Mobilizing Local Government Tax Revenue for Adequate Service Delivery in Nigeria by Oghenovo Egbegbedia


Published on

Published in: Education
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Mobilizing Local Government Tax Revenue for Adequate Service Delivery in Nigeria by Oghenovo Egbegbedia

  1. 1. 1 MOBILISING LOCAL GOVERNMENT TAX REVENUE FOR ADEQUATE SERVICE DELIVERY IN NIGERIA: (AN EMPIRICAL ANALYSIS) BY EGBEGBEDIA OGHENOVO A project work submitted to the Department of Economics and statistics in partial fulfillment of the requirement for the award in Masters in Economics (M.Sc Degree) December 2010
  2. 2. 2 DEDICATION This work is dedicated to God Almighty in appreciation of his special love, care, mercy and protection.
  3. 3. 3 ACKNOWLEDGEMENT I wish to express my profound gratitude to God Almighty for seeing me through this work. My sincere appreciation goes to Dr. D.E. Oriakhi, my project supervisor whose guidance, contributions and supervision helped in the completion of this work. I also want to appreciate Dr. Oaikhenan, Dr. Ekanem and other lecturers, staffs and my fellow colleagues of the department of Economics and Statistics for their immeasurable support. Thank you so much. Finally, I want to appreciate my family especially my father, Mr. A.E. Egbegbedia. Thank you for supporting me financially throughout this programme.
  4. 4. 4 TABLE OF CONTENTS Title page - - - - - - - - - - i Certification - - - - - - - - - ii Dedication - - - - - - - - - - iii Acknowledgement - - - - - - - - iv Table of Contents - - - - - - - - v Abstract - - - - - - - - - - viii CHAPTER ONE: INTRODUCTION 1.1 Introduction - - - - - - - - 1 1.2 Statement of Problem- - - - - - - 8 1.3 Research Questions - - - - - - - 9 1.4 Statement of Hypothesis - - - - - - 10 1.5 Objectives of Study - - - - - - - 11 1.6 Scope and Limitation - - - - - - - 12 1.7 Significance of Study - - - - - - - 13 CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction - - - - - - - - 15 2.1.1 Revenue Instruments for Local Governments - - 18 2.1.2 Who Levies What Taxes? - - - - - 19 2.1.3 Transfers and Borrowing- - - - - - 22 2.2 Reforming Local Government “Own Revenue” Systems - 25
  5. 5. 5 2.2.1 Strength and Weaknesses of Major Local “Own Revenue” Instruments - - - - - 27 2.3 Evolution of Nigeria’s Federal Structure - - - 28 2.3.1 Federalism and Local Government Autonomy in Nigeria - - - - - - - 41 2.3.2 Implications of Local Government Autonomy in Nigeria - - - - - - - 51 2.4 Revenue Utilization for Local Development - - - 59 2.4.1 Local Government Tax Finances and Revenue Utilization - - - - - - - - 65 2.4.2 Problems of Local Governments Tax Mobilization and Utilization in Nigeria - - - - 78 2.4.3 Prospects of Local Governments Revenue Mobilization and Utilization in Nigeria - - - - 80 2.5 Concepts, Measurement and Accountability of Service Delivery - - - - - - - 81 2.5.1 The Political Economy of Services- - - - - 83 2.5.2 The Central Role of Accountability - - - - 85 2.5.3 Developing the Capacity of the Centre to Enable the Local- - - - - - - - 89
  6. 6. 6 2.6 Problems of Adequate Local Service Delivery- - - 91 2.7 Capacities Needed for Effective Local Service Delivery- - - - - - - - - - 94 CHAPTER THREE: THEORETICAL FRAMEWORK AND METHODOLOGY 3.0 Theoretical Framework - - - - - - 108 3.1 Specification of Models - - - - - - 112 3.2 Methodology 3.2.1 Nature and Sources of Data - - - - - 114 3.2.2 Method of Data Presentation - - - - - 114 3.2.3 Method of Data Analysis - - - - - - 115 CHAPTER FOUR 4.0 Analysis of Regression Results - - - - - 117 4.1 Policy Implication of Results - - - - - 120 CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION 5.0 Summary of Findings - - - - - - - 124 5.1 Recommendations - - - - - - - 126 5.2 Conclusion - - - - - - - - - 128 Bibliography - - - - - - - - 130
  7. 7. 7 ABSTRACT The growth of Nigeria’s towns and cities has out placed local authority capacity in terms of management, infrastructure and financing. Many Nigerian towns and cities are now facing a governance crisis. Accordingly, the federal structure in Nigeria constraints local government’s ability to mobilize and use revenue to meet their obligation in a sustainable way. In particular, fiscal decentralization- the devolution of revenue mobilization and spending powers to lower levels of government- has become a main theme of urban governance in recent years. Local government system as the third-tier of government deserves adequate finances to enable it cope with numerous developmental activities within its jurisdiction. This study empirically tests the relationship between local government revenues and expenditure in Nigeria, a low income developing country. A regression test is conducted and estimation is via a regressive model using data for the period 1970 to 2007. Our findings reveal that both own-source revenue and allocations from central government have no important impact on both health service delivery and education services, across provinces in Nigeria. Thus, local governments need to be given access to adequate resources to do the job with which they are entrusted. However, a general conclusion emerging from this study is that local revenues mobilized in most urban authorities in Nigeria are necessary but not sufficient to develop and supply adequate services for the fast-growing urban population.
  8. 8. 8 CHAPTER ONE 1.1 INTRODUCTION One of the recurrent problems of the three-tier system in Nigeria is dwindling revenue generation as characterized by annual deficits and insufficient funds for meaningful growth and viable projects development. Local governments are the nearest government to the people at the grassroots in Nigeria; they are strategically located to play a pivotal role in national development. Since they are responsible for the governance of about 70 percent of the population of Nigeria, they are in advantage position to articulate the needs of the majority of Nigerians and formulate strategies for their realization. Nigeria is one of the few countries in the developing world to have significantly decentralized both resources and responsibilities for the delivery of services including basic health and education services to locally elected governments. Local governments in Nigeria are constitutionally entitled to a share of about 20 percent of federal revenues, which in recent years of oil price booms has implied substantial resource flows to local governments.
  9. 9. 9 Local administration in Nigeria can be traced to the colonial period. Available record shows that the first local administration ordinance was the Native Administration Ordinance No. 4 of 1916 which was designed to evolve from Nigeria’s old institutions the best suited form of rule based on the people’s habits of thought, prestige and custom (Bello-Imam 1998). These local administrations were used in the North Eastern and Western parts of the country while the indirect rule was introduced in the rest of the North. For example, in 1926, a centralized budget system was introduced, following the creation of Northern, Western and Eastern regions in 1946; a decentralized public revenue structure began to emerge. The first revenue commission was set up in 1946. During the colonial period, four revenue commissioners were created. The principles, criteria and allocation formulas recommended by the commissions are well documented (See, Ekpo 1994) Macpherson constitution of 1948 initiated some remarkable changes, the regions introduced some reforms in their local
  10. 10. 10 administrations to collect rates and levy pools and income taxes to finance their activities, the regions had overall control of the taxes. Local administration lacked self-determination, hence their resources were inadequate. Though, the local authorities were partially successfully in the North but unsuccessful in the Eastern and Western regions. Ever since the Macpherson constitution of 1951 provided four reforms at the local government level, the exercise has become a routine in Nigeria, in a bid to improve the effectiveness of this level of governance in national development. The local government has become a particularly important issue in Nigerian politics since the landmark nationwide reform of 1976. That reform saw the local government as “Government at the local level exercised through representative councils established by law to exercise specific powers within defined areas” (FGN 1976). In the foreword to guidelines for Local Government Reform, government expressed serious concern about how best to make the local government “an effective instrument of development” and the need to generate adequate resources to enable them meet their obligations, the most important of which is to
  11. 11. 11 stimulate development at the grassroots level. To this end, the principal aims of the local governments were to: - Make appropriate services and development activities responsive to local wishes and initiative by devolving or delegating them to local representative bodies; - Facilitate the exercise of democratic self-government close to the local levels of our society, and to encourage initiative and leadership potential; - Mobilize human and material resources through the involvement of members of the public in their local development; and - Provide a two-way channel of communication between local communities and government (both state and federal) (FGN 1976:1). To ensure the attainment of these aims, the 1976 reform was quite unequivocal in its recognition of local governments as the third-tier of government in Nigerian federalism, with all the necessary paraphernalia of office, most especially a grant of local autonomy. This was the first time Nigerian local governments enjoyed such recognition, which was consolidated three years
  12. 12. 12 later in the 1976 constitution (Roberts 1997). Subsequent administration measures in the 1980’s enhanced the importance and autonomy of the local governments. Such measures included an increase in their share of federal revenue, direct disbursement of such revenues to them, abolition of some political and fiscal controls exercised over them by state governments, extension of the presidential system of governance to the local government system, entrenchment of the Local Government Areas (LGAs) in the constitution and the simultaneous use of these areas as state and federal electoral constituencies, especially during the 1994/1995 National Constitutional Conference (Benjamin 1996). Local governments have also increased in number from 301 in 1976 to 774 in 1998. Local government administration in the country experienced fundamental changes in 1976. The 1976 local government reform created for the first time, a single-tier structure of local government in place of the different structure in the various states. Our interest in the 1976 reform hinges on the restructuring of the financial system. The reforms instituted statutory allocation of revenue from the federation account with
  13. 13. 13 the intention of giving local government fixed proportions of both the federation account and each states’ revenue. This allocation to local government became mandatory and was entrenched in the recommendations of the Aboyade Revenue Commissions of 1977. At present, local government receive 20 percent of the federation account. In addition, proceed from the Value Added Tax (VAT) are also allocated to them. Presently, VAT’s allocation is 35 percent based on equity of states (50 percent), population (35 percent) and derivation (2 percent). The 1976 local government reforms states the internal revenue sources of local governments to include; - Rates, which include property rates, education rates and street lightening. - Taxes such as community, flat rates and poll tax. - Fines and fees, which include court fines and fees, motor park fees, forest fees, public advertisement fees, market fees, regulated premises fees; registration of births and deaths and licensing fees; and
  14. 14. 14 - Miscellaneous sources such as rents on council estates, royalties, interest on investment and proceeds from commercial activities. Despites this clear demarcation, states and local government still clash over sources of internal revenue. There has been a significant increase in the number of Local Government over the years. There were 96 divisions in 1967. By 1976, they had increased to 3,000. The number was increased to 774 after five years (Adedokun A.A. 2004) we will like to emphasize here that the rise in the number of Local Governments has implication on the assignment of public revenue responsibilities among the tiers of government. Although recently many developing countries have implemented or are implementing decentralization reforms, the Nigeria experience is rare in terms of both the length of time that locally elected governments have existed, and in terms of substantial revenue devolution to local governments for the discharge of their responsibilities. India, for example, which has a longer standing democracy than Nigeria, adopted a constitutional
  15. 15. 15 amendment as recently as 1993 to create locally elected governments, compared to Nigeria where local governments were constitutionally recognized in 1976; India has still not provided systematic sources of revenue to its local government whereas Nigerian local governments are constitutionally entitled to substantial united grants from the federal government (Adeniyi and Oladepo 2007) describe the survey in details. 1.2 STATEMENT OF PROBLEM Adedeji (1979) blames the ineffectiveness of local administration on the following reasons; - Lack of mission or lack of comprehensive functional role. - Lack of proper structure (i.e. the role of local governments in the development process was not known). - Low quality of staff and; - Low finding. According to Him, these problems led the local governments into a vicious circle of poverty because inadequate functions and powers lead to inadequate funding which result in the employment of low skilled and poorly paid staff.
  16. 16. 16 This problem appears to be an endemic one for basic service delivery in Nigeria (with a similar problem of non-payment of primary school teacher salaries creating a public outcry in the 1990s), and has been argued to be the result of federal institutional arrangements where local governments are overwhelmingly dependent on federal revenue transfer for the discharge of their responsibilities. While some argue that the problem is lack of adequate resource transfers to local governments to finance their expenditure responsibilities, others argued that over-dependence of local governments on federal transfers has undermined local accountability and created perverse incentives at the local level to misallocate public resources (Olowu and Enero, 1995; Ekpo and Ndebbio, 1990; the World Bank, 2004). This research study will therefore address how the Local Government can mobilize tax revenue for adequate service delivery. 1.3 RESEARCH QUESTIONS This study attempts to answer the following questions;
  17. 17. 17 a. Has Local Government tax revenue mobilization provided adequate service delivery? b. How accountable are locally elected governments for the delivery of local public goods? c. What is the impact of inter governmental fiscal relations on local accountability? d. Has the increase in revenue from local government statutory allocations enhanced their economic fortunes and service delivery ability? e. To what extent has Nigeria’s fiscal structure contributed to the local government and their inability to mobilize local resources and people for grassroots developments? 1.4 STATEMENT OF HYPOTHESIS The research hypothesis will be stated thus; HYPOTHESIS I H1: There exist a significant relationship between health service delivery and Local Government own tax revenue. Hypothesis II H1: There exist a significant relationship between Education services and Local Government own tax revenue.
  18. 18. 18 1.5 OBJECTIVE OF STUDY The aim of this study are vast and vain, most importantly, the research will examine and evaluate the way local government tax revenue can be mobilized for adequate service delivery in Nigeria. Others are; a. To determine how Local Government tax revenue can be mobilized to ensure adequate service delivery in Nigeria. b. To explore ways of financing decentralization through intergovernmental transfers, in the absence of sufficient local revenue potential. c. To determine local government responsibility for primary health care services, in particular, is emphasized in a recently revised health policy document formulated in the 1980s. d. To determine the impact of intergovernmental fiscal relations on local accountability. e. To suggest measures that will accelerate the mobilization of local government tax revenue in Nigeria. However, we shall determine the effect of some other variables on Adequate Service Delivery in Nigeria.
  19. 19. 19 1.6 SCOPE AND LIMITATION The research study will focus on mobilizing local government tax revenue for adequate service delivery in Nigeria from the period of 1970s to 2007. Practically, Adequate Service Delivery does not attempt to cover the totality effects such as social and political ramifications. Only the impact on major economic variables which are important for economic growth and development are examined. This research work is devoid of some constraints which includes, the problem of data collection, no easy access to some offices in possession of the required information and data required and also the fact that some of the data were on quarterly basis, it took time to collect actual information for the period under view. Additionally was the problem of time, which was constrained with academic activities coupled with traveling for the required materials.
  20. 20. 20 However, these limitations will no way make this research study substantial. All the materials included are relevant, valid and dependable. 1.7 SIGNIFICANCE OF STUDY This study will be reliable and significant to all stakeholders in the public sector. The need for this study cannot be over-emphasized since it will be useful to local government tax officials, government agencies, tax payers, students and all interest individuals.
  21. 21. 21 REFERENCES Adebayo Adedeji (1970): ‘Local Government Finance and Prospects, Adebayo Adedeji and Rowland, eds. Ile-Ife: University Press pp. 1-19. Adedokun, A.A. (2004): The Development of Local Government in Nigeria Since Pre-Colonial Era to 1999 Constitution Polycom Vol. 2, No. 2, 2004. Adeniyi, J.O. Oladepo and A. Soyibo, (2003): ‘Survey of Primary Health Care Service Delivery in Lagos and Kogi State’: A Field report. African Regional Health Education Center, University of Ibadan. Bello-Imam, I.B. (Ed) (1990): ‘Local Government Finance in Nigeria, Ibadan, NISER. Ekpo, Akpan A. (1994): ‘Fiscal Federalism’; Nigeria Post- Independence Experience, 1960-1990 World Development Vol. 22, No. 8. Ekpo, Akpan H. and John Ndebbio, (1998): “Local Fiscal Operations in Nigeria; Research Paper 73, AERC Nairobi, Kenya. the World Bank, (2004): State and Local Governance in Nigeria, Sector Report No. 24477, Washington D.C.
  22. 22. 22 CHAPTER TWO LITERATURE REVIEW 2.1 INTRODUCTION The urbanization of poverty is one of the most dramatic developments on the African continent, yielding contrasting images of affluent residential and business districts and utter misery in sprawling shanty towns or slums. More than 50 percent of Africa’s population will soon live in towns and cities, and 50 percent of Africa’s poor will live in urban slums by 2025 (Tostensen et al 2001). Southern Africa is the most urbanized region on the continent, with Angola currently having an urban population of more than 60 percent and South Africa and about 55 percent urban migration does not seem to slow down, taking hundreds of thousands of women, men, and children to towns in search of a better life. Over the next ten years, some 50 million people in West Africa are expected to migrate to cities, and by 2030, it is protected that 63 percent of the population will live in cities. The demographic change in East Africa is just as dramatic. The growth of Africa’s towns and cities has outpaced local authority capacity for service delivery in terms of management,
  23. 23. 23 infrastructure and financing (McCluskey et al. 2003, p. 3). Firstly, the urban municipal authorities, many of which were originally instituted as colonial administrative institutions, have not been restructured to cope with the fast growing population (Beall, 2000). Secondly, a growing number of urban residents live in informal settlements characterized by deficient basic services such as housing, clean water, electricity, sanitation, refuse collection, roads and transport (Devas, 2003). Thirdly, many municipalities are financially weak and rely on financial transfers and assistance from the central government (Brosio, 2000). Moreover, the revenue collection administrations are often inefficient and large amounts of revenues collected are inappropriately managed. As a result, many African towns and cities are now faced with a governance crisis and poor service delivery capability. Consequently, the restructuring of governmental functions and finances between the national and municipal levels of government has entered the core of the development debate. In particular, fiscal decentralization-the devolution of revenue mobilization and spending powers to lower levels of government-
  24. 24. 24 has become a main them of urban governance in recent years. The purpose of this study is to explore the opportunities and constraints facing local revenue mobilization in urban settings. The study examines various revenue instruments available, their revenue potential, and how they affect economic efficiency and income distribution. Moreover, the paper discusses political and administrative constraints facing local revenue mobilization and factors impacting on citizens’ compliance behaviour. The emphasis is on local government “own revenues”, but fiscal transfers from the central level and borrowing are also addressed. The study argues that urban local governments need to be given access to adequate resources to do the job with which they are entrusted. However, own revenues mobilized in most urban local authorities in Africa are generally not sufficient to develop and supply adequate services for the fast-growing urban population. Hence, a general conclusion that emerges from this study is that local own revenues are a necessary but not a sufficient condition for fiscal decentralization. The remaining part of the study is organized as follows: The next section provides a brief review of the main components of
  25. 25. 25 current local government revenue systems, including “own revenues” and transfers from the central level. Thereafter, challenges facing local government revenue reforms in Africa are assessed. The following section focuses on the strengths and weaknesses of major local “own revenues” instruments. Measures to improving current property taxes, business licenses and user fees are emphasized. 2.1.1 REVENUE INSTRUMENTS FOR LOCAL GOVERNMENTS A sound revenue system for local governments is an essential pre-condition for the success of fiscal decentralization (Olowu and Wunsch 2003). In addition to raising revenues, local revenue mobilization has the potential to foster political and administrative accountability by empowering communities (Shah 1998; Oates 1998). However, prescriptions deriving from the theory and from good international practice impose huge constraints on the choice of revenue instruments for local governments. In general, there are two main categories of current revenue for local authorities in Africa:
  26. 26. 26 i. “Own revenue”, which includes taxes, user fees and various licenses and ii. Transfers from the central or regional levels, usually in the form of grants and revenue sharing (Bahl et al 2003, p. 71). In some countries, municipalities are also allowed to borrow money for capital investments in infrastructure. This section briefly reviews some general principles for revenue assignment between different levels of government, and discusses challenges to securing fiscal responsibility at sub-national levels with respect to transfer systems and borrowing. 2.1.2 WHO LEVIES WHAT TAXES? There is no ideal assignment of revenue sources between central and lower levels of government. Nevertheless, a set of “tax- assignment rules” has been developed in the traditional fiscal federalism theory (Oates 1972; Musgrave 2000). These principles relate to the respective responsibilities of central and lower tiers of government in macroeconomic stabilization, income redistribution and resource allocation (Boadway et al 2000).
  27. 27. 27 Furthermore, in developing countries the administrative capabilities of local governments in revenue design (i.e., deciding on revenue bases and setting rates must be taken into consideration) (Bird 1990). Moreover, in large and diverse countries the issue of revenue harmonization between jurisdictions is important when assigning taxing powers. The stabilization objective of the fiscal system calls for central control over the revenue instruments that may substantially influence central budget deficits or inflation. Thus, taxes on international transactions (custom duties) and a considerable share of income and general sales taxes (such as VAT) should be assigned to central government across regions, as there are in many African countries, then local taxing powers may exacerbates these differences. Hence, the distributive function of government is an argument for centralized, progressive corporate income and wealth taxes. Since the central government can borrow money to make up for short falls, it can live with the more unstable revenue sources, such as customs duties and income taxes. Local governments, by
  28. 28. 28 contrast, require relatively stable sources of revenue. Thus, lower-level governments should tax revenue bases with low mobility between jurisdictions. Property tax is therefore often labeled as the “ideal” local tax. Moreover, if properly designed, user charges on trading services such as electricity, water, sanitation, and solid waste collection may be attractive local revenue instruments. The same applies to benefit taxes such as road and port tolls and to various licenses, which also may have regulatory functions. There is no “ideal” way of dividing revenue responsibility between central and lower tiers of government. While the general principles and theoretical discussions of revenue assignments are useful, in practice, country-specific factors play a large role (Tanzi, 2000). The case for centralization is usually built around macroeconomic considerations and equalization, and the case for local government taxing powers on efficiency considerations. The “optimal” way to do things, however, depends on how the government weighs these considerations (Bahl and Wallich, 1992). Furthermore, the capacity to administer revenue instruments is always an important constraint to the assignment
  29. 29. 29 of “taxing powers” to lower levels of government in developing countries. Finally, but not least important, local revenue sources must be politically acceptable (Bahl et al. 2003, p. 75). As a rule of thumb, less visible revenue instruments tend to be more acceptable to tax payers. 2.1.3 TRANSFERS AND BORROWING Almost without exception, governments across the world assign more expenditure functions to local authorities than can be financed from their own revenue sources. The result of this mismatching of functions and finances often referred to as “vertical imbalances”- is that local governments are generally dependent on transfers from higher levels of government. There are a number of methods to close the fiscal imbalances of sub-national governments, some of which also reduce imbalances between jurisdictions (Ahmad 1997, p. 6). In practice, transfers may be in the form of surcharges or revenue sharing whereby a local government receives a share of the revenues from particular taxes collected by the central government within its jurisdiction (Mclure, 1999, p. 12). The main mechanism for intergovernmental transfers in Africa, however, is conditional
  30. 30. 30 and/or unconditional grants from central to local governments. Moreover, in some countries, for instance in South Africa, municipalities are also given the right to borrow to finance investments in local capital infrastructure (Bahl and Smoke, 2003, p. 8). Promoting fiscal responsibility at sub-national levels calls for implementation of a stable and transparent system of transfers, geared to filling any gap between the assigned spending and revenue-raising responsibilities to lower-level governments (Ter- Minassian, 1999). The definition of such a system is far from easy, especially given the need to preserve adequate incentives for tax effort and cost effectiveness in spending by the sub- national governments. However, in the process of fiscal decentralization it is important to be aware of the risks for macroeconomic management and fiscal discipline. Mechanisms of fiscal transfers may impose considerably rigidity to the central government budget. Therefore, substantial devolution of revenues and spending responsibilities to sub-national jurisdictions can affect the central
  31. 31. 31 government’s ability to carry out stabilization and macroeconomic adjustment through the budget. The destabilizing potential of sub-national governments is greatest when they face no hard budget constraint (Ter- Minassian, 1999; World Bank 2000). Expectations of bail out in case of financial trouble weaken the incentives to economies on costs, and may generate resource waste and rigidity within local authorities. These inefficiencies, in turn, may spill over into macroeconomic imbalances. In particular, concern for macroeconomic imbalance lies behind the common recommendation that strict limits should be imposed on the borrowing ability of sub-national jurisdiction (Bird and Vaillancourt, 1998). It is feared that sub-national governments that are highly dependent on national transfers may increase their current expenditures above their capacity to fund them out of current revenues and then close the gap through borrowing. For instance, in the mid-1990s in Mexico, provincial borrowing contributed to a situation where some states were defined as “bankrupt”. (Tanzi, 2000).
  32. 32. 32 2.2 REFORMING LOCAL GOVERNMENT “OWN REVENUE” SYSTEMS A widely found characteristic of local “own” revenue systems in Africa is the huge number of revenue instruments in use by local authorities (Bahiigwa et al. 2004; Brosio, 2000; Fjeldstad and Semboja, 2000). In many countries, local governments seem to raise whatever taxes, fees and charges they are capable of raising, often without worrying excessively about the economic distortions and distribution effects that these instruments may create. A complicated and non-transparent local government revenue system is costly to administer and it facilities corruption and mismanagement (Bardhan and Mookherjee, 2002). Moreover, many local taxes have a distorting effect on resource allocation decisions, and, thus, an inhibiting effect on the start-up of new enterprises and the achievement of economic growth (Bahiigwa et al. 2004; Davas and Kelly, 2001; Sander, 2003). These effects occur when effective rates vary greatly between different goods that are traded, or when license fees are set too high for start-up small scale enterprises to survive. In addition, the levels and
  33. 33. 33 types of local revenue instruments by themselves can result in the tax burden falling more on the poor than on the relatively better off in local communities (Fjeldstad and Semboja, 2001). This is mainly due to the basic design of the local revenue system and the way revenues are collected (Fjeldstad and Semboja 2000; Fjeldstad 2001). Despite the many comprehensive central government tax reforms during the last decade, local government revenue systems in sub-Saharan Africa have remained largely unchanged until recently. Generally, a fundamental requirement when redesigning local revenue systems is greater emphasis on the cost-effectiveness of revenue allocation, taking into account not only the direct costs of revenue administration, but also the overall costs to the economy, including the compliance costs to tax payers. In addition, losses through corruption and evasion need to be reduced. Clearly, improved revenue administration cannot compensate for bad revenue design. Thus, reforming the revenue structure should precede the reform of revenue administration since there is not much merit in making a bad revenue system work somewhat better.
  34. 34. 34 Recently, Tanzania conducted a comprehensive reform of its local revenue system. The main elements of this reform were: i. Abolition of unsatisfactory local revenue instruments, which were costly to collect from administrative and political perspectives (including the poll tax), and ii. Improvements to remaining revenue bases by simplifying rate structures and collection procedures. The Tanzanian reform demonstrates that radical changes of the local revenue system are possible, although it is too early to assess the long-term impacts of this reform on local government revenues. 2.2.1 STRENGTHS AND WEAKNESSES OF MAJOR LOCAL “OWN REVENUE” INSTRUMENTS As noted above, the local ‘own revenue’ systems across Africa are often characterized by a huge number of revenue instruments. However, the main sources of ‘own revenues’ in urban councils are usually property rates, business licenses and various uses charges, often in the form of surcharges for services provided by or on behalf of the municipality. Nevertheless, experiences from a number of African countries show that these revenue instruments have serious shortfalls. For instance,
  35. 35. 35 property taxes can be very costly to administer (Brosio, 2000, p. 20), and the enforcement of user fees has resulted in widespread resistance to pay from the poorer segments of the urban population in some countries (Fjeldstad, 2004; Fjeldstad et al. 2005). Moreover, complex business licensing systems have proved to be major impediments for the start up and expansion of especially micro and small enterprises (Devas and Kelly, 2001; Sander, 2003). However, international evidence shows that when well administered, these revenue instruments can provide substantial and reliable revenues for urban municipalities. 2.3 EVOLUTION OF NIGERIA’S FEDERAL STRUCTURE Nigeria’s fiscal federalism is anchored on economic, political, constitutional, social and cultural developments. As the country progressed from a unitary government to a federal one and governance became more decentralized, there were also changes in fiscal arrangements. The process towards a federal structure was not that smooth. The colonial administration demarcated the country into three segments, namely, the protectorate of Southern Nigeria; the colony of Lagos and the protectorate of Northern Nigeria. In each
  36. 36. 36 administrative area, there was complete fiscal independence which lasted up to 1914. That same year, following the amalgamation of the Northern and Southern protectorates (including the colony of Lagos), attempts was made to unify the fiscal system. For example, in 1926, a centralized budget system was introduced. Following the creation of Northern, Western and Eastern regions in 1946, a decentralized fiscal structure began to emerge. The first revenue commission was set up in 1946. By 1951, a quasi-federal structure was in place followed by self- governing regions in 1954. During the colonial period, four revenue commissions were created. The principles, criteria and allocation formulas recommended by the commissions are well documented in the literature (See, for instance, Ekpo, 1994). From three regions in 1960, the country grew to four regions in 1963. During the civil war of 1967 to 1970, the country was carved into twelve states. By 1976, the states had increased to nineteen and it remained that way until 1987 when it was increased to 21. In August, 1991, the number of states increased
  37. 37. 37 to 30 and a separate Federal Capital Territory was carved out in place of the old capital in Lagos. By October, 1996, six additional states were created, thus bringing the total number to 36. The evolution of local government administration Nigeria can be examined within the context of regionalism. The local government system experience several changes in the early 1950s. During that period, the system was constituted on a representative basis. Colonial local administration revolved around traditional rulers, with the unit of local administrative referred to as the Native Authority. Executive authority lay with the District Officer. The authorities at that time established administrative organizations that were adhoc. “However, some success of this type of administration was noticeable in the centralized emirates of the former Northern Nigeria” (Ekpo and Ndebbio, 1998). The former regions of the East, West and North, because of the different stages of development, also experimented diverse ways of strengthening their systems of local administration. (for an examination of the evolution of local government administration prior to the 1976 local government reform see NCEMA 1990 and Gboyega, 1983).
  38. 38. 38 Local government administration in the country experienced fundamental changes in 1876. the 1976 local government’s reform created for the first time, a common, single-tier structure of local governments in place of the different structures in the various regions/stages. Our interest in the 1976 reform hinges on the restructuring of the financial system. The reforms instituted statutory allocations of revenue from the federation account with the intention of giving local governments (LGs) fixed proportions of both the federation account and each state’s revenue. This allocation to local governments became mandatory and was entrenched in the recommendations of the Aboyade Revenue Commission of 1977. The 1979 constitution empowered the National Assembly to determine what proportion of the federation account and revenue from a state to allocate to local governments. In 1981, the National Assembly fixed these proportions at 10 percent of the federation account and 10 percent of the total revenue of a state. In 1985, the state’s proportion was reduced to 10 percent of the internally-generated revenue. Local governments’ allocation from the federation account was later adjusted to 20 percent. Thereafter, it changed to 25 percent with the argument that local governments are
  39. 39. 39 expected to take on large developmental responsibilities. The proportion has continued to vary overtime. At present, local governments receive 20 percent of the federation account. In addition, proceeds from the Valued Added Tax (VAT) are also allocated to them. At present VAT’s allocation is 35 percent based on equality of states (50 percent), population (35 percent) and derivation (20 percent). The 1976 local government reforms stated the internal revenue sources of local government to include. - Rates, which include property rates, education rates and street lightening; - Taxes such as community, flat rate and poll tax. - Fines and fees, which include court fines and fees, motor park fees, forest fees, public advertisement fees, market fees, regulated premises fees, registration of births and deaths and licensing fees; and - Miscellaneous sources such as rents on council estates, royalties, interest on investments and proceeds from commercial activities.
  40. 40. 40 Despites this clear demarcation, it is not uncommon to find states and local governments clashing over sources of internal revenue. Overtime, there has been a remarkable increase in the number of local government. There were 96 divisions in 1967. By 1976, they had increased to 300. The number further increased to 448 between 1987 and 1990 before jumping to 598 in 1991. The number was again increased to 774 after five years. (NES 1999 Annual Conference).
  41. 41. 41 Table 1: Evolution of Nigeria’s Federal Structure 1914-1996 Date Northern Nigeria Southern Nigeria Total Enabling Laws 1914 1 protectorate 1 protectorate 2 1993- 1939 1 group of province 2 groups of provinces (East and West). 3 Native, authority ordinance 1946 1 region (Northern Region) 12 Provinces 39 Divisions 2 regions (East and West 11 Provinces 44 Division 3 23 83 Notice No. 43 of 1933 Notice No. 1725 of 1938 Notice No. 17 of 1943 1963 1 Region (Northern Region) 14 Provinces 41 Divisions 3 regions (East, West, and Mid-West) 21 Provinces 55 Divisions 4 35 96 The mid-West Region Transitional Provisional Act No. 19, 1963 1967 10 States 41 Divisions 2 States 55 Divisions 12 96 State (creation and Transitional Provisional) Decree 14, 1967. 1976 10 States 152 Local Governments 9 States 148 Local Governments 19 300 States (creation and Transitional Provisional) Decree 14, 1976.
  42. 42. 42 1987- 1990 11 States 240 Local Governments 10 States 208 Local Governments 21 448 State (creation and Transitional Provisional) Decree 1987 and 1989. 1991 17 States (including FCT) 14 States 272 Local Governments 320 Local Governments 31 595 States (creation and Transitional Provisional) Decree 37, 1991. 1996 20 States (including FCT) 414 Local Governments 17 States 355 Local Governments 37 769 State (creation and Transitional Provisional) Decree 36, 1996. Note: Provinces created between 1993 and 1963 now have the status of states while divisions created in the same period now have the status of local governments. Sources: Tell Magazine, March 29, 1999, pp. 50 Northern Region and 355 in the former Southern Region. According to government, decentralization was necessary to broaden the growth of development centers. It should be noted
  43. 43. 43 that the rise in the number of local governments has implications in the assignment of fiscal responsibilities among the different levels of government. Local government system in Nigeria needs a moderate amount of financial autonomy to be able to discharge its responsibilities effectively. Public revenue in a federal system assumes that there are benefits to be derived from decentralization. Public revenue decentralization occurs when lower tiers of government have statutory power to raise taxes and carryout spending activities within specified legal criteria. This is referred to as the Overlapping Authority Model propounded by Deil .S. Wright (1978) on intergovernmental relationships. Public revenue decentralization occurs when much of the money is raised centrally but part of it is allocated to lower levels of government through some revenue-sharing formula otherwise known as administrative decentralization. The main reason for decentralization is anchored on allocation sharing or efficiency grounds so it is possible to advance argument for decentralization in Nigeria where there are many
  44. 44. 44 ethnic groups. Oates (1993:240) contends that “there are surely reasons, in principle to believe that policies formulated for the provision of infrastructure and even human capital that are sensitive to regional of local conditions are likely to be more effective in encouraging economic development than centrally determined policies that ignore these geographical differences”. There is a great relationship between decentralization and economic growth and behaviour for economic fundamentals within the decentralized jurisdiction is a matter that remains an empirical issue and discussions must be country specific. Kim (1995) quoted in Oates (1996) has shown that in his mode of explaining rates of economic growth, revenue decentralization that there are positive and statistical significant change, using a sample of countries. His results also shows that, other things being equal, more public revenue decentralization was associated with more rapid growth in GDP per capita during 1974-1989 period. Prud’Homme (1995) on the other hand, argues that decentralization can increase disparities jeopardize stability, undermine efficiency and encourage corruption. He maintains that local authorities, for example, have few incentives to
  45. 45. 45 undertake economic stabilization policies. The instrument of monetary and public revenue policies are better handled by the central government. Oates (1993) opines a contrary view that the principles of centralization is costly because it leads the government to provide public goods and diverge from the preferences of the citizens in particular areas (regions, provinces, state, local governments). He also argues that “when these preferences vary among geographical area, a uniform package chosen by a nation’s government is likely to force some localities to consume more of less than they would like to consume. According to Tanzi (1995) the interpretation of both Oates and Prud’homme assumes that sub-national government levels already exist, hence the crucial problem becomes which of the existing government levels ought to be responsible for particular forms of spending. The function of government can be divided into three-allocation, distribution and stabilization function (Musgrave, 1959). Using this stratification, stabilization and distribution functions are expected to be under the periphery of
  46. 46. 46 the central government while lower government undertakes allocative functions. Hence, any spending and taxing decisions that will affect the rate of inflation, level of unemployment, etc are better handled at the centre, while other activities that will affect social welfare are more efficient if undertaken by sub- national governments. Theoretically, the scope of benefit is the basis for allocating responsibilities governments. Public goods and services which are national in nature (foreign affairs, environment, immigration and defense) should be provided by the central government while those whose benefits are mainly localized should be assigned to the lower levels of government. Quasi-private goods or intermediate goods and services such as administration, health and welfare services should on account of efficiency delivery, be assigned to lower levels of government (Vincent .O. 2001). Studies on tax and public revenue mobilization in Nigeria have shown a high degree of centralization. According to Emenuga (1993), the allocation of revenue to the tiers of government has no adhere strictly to the expenditure requirements of each tier, thus the federal government has become a surplus spending unit
  47. 47. 47 while other functions, he proposes the determination of a tier’s share through the aggregation of its basic expenditure needs. To reduce the gap between tax power and responsibilities, two types of revenue sources are allocated to each tier. These are independent revenue sources and direct allocation from the federation to which centrally collectable revenues are paid. Local government also receives allocations from states Internal Revenues. An agreed formula for vertical revenue sharing is used in sharing funds from the federation account. Another key issue in the practice of public revenue mobilization in Nigeria is how to distribute the bloc share from the federation account among the constituent units of each tier i.e. among the 36 states and the 774 local governments. This is called horizontal revenue sharing. In Nigeria, there are four categories in the vertical allocation list- federal, state, local governments, and the special fund. The allocation to the Federal Capital territory (FCT) is accounted for under the special fund which is administered by the Federal Government.
  48. 48. 48 2.3.1 FEDERALISM AND LOCAL GOVERNMENT AUTONOMY IN NIGERIA Local government autonomy is the degree to which a local government is able to decide and act on issues within its defined jurisdiction, irrespective of whether or not higher levels of government are disposed towards such decisions and/or actions from this definition, we can list some essential elements of local autonomy as; - It is a matter of degree; therefore, it is relative and not absolute. - It has to be effectively backed up with human, financial and material resources to make its exercise a reality; - It has to be intra vires, that is, it must be exercised within the scope of the enabling statutes which define the intergovernmental distribution of responsibilities in a polity; and - It is empirically observable if the local government can decide and/or act on issues, without falling foul of higher levels of government.
  49. 49. 49 The extent of local government autonomy may be considered from the viewpoints of the extent to which power is conferred on it within the prevailing system of decentralization, and the amount of control that is exercised over it (Okunade, 1997), or, if in a federation, the level of the structured system of non- centralization that is adhered to. The purpose of dividing government into many tiers is to better achieve the developmental objectives of the state through the division of work, authority and resources. The system of relations between the tier in a given polity primarily reflects the constitutional or other statutory provisions specifying their establishment, structure composition, finance and functions. In this context, local governments are sub-national units of a unitary or federal nation-state and legally, conferred with power/authority over specified functions and territory. To that extent, they are supposed to have requisite executive and administrative power as well as financial and human resources to register their existence and activities. Moreover, they should enjoy some degree of freedom over the defined functions and territory. This is the crux of local autonomy.
  50. 50. 50 The traditional theory of local government autonomy emanates from a liberal democratic analysis of the state and politics. The theory accepts pluralism, but is very critical of centralization (Roberts, 1997:10). Its North American models favour political pluralism and decentralization with emphasis on local control and self-determination (Clark and Dear 1984). Its British variant derives from beliefs in “collective convictions” about local self- government as a “traditional institution” and “proper government” which informed the local government policy in the former British colonies, including Nigeria (Mackenzie, 1961). From May 1967 (when states were first created in Nigeria) up to 1976, federal government relations with the local governments were generally maintained through state governments. On the other hand, state-local relations were consummated mainly through the erstwhile Ministries of Local Government (MLGs), which served as supervising ministry. Sometimes, the states used this power positively. Most of the time, however, the power was used negatively to the detriment of Local Government autonomy. The result was that up to 1976, local governments
  51. 51. 51 suffered from “continuous whittling down of their powers by state governments” (FGN 1976). The 1976 reform responded to the situation by recognizing the Local Government as a distinct tier of government in Nigeria and one which exercises specific statutory powers. The reform was expected to result in substantial local government control over local affairs, as well as the use of their institutional and financial powers to implement projects that will complement the activities of the state and federal governments in their areas (FGN 1976). The 1979 constitution not only recognized the local governments as the third tier of government, it also assigned specific roles to them, thereby according to them the status of a development partner to the state government rather than a mere subordinate agent. Paradoxically, however, the reform which preceded the Second Republic (1979-1983), retained the principle that local governments were essentially the responsibility of the state governments. Evidently, besides the recognition that local government councils should have substantial control over local
  52. 52. 52 matters, the reforms did not give them the necessary amount of administrative and financial autonomy that would enable them to operate as a distinct level of government. Thus, as noted elsewhere (Roberts, 1997:63), in the early years of the 1976 reform, there was a tendency for superintending ministries/departments at the state level to try to do things for local governments even when such things were well within the latter’s competence. Uncertainty about autonomy of the local government reached a head in the Second Republic. Arising from the simultaneous but contradictory recognition of the local government as “the third tier of government” and the acceptance that it is yet “primarily the responsibility of state government”, controversy raged on, for instance, as to whether state governments could create local governments without federal concurrence. The constitutional ambiguity, in particular, posed a major implementation problem in the scheme of local autonomy. In spite of constitutional provisions which appeared to grant local governments a measure of autonomy, they were, up to the end of the second republic, tightly controlled and subordinated by state governors through
  53. 53. 53 sundry mechanisms, including manipulation of the disbursement of financial transfers to them. The Major-General Muhammadu Buhari administration (1984- 1985), which sacked the Second Republic and set up the Dasuki Committee on local government administration (cf. FGB 1984) did not have the time to fully implement its planned reform on the local government. It was, therefore, left to the succeeding regime of General Ibrahim Babangida (1985-1993) to carry out a number of measures designed to give strength to the local government in Nigeria. The central plank of the reform introduced by the Babangida regime was to devolve responsibilities to the local governments and allow them some autonomy “to function effectively as the third tier of government which is truly local to the environment” (Babangida 1988). The guarantee of local autonomy was of particular significance in the Babangida reform of the local government. In the National Day Broadcast of October 1, 1998, President Babangida had noted that:
  54. 54. 54 Local Government will be given the necessary freedom and autonomy to operate within the ambits of the constitution as a mere adjunct to the state as a truly coordinate and effective level of government. Parallel measures were also adopted to strengthen the independence of local governments on financial matters. The most significant of these was the decision to disburse their share of federal revenue directly to them instead of going through their respective state governments, where such funds were routinely hijacked. Such measures, including the increase in federal allocation to the local governments from 10 to 20 percent, were based on the conviction that local governments should enjoy greater freedom of action if they are to be effective as the closest level of government to the people. The implications of these measures are; - The conviction that all forms of state government control over the finances of local governments must cease; and - That states should no longer act as financial intermediaries for local governments in the allocation and transmission of funds (Okunade, 1997).
  55. 55. 55 These measures were complemented by the Presidential system of government at the local government level which was designed to strengthen the autonomous status of local representatives, particularly the local government chairman, as the fount of executive power and locus of accountability. Other significant measures designed to enhance local autonomy during the period include; - The holding of elections into local government councils in 1987, 1990 and 1996; - The directive that all state statutory allocations not paid to local governments be deducted at source by the federal government; - The adjustment of local government boundaries and the creation of some new local governments in the areas that demanded them; and - The change which made LGSCs constitutional rather than merely statutory. Up to 1993, the Babangida administration continued to assure the nation of its intention to “remove all constraints” in local government administration before leaving office.
  56. 56. 56 In spite of these novel provisions for local government autonomy, the reality differed much from expectations. State and Federal Government pronouncements and actions largely subverted these expectations of local autonomy. The federal Government consistently warned “over zealous” local government officials of the non-absolute status of their autonomy (Roberts 1997:63). Okunade (1997) reports that the Attorney- General of Ogun State categorically stated that “Local Governments are not totally free” and that they were still subject to administrative and financial control by the state government. Also, the Deputy Governor of Oyo State indicated local governments in the state, accusing them of abuse of power, gross misconduct, outright maladministration, nepotism, favouritism, partiality and violation of regulations and guidelines in the name of local government autonomy. Such indictments were made in order to maintain state governments’ stranglehold over local governments. In effect, the state governments continued to behave as if the old system had not changed. The Department of Local Government in the State Governor’s office which replaced the
  57. 57. 57 MLG continued to function as a de facto MLG. In Rivers States, the government monitored the performance of Local Governments ostensibly to ensure that their development programmes and policies conformed to those of the state government. It was believed that although local governments had a measure of autonomy, they were still part of the state government in a generic sense (Roberts, 1997). The Federal Government itself also took some anti-autonomy measures including fixing the salaries of local government chairmen and secretaries even after the deregulation of salaries, and failing to shield the local governments from the over lordship of the states (Okunade, 1997). In the end, elected local government councils were even dissolved by military fiat during the period. From November 1993 to June, 1998, whatever gains that were made in local autonomy were lost completely with the scrapping of all democratic structures under the regime of General Sani Abacha. In December 1993, central government officials in charge of local government affairs asserted that the government’s intention in granting financial and administrative autonomy to local governments were “concessions” which were
  58. 58. 58 misunderstood by council officials. By 1994 when local government administration was reconstituted, it was a return to the status quo ante, which placed local government caretaker committees at the mercy of state military administrators (Roberts, 1997). 2.3.2 IMPLICATIONS OF LOCAL GOVERNMENT AUTONOMY FOR REVENUE MOBILIZATION The degree of local autonomy that exists in Nigeria at any moment has critical implications for the ability of local governments to mobilize and utilize revenue for developmental purposes. The implications can be positive or negative, and are normally dependent on the existing nature and structure of local government finance. Normally, Nigerian local governments mobilize their funds from external and internal sources. The external sources include federal and state governments’ financial transfers to local governments (grants, statutory allocations, their share of Value Added Tax (VAT) receipts), and loans. The internal sources include property and community rates, taxes, fees and charges of various kinds.
  59. 59. 59 Since the constitutional recognition of the local government as the third-tier of government in Nigeria, external revenue has become a major source of income for the local government. Both Federal and state Government sometimes gives grants to Local Governments for specific service delivery (Bello-Imam, 1988). The most important of these is the general grant called statutory allocation which local governments are entitled to receive from federal and state governments. Initially, Nigerian local governments were entitled to 10 percent of federally collected revenue in the federation account and 10 percent of total revenue of the states. Currently, this has been revised to 20 percent of revenue in the federation account and 10 percent of the state’s internally generated revenue. While loans are not a very popular source of revenue for Nigerian local governments, they now also receive a share of the VAT which was introduced in 1994. The contribution of VAT to local government revenue is growing and some local governments have come to depend on it as a distress-avoidance mechanism in the light of significant financial challenges facing them. This is
  60. 60. 60 particularly so, given the recent upward revision of their share of VAT from 25 percent in 1997 to 30 percent in 1998. The local governments were expected to complement their federal and state allocations with revenue earned from their internal statutory sources. Generally, the most buoyant internally generated revenues of them remain local licenses, fees and charges. (Bello-Imam, 1992). Particularly since 1981, the significance of poll tax has greatly declined for reasons which include erratic decisions on it by the central government, labour mobility which renders it difficult to administer, and impropriety on the part of the collectors. In spite of long-standing recognition of its potential, property rate has remained a largely neglected source of local government revenue except in Lagos State where it has been operated since 1915. The reason for its neglect is political: it suffers culture-bound definitional problems which make it difficult to justify to clients, and it also suffers technical problems of defective valuation mechanisms coupled with the incidence of too many exemptions. Similarly, for fees and charges, the issue has not been whether the charges could be imposed (Bello-Imam 1990; Roberts 1997).
  61. 61. 61 Against this background, the prevailing reforms and the attempt to accord some autonomy to local governments certainly had some positive implications for local revenue mobilization. The institution of statutory allocations as a local revenue mobilization mechanism, the increase of the allocation from 10 to 20 percent of the federation account, the direct disbursement of federal revenues to local governments, and the abolition of several political and fiscal controls over the local government, in principle, boosted the revenue profile of Nigerian local governments. Increases in local government budgets have been due mainly to large infusions of money to them from the federation account- about 10 billion between 1976 and 1987 (Roberts 1997:53). Their allocation of N1.095 billion in 1986 had risen sharply by 1990 to N7.2 billion. In January 1993, it rose further to N22.1 billion (Gboyega, 1997). This rising allocation has put more money at the local government, irrespective of the real worth of the money against its nominal value.
  62. 62. 62 On the other hands, the status of local government autonomy in Nigeria has had some profoundly negative implications for revenue mobilization. While local governments have certainly had more money at their disposal over the years, a critical look at the structure of their revenue reveals that it is mainly derived from external sources. As we shall see shortly, the nature of these external sources and the manner of their disbursement not only reinforce the erosion of local autonomy, but also introduce a dependency syndrome in local governments’ revenue mobilization effort. As local governments come to depend almost exclusively on statutory allocation, their internal revenue mobilization capacity is weakened. Other than statutory allocations from the federation account and grants from federal and state governments, loans are constrained by intergovernmental controls which limit local financial autonomy through; - Prescription of source, extent and purpose of borrowing - Official sanctions restricting loans to a minority of local government projects.
  63. 63. 63 - Structures on local governments to avoid deficit budgeting, thereby making borrowing irrelevant and - Absence of appropriate lending institutions outside the capital market. As for VAT, local governments have absolutely no say or power over the administration of this tax or over how much revenue they can expect to raise from it. The prevailing structure of local autonomy means that the local governments are totally at the mercy of the federal government in mobilizing revenue from this source. Also, the relations between states and local governments have also created uncertainties over allocation of state government funds to local government councils. For instance, there are questions about which income sources to include or exclude the formula to apply, the method of distribution of funds, and the regularity and punctuality of remitting state financial contributions to local governments. This uncertainty was demonstrated at a workshop on Local Government Administration and Finance in Ibadan in 1997 when
  64. 64. 64 officials of the State’s Budget Department said that the State no longer paid its statutory 10 percent allocation to Local Governments because it was performing Local Government’s obligations by paying primary school teachers pensions and gratuities. The local government officials at the workshop said the argument was “unimpressive”. Again, in spite of local government’s entitlement to statutory allocations, intergovernmental financial transfers are highly politicized. The higher levels of government are generally tardy in their funds disbursement. During the Second Republic, all the States except Lagos hardly remitted the Local Government’s share of statutory allocations to them. Using their supervisory and control powers, many states either diverted these grants to other buses or reduced the amount that actually got to the local governments. Under the Abacha regime, statutory allocations, especially capital votes were always released very late. As characteristic of the regime, the federal government always made upfront appropriations and deductions from total revenue collections before the balance was paid into the federation account. Consequently, state and local governments were denied
  65. 65. 65 about 40 percent of their legitimate funds which was cornered by the Federal Government during that regime (Phillips, 1998). In spite of the foregoing, a further constraint is imposed on Local Government revenue mobilization capacity through State control over Local Government budget, which is made to pass through state control over local government budget, which is made to pass through many levels of approval in the hands of the State government. Even after approval, post-budget controls still impose further restrictions on what local governments can do (Roberts, 1998). One of the most serious implications of the local governments have found themselves is that they are dependent on external sources-even with all the vagaries mentioned above and this has the twin effect of instilling a dependency syndrome in them and weakening their internal revenue mobilization capacity. The structure of local government revenue is such that over three- quarters of it is externally derived. This level of dependency on external sources has induced a decline in their internally- generated revenue. It has also made them more vulnerable and
  66. 66. 66 further eroded their fragile autonomy. An ideal framework of local autonomy anticipates that each level of government must mobilize the necessary revenue or resources from within its own sphere for purposes of carrying out its programmes, with statutory financial allocations serving as supplements to internal budgetary efforts. 2.4 REVENUE UTILIZATION FOR LOCAL DEVELOPMENT With their direct and expanded access to federal revenue the local councils have assumed important responsibilities in the prosecution of their own development functions, especially primary education and health programmes, as well as the implementation of a wide range of federal development policies and programems at the Local level. Local Government contributions to the Gross Domestic Product (GDP), for instance, dropped from 2 percent in 1960 to 0.3 percent in 1976. Their share of public expenditure also fell from an average of 11 to 15 percent between 1955 and 1966 to 2 percent in 1976. From 1976, however, local government share of GDP has been rising-it rose to 3 percent in 1987, while their share of public expenditure reached 7.5 percent (Olowu, 1988).
  67. 67. 67 Essentially, then, the increasing revenue from local government statutory allocations have enhanced their economic fortunes and service delivery capacity. Their ability to deliver to services depends on the availability of revenue. Yet, it is clear that neither the enhanced autonomy nor the increased and direct fund disbursement over the years has been adequate to meet their needs. Lack of adequate financial resources to backup the workings of established local councils has, therefore, become an economic constraint which derives from and, in turn, reinforce their relative lack of autonomy. Consequently, many local governments in the country have ended up spending the bulk of their revenue on recurrent rather than capital expenditures, and even this has hardly been sufficient. Examples include the Akinyele Local Government in Oyo State and Ahoada Local Government in Rivers State where the best capital expenditure performance in the early 1990s was about 28 percent of total expenditure (Roberts, 1994). In 1993, Oyo Local Government received a quarterly allocation of N3.8 million from the federation account out of which N3 million was used to pay salaries and allowances, leaving N.8 million for other
  68. 68. 68 council activities. No less than nine local governments in Oyo State had this same experience that year (Roberts, 1997). This pattern of revenue utilization is still widespread in the country and defeats the intention to make local governments “prime centers” for social and economic development. General Babangida, a former Nigerian Head of State, articulates the expectations from the Local Government thus; Local Governments are no longer there just to pay salaries. They are there to ensure collective participation in governance, motivate physical and economic development, create the conditions for employment opportunities, and provide social services which can improve the well being of our people (Babangida 1988). In 1996, many local governments made representation to state and federal governments concerning the continued burden of staff salaries on their revenue. Their fear was that as elected officials, they risked being characterized as failures by the electorate, given that in their desperation, many of them had resorted to using their VAT receipts meant for capital projects for recurrent expenditure (Benjamin, 1996).
  69. 69. 69 Even of more direct importance but of no less consequence in determining the effect of local government autonomy on revenue utilization is the fact that local governments have limited freedom over their expenditures. The absence of local discretion in planning and budgeting at the local level tends to stifle local initiatives, contrary to the stated objectives of the local governments. Planned appropriations also get distorted in the course of scrutiny and control by higher levels of government (Roberts, 1998). The Department of Local Government in the Military Administrator’s Office has continued to be “obstructive, inhibitive and no less meddlesome” than the former MLGS (Okunade, 1997). Spending limits are routinely imposed on local government officials. Local government officials in the former Kwara State, for instance, complained of the tendency to subordinate them to the state government by means of “incessant circulars… which tended to supersede the contents of edicts stating local government functions”. Sometimes, local governments utilization of revenue had gone far in one direction only for circulars which are in direct conflict with them to be sent “from above” (Roberts, 1997:63). Hence, the absence of local autonomy directly affects the local government’s revenue
  70. 70. 70 utilization for development. Nevertheless, the constraints of local autonomy are not the only inhibitions on the role of local government in development. Particular cognizance must be taken of the role of corruption. While some isolated cases of good performance were evident during the botched Third Republic, for most local government chairman, it was a case of: A rare change to go on pilgrimage to Mecca or Jerusalem, to acquire and brandish a fleet of the latest posh cars in town, to erect some of the best architectural castles as their private homes, while unbridled corruption and fraud closely punctuated the officials activities of the council’s rank and file (Iyioke, 1993). In Cross River State, the State Government had to freeze the accounts of Biasse Local Government in 1993 the legislature opened an “illegal account” from which its members drew “illegal allowances”. In Lagos, an audit panel into the activities of the then 15 local governments noted diversion of local government funds into private pockets and dubious business ventures. In Ondo and Akwa Ibom States, several chairmen deposited local government subvention into savings and loans companies in which the local governments had no account. Jigawa State lost
  71. 71. 71 about N147 in 2000 due to similar activities by its local governments (Roberts, 1997). The cumulative effects of these acts of corruption on local development have been quite telling. It is hardly surprising that Nigerian local governments prefer “contractocracy” as development strategy, in contradistinction to “contracting out” which defined the thatcherite era in the British local government. Thus, even in the context of local autonomy, corruption injects autonomous local authority with allocation as well as production inefficiency. What obtains, therefore, is the multiplication of “autonomous” nodes of corruption nationwide, thereby making it more widespread. Theoretically, the benefits of decentralized or relatively autonomous corruption are better distributed than those of centralized corruption. However, the real cost is that it leads the local government to favour development projects with a significant scope for kickbacks over and above those defined by popular need but with little scope for personal gains. Corruption is also costly to local development because it leads to corruption avoiding strategies that increase costs, favour ineffective technologies, and waste time (Prud’ homme, 1994).
  72. 72. 72 2.4.1 LOCAL GOVERNMENT TAX FINANCES AND REVENUE UTILIZATION Public revenue mobilization is one of the most keenly contested issues in Nigeria. A comprehensive review of the reports of the various commissions and government policies from the 1946. Philipsons commission to the activities of the National Revenue Mobilization, allocation and fiscal commission established in 1989 could be found in Kayode (1993), Emenuga (1993) and Ekpo (1994). Local governments in Nigeria received statutory allocations from the two higher tiers of government (Federal and States). At the present, revenue sharing formula, local governments receive 20 percent from the federation account. They are also statutorily entitled to 10 percent of states’ internally generated revenue. As regards to Value Added Tax, local governments receive 30 percent in 1998. This was shared to local governments, on the following basis; equality (50 percent): population (30 percent) and derivation (20 percent). In 2006, local governments received 35 percent of the VAT proceeds.
  73. 73. 73 The federal government controls all the major sources of revenue like import and excise duties, mining rents and royalties, petroleum sales tax, petroleum profit tax and companies income tax among other revenues sources. Local government taxes are minimal hence this limits their ability to raise independent revenue and so they depend solely on allocation from the federation account. But the federal government seems to exercise too much control over its distribution. So many deductions are made from the total revenue collected before the rest is distributed according to the sharing formula. Table 3 summarizes federal allocation to local governments for the period 1976 to 2006. The federal allocation showed steady increases during the periods. In nominal terms, the allocation which stood at N100 million 1976 jumped to N352.6 million in 1980 and further jumped to N1166.9 million in 1986, reflecting a compound growth rate of almost 29 percent. During the structural adjustment programme (SAP) federal allocation to local governments increased remarkably by 45.7%. This jump could be as a result of the increase in the number of local governments.
  74. 74. 74 Table 2: Jurisdiction of Major Taxes in Nigeria 1990 S/N Type of Tax Administration and Collection 1 Import duties Federal 2 Exercise duties Federal 3 Export duties Federal 4 Mining and royalties Federal 5 Petroleum sales and profit tax Federal 6 Companies tax Federal 7 Capital gains tax Federal/State 8 Personal income tax (other than listed in 9) States 9 Personal income tax, armed forces, external affairs officers, on-residents, residents of the Federal Capital Territory and the Nigeria Police. Federal 10 License fees on television and wireless radio. Local 11 Stamp duties Federal/States 12 Capital transfer tax (OTT) States 13 Value Added Tax Federal 14 Pools Beffing and other Beffing, taxes States 15 Motor vehicle and Driver’s licenses States
  75. 75. 75 16 Entertainment tax States/Local 17 Land registration and survey fees States 18. Property taxes and rating Local 19 Marketing and trading licenses and fees Local 20 Motor parks duties Local 21 Advertisement fees Local 22 Gift tax States Source: Constitution of the Federal Republic of Nigeria.
  76. 76. 76 Table 3: Nigeria Federal Statutory Allocation Revenue to Local Governments, 1976-2006 (N million) Year FA FR FA/FR% 1976 100.0 6765.9 1.5 1977 250.0 8012.2 3.1 1978 150.0 7469.3 2.0 1979 261.4 10913.5 2.4 1980 352.6 15234.0 2.3 1981 1085.0 12190.2 8.9 1982 1081.7 11764.4 9.2 1983 876.9 10508.7 9.3 1984 1061.5 11766.8 9.0 1985 1327.5 14680.8 9.0 1986 1166.9 12837.6 9.1 1987 2117.8 25099.8 8.4 1988 2727.1 27310.8 10.0 1989 3399.8 50272.1 6.8 1990 7680.0 66895.4 11.5 1991 10764.8 100991.6 10.6 1992 16488.0 90453.2 8.7
  77. 77. 77 1993 18316.4 192769.4 9.5 1994 17321.3 201910.8 8.6 1995 17983.4 459987.4 3.9 1996 21590.6 520190.0 4.1 1997 22881.5 452000.0 5.1 1998 30,600.9 44948.2 68.1 1999 43,870.3 60,800.6 72.1 2000 118,589.4 151,877.3 78.1 2001 128,500.5 171,523.1 74.9 2002 128,896.7 172,151.1 74.9 2003 291,406.9 370.170.9 78.7 2004 375,656.3 468.295.2 80.2 2005 493,000.3 597,219.1 82.5 2006 550,796.3 674.255.7 81.7 Source: Central Bank of Nigeria, Annual Report and Statement of Accounts (Various Issues)
  78. 78. 78 Table 4: Nigeria: Fiscal Balance of Local Governments 1993-2006 (N million) Year Revenue Expenditure Surplus 1993 19,915.6 19,544.7 370.9 (+) 1994 19,072.7 18,776.4 296 (+) 1995 25,227.1 24,191.5 1035 (+) 1996 23,789.6 29,809.9 1422.4 (+) 1997 31,254.4 29,939.9 1,314.3 (+) 1998 44,948.2 44,056.9 891.3 (+) 1999 60,800.6 60,441.2 359.4 (+) 2000 151,877.3 153,864.8 1,987.5 (-) 2001 171,523.1 171,374.5 148.6 (+) 2002 172,151.1 169,820.2 2,330.9 (+) 2003 370,170.9 361,713.2 8,457.7 (+) 2004 468,295.2 461,050.6 7,244.6 (+) 2005 597,219.1 587,977.8 9,241.3 (+) 2006 674,255.7 665,838.0 8,417.8 (+) Source: Central Bank of Nigeria, Annual Report and Statement of Accounts 2006.
  79. 79. 79 The internally generated revenue sources of Local Government consist of taxes, rates, fines, fees and licenses. The study shows that taxes continue to form the bulk of internal revenue, followed by fines and fees. There is also a list of users’ charges, royalties and proceeds from stocks and shares, which are categorized as “others”. Internally generated revenues increased from N19,915.6 million in 1993 to N674,225.7 million in 2006, representing a growth rate of 50 percent. “For all the local governments, taxes rates, fines and licenses increased during the period under review. In Ijebu-North Local Government, taxes jumped from N31,000 (N55,259.19 in real terms) in 1980 to N121,000 (N67,760.00 in real terms) in 1984 and by 1991 taxes stood at N31,000 (N74,745.19 in real terms). The taxes grew by 12.8 percent between 1980 and 1991. During the same period, taxes and rates grew by 31.2 percent and 18.9 percent respectively. However, in metropolitan Calabar, taxes and rates grew by 5.1 percent and 9.8 percent respectively, during the same period. On the other hand, licenses declined by 4.4 percent (Ekpo and Ndebbio, 1998:16).
  80. 80. 80 Value Added Tax also constitutes an additional source of revenue to local governments. There is a limit to the imposition of taxes on the people in order to provide infrastructures. One should try to strike a balance between aggressive internal revenue sources through increased taxation and the need to avoid governance problems. The viability of local governments has implications on the management of the wider economy. Budget deficits at the local level may create or aggravate public revenue mobilization problems. In Nigeria, major tax bases remain under the central government. Some taxes are shared by state and local governments, for example, property taxes and rates (see table 2). On the other hand, licenses and fees on television and wireless radio are shared between the federal and local governments. But the federal government may manipulate tax rates to solve macroeconomic problems without bothering about the lower levels since the latter have no major tax bases assigned to them. It is evident from the available data that for the period 1993-2006, local governments had fiscal surplus. This situation may be different when specific local governments are
  81. 81. 81 examined. Hence, it is difficult to conclude whether decentralization may result in stability or instability. There are several other off-budget accounts that have been operated by the federal government. Some of these are the oil surplus account opened at the beginning of the Gulf War in 1990. Another one is the special debt account intended for repaying part of the country’s external debt. This discretionary powers exercised by the federal government has caused public resources to be over-concentrated at the centre. This concentration can be seen from the distribution of total public sector expenditure among the three tiers of government’s from 1993 to 2006 as shown in table 5.
  82. 82. 82 Table 5: Distribution of Total Public Sector Expenditure among the Federal, States and Local Governments, 1993- 2006 (N million) Date Federal States and FCT Local Total 1993 1912229.1 44180.9 19475.5 254885.5 1994 160893.2 55916.4 18967.1 235776.7 1995 248767.8 79591.6 22443.3 350802.7 1996 288289.3 84177.1 24261.7 396528.1 1997 356262.3 92647.6 30833.0 479742.9 1998 487113.4 143773.6 44056.9 674943.9 1999 947,690.0 163121.0 60441.2 1171252.2 2000 701.1 355679.7 153864.8 510245.6 2001 1018.0 529951.2 171374.5 702343.7 2002 1018.2 707669.2 169820.2 878507.6 2003 1226.0 869328.6 361713.2 1232267.8 2004 1426.2 969738.5 461050.6 1432215.3 2005 1822.1 1303852.1 587977.8 1893652.0 2006 1938.0 1478300.3 665838.0 2146076.3 Source: Central Bank of Nigeria, Annual Report and Statement of Accounts 2006.
  83. 83. 83 Table 5 shows that from 1993 to 1999, the Federal Government controlled between 68 and 75 percent of total public expenditure while the other two tier accounted for the remaining 32-25 percent. All the local governments in the country had control over only 8 percent of total public spending in 1993 and 6 percent of same in 1999. At this same time, local government internal revenue only increased marginally from 5 to 8 percent as shown in table 6. From 1999 to 2006, the Federal Government control of total public expenditure dropped drastically. While that of the other two tiers rose up tremendously.
  84. 84. 84 Table 6: Relationship between Direct Allocations and Internally-Generated Funds at the Local Government Level Date Direct Allocation Less Grant Internal Tax Efforts Total 1993 18569.5 269.4 1035.6 19874.5 1994 17787.7 229.5 1205.91 19223.1 1995 18500.9 242.9 2110.8 20854.6 1996 18271.6 0.0 2211.1 20482.7 1997 21022.2 139.2 2506.9 23668.3 1998 31351.3 94.5 3331.6 34777.4 1999 44290.1 2266.9 4683.8 51240.8 2000 120512.5 10,303.2 7152.9 137968.6 2001 130099.1 15300.9 6020.4 151420.4 2002 130569.0 12434.1 10420.8 153423.9 2003 293526.7 16820.3 20175.5 330522.5 2004 379282.0 20620.2 22407.8 422310.0 2005 496244.2 21138.8 24042.5 541425.5 2006 554231.1 20879.5 23225.1 598335.7 Source: Central Bank of Nigeria, Annual Report and Statement of Accounts 2006.
  85. 85. 85 Also, local governments are not allowed to borrow externally, to develop any viable project; through they may borrow domestically. Since local governments are very crucial for national development, then revenue and expenditure decentralization must accompany each other. 2.4.2 PROBLEMS OF LOCAL GOVERNMENTS TAX MOBILIZATION AND UTILIZATION IN NIGERIA There is shortage of well trained and qualified personnel which suppose to serve as tool for collection of taxes and rates at the local level, even the few available are not properly trained in efficient budgetary and financial management systems. Also most of the local governments are short staffed to carry out their duties. Local governments lack the capacity to attract and retain the right caliber of staff to articulate plans and execute programmes and projects in order to transform the lives of the grassroots people in a short period. Despite the fact that there are constitutional provisions for statutory allocations and internally generated revenues, local governments are tightly controlled and subordinated by state governors through sundry mechanisms, including manipulation of
  86. 86. 86 the disbursement of financial transfers to them. Local governments in Nigeria mobilize their funds solely from external sources. The external sources include federal and state governments financial transfers like grants, statutory allocations, share of Value Added Tax (VAT), receipts and loans. These external sources introduce a dependence syndrome in local government revenue mobilization effort. Any set back from the external sources would have adverse effect on the administrative machinery and execution of some viable projects. This also has weakened their internal revenue mobilization capacity. Another constraint is imposed on local government revenue mobilization capacity through state control over local government budget, which is made to pass through many levels of approval in the hands of the state governments. Even after approval, post- budget controls still impose further restrictions on what local governments can do (Roberts, 1998). The delay in the passage of annual budget for local governments poses a great problem in the sense that budget sometimes takes 3 months before approval. Some local governments chairmen
  87. 87. 87 deposited local governments subventions into savings and loans. Companies in which the local governments had no account some local governments see this as an avenue to divert council’s funds for personal use. 2.4.3 PROSPECTS OF LOCAL GOVERNMENTS REVENUE MOBILIZATION AND UTILIZATION IN NIGERIA The increase in revenue from local government statutory allocations definitely enhanced their economic fortunes and service delivery ability. No doubt, the institution of statutory allocation as local revenue mobilization mechanisms, the increase of the allocation from 10-20 percent of the federation account, the direct disbursement of federal revenues to local governments and the removal of some political bottlenecks and abolition of other administrative hindrances have boosted the revenue profile of local governments in Nigeria. Local governments in Nigeria are no longer there to discharge administrative functions they are deeply involved in collective participation in governance, encourage physical and economic development, and create the conditions for employment within their localities and provide social services that will improve the well being of their people.
  88. 88. 88 The 1976 reform has given local governments in Nigeria a short of radical transformation from being an appendage of state governments to a very important and autonomous third tier of government. With this reform, local government became a legal and conditional entity. 2.5 CONCEPTS, MEASUREMENT AND ACCOUNTABILITY OF SERVICE DELIVERY Delivering public services is a top priority in fragile states of these states are to make progress towards the Millennium Development Goals (MDGs). Strengthening the provision of essential services can also contribute to the long-term process of state building and may help to rebuild the legitimacy of the state and to strengthen civic engagement (OECD, 2008). A key measure of governance is the quality and availability of essential services such as healthcare and primary education. Services comprise a core element of the social contract. Public access to good services indicates that a society is well-governed and enables the political leadership to draw continued support for its programme. (Collier and Hoeffler, 2004).
  89. 89. 89 The governance perspective helps counteract the tendency to view essential services as akin to industrial outputs-that is, results of purely technical processes in which resources (tax revenues or aid funds) are converted into health care, policing, etc. The treatment of service delivery in the most advanced nations contributes to this impression. But experience in international development shows services to be something more; an outcome of the cooperative and hierarchical management of political aims (IECD, 2008). The quality and availability of essential services, such as health care and primary education, are a key measure of governance. Public services underpin the social contract between states and citizens and, as such, are an indicator of the health of a society. Grossly inadequate service delivery signals fragility (Collier and Hoeffler, 2004). Governments everywhere deliver services effectively when there is accountability between citizens and their leaders. Accountability emerges as a complex chain of relationships linking users, policy makers and service providers. Services reach the public in a two-step process: - policy makers allocate and providers produce the services (OECD, 2008).
  90. 90. 90 Different groups in society will have different visions about what makes “good” service delivery. In the education sector, clients (parents/learners) want low-cost, easy-to-access, safe, high- quality schooling that improves their children’s/their life chances. Policy makers and political leaders want to deliver social benefits at low cost, with high propaganda value and political rewards. The providers (teachers) care about technically sound curricula, high salaries, respect and safety. Thus, the effectiveness of service delivery-and in turn, the legitimacy of the political order- depends on addressing competing goals and expectations in ways that satisfy the stakeholders. The result may or may not involve the local government providing services directly, as long as the services are in fact delivered. 2.5.1 THE POLITICAL ECONOMY OF SERVICES The local government (or more precisely, the governing regime) plays a political “game” when it struggles to secure power; its success in doing so depends on, among other things, legitimacy. The source of legitimacy might be the leaders’ ability to deliver economic growth, national prestige, or public services. Alternatively (a more partial) legitimacy might derive from signals of special allegiance to certain traditions or ethnic groups.
  91. 91. 91 Thus, legitimacy may or may not relate to equitable service delivery. Even well-established states can fail to provide services capably and equitably. Public investments in services are always constrained by a range of influences reflecting a given state’s social and historical context. These include limits on voter’s knowledge and information, polarization of the electorate and (especially) the credibility of political commitments. Such constraints have the strongest effect in low-income countries like Nigeria and particularly in fragile states: accountability is weak, as government does not “listen to the people”. Where credibility is low (the case of Nigeria), instead of making broadly beneficial policy commitments, politicians may focus their attention on specific localities or individuals, and devise special projects and patronage jobs. This pattern, clientelism, thus sacrifices collective benefit-at times going so far as to create public ills-in the service of favouritism (Keefer and Khemani, 2003).
  92. 92. 92 The economy itself may have a broad or a narrow base. A broader base will have a narrower scope for government monopoly and exploitative regulation. A narrowly based economy enables the regime to extract benefit or “rents” from its control over natural resource exports, industrial monopolies, or strategic infrastructure (canals, military bases). The state is then free to ignore the non-strategic regions and populations in favour of narrow interests. A broader economic base forces the government to exert that much greater an effort to maintain effectiveness and legitimacy. 2.5.2 THE CENTRAL ROLE OF ACCOUNTABILITY Service delivery is not only a technical task but also a governance process. Adequate service delivery rests on a four- part relationship of accountability between the citizens and their leaders. a. Citizens elect political leaders, who are evaluated based (in part) on their policies regarding services. b. The policy makers choose a package of services and allocate them to beneficiary groups. c. The policy maker selects agents to implement (produce) the services in the package. (These agents may be units
  93. 93. 93 of the public administration or, alternatively non-state providers). d. The policy maker sets standards for the expected level and quality of performance, monitors the outputs and rewards or sanctions the implementers as appropriate. Services reach the public in a two-step process allocation (by policy makers) and production (by service providers/implementers). Accountability between the policy maker and the implementer is defined by a compact, which includes services delivery standards, monitoring methods, rewards and sanctions. This service compact cannot fully specify outcomes, especially for services that are inherently transaction- intensive and hard to monitor (such as classroom education). Moreover, the user of the services the client- is not a party to the service compact. Users have two potential routes of accountability for securing essential services; a long route, via the policy makers; and a short route, directly to the producers, as shown in the figure below;
  94. 94. 94 Accountability Triangle Short Route of Accountability Source: World Bank, 2003 The long route of political accountability is the more visible of the two. Whether the services are produced by a Local Government agency or contracted out to a private provider, the state has an irreducible role in choosing, designing, allocating and often regulating essential services such as education, health care and water sanitation. The long-route can also be referred to as voice, defined as the expression of citizen satisfaction or dissatisfaction through political, administrative, legal and media channels. Policy Makers (Allocation) Services Voice Citizens (prayers/clients) Client Power Providers (Production) Component Long Route of Accountability
  95. 95. 95 There is also an informational dimension to accountability. Policy makers must be informed of citizen’s preferences and citizens must have information on policy decisions and service quality. Where government is willing but lacks capacity, information flows may be impeded; weak communications and transport links can result in impaired public accountability. In these situations, the local government (and the long route of accountability) may not be a viable channel. Service delivery is therefore likely to depend on short-route accountability i.e. from service providers (producers) directly to users. Service producers may be local governments, private or NGO entities, or even dissident political movements or rebel groups (OECD, 2008). Where short route accountability is effective, clients can help tailor the package of services to their own needs and monitor the producers. (World Bank, 2003).
  96. 96. 96 2.5.3 DEVELOPING THE CAPACITY OF THE CENTRE TO ENABLE THE LOCAL Donor and academic literatures suggest that among the main benefits of decentralized service delivery are that local officials have greater knowledge of and are more responsive to their citizens’ preferences in designing services and allocating resources. It is also argued that the proximity of citizens to local government enhances their ability to articulate their demands and to hold officials to account, and that cost savings can result from efficiency gains arising from decentralization. These arguments are based on the following assumptions: - Higher levels of government will be willing to devolve power and responsibility for services to the sub-national levels, whilst also taking on important roles in creating policy frameworks and support systems. - Higher levels of governments will ensure that sub- national governments have adequate financial resources for service provision. - Administrative capacity at all levels of government will be adequate to take on their roles in service delivery. (UNDP, 2010).
  97. 97. 97 However, these conditions are rarely in place, and there is little empirical evidence to support the theory that decentralization improves service delivery (see Robinson 2007, Conyers 2007). Local governments frequently complain of excessive control from central units, onerous accountability mechanisms, inadequate resourcing and political interference, all ultimately undermining the decentralization of power. Nevertheless, central government does have to retain a degree of involvement in local affairs to ensure adequate accountability, proper use of resources and broadly equitable service accessibility across the national territory. How can this problem be addressed? Designing accountability and coordination mechanisms to ensure balanced central/local relations is a dimension of capacity development that has often been overlooked, but is absolutely critical to improving efficiency and effectiveness (UNDP, 2010). Capacity development for local service delivery requires interventions and approaches that also focus on the central level. While there is little evidence that service delivery is improved by