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

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DEDICATION

This work is dedicated to God Almighty in appreciation of his

special love, care, mercy and protection.

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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.

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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

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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

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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

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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.

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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.

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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

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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

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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

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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

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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

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- 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

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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.

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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;

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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.

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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.

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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.

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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.

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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.

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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

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-

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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

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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:

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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).

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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

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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

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

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

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).

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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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

- 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

98

decentralization, there is also little to demonstrate that capacity

to deliver services locally is greater in national governments.

Rather than comparing their competence to do the same job-

deliver services. It would be better to consider how to develop

their capacity to do different but complementary jobs. Ultimately,

services are never completely devolved the centre always retains

some degree of responsibility or oversight.

2.6 PROBLEMS OF ADEQUATE LOCAL SERVICE DELIVERY

It is important first to recognize that while most of the literature

on local service deliver highlights the failure of sub-national

governments to deliver improvements, there is a counter-

argument. First, there are many more local than central

governments and so there is greater chance that some will be

found to perform less well. Second, it may be that locally

delivered services are not more likely to fail, but that they are

more exposed to the scrutiny that reveals poor performance. If

more reported cases of failure follow decentralization, it could

infact be seen as a positive sign that local government is more

accountable and responsive (UNDP, 2010).

99

We should be skeptical about universal approaches to capacity

development for local service delivery; national and local realities

are too specific for that. However, the literature that views

decentralization positively and the critical literature both indicate

the conditions that have to be in place for effective, efficient and

locally accountable service delivery. (Blare et al, 2004).

Analyses of local service delivery allow us to identify four key

constraints on local service delivery:

a. Dysfunctional Central/Local Relations: Several authors

emphasize that it is naïve to assume that officials benignly

devolve power and responsibility to lower levels of

government, when there is often little incentive to do so.

Case studies repeatedly find that central governments,

unwilling to truly devolve power, seek ways to ensure

central control, for example by under-resourcing local

government in terms of both human and financial

resources. Or, national governments are found to devolve

responsibility only in times of crisis when it suits them to

off-load the burden of meeting demands with inadequate

resources.

100

b. Elite Capture: Some authors indicate the danger of elites

capture within local government and the entrenchment of

patronage politics. If services are being delivered in an

environment of political patronage then decisions that could

benefit efficiency and equity will be corrupted, and instead

be made in favour of elites for personal financial or political

reward. There may well be even higher levels of elite

capture in higher tiers of government, but Ahmad et al

(2005) note the irony that local politicians may be more

inclined to operate on a clientelistic basis precisely because

of the positive fact that they have closer relations with their

electors.

c. Limited Administrative Capacity: Administrative

performance at local levels is often found to be extremely

weak due to lack of education and training vague or

inappropriate processes and systems, and poorly motivated

staff. Incentives for central government to improve the

administrative capacity of local government are often

missing.

d. Financial Constraints: There is little evidence to support

the claim that local revenue mobilization and the efficiency

101

of services increase with decentralization of powers. The

weak tax base in most developing countries renders the

possibility of local taxes resulting in significant revenues

unlikely. Local governments usually have to operate in

severely resource constraint environments, which hinder

their ability to improve service delivery. Local governments

are mainly reliant for funding on central government and

donor transfers that are often unpredictable and not

sustained.

2.7 CAPACITIES NEEDED FOR EFFECTIVE LOCAL SERVICE

DELIVERY

Considering the constraints, the capacities that need to be

developed can be grouped into:-

- Two that are mainly about internal functioning within and

between levels of government; financial management

including budgeting, and administration;

- Two that are mainly about relations with actors outside

government: the participation of and accountability to

citizens and partnership with non-state service providers.

Capacity development initiatives often fail to

understand that capacity for local service delivery

must be built at all levels of government and must

102

incorporate all stakeholders. The coordinator of a

local government training initiative in Uganda

commented that “initially local governments

thought it would only be appropriate to build the

capacity of the technical staff and less of the

elected officials (politicians). Experiences have

demonstrated otherwise, because the capacity of

local government should be built as one system...

The capacities of these stakeholders (technical

staff, politicians, local government statutory bodies

and non-state providers) need to be build equally

so that they are able to play their roles effectively

in the function of local governments for improved

service delivery. Incapacity of any player in the

system would adversely affect the performance of

the entire system. (Pyndt and Stefferson, 2005).

a. Capacity for Financial Management and Budgeting:

Financing constraints are a frequently cited cause of poor

local service delivery. Constraints concern two main

functions that cut across service sectors and are at the core

of the local political process:

i. Revenue mobilization and the management of

expenditure; and

103

ii. The organization of priorities and coordination through

budgets. At the organizational level, research shows

that the clearest skill deficiencies and system failures

in sub-national government are in public financial

management, including basic functions like collecting

revenues, processing intergovernmental fiscal

transfers, costing projects, making and following

budgets (Blare et al, 2004).

b. Administrative Capacities:

At both national and sub-national levels, skills and systems are

often weak for handling relatively new and complex functions

such as making contracts and regulating private providers. But

even basic bureaucratic functions are often poorly performed-

Mills et al (2002) cite the weakness of information (including

simple filing and record-keeping) and management systems as

among the principal reason for failure in the delivery of health

services. Management Information Systems (MIS) are often

heralded as the solution to poor record-keeping in developing

countries. In reality, the experience has been less promising.

Equally, there is often low management commitment to the use

104

of information technology, especially in cases where affordability

is an issue.

However, when implemented properly MIS can lead to great

efficiency gains and can ease information flows between levels of

government. Again this raises the issue of how best to create

incentives for changed behaviour.

A major part of reform is to achieve a balance between clarifying

inter-organizational roles and relationship and leaving a proper

space for local administration. Decentralization requires a formal

or information “constitutional settlement” in which administrative

responsibilities are clearly allocated, and boundary-crossing is

policed through mechanism such as constitutional courts,

external audit, parliamentary review or arbitration boards

(Souza, 1997). The balance of the settlement varies between

countries; what is important is to achieve clarity, transparency

and mutual respect for the rules of the relationship

c. Capacities for Participation and Accountability:

Two aspects of accountability are fundamentally important for

local service delivery: downward accountability to citizens and

105

upwards accountability to ministries. In poorer developing

countries, these accountabilities are often confused by the need

to respond to the requirements of external bodies, including

donors and international NGOs. Over the last decade

international agencies have given priority to the development of

indigenous system of accountability in particular by building into

direct budget support expectations of external audit,

parliamentary review and civil society involvement (OECD,

2009). Making this a reality is one of the most difficult and

important aspects of aid management and effective

decentralization (IDD and Associates, 2006).

There is a tension in opening more space for participation in the

management of services if it only benefits the already organized

and influential. It is widely argued that it is elite groups that

capture these opportunities; they are always likely to be more

capable of mobilizing their demands (World Bank 2003:73).

At the wider institutional level, all this depends on the emergence

of a democratic culture, where politics does not operate on an

ethnic of patronage and accountability structures are in place to

prevent the dominance of elites.

106

d. Capacities for Working in Partnership:

The increasing recognition of the need to work with non-state

actors in service delivery raises other capacity issues. Precisely

because of the severe capacity constraints on local governments,

and often encouraged by donors, there are pressures to bolster

their capacity by working with outside organizations. Local (and

central) government’s role in service delivery is increasingly

about partnering, contracting and regulating private businesses,

NGOs and community groups. This trend should not be

overstated. While non-state service actors in many countries are

the predominant providers of health, water and sanitation

services, and often large providers of basic education, they

mostly operate separately from government or on the basis of

reluctant toleration.

The experience of government and sub-national governments

that have entered into arrangements for collaboration or for

contracting out services demonstrates a wide spread weakness of

capacity on the part of government. In some, mutuality is

required-for example in working with citizens’ groups to develop

local sanitation, in others-such as contracting private health

providers-a delicate combination of trust and the ability to

107

monitor and control are needed (Batley and Mcloughlin,

Forthcoming).

To meet these newly emphasized roles, local capacity

development may need to move beyond focusing exclusively on

developing “functional capacities” to developing what Jayasuri

(2004) describes as “relational capacity”.

108

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Ahmad, E. (1997); “Intergovernmental Transfers-An

International Perspective” (Chapter 1, pp 1-17)., in E.

Ahmad (ed) Financing Decentralized Expenditures An

International Comparison of Grants (Cheltenham; Edward

Elgar).

Bahiigwa, G. Ellis, F. Fjeldstad, O. H. and Iversen, V. (2004):

“Rural Taxation in Uganda”. Implications for Growth,

Income Distribution, Local Government Revenue and

Poverty Reduction; EPRC Research Series No. 35

(January), Kampala. Economic Policy Research Centre.

Bahl, R. and Smoke, P. (eds) (2003): “Restructuring Local

Government Finance in Developing Countries” Lessons

from South Africa. (Cheltenham. Edward Elgar).

Bahl, R. and Wallich, C. (1992): “Intergovernmental Fiscal

relations in China”, Policy Research Working Papers WPS

863 (Washington DC: World Bank).

Batley, R. and Mcloughlin, C. (Forthcoming): “Engagement with

Non-State Service Providers in Fragile States: Reconciling

State-Building and Service Delivery”. Development Policy

Review.

109

Bardhan, P. & Mookherjee, D. (2002): ‘Corruption and

Decentralization of Infrastructure in Developing Countries’,

Mimeo, University of California, Berkeley, and Boston

University.

Beall, J. (2000): ‘From the Culture of Poverty to Inclusive

Citizens’ Re-framing Urban Policy and Politics, Journal of

International Development, Vol. 12, pp 158-181.

Bello Imam, I.B. (ed) (1990): ‘Local Government Finance in

Nigeria, Ibadan NISER.

Bird, R. (1990): ‘Intergovernmental Finance and Local Taxation

in Developing Countries: Some Basic Considerations for

Reformers’, Public Administration and Development, Vol.

10 pp 277-288.

Bird, R. and Vaillancourt, F. (eds) (1998); “Fiscal Decentralization

in Developing Countries” (Cambridge: Cambridge

University Press).

Blore, I., Devas, N. and Slater, R. (2004): ‘Municipalities and

Finance; A Source Book for Capacity Development’,

Earthscan, London.

Boadway, R., Roberts, S. and Shah, A. (2000): ‘Fiscal Federalism

Dimensions of Tax Reform in Developing Countries’

110

(Chapter 9, pp 171-200), in Perry, Whalley and McMahon

(eds) Fiscal Reform and Structural Change in Developing

Countries Vol. I (Basingstoke: Macmillan Press).

Brosio, G. (2000): ‘Decentralization in Africa’, Paper Prepared for

the Africa Department, International Monetary Fund

Washington DC.

Devas, N. (2003): ‘Can City Governments in the South Deliver

for the Poor’ London, Earth Scan.

Devas, N., Amis, P., Beall, J., Grant, U., Mitlin, D., and Rakodi,

C., (2004): “Urban Governance” Voice and Poverty of the

Developing World, London, Earth Scan.

Ekpo, Akpan H. (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.

Emenuga, Chidozie (1993): “The Search for an Acceptable

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Economic Development in Nigeria, Ibadan. Nigerian

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Fjeldstad, O.H. and Semboja, J. (2001):’Taxation, Coercion and

Donors. Local Government Tax Enforcement in Tanzania’.

The Journal of Modern African Studies, Vol.39(2), pp.289-

306.

Kayode, M.O. (1993): ‘The National Question and Revenue

Allocation’: An Articulation of Some of the Problems and

Issues. The National Questions and Economic

Development in Nigeria, Ibadan; Nigerian Economic

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Keefer, P. and S. Khemani, (2003): ‘The Political economy of

Public Expenditures’. Background paper for the World

Development Report 2004. Making Services Work for Poor

People, Development Research Group, World Bank,

Washington DC Processed.

Khemani, S. (2001): ‘Fiscal Federalism and Service Delivery in

Nigeria: The Role of States and Local Governments,

Mimeo Development Research Group, the World Bank,

Washington D.C.

Musgrave, R.A. (1959): ‘The Theory of Public Finance’ (New York

McGraw-Hill).

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Nigeria National Primary health Care Development Agency,

(2001): The Status of primary Health Care in Nigeria,

Report of a Need Assessment Survey.

Oates, Vallace E. (1993): ‘Fiscal Decentralization and Economic

Development, National Tax Journal Vol XLVI, No. 2.

Oates, Vallace E. (1994): Federalism and Government Finance in

Modern Public Finance Quigley, J. and E. Smolensky, eds.

OECD (2009): Aid Effectiveness: A Progress Report in

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Olowu, Dele and John Erero, (1995): ‘Nigeria Institutional

Delivery Mechanisms and the Poor’ Faculty of

Administration Background Paper prepared for the World

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Roberts, F.O.N. (1998); Paper Presented at a Two-Day Workshop

on “Effective Budgeting, Planning Implementation and

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of Oyo State, Iseyin.

Shah, A. (1998): “Fostering Fiscally Responsive and Accountable

Government: Lessons from decentralization”. (PP 83-96).

in R. Picciotto and E. Niesner (eds) Evaluation and

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Thoughts on Moving Forwards; paper Prepared for the

Conference on Fiscal Decentralization, 20-21 November,

2000, International Monetary Fund, Washington, D.C.

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114

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115

CHAPTER THREE

THEORETICAL FRAMEWORK AND METHODOLOGY

3.0 THEORETICAL FRAMEWORK

We adopt a simple theoretical framework for empirical

investigation. The sub-national government is assumed to choose

levels of education expenditure (E), health expenditure (H) and

other expenditure (O) in order to maximize a social welfare

function. It is assured that government expenditure provides

consumable services (using expenditure rather than actual

quantities of commodities). In the absence of true democratic

representation in sub-Saharan Africa, government officials make

choices based on a weighted average of various political

coalitions rather than preferences of the median voter (Fosu

2006). The government maximizes a general welfare functions of

the form.

U (E, H, O) - - - - (1)

Subject to the budget constraint

E + H + O = R - - - - (2)

Where R is sub-national government revenue, which consists of

R = OS + TR + OR - - - (3)

116

Where OS is own-source revenue (tax and non-tax), TR is

transfer from central government and OR is revenue from other

sources including borrowing (domestic and foreign). The marginal

utilities of expenditure on education (UE), health (UH) and other

services (UO) are assumed to satisfy the first-order conditions;

UE = UH = UO - - - - (4)

E + H + O = OS + TR + OR - - (5)

The social welfare function is assumed to have the usual

properties of strict quasi-concavity such that the second-order

conditions are:

UEE < O, UHH < O, UOO, UEEUOO > O, UHHUOO > O

UEE, UHH, UOO are the second order partial utilities.

Accordingly, we can write the demand functions as:

E = E (RP) - - - - (6)

H = H (RP) - - - (7)

Where RP is the predetermined component of R (such as

transfers). Assuming that E and H are normal goods, demand for

education and health is expected to vary positively with R. And to

the extent that sub-national government action can determine

revenue levels, R will be endogenous. This is particularly the tax

base and tax rate, are fixed by the central government, then OS

117

will be exogenous. The degree of endogeneity will depend on the

freedom given to SNGs to determine tax rate and tax base.

Normally SNGs determine the tax rate and tax base within

certain limits.

Ideally, the specification of education and health equations

should take account of the institutional framework for

government decision-making and this would imply a structural

model. However, as Fosu (2006) argues that estimation of

structural models can be highly sensitive to their specification.

Meanwhile, the process of decentralizing fiscal responsibilities is

not always well defined in developing countries, especially those

that lack true democratic representation. Under such

circumstances, the choice of a reduced-form model may be

preferred as it can give robust results across different types of

institutional settings governing public choice (Fosu, A. and T.

Ryan 2004).

As indicated previously, the demand for education and services

will depend on income, the level of development, and the factors

determining R. As some of the explanatory variables are not

118

explicitly accounted for in the model, it is arguable that the

model would yield more robust results through use of

instrumental estimation methods. However, as some researchers

suggest that potential endogeneity problem may be addressed by

using the share of education and health expenditure in the

government budget assuming that the relative allocation of the

budget is neutral with respect to domestic resources. Thus, the

education and health equations to be estimated are:

E = a1 + a2 OS + a3 TR + a4 Y + U - - (8)

H = b1 + b2 OS + b3 TR + b4 Y + U - - (9)

Where Y is income measured by regional GDP per capita,

OS share of own-source revenue in total revenue; TR is the share

of transfers in total revenue, and U is the stochastic disturbance

term. The focus of this study is on OS while other variables serve

as control factors. For fiscal decentralization to increase the

efficiency of service delivery the coefficient of the own-source

revenue must be positive. Demand for education and health is

expected to rise with per capita income. However, some studies

suggest that the income elasticity of demand for health services

for example, is unitary so that the income coefficient is not

significantly different from zero. The effect of transfers depends

119

on the transfer system and its objectives and could take either

sign. Similarly, the effect of OR, which includes aid is ambiguous

as it depends on its nature and the conditionality placed on aid.

This is particularly true if the aid is non-sector specific (Adam B.

Elhiraika (2007)).

3.1 SPECIFICATION OF MODELS

Model I

This model aims to capture the relationship between Health

Service Delivery and Local Government Tax Revenue

Mobilization. The model is outlined below:

HSD = F (LGT, FSA, IR, G) - - - - (1)

The above function can be expressed in an equation form given

below,

HSD = a0 + a1 LGT + a2 FSA + a3 IR + a4 G + Ut ----(2)

a1, a2, a3, a4 > 0

Where

HSD = Health Service Delivery Proxied by Local

Government Recurrent and Capital Expenditure.

LGT = Local Government Tax

FSA = Federal and State Allocation

IR = Internal Revenue

120

G = Grants

Ut = Error Term

Model II

This model tends to capture the relationship between education

services and Local Governments Tax Revenue Mobilization over

the period of time that is been examined. The model is outlined

below;

ES = f (LGT, FSA, IR, G) - - - - - (1)

The above function can also be expressed in an equation for

given below;

ES = b0 + b1 LGT + b2 FSA + b3 IR + b4 G + Ut - (2)

b1¸b2, b3, b4 > 0

Where

ES = Education Services proxied by Local Government

Recurrent and Capital Expenditure.

LGT = Local Government Tax

FSA = Federal and State Allocation

G = Grant

IR = Internal Revenue

Ut = Error Term

121

3.2 METHODOLOGY

3.2.1 NATURE AND SOURCES OF DATA

The nature of any research work dictates the type of data to be

used. Accordingly, this research projects employs solely

secondary data. This was necessitated by the fact that such data

are readily available and easily accessible with less probability of

inaccuracy. The sources of data for the research project were

secondary in nature. Such data were obtained from publications

of the Central Bank of Nigeria (CBN) and the Federal Office of

Statistics (FOS). The publication the Central Bank of Nigeria

(CBN) includes Annual Reports, Economic and Financial Review,

Statistical Bulletin etc. In order to evaluate the subject as

extensively as possible, textbooks, seminar papers, articles and

journals of various sources are consulted for useful information.

3.2.2 METHOD OF DATA PRESENTATION

Due to the nature of the research project, time series analysis of

the various variables was employed. That means annual data

were used. Data was presented with the aid of table in order to

show trends in the variables of analysis.

122

3.2.3 METHOD OF DATA ANALYSIS

The research project evaluates the topic titled; “Mobilising

Local Government Tax Revenue and Adequate Service

Delivery (An Empirical Evaluation). The nature of the

research project and the type of data to be employed requires

the use of several methods of analysis. Specifically, the research

project employed the use of regression analysis. The regression

analysis was employed since it will empirically evaluate whether

or not there exist a relationship among the variables of interest.

And if such relationship exists, the regression analysis will assist

in determining the nature of the relationship. Whether negative,

positive or neutral. The regression analysis adequately solves the

problems of inferences or that of drawing up viable conclusions.

Above all, the nature of data collected dictates that the

regression analysis is the best econometric method for this

nature of research. (OJameruaye, E.O. and Oaikhenan, H.E.

2004).

123

REFERENCES

Adam B. Elhiraika (2007); ‘Fiscal Decentralization and Public

Service Delivery in South Africa’. African Trade Policy

Centre (ATPC) Work in Progress No. 58 Economic

Commission for Africa.

Fosu, A. (2006): “Fiscal Allocation for Education in Sub-Saharan

Africa: Implications of the External Debt Constraint,”

Forthcoming in World Development.

Fosu, A. and T. Ryan (2004): “Public Sector Delivery: A

Synthesis”, Journal of African Economies Vol. 13

Supplement 1, pp 137-141.

Gujarati, D. (2004): Basic Econometrics. 14th Edition New Delhi:

McGraw Hill

Ojameruaye, E.O. and Oaikhenan, H.E. (2004): A Second Course

in Econometrics, Benin City: He Hennas Publishers.

124

CHAPTER FOUR

4.1 ANALYSIS OF REGRESSION RESULTS

The results of the estimated equations are presented and

analyzed in this section. We begin by showing the results of the

OLS technique on both models.

Model I

We begin by observing the relationship between Health Service

Delivery and Local Government Tax Revenue Mobilization. The

results can be stated below;

Dependent Variable: HSD

Independent

Variable

Coefficient T-statistics

LGT

IR

G

FSA

C

-0.000627

-0.001636

-0.000534

-0.004634

0.771196

-4.425733

-3.639887

-1.545744

-1.503205

0.423490

R2=0.94, R2 = 0.92, F-statistic = 40.8, DW = 2.1

Source: Authors Computation

This result has a strong goodness of fit. At a value of 0.94, the R-

Bar squared shows that over 92 percent of the systematic

125

variations in Health Service Delivery is captured by the four

outlined variables. The F-value which is 40.775, shows that the

overall model is significant at both 5% and 1% level. This gives

in confidence that a relationship actually exists between Health

Service Delivery and the combined effects of the independent

variables.

When considering the individual coefficients of the explanatory

variables, it is observed that LGT, IR, G and FSA are significant

at 5% level while G and FSA are not significant at 1% level.

Each coefficient does not possess their expected apriori signs.

Hence, indicating an inverse relationship between Health Service

Delivery and the explanatory variables. In other words, this

indicates that a rise in any of the explanatory variable will lead to

a fall in Health Service Delivery. The DW statistic is 2.1 which

indicate no evidence of auto correlation in the model.

126

Model II

This model tends to capture the relationship between Education

Services and Local Government Tax Revenue Mobilization over

the period of time that is been examined. The results of the OLS

can be stated below;

Dependent Variable: ES

Independent

Variable

Coefficient T-statistics

LGT

IR

G

FSA

C

-0.000513

-0.001524

-0.000320

-0.007482

2.373576

-3.325310

-3.110883

-0.849559

-2.227503

1.196255

R2=0.93, R2 = 0.90, F-statistic = 33.80, DW = 1.61

Source: Authors Computation

The R2 of the result is 0.93 while its adjusted R2 is 0.90. This

shows an impressive goodness of fit. About 90% of the

systematic variation in education services is explained by the

four explanatory or independent variables.

127

The F-statistics value of 33.80 is significant at both 5% and 1%

level, indicating that there exist a significant relationship between

Education Services and the four explanatory variables.

The individual test for each of the coefficient of the explanatory

variables reveal that the LGT coefficient does not possess the

expected apriori sign, but it is significant at both 5% and 1%

level. The Internal Revenue (IR) coefficient is significant at both

the 5% and 1% level but has a negative sign. The other

coefficients are insignificant at 1% level, but the coefficient of

FSA is only significant at 5% level.

The DW statistic is approximately 2 which indicates no evidence

of auto correlation in the model.

4.2 POLICY IMPLICATION OF RESULTS

Based on the results derived from the final representation in the

models above, far reaching policy implications are contracted.

Thus, Local Government Tax was found not to conform to apriori

criterion. Hence, an increase in Local Government Tax

mobilization would lead to a decrease in its allocation to Health

Service Delivery. The deductions that could be made from the

128

empirical findings are predicted on the sizes and magnitudes of

the slope coefficients. From Model I, under the short-run model

the R2 which is 94% has a high predictive power that is it can be

used for policy forecasting and stimulation. Model I also shows

that all coefficients of the explanatory variables are not correctly

signed except that of the constant coefficient whose coefficient is

positively signed. This implies that it increases Health Service

Delivery and makes it rise faster than others. This result also

demonstrates that Local Government Tax, Federal and State

allocation, Grants and Internal Revenue are individually

significant in explaining Health Service Delivery in Nigeria and

also all explanatory variables of interest contributes collectively

in the determination of Adequate Service Delivery in Nigeria.

Model II shows that all the coefficient of the explanatory

variables are also not correctly signed except that of the constant

coefficient. In other words, they do not conform to apriori

expectation. The explanatory variables are more or less

redundant in the determination of Education Service in Nigeria.

This conclusion emanated from an unreported analysis in which

the explanatory variables which are not correctly signed, was

129

found redundant in the Education Services Model. Thus, a unit

increase in any of these variables will reduce the rendering of

Education Services in Nigeria. This implies that the government

should adopt different policy measures which can mobilize

revenue for adequate service delivery and also the government

should also build confidence in the domestic political system with

strong governance institutions.

On the whole, it is inferred that the dependent variables which

are Education Services and Health Service Delivery and the

regressors are collectively significant at 5% level and also

variables such as Local Government Tax, Internal Revenue, Grant

and Federal and State Allocation are individually significant in

explaining adequate service delivery in Nigeria.

130

REFERENCES

Gujarati, D. (2004); “Basic Econometrics 4th Edition, New Delhi:

McGraw Hill.

Ojameruaye, E.O. and Oaikhenan, H.E. (2004): A Second Course

in Econometrics. Benin-City, H. Hennas Publishers.

131

CHAPTER FIVE

SUMMARY, RECOMMENDATIONS AND CONCLUSION

5.1 SUMMARY OF FINDINGS

In this study, we assess the relationship between mobilising tax

revenue and adequate service delivery for Nigeria’s Local

Governments. Quantifying this relationship is important in as far

as understanding the role of government in allocation of

resources is concerned. The fundamental premise of this study is

that the “sourcing” of local government revenues precedes the

spending of these revenues by Local Government expenditures in

Nigeria.

This objective is achieved in several steps, first, using data from

the period 1970-2007. Second, using six variables which include

two dependent variables (Health Service Delivery and Education

Services) and four independent variables which includes (Local

Government Tax, Federal and State Allocation, Grants and

Internal Revenue. Third, our econometric tests further reveal

that while there is a stable relationship between local

government tax revenue mobilization and adequate service

delivery, there exists an inverse relationship between health

132

service delivery, education service and the other independent

variables.

The findings of the study also indicates that both own-source

revenue and allocations from central government have no

important impact on education services across provinces. A

certain fraction of generated revenue is always used to finance

education services. Thus, it seems that the mobilization of

revenue is effective in securing a minimum level of spending on

education services that is not disturbed by changes in the

relative share of allocations and own-source revenue in total

provincial revenue. While revenue allocations are always

associated with higher spending on health, the relative share of

health declines as provinces mobilize more own revenue, which

they spend on other services. This is an outcome of the fiscal

system and institutional arrangements that tie service delivery to

both the federal and state allocations.

Stated differently, local government in Nigeria face limited risk of

budget deficit explosions over the long term; and this could be

133

due to the fact that these sub-national governments raise funds

first and subsequently Finance expenditures.

Our findings are consistent with Park (1998) who found evidence

in support of the tax-spend hypothesis for the case of Korea. Our

findings also reaffirm earlier studies by Buchanan and Wagner

(1977) and Friedman (1978) who argue that governments first

raise tax revenues before engaging in new expenditures.

5.2 RECOMMENDATIONS

Our results point to the importance of aligning both local and

central government expenditures with revenue mobilization

capacity. Such alignment will also improve efficiency in the

allocation of resources particularly to the growth-enhancing

categories including infrastructure, health and education.

Capacity development for local service delivery should focus on

both internal functions (resource mobilization and expenditure

management, budgeting; basic administration within and

between levels of governments) and on external relationships of

participation, accountability and partnership with citizens, other

levels of government and other service providers. Very often it is

134

not just local skills that are lacking in these areas but an enabling

institutional environment. Two main themes have run through

this study. The first is that capacities must be developed at all

levels, and not just locally. Investments are also required in

national government to ensure supportive systems for local

service delivery. The second theme relates to the importance of

creating and maintaining incentives for change and for effective

delivery. The case study material shows that progress is possible

and that successful investments can be made when awareness of

the wider context and need for incentives influences policy

design.

Local government’s revenue generation in Nigeria needs

restructuring so that taxing powers be given to local authorities

and also she should be allowed to share major tax bases with

other levels of government to enable enough independent funds

for development.

Local governments should strive towards improving internally

generated revenue and instill transparency and accountability in

their management structure. This can be effectively carried out

135

through community participation in their various activities. Need

to carry people along in the execution of the projects would

encourage administrative openness and accountability.

5.3 CONCLUSION

This study has examined Local Government Tax Mobilization and

Adequate Service Delivery in Nigeria. Local Governments in

Nigeria receive statutory allocation from both the Federal and

State Governments. They also generate internal revenues

through taxes and fees etc. It is opined that expenditure

assignment should match with revenue generating powers in

order for Local Governments to discharge their functions

effectively. In essence, revenue and expenditure decentralization

must support Local Government public revenue profile.

136

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MODEL I

Dependent Variable: HSD Method: Least Squares Date: 08/11/10 Time: 03:18 Sample(adjusted): 1993 2007 Included observations: 15 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

LGT -0.000627 0.000142 -4.425733 0.0013 IR -0.001636 0.000450 -3.639887 0.0045 G -0.000534 0.000346 -1.545744 0.1532

FSA -0.004634 0.003083 -1.503205 0.1637 C 0.771196 1.821048 0.423490 0.6809

R-squared 0.942230 Mean dependent var 12.63333 Adjusted R-squared 0.919122 S.D. dependent var 12.90042 S.E. of regression 3.668752 Akaike info criterion 5.698782 Sum squared resid 134.5974 Schwarz criterion 5.934798 Log likelihood -37.74086 F-statistic 40.77522 Durbin-Watson stat 2.054240 Prob (F-statistic) 0.000004

145

MODEL II

Dependent Variable: ES Method: Least Squares Date: 08/11/10 Time: 04:38 Sample(adjusted): 1993 2007 Included observations: 15 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

LGT -0.000513 0.000154 -3.325310 0.0077 IR -0.001524 0.000490 -3.110883 0.0110 G -0.000320 0.000377 -0.849559 0.4154

FSA -0.007482 0.003359 -2.227503 0.0501 C 2.373576 1.984173 1.196255 0.2592

R-squared 0.931126 Mean dependent var 15.36000 Adjusted R-squared 0.903576 S.D. dependent var 12.87311 S.E. of regression 3.997389 Akaike info criterion 5.870361 Sum squared resid 159.7912 Schwarz criterion 6.106378 Log likelihood -39.02771 F-statistic 33.79794 Durbin-Watson stat 1.610672 Prob (F-statistic) 0.000009