. The APC government obviously wants to seize on this to tax us with glee.

I accept that we have to pay taxes. But it’s not with the current fiscal regime. IF Nigeria government wants to add huge direct tax revenues to their already huge indirect tax revenues (oil), the government will have to hands off oil.

The oil revenue accruing to government must be earmarked statutorily for education, healthcare, poor people’s pension and unemployment insurance. It should be off limit to politicians. They can only legislate the criteria for access.

It’s only after these changes that it may be fair to deepen and broaden the tax bracket. The government will also need to right size, as taxpaying Nigerians won’t accept a bloated civil service feeding fat on tax revenue.

Equally a new revenue sharing formula, with clear and greater emphasis on derivation must accompany the expansion of the tax bracket. Nigerians will generally not accept unbridled revenue transfers. For example, Ogun tax payers will resent having to pay for Borno hajj expense, via government funding of pilgrimage. If changes in revenue sharing formula do not accompany diversification of government revenue structure, expect social and political crisis in the future.

The government must also learn to support small and medium enterprises, if they hope to grow the tax base. These companies pay more tax, on aggregate, than the big companies. They also create more potentially taxable jobs. The current epoch of bureaucratic high handedness and banking contempt is not conducive for business. The government has to remove red tapes and lay out red carpets for SMEs. That is the only way businesses can thrive and pay taxes
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Small businesses will need small business insurance, underwritten by a quasi-government fund. This will stimulate banks to lend to them, since the risk is reasonably mitigated.

The Finance Ministry and CBN will do well to midwife an active factoring market in Nigeria, to ease the liquidity burden of SMEs.

The culture of disdain for business operators, while hoping to force taxes out of them, is at best self-defeating. SMEs are the major job creators in all societies. Government should improve the ease of doing business in Nigeria.

In all, token essentialism as we have always done in Nigeria will not solve our current challenges. We have to start the structural redesign that can save our children’s future, today. The public sector is the principal theater of that work.

By Olisa Akukwe

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