A lot of Nigerian states are unproductive; they simply rely on crumbs from the master’s table, the federal government FAAC account. Governors and their accountants wait earnestly for the phone call to report to Abuja for their FAAC allocation. The 2014 oil windfall led to the rise of multimillionaires in the political class due to ‘fat’ FAAC allocations. Unfortunately, the tables have turned because instead of saving some FAAC allocation in reserves like the excess crude account, sovereign wealth fund, and the debt sinking fund, the federal government remitted heavy allocations to governors, while it faced a debt hangover. In the last three years, governors have seen episodes of late FAAC allocation, lower-than-expected allocation, and tussle on the Paris club debt refunds. To make matters worse, crude oil theft and the lack of a functional local refinery have worn out the ability to take from Bull Run on oil prices. Without revisiting how to make Nigerian states economically independent on their own, it is only a matter of time before some states become economically extinct.
Before describing my thought process on achieving economic independence for Nigerian states, let me address a few developments that could potentially thwart this process. Nigeria does not need any more states; in fact, some of them should be merged to save governance costs. Likewise, the narrative on federalism should start with ensuring these states can stand on their own economically and develop their infrastructures. Federal bias toward specific states should also be discouraged except for oil-producing states experiencing pollution and oil spillage.
How does a federal government make its states economically independent? There are five measures I believe will answer this question. First, taxes! State governments currently have the jurisdiction to collect personal income taxes, but these states have not utilized their tax collections to expand the tax base. Personal income taxes collected by the state governments should be used to create quality infrastructures that lure investors and businesses to the state. In turn, this creates more jobs and expands the tax base. Second, the federal government should attribute some fraction of FAAC allocation to the independent generation of revenue. A strategy for achieving this is to factor in the internally generated revenue (and the utilization of this revenue to create quality infrastructures) in calculating the FAAC allocation to states.
Then, there is the domestic capital market, which should be revamped to allow some states to raise funds for capital-intensive economic projects. The main challenge for states raising capital from the Nigerian Exchange is that investors have little credibility in the revenue-generating potential of these states. Hence, the risk of default is high. To reduce default risk, state governments should explore new revenue-generating sources that do not significantly impair the standard of living of their citizens; invest in sustainable revenue sources that outlive four-year administrations, and have an efficient debt management plan. Furthermore, there are non-oil natural resources in different states in the country that should be explored. On this point, some of the exclusive mining rights that reside with the federal government should be rescinded. This would require the federal government to adequately assess the readiness of the states to explore this mining right before they are granted permission to mine. There is not enough capital in Nigeria to drive the economic independence of Nigerian states; therefore, instead of governors and their commissioners idling away, they should visit developed countries, and attend investment summits and investor conferences to attract investors to their states. Regular pitch presentations by governors and their commissioners to foreign investors are productive in this context.
If the federal government is keen on reducing the federal coffers drain, it should look to recommend and implement these strategies in Nigerian states.
Written by Michael Ogunremi
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