Opinion: Why Nigerian states need restructuring

By Uzoma Erondu

Nigeria has a thing or two to learn from Sudan. Yes, the same Sudan known for strife, pestilence, drought, internal conflict and war. But hang-on, before we say too negative a thing about Sudan vis-a-vis Nigeria, let us remember at least, that Sudan as a country existed way before Nigeria in its present configuration, yet still swims in its pool of conflict and negativity.

The five states in the western zone of Sudan i.e. Darfur, voted in a referendum to decide if the states should be merged or remain separate. Now, the United States of America issued a statement, saying the referendum will likely be unfair, due to non-participation of the large number of internally displaced persons (IDPs). The take-away here should not be the ‘why’ or ‘why not’ of the referendum, but that some people are thinking about merging/consolidating organs of government albeit for a particular political reason and this should not be missing on us as a people – Nigerians who have both political and economic justification to do so.

A state is supposed to be an independent entity, a subset of a larger entity called Nigeria. Going by the system of governance we chose – federalism, each states is expected to be a federating unit. In order words, each state should be a stand-alone, at least to a large extent. But the recent Internally Generated Revenues (IGR) published by the National Bureau of Statistics (NBS) analysis will prove that we need to answer hard questions surrounding the continued existence, or to put in financial context, the going-concern of some of these states.

A cursory look at the IGR of all the 36 states for the financial year 2015 reveals a deep and frightening story of our federating units. But a quick detour will be necessary at this point to reflect how the IGR of these states reflects the viability or better still continued existence, by gaining an understanding of how a cash flow statement for an entity works. The cash flow statement shows inter alia; the cash inflows, outflows, net position for a period, and ultimately the cash balance at a particular point in time, usually the last day of the period under review.

A cash flow statement of a revenue-generating entity has three main parts:

• The first called the Operating Activities, indicates the cash the entity ‘brings in or generates from its regular activities. By regular, we mean activities done within its mandate or scope;
• Investing activities reflects majorly, the investments in fixed/long-term assets, and cash proceeds received from its previous investments; and
• Financing activities on its own part shows how a company raises money (either through the bank or from the owners of the business – equity) and how it pays back.

Cash flow statements can tell how an entity is financing its long-term/capital expenditures (investing activities). Healthy and mature companies tend to have their cash flows from operating activities sufficient enough to pay for their investing activities. However, for expansionary purposes, cash inflows from financing activities is what pays for the investing activities.

Revenues accruing to states in Nigeria can be classified into two major sources, viz: External and Internal. The external source is largely 70-80% derived from the sale of crude oil which is shared by the Federal Accounts Allocation Committee (FAAC) to the three federating units i.e Federal, State and Local Governments; while the internal revenue comprises personal income tax, levies, road taxes etc. Hence, we can aptly say that the IGR of states in Nigeria can be likened to inflows generated under the ‘Operating activities’, while Income received from the FAAC will be classified as cash inflows from investing activities.

Based on the latest IGR figures for the period that ended in December 2015 as published by the NBS, the following states seem to be the laggards in their geo-political zones. Yobe State, estimated to have generated approximately N2.3 billion ($11.5million), Ekiti State – an estimated N3.3 billion ($16.5million), Zamfara – recorded a sum of N2.7 billion ($13.5million), Nasarawa – N4.3 billion, Imo State generated N5.4 billion ($27.4 million).

These numbers will be better appreciated when we compare them with some companies in Nigeria e.g. Zenith Bank Plc, which based on its annual reports for the year 2015, made a revenue of N396.6billion ($1.9 billion); Guinness Nigeria Plc, playing in a different sector recorded a revenue of N118.5 billion ($592 million).

An interesting thing to note is that these companies have ‘lesser’ responsibilities i.e. lesser employee headcounts compared to our almighty states. Average number of employees: Zenith Bank – 6,286; Guinness – 1,371 and do not have to bother with the responsibilities of providing security 24/7 for their employees; nor about social security, judiciary, health, education etc. Yet these companies record larger revenues compared to these profiled states. Another take-away from the publication is the worrying fact that IGR for 24 states in 2015 dropped, when compared to IGR for 2014, this goes without saying that the FAAC distribution to the states also declined comparatively, due to the dwindling oil prices.

In this precarious times where the IGRs (operating cash inflows) are not sufficient to cater for even some of the operating cash outflow activities such as salaries, it should also leave no one in question as to where funds for capital expenditure will come from.

Alternatively, the other options for such states will be to ignore capital expenditures (which includes roads, hospitals, potable water, etc.) or better still cut back on the outflows within the operating activities (e.g. salaries- headcount and/or remuneration, political expenses etc.). We need governors who know what it means to manage investment centres or at the minimum, revenue centres, rather than the current batch of governors most of whom have limited knowledge as to how to generate revenues, how much more be accountable for investment decisions.

What these pointers show to us are that for some states to be viable, then the IGRs need to be sufficient in the first instance to be able to cover for the payment of salaries, while inflows from the FAAC should be used to finance the capital expenditures. Any state that cannot adopt this model, should simply cut to the chase and do the needful i.e. consider the Sudan option, which is to merge with a more economically viable neighbor.

But we know the present crop of politicians we have will rather kick-against that than have their only source of livelihood taken away from them. So, for as long as we leave the politicians to make all the decisions for us, we will continue to play in the league of countries like Sudan.

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