The road to financial difficulties for states

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More than one-third of the 36 states of the federation owe workers’ salaries in arrears. No thanks to dwindling statutory allocations from the Federation Account, which have compounded the headaches of the governors. The Nigerian Governors’ Forum (NGF) is going cap-in-hand to President Muhammadu Buhari for a bailout. If that fails, the Federal Government should pay what its owing states. Assistant Editor Nduka Chiejina takes a look at how the states ran into financial barbed wire.

A number of reasons account for the inability of states to pay workers’ salaries. Allocations from the federal purse are falling as crude oil prices tumble in the international market. besides, there are oil theft in some parts of the country, the declaration of Force Majeure at the Bonny terminal and lack of creativity on the part of governors to develop new ways of generating funds internally, outside of the monthly handouts from the Federation Account.

Reason crude oil prices drop

It is no longer news that global oil supplies exceeded demand, thereby driving down prices. A major factor for the development was the explosion in United States (U.S.) oil production to almost nine million barrels per day and expected to hit the highest levels in four decades next year.

The struggling economies in Asia and Europe reduced oil consumption. China, one of the world’s largest oil consumers, has been having economic challenges, which have resulted in its demand for oil being outpaced in Asia by India, a country with its own share of financial difficulties as well. Saudi Arabia also cut the price of its crude supplies to the U.S, which has further propelled the sell-off.

According to the Financial Times of London, “oil futures (international market sales of commodities-oil) were hit especially hard by a decision by the Organisation of Petroleum Exporting Countries (OPEC) not to adopt additional measures to tackle oversupply issues. OPEC, the cartel responsible for one-third of global oil production, said it would keep its self-imposed output ceiling at 30 million barrels per day.

“The announcement subsequently sent already-low oil prices down even further as OPEC’s maintained quotas will do nothing to lower overall oil output to a point that is consistent with global demand for the cartel members’ oil, which the International Energy Agency estimates at just above 29 million barrels per day for next year.”

The extent to which prices has dropped

Oil prices fell steadily throughout the second half of last year, declining from highs above $100 to threateningly below $50 per barrel. Oil prices dropped below $70 per barrel for the first time since May 2010 and have continued their decline, even in the past week. Brent crude dropped 37 per cent since June 2014 last year, and fell nearly 12 per cent in the wake of OPEC’s quota announcement. Similarly, West Texas Intermediate (WTI) is down 34 per cent over the past five months and the oil price has dropped by roughly 12 per cent since last week too.

Historically, the fall in crude oil prices is not new. Between 1999 and mid 2008, the price of oil rose significantly. It was explained by the rising oil demand in countries like China and India. In the middle of the financial crisis of 2007 to 2008, the prices of oil underwent a significant decrease after the record peak of $145 it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to $30.28 a barrel, the lowest since the financial crisis of 2007 to 2010 began. The price sharply rebounded after the crisis and rose to $82 a barrel in 2009. On January 31, 2011, the Brent price hit $100 a barrel for the first time since October 2008, on concerns about the political unrest in Egypt.

For about three and half years the price largely remained within the $90–$120 range. In the middle of 2014, prices started declining due to a significant increase in oil production in the U.S., and declining demand in the emerging countries. By January 2015, the benchmark price of crude oil, both Brent and WTI reached below $50, with vanishing spread. A record dip below $44 for WTI (with Brent near $54) was reached at mid March 2015. The WTI price increased in the $60 (WTI) and $65 (Brent) region in the following months.

In December 2013, the Federal Government said the country recorded a huge decline of N117.89 billion in gross federally collected revenue in the month of December as a result of “serious disruptions in production and lifting operations due to maintenance, vandalism of pipelines and Force Majeure declared at Bonny terminal.”

The phrase, Force Majeure has become a common lexicon at the monthly Federation Account Allocation Committee (FAAC) meetings. Force Majeure means “superior force, chance occurrence, unavoidable accident”. It is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term- act of God (such as hurricane,  flooding, earthquake, volcanic eruption, among others), prevents one or both parties from fulfilling their obligations under the contract. In practice, most Force Majeure clauses do not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure.

Of course, the oil company(ies) operating at the Bonny Terminal relied on the activities of  the so-called vandals to institute the Force Majeure for almost a year, thus contributing to the decline in revenue to be realised by the country.

Lack of funds

By March 2014, states like Osun, Benue, Edo, Cross River and others have been having problems paying salaries. The Chairman of state commissioners of finance, who doubled as the Ebonyi Finance Commissioner, Timothy Odaah, told reporters after the March 2014 FAAC meeting in Abuja that state governments were advocating that “the subsidy should be removed so that every state or any member of the federating unit sharing from FAAC will take its own money and determine how to use it or grant subsidy to the level that it can afford.”  Odaah lamented that “subsidy is not solving the problem which it is meant to solve.”

He noted that the “Nigerian Labour Congress (NLC) and majority of the Nigerian populace appear to have been deceived into clamouring for subsidy because of syndicated projects and programmes that were put in, especially with regards to easing transportation problem and likewise tariffs on power supply. But, you will discover that it is the average poor man that suffers.”

To this end, Odaah stated that “a committee for subsidy has been constituted and it is to look into the impact of subsidy whether it should actually be alllowed, but I want to tell you that the resolution we took is that subsidy should be removed.”

The committee he said “will formulate a letter that will be sent to the Nigerian Governors’ Forum (NGF) and we are going to brief our respective governors and we will inform the president. We know it will be very difficult, considering the critical period we are in.”

Defending the proposal for oil subsidy removal, Odaah said: “There are some states that are fully industrialised and you have many industries and you use this subsidy in that particular place and the people who benefit more are those from the states that are industrialised because the fuel consumption of those industries which use more of the fuel subsidy unlike the states that are under industrialised.”

On marketers of petroleum products, Odaah stated that the “marketers are not following the intention of the government because it has created a very big market for them in certain ways. This is because transparency is not coming up. There are some people that are eating from the subsidy to the disadvantage of others.

“The resolution at FAAC, and that has been the position of the finance commissioners, is that the call should be made to the president so that he will have to review and reconsider the position of this subsidy and remove it.”

To prevent a backlash, Odaah advocated for the “sensitisation of the average public in Nigeria and the labour leaders to understand that we were deceived because it is not really serving the purpose because many states are crumbling as subsidy payment has eaten so much into the crude reserves.”

In March last year, the proceeds into the Excess Crude Account (ECA) stood at $3.5 billion because $1 billion was transferred and according to Odaah, “it is because certain approaches were followed otherwise by the month of April, you will be discovering a situation where the states’ allocation would have to be deducted to pay subsidy. And where is this subsidy going into?”

However, “you will be better employed in the states, the sates will grow their own industry, there will be more employment compared to the situation where subsidy takes away much that could be used for the purpose of industrialisation, there will be no employment, no investment and the vicious circle of poverty will continue,” he said.

The states claimed they ran into financial barbwire when the Central Bank of Nigeria (CBN) increased the Cash Reserve Ratio (CRR) of public sector deposits to 75 per cent. Speaking on behalf of his colleagues, Odaah took a swipe at the CRR policy. He expressed concern that “75 per cent of public sector deposits taken to the apex bank was a deliberate attempt to create artificial funds’ scarcity so that states, local government and even the federal governments cannot access bank loans because the interest rate would have gone so high and there is a plan by the CBN to raise it to 100 per cent. If that is done, it is an absolute artificial scarcity of funds created by a manipulated means.”

As a result, “FAAC members,” he said, “are calling on the Federal Government to look at it and review it by bringing it down so that cash would be available because the cost of funds is growing too high and with that, states cannot meet up. You go to borrow from international organizations, it is not possible; you want to borrow within Nigeria, it is not possible; because even the facilities you accessed previously at 12 per cent, the banks are now raising it to between 25 to 28 per cent and by the time they push the CRR to 100 per cent, it would even become 50 per cent. So, whose interest is it serving? We see it as a solution that is designed only to confuse. That is one of the issues we took into consideration.”

Dwindling monthly allocations

The total allocations to the three tiers of government for the month of February 2014 was N641.299 billion made up of N531.332 billion as statutory allocations to: Federal Government (52.68 per cent or N247.533 billion); states (26.72 per cent or N125.552 billion) and local governments (20.60 per cent or N96.795 billion).

In the following month, out of the N530.095 billion statutory allocation, the Federal Government was issued a cheque for the sum of N249.084 billion (52.68 per cent), the 36 states and the Federal Capital Territory got N126.339 billion amounting or 26.72 per cent while the 774 local governments shared N97.402 billion (20.60 per cent) among themselves.

An in April,  the Federal Government got the lion share of  N249.060 billion, representing 52.68 per cent; states got N126.327 billion, representing 26.72 per cent, while local governments got N97.392 billion, amounting to 20.6 per cent.

In May 2014, the net statutory allocation to the federal, state and local governments was N567.824 with the Federal Government pocketing N271.340 billion or 52.68 per cent, states got N137.627 billion or 26.72 per cent, local governments received N106.105 billion or 20.60 per cent.

That same month, Odaah advised all tiers of government to brace for the possibility of the country losing the buyers of its crude oil.

Odaah alerted of the possibility of the U.S. and China to stop their patronage. He advised all tiers of government to look inward towards generating revenue outside crude oil.

For June 2014, a breakdown of the allocated amount showed that N582.93 billion was shared under statutory allocation, N66.414 billion under Value Added Tax (VAT) envelope and the balance of N71.04 billion was shared from excess non-oil revenue.

In July, After deducting the cost of collection to the Federal Inland Revenue Service (FIRS) and the Nigerian Customs Service,  the Federal Government got from the statutory revenue the sum of  N257.32 billion representing 52.68 per cent, the 36 states shared the sum of N130.51 billion or 26.72 per cent while the sum of N100.62 billion was allocated to all the 774 local government areas.

The federal and state governments were locked in fierce negotiations on what to share for the month of September with the state governments forcing the sharing of N2.7 billion from the ECA.

Midway into the negotiations, state commissioners of finance stormed out of the auditorium of the federal ministry of finance, venue of the FAAC meeting in Abuja to regroup elsewhere and review the offer brought to the table for sharing.

The bone of contention was the outstanding debt owed by the Nigeria National Petroleum Corporation (NNPC) to the Federation Account and what to do with the proceeds of the ECA.

A commissioner told The Nation after the meeting was deadlocked that the figure brought to the table was bad (inadequate and unacceptable to the states) and that the states were prepared to reject the figure from the federal government. He, however, noted that negotiations were on to arrive at a more acceptable figure.

It was furthered confirmed to The Nation that the N2.7 billion from the ECA generated a lot of debate with the federal government team led by the former minister of state for finance, Ambassador Bashir Yuguda, who canvassed for “the no-sharing option based on the view that the country’s savings should be beefed to mitigate any likely shocks on the economy.”

However, the states led by their commissioners of finance opposed moving the amount into ECA on the grounds that their state governments “needed more funds to execute various projects and programmes as well as pay civil servants.” The state governments had their way and by this development, $4.1 billion was left in the ECA then.

The state governments also demanded for full disclosure of the activities of the NNPC, especially, how much had been transferred to the Federation Account.

At the end of a long drawn out meeting, the former minister told reporters what was shared for the month of September.

According to Yuguda, a total of N603.529 billion was shared for the month of September, which was lower than the N611.767 shared in the previous month.

The three tiers of government shared N463.779 billion, N65.102 billion from VAT, N30 billion as additional distribution from the NNPC, N35.549 billion from Subsidy Reinvestment Programme (SURE-P) and N6.330 as NNPC refund to the Federal Government.

State governments later presented a proposal to former President Goodluck Jonathan, demanding for $2 billion from the ECA “to complete on-going projects and to fund coming (last) elections.”

Odaah noted that “security matters and the coming elections required large amounts of money to execute and that the state governments were optimistic that President Jonathan as an understanding president, will favourably consider the proposal.”

For the fourth month in a row, the amount shared by the three tiers of government from the federation account shrunk from N603 billion in September to N593.337 in October  last year. The decline amounted to N10.192 billion.

For October, the statutory distributable revenue shared by the federal, states and local governments was N484.321 billion. About N35.549 billion was distributed under the SURE-P. The NNPC refunded N6.330 billion to the federal government and N64.137 billion was shared from VAT proceeds.

The steady decline angered states and their anger was aggravated because the former Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, had announced at the previous meeting that withdrawals will be made from the ECA to support the dwindling fortunes of the federation account but at the October’s FAAC meeting in Abuja,  not a kobo was withdrawn from the ECA to augment the shrinking fortunes of the other tiers of government, but N16.822 billion was transferred into the domestic ECA.

By the development, there were  strong indications that many states were suffering from poor financial situations and may have difficulties paying salaries and allowances. There were fears that the 2014 Christmas celebrations will be bleak in many states.

By November 2014, because of the continued drop in revenue, some states had demanded that the Federal Government should stop making further payments into the ECA and instead, share the money to all the tiers of government. The same demand was renewed in December.  By then, the state governments had started rushing to the capital market to raise funds to meet their financial obligations when it became clear that the Federal Government would not shift ground on the matter.

The Securities and Exchange Commission (SEC) admitted then that it was processing requests from at least seven states to access long-term funds bonds to meet pressing financial obligations.

Giving the sensitive nature of the requests, the SEC refused to disclose the states that approached it, but officials of the SEC were categorical in their stand that such bonds should not be used by the states to pay workers salaries.

According to the some SEC officials, who spoke to The Nation on the sidelines of the Capital Market Committee Retreat in Abuja, “for state governments to succeed in raising funds from the capital market they have to come with bankable projects with prospects of generating revenue.”

Such bankable projects that will likely scale the SEC’s hurdle for approval include infrastructure, real estate and such projects that can generate revenue for the states to pay back what they have borrowed from the capital market.

A source at the Debt Management Office (DMO) also confirmed that state governments were “making overtures to raise long-term funds from the capital market but were not carrying the DMO along as required by law; the figures are very bad as a result of the continued fall in revenue.”

The states, scrambled to raise these long-term funds because of the persistent drop in their monthly revenue occasioned by the drop in global oil price and the decision of the FAAC not to augment further shortfalls in monthly allocations to the three tiers of government, when it became apparent that there was a threat to the accruals in the foreign reserve and by extension, the ECA from where augmentation was accessed.

The worsening economic situation has forced states under FAAC umbrella to clamour for a wage review for political office holders and their appointees. Befored Odaah served out his tenure, he said the time had finally come for all tiers of government to tighten their belts and brace for tough time.

He said the option left for the states was to evolve survival strategies and stop the dependence on oil. One of such strategies, according to him, was the need for a downward wage review for political office holders to save more money to meet other demands.

However, Odaah cautioned against pruning down the number of special/personal advisers and assistants to governors and the president as their appointments was a way of reducing unemployment.

Another option was the diversification of state economies and less-dependence on oil to a point where oil would be a substitute and not the main stay of the economy, so that price volatility of oil would no longer be a shock to economies but a cause for little concern.

The need for wages review, he said, was occasioned by the fact that the ECA is dwindling and the amount shared by the three tiers of government has also been on the decline for many months running.

It was disclosed at the January FAAC meeting that the ECA accounts had been depleted to $2.45 billion from $3.1 billion within a month.

Yuguda said N15.631 billion was deducted from the ECA to beef up what was shared among the three tiers of government for the December FAAC allocation.

At the end of the meeting, N580.378 billion was shared by all the tiers of government as against N628.775 shared the previous month. To arrive at this amount, N474.400 was shared as statutory distribution among the federal, state and local governments; N73.466 billion from VAT; N10.551 billion from Exchange Gain; N15. 631 from the ECA and N6.330 refunded to the Federal Government NNPC.

The minister noted that the country was in this sorry state because there was “a 12 per cent drop in crude oil prices from $87.8 million in October to $77.5 million in November, leading to $62.8 million loss in revenue and a 52 per cent loss in volume coupled with 31 per cent price drop, culminating in a total revenue loss from the LPG/NGL October sales all contributed negatively to the federation equity.”

Yuguda  added: “The persistence of the Force Majeure declared by Shell since June 2014 and the shut down and shut-in of trunks and pipe lines at various terminals also impacted negatively on the revenue performance.”

Sadly, non-oil revenue also dropped “due partly to the fact that the timeline for the payment of taxes by many companies is yet to fall due.”

In April, the three tiers of government shared a paltry N388.339 billion compared to the N435.061 billion shared the previous month.

 

Desperate moves for way out.

A meeting of the 36 governors under the NGF with President Muhammadu Buhari is scheduled for tomorrow at the Aso Villa, seat of the Federal Government. On the agenda for discussion is the possibility of the President bailing out the states that are finding it difficult to pay salaries.

Without a bailout, it will be difficult for many states to clear the   backlog of salary arrears as some of them will require more than a month’s allocation to pay the workers for one month. The monthly subvention from the Federation Account is barely enough to pay workers’ salaries in some states. Once the salaries are deducted, there is virtually nothing left for projects.

 

President Buhari to the rescue

The Federal Government can do little giving the fact that the country practices a federal system where all the federating units are expected to fend for themselves, at least. However, the Federal Government can appeal to SEC and the DMO to help the states raise long-term loans by guaranteeing the bonds. But, there must be an understanding that the benefiting states must adhere to strict prudential guidelines and transparent management of financial resources before they get the Federal Government’s backing.

Sadly, the time the economic recession hit the states coincided with the country’s general elections when many state governors and key political actors were battling for their political survival, rather than exerting energies on how to save their state economies.

 

How states got into trouble

 The states got into financial mess by not being proactive and not applying creative economic skill to save their states. Instead of devising ways and means of boosting the Internally Generated Revenue (IGR), many of them sat back and waited for handouts from the monthly Federation Account.

Some of states also failed to prioritise their needs. They embarked on building non-revenue-yielding projects such as airports with no commercial value, additional universities when existing ones had not been maximised, football stadium not utilised for most days of the year, bogus government houses and governors’ lodges in the Federal Capital City (FCT).

Other unprofitable ventures include the sponsorship of rich and influential people to holy pilgrimages in Saudi Arabia and Israel; building duplexes and mansions as commissioners and legislators quarters even when they could not sustain 18,000 minimum wage and bought private jets for governors.

 

States with high dept profiles 

According to external debt figures released by the Debt Management Office (DMO), Lagos is leading other debto states with $1,169,712,848.65 (about N233.94 billion). The state had also borrowed N167.5 billion from the bond market. As of the last count, the debt portfolio of Lagos stood N40I.44 billion.

Following dwindling oil revenues and their inability to boost their IGR, many states, in addition to obtaining loans and overdraft from banks, had approached the capital market in the last four years to raise funds. The amount of money they borrowed through the issuance of bonds has tripled over the period, rising to N673 billion from N298 billion in 2011.

About 12 states have issued N375 billion bonds, surpassing the total bonds issued by all the states in the country since 1978. Lagos State is also atop the list of borrowers from the bond market with N167.5 billion. Rivers states, which recently launched a NI00 billion bond is second and Delta State with N50 billion is trailing. Others include Gombe (N30 billion), Ekiti (N25 billion), Niger N21 bilion), Bauchi (N15 billion) and Benue (N13 billion).

 

Most indebted states

Using the DMO’s external debt figures without adding domestic debts, Lagos tops the chart of 10 most indebted states in the country with $1.I7 billion or N233.94 billion debt, beating Kaduna  with N46.88 billion to a distant second; Cross River (N28.29 billion), Edo (N24.63 billion), Ogun (N21.83 billion), Bauchi (17.51 billion), Katsina (N15.79 billion), Osun (N14.81 billion), Oyo (N14.47 billion) and Enugu (N13.79 billion).

 

Least indebted states 

Leading the states with minimal exposure to multilateral and bilateral loans are: Taraba (N4.56 billion), Borno (N4.61 billion), Delta (N4.85 billion), Plateau (N6.19 billion), Yobe (N6.25 billion), Benue (N6.62 billion), Abia (N6.76 billion), Zamfara (N7.11 billion)and Kogi(N7.16 billion).

If domestic debts are added, states like Taraba, Borno and Abia, that had not issued bonds will qualify as the least indebted.

Abia State’s immediate finance commissioner, Dr. Phillip Nto, was quoted to have said: “When you collect bond, you are mortgaging your future because you pay over a long period of time.”

The National Bureau of Statistics (NBS) recently released the amount of money each state of the federation was making from their IGR efforts.

The Bureau had to release the figures following the outcry over the non-payment of salaries by some states on the grounds of non-availability of funds.

In the document entitled: “Details of Internally Generated Revenue in states” released by the NBS, it showed Lagos State collecting N276,163,978,675.95 in fiscal in 2014 as against N384,259,410,959.19 collected in 2013 to lead 22 other states which records of IGR were released.

Following Lagos is Rivers with an IGR portfolio of N89, 112,448,347.58 in 2014 compared to N87,914,415,268.80 collected in 2013 fiscal year. Delta trailed Lagos and Rivers with an IGR portfolio of N42,819,209,025.24 in 2014 as against N50,208,229,986.91 in 2013.

The NBS said the 2014 report would be updated as soon as other states submitted their IGR report.

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