OUTSIDE THE BOX BY ALEX OTTI
“Despite a voluminous and often fervent literature on “income distribution,” the cold fact is that most income is not distributed: It is earned.” – Thomas Sowell
We live in a dynamic world where numerous ideas are constantly being introduced by creative and daring minds. These radical innovations live or die purely on the strength of how they are received by a discriminating society that has the freedom to choose and which votes literally with its wallet. The only sad situation is that for us in Nigeria, much as we claim or believe to be part of that dynamic and progressive world, we often miss the plot. Sometimes, we refuse to adopt the full concepts and corrupt them to suit our narrow selfish interests, or we simply read the script upside down. We shall delve more deeply into this but suffice it to say now that the world is currently experiencing the new wave of innovations brought about by the concept of ‘Sharing Economy’ but here in Nigeria, we are slow in adapting and indeed, we have a totally misguided concept in our ‘sharing’ of resources.
The term “sharing economy” is a relatively new concept that is built around collaborative consumption. A few individuals own goods (and services) while others are privileged to borrow, use, return and pay for them. Instead of allowing resources to lie fallow, they are made available to others who do not own such resources so they can use them when the actual owner does not have a need to use them. From a macroeconomic perspective, more resources in the society are mobilised and put to better use, under the concept of ‘sharing economy’ An example is what is referred to as peer to per (P2P) transactions where users are linked to owners for temporary use of assets when the owner doesn’t have the need to use such assets. P2P lending brings people who have excess funds to those that need to use such funds and make them available for a specified period and interest rate and they are returned to such owners at the expiration of the period. Technology is the main facilitator of this new form of transaction and it is a big threat to banks.
Another example of where technology is being used to disrupt traditional business methods, is in transportation. The introduction of Uber and other companies, modelled along its style, has literally rendered many traditional taxi drivers and transport businesses, redundant. Uber, amazingly, has no cars of its own, but it has become the largest commercial car company in the world.
The Uber model simply provides robust application software that brings car owners directly in touch with riders who pay less than they would ordinarily pay to taxi drivers while such car owners make money from the otherwise idle time of their cars. Uber takes a commission from what riders pay and passes on the balance to the owners of the cars and the tax man. Using a similar strategy, Airbnb puts idle rooms to use by advertising same on its online platform and getting guests who would have used hotels to occupy those rooms at relatively cheaper rates than the hotels. The company makes money by taking a commission from what the guests pay. The owner of the apartment is happy because he has an opportunity to collect rent from rooms that would have been otherwise empty.
As you would have guessed, our interest today is not on this type of sharing economy, but a sad parallel, which has bogged us all down. We intend to discuss the Nigerian sharing mentality, particularly with respect to governments at both national and sub national levels. Since the advent of the oil boom, officials of the various states of the Federation, meet with the Federal Minister of Finance or his designate to share money in a meeting called FAAC. FAAC stands for Federal Accounts Allocation Committee. At every FAAC meeting, the Federal government shares the revenue generated in the previous month to all the tiers of government based on constitutionally arranged formulae. Bear in mind that in contrast, several other countries that experienced the same ‘oil boom’, save their funds for the rainy day. In fact in Norway, almost all revenue from oil is saved in their sovereign wealth fund whose balance today stands at over $1trillion.
This year alone, up to November, FAAC has distributed about N6.85 trillion to all the tiers of government. This averages N623 billion per month and it is what majority of the states rely on to run their expenses and feed the greed of some public officers. A significant chunk of this FAAC is from proceeds of crude oil. The NNPC funds the FAAC account by periodic transfers to the federation account from where it is shared. Ordinarily, this should not be a problem as humans love to share, particularly if it is a largesse. The problem with sharing, however, is when the beneficiaries become dependent on the largesse such that they become lazy and unable to fend for themselves.
The bigger problem is that the beneficiaries become addicted to the largesse that even when something goes wrong and the largesse does not flow like it used to, the addict finds it difficult to adjust his life style and continues to spend as he was spending before, thereby, exposing himself to several risks. The immediate and clear risk is that the addict becomes technically insolvent and may resort to selling its assets or borrowing to meet up with day to day expenses. But for how long can this last? There is a limit to how many assets the addict can sell as he can only sell what he has, except he goes out to convert someone else’s assets. There is also a limit to how much he can borrow because lenders must pay attention to the capacity of the borrower to pay back its loan with interest and the assets put at his disposal in case of default. Yet another danger is the creeping laxity that this addiction breeds.
Because the addict assumes that the largesse would continue to flow, he becomes lazy and may refuse to work hard or work at all. The more the reliance on the largesse the less the need to sit down and think. Even things that he hitherto was an expert in doing become impossible. At first it is seen as something that is beneath him. He becomes a big man over night, but without the proper foundation and orientation. He wakes up in the morning and what is important to him is not how to add value to himself and the society but how to enjoy the good life, party, drink and go back to sleep.
Ladies and gentlemen, welcome to the Nigerian state of today! Times were, when oil was not a revenue earner in this country. Before oil was discovered, this country was running, many people would argue, more efficiently based on thrift and planning. Many national assets and infrastructure were created and nurtured. The Regions, as we had them then, were in healthy competition with each other to build such infrastructure as, roads, farm settlements, industrial parks, hospitals, universities, banks, and other assets. Many of these have endured till today.
The groundnut pyramid in the Northern Region had nothing to do with oil but for groundnut oil. The only relationship the palm settlements in the Eastern Region had with oil was probably palm oil. The cocoa harvests in Western Nigeria could only be said to be oily after it had been processed to cocoa butter. How about the rubber in the Mid West and some parts of the Eastern Region? When the oil largesse got us addicted, we abandoned all these God-given resources in a manner more crude than the crude in oil.
As if that was not enough, we went on a state creation spree. From 4 regions, we went to 12 states and from there to 19 and then to 36 states. Even as we speak, some people are still clamouring for more states. We also created without any reasonable logic, some 774 local government areas, who by recent law, have become autonomous. All these creations must be administered and such administration must be funded; all through the Centre. This is our own concept of the ‘sharing economy’!
According to a recent report by Budgit, a respected research and policy analysis company, 92% of the 36 states in Nigeria are today unviable. Only four states, namely Lagos, Rivers, Akwa Ibom and Kano passed the sustainability test. What this means is that it is only those four states that can raise enough internally generated revenue to fund their recurrent expenditure. So, if the other 32 states were businesses, they would, by now, be up for liquidation or auctioning. According to Budgit “We discovered states, such as Delta, are running huge recurrent expenditure reaching N200 billion. Bayelsa, despite its size and population, has a high recurrent bill of N137 billion, compared to Ebonyi with recurrent bill of N30 billion, Sokoto (N38 billion), Jigawa (N43 billion), Yobe (N35 billion), etc. It is a recurring theme to see states in South-South Nigeria running high recurrent bills, mainly driven by the high revenues earned due to the 13 percent derivation.”
Now that we are faced with these facts what should we be doing differently? The first is that the states should henceforth be run like businesses instead of as charities, as clearly seems to be the case currently. They must be made to cut down on their unjustifiably high cost of operation. This is true of both the federal and the local governments. Any business that does not cover its costs at the minimum, is a candidate for insolvency. So also, we must see and treat governments.
Governments must, as a matter of urgency, sit down and look at how to improve their level of productivity and capacity for internal revenue generation. There are fundamentals that should not be ignored. When a government behaves as if it is doing its citizens a favour by providing basic amenities and infrastructure, that government misses the point completely. Governments at all levels must realise that they are in competition with other governments. The beautiful bride called ‘investments’ only goes to a suitor who is prepared to receive her. Some public officials spend so much money and time in search of investments, instead of creating the necessary environment that will attract investments.
Little do they know that capital has the best information about everywhere. In addition, capital is a ‘coward’ that quickly flees at the first sign of inability to secure appropriate return on investment. With the advent of technology, all information is available at the click of a button. Your road shows may not be too important in making decisions as to where to invest. So, we advise our leaders particularly at state levels to sit down and prepare their states to become an investment destination. Frequent self-serving foreign trips, negatively impacts their recurrent expenditure and makes them more unattractive to investments.
Governments must also make a conscious decision to stop looking up to oil money from FAAC in Abuja and begin to look at other kinds of oil that is within reach in their own backyards. Our land is still very fertile for groundnuts, potatoes, vegetables, tomatoes, rice, palm oil, rubber, cocoa to mention but a few. Solid minerals are also found everywhere in Nigeria, most of them untapped. It is our contention that governments at state and local levels should pay more attention to harnessing all the resources available to them in order to reverse the trend of going cap in hand to share money at Abuja. The era of the ‘feeding bottle mentality’ must stop immediately.
We must not be oblivious of the fact that we may wake up one day to find that oil has dried up or that the world has no need for it anymore. The model that each government chooses to adopt is up to it, but we must advise that governments should take the lead and have the private sector come in either to partner with them in joint venture arrangements or take over completely. There are also places where constituents are blessed with ingenuity in producing and manufacturing consumer goods and generating services for economic value. It is imperative on governments to provide enabling environments for such businesses to do well, so government can raise revenue from such businesses. Like we have always maintained in this column, no government has the right to raise revenue when it has failed to create prosperity for the taxpayers.
Governments must also get their priorities right. Government expenditure must prioritise sectors that can boost the economy and create jobs. Some states are so close to each other that they can collectively share infrastructure and services. Instead of duplicating facilities like airports and stadia, for instance, such could be shared where possible. We are therefore calling for some form of economic integration amongst contiguous states, even if political integration may not immediately seem feasible.
Finally, it is our considered view that the current structure of government is simply unsustainable. We must agree to prune down the number of states and have the few states determine the number of local government areas it wants to have. In like manner, we must also reduce drastically, the number of our legislators to a manageable size and run a very lean and slim but efficient government. The earlier we begin this discussion, the better for us. We may pretend that all is well, but we cannot pretend for too long. The economic realities staring us in the face say otherwise. We have a choice to make between voluntarily reforming the structure of our political economy or waiting for the political economy to force us to do it. From history, the latter is never a palatable experience. The choice is for us to make, and quickly too!
To my readers, may I use this opportunity to wish all of you a Merry Christmas and a prosperous 2020. I must also thank you for keeping faith with this column.