by

Vanessa Ushie

Political Decentralization

and Natural Resource Governance in Nigeria

December 2012

Table of Contents Page Background and Rationale 1 Fiscal Federalism and Resource Revenue Management in Nigeria

8

Subnational Resource Revenue Management: Evidence From the Niger Delta

16

Conclusion and Policy Suggestions 38 References 45

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.

1

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 Fig 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).

2

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)

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).

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3

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).

4

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) notes that over 80% of approved programs and projects between 2000 and 2004 were focused on 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 for ensuring political accountabili ty. 21 Anderson ed. (2012:3).

5

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).

6

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 main argument of the study is that political decentralizationis not

necessarily associated with good management and transparency in the use of natural

resource revenues. 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.

7

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

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.

8

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

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.

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%).

9

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

Source: National Population Commission

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).

Table 1: Expenditure Assignment in the Nigerian Federation

28 Anderson (2010) provides a comprehensive review of approaches to fiscal federalism in federal countries.

10

Level of Government Expenditure Category

Federal

Defense

Foreign Affairs

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

Federal-State (Shared)

Health, Social welfare

Education (Post primary/technology)

Culture

Antiquities

Monuments, archives

Statistics, stamp duties

Commerce, industry

Electricity (generation, transmission, distribution)

Research surveys

State only

Residual power, i.e., any subject not assigned to federal or local government level by the constitution

Local governments

Economic planning and development

Health services

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)

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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.

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%

29 Excerpt from Ushie (2010:13-15). 30 Ross (2003:9). 31 Human Rights Watch (1999:42).

12

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 factor 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.

32

Frynas (2001:32-33). 33 Avuru (2005:205). 34 Ahmad and Singh (2003:9-13).

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

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.

State Population 1

(in millions) GDP (in millions of Naira)

GDP per capita 2

(in Naira) Percent of total states’ GDP (%)

2010 Poverty Incidence (%)

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

14

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)

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.

0 10 20 30 40 50 60 70 80 90

2000

2001

2002

2003

2004

2005

2008

2007

2008

2009

2010

2011

Percent

Internally generated revenue (% of total states' revenue)

Federal revenue allocations (% of total states' revenue)

15

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

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.

0

5

10

15

20

25

30

35

40

45

50

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2000 2001 2002 2003 2004 2005 2008 2007 2008 2009 2010 2011

% o

f to

tal F

ed

era

l sp

en

din

g

Bill

ion

s o

f N

aira

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

16

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 number about 1 million, and 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.

17

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.

18

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, Demobilisation,

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 the lucrative opportunities in the ‘conflict

economy’, high poverty and youth unemployment in the region serve to 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.

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.

19

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 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 economy 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

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.

20

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.

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

21

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.

Table 5: Akwa Ibom State – Public Expenditure Profile in US$ Billions (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 1,970,270,730 Period Average

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)

Source: Fiscal data from Table 5, above

0

100,000,000,000

200,000,000,000

300,000,000,000

400,000,000,000

500,000,000,000

2008 2009 2010 2011 2012

Bill

ion

s o

f N

aira

Year

Total Expenditure Total revenue

22

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

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)

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.

0

1

2

3

4

5

6

7

8

9

2008 2009 2010 2011 2012

Pe

rce

nt

IGR as percent of total revenue

23

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

Source: Fiscal data from Table 5, above.

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.

0 10 20 30 40 50 60 70 80 90 100

2008

2009

2010

2011

2012

Percent of Total Expenditure

Total Recurrent Expenditure Total Capital Expenditure

24

Table 6: Akwa Ibom State - Capital Expenditure on Selected Social Sectors

(2008-2011)

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

25

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.

Table 7: Akwa Ibom State – Capital Expenditure on Selected Social Sectors

(2008-2011)

2008 1 2009

2 2010

3 2011

4

Period 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

26

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.

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 (2009, 2010, 2011). 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.

27

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

28

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 (2011:27-28)

29

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 Period Average

181,383,914,926

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.

30

Table 10: Bayelsa State – Public Expenditure Profile in US$ Billions (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

1,170,205,903

Period Average

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

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.

31

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

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

long as the state cuts back on wasteful public spending. In terms of the composition of

public spending, the results are mixed (see Fig. 10 below).

0

50,000,000,000

100,000,000,000

150,000,000,000

200,000,000,000

250,000,000,000

2008 2009 2010 2011 2012

Bill

ion

s o

f N

aira

Year

Total Expenditure Total Revenue

32

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

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.

0 10 20 30 40 50 60 70

2008

2009

2010

2011

2012

Percent of Total Expenditure

Capital Expenditure Recurrent Expenditure

33

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

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.

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012

Pe

rce

nt

IGR as percent of total revenue

34

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.

35

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 (2009, 2010 and 2011). 59

Niger Delta Citizens and Budget Platform (2011:27-28).

36

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

2008

1 2009

2 2010

3 2011

3 2012

4

Period 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.

37

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 state-driven distributive patronage. In the final section of

the paper, we make specific policy recommendations that can improve sub-national

resource revenue management in Nigeria.

38

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.

39

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 these resources. 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).

40

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)

41

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.

42

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, electioneering in post-democracy Nigeria has

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

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.

43

rule 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.

44

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 ‘devo lve or die’.

45

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