Nigeria’s Senate recently did something that drew the applause of the majority of citizens. The red legislative chamber reduced the percentage share of recurrent expenditure in the proposed 2015 budget from 59 percent or N2.616 trillion to 58 percent or N2.5 trillion. Simultaneously, the Senate increased the relative share of the capital vote from 14 percent (N633bn) proposed by the executive to 16 percent (N700bn). The 109 wise men and women in the Senate and the applauding majority of Nigerians based their actions on the spurious claim that recurrent expenditure is unproductive and should, therefore, be curtailed as much as possible. There is evidence to the contrary but first, the evolution of the idea.
Nigeria’s economy watchers would recall that on 26 November, 2010, Sanusi Lamido Sanusi, then governor of Central Bank of Nigeria (CBN) and currently Emir of Kano, added glamour to the debate on relative shares of recurrent and capital votes in the annual budget with his convocation lecture at the Igbinedion University, Okada, Edo State.
Speaking on “Growth prospects for the Nigerian economy”, Sanusi repeated the idea that recurrent expenditure was unproductive when he declared that 25 percent of Nigeria’s recurrent expenditure was consumed by the lawmakers. By the time it was pointed out that the correct figure was 17 percent, the Senate had summoned both Sanusi and Olusegun Aganga, the finance minister at the time, to appear before its committees. Tempers later cooled but it had become a mark of wisdom to advocate higher relative share of capital vote in the annual budget.
By 2011, Ngozi Okonjo-Iweala, who replaced Aganga at the finance ministry, was comfortable to announce that it would be official policy to progressively increase the relative share of the capital vote in the annual spending plans of government. It was predictable that the finance minister would fail to deliver on that promise because public finance teaches that unqualified preference for progressively higher relative share of the capital vote in the annual budget is a myth that bears exploding.
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Students of budget reforms in Nigeria would recall that the State Economic Empowerment and Development Strategy (SEEDS) Manual produced by the National Planning Commission (NPC) with support from the British Department for International Development (DFID) states clearly that it is misleading to conclude that the recurrent vote is always unproductive. Regrettably, the decision of the late President Umar Yar’Adua to dump SEEDS for seven-point agenda scuttled widespread use of that manual by governments at all levels in the country. The SEEDS manual notes that current policy in Nigeria emphasizes capital investment with the recurrent expenditure generally seen as unproductive and a reflection of public service over-manning. It continues: “It may well be true that much recurrent expenditure is not productive, but this does not prove that infrastructure spend can be implemented successfully with reduced recurrent budgets.”
Part of the nationwide budget reforms sought to introduce Activity Based Budgeting (ABB) which often reveals that recurrent costs should increase to meet policy targets. Indeed, a central point of the strategy framework emphasized that budgetary allocations to recurrent expenditure on staff and overheads must be based on the targets and the strategies developed earlier, just as much as any capital projects. “There may well be cases where a particular strategy will involve only recurrent expenditure. If the best way to raise school attendance is to provide free school lunches and more textbooks or to raise teaching standards by training, only recurrent activities will be needed,” the authors of the SEEDS Manual stressed.
In addition, there is a sense in which a capital project generates recurrent expenditure streams. This is to say that if you spend your capital vote wisely in 2015, you will have to accommodate the recurrent component of that capital expenditure in 2016 budget if the benefits of the capital expenditure of 2015 are to be realized in 2016 and beyond.
Further examples could make the point clearer. Take the example of a federal government college located in Oginibo in Ughelli South Council of Delta State. The buildings and related infrastructure will be funded from the capital vote. However, the objective of improving pass rate in the junior and senior secondary schools exams will not be achieved unless teachers, library staff and other categories of human capital are reunited and deployed. The purchase of a school generator, which is a capital expenditure, will require a generator attendant and diesel or petrol to run it. These and similar examples of recurrent expenditure embedded in a capital project are bound to hike the recurrent expenditure budget.
Another dimension to the fixation on relative higher share of capital vote in the annual budget is the fact that over the last seven years, actual capital expenditure performance has averaged 53 percent. This necessitated the practice of allowing the capital budget to run until March or May of the following year. The oddity of this practice in terms of budget monitoring and evaluation led the finance ministry to abolish the practice in the last quarter of 2014.
The question to ask is, will Nigeria experience improved capital budget performance, economic growth and improved welfare (development?) if the capital vote were to account for 75 percent of the annual spending plans? One economics professor who has considered this matter concluded that the answer is “no” because there are several reasons why capital budget performance is low. Chief among these is the issue of absorptive capacity.
The National Integrated Infrastructure Master Plan (NIIMP) calculated that Nigeria has a skills gap of 8,000,000 people which must be filled in the first five years of implementing the 30- year master plan. Chinedu Nebo, power minister, confirmed last year that the shortage of technicians and engineers required for implementation of electricity reforms was an estimated 170,000.
The NIIMP recognized that executive capacity to profile projects admitted into the annual budget is lacking or weak. Hence projects are admitted into the budget without adequate costing. By the time the National Assembly approves the budget and it is assented to by Mr.
President usually at about April of the budget year, that is when MDAs begin the process of profiling the approved projects. The result is that procurement processes may not start until mid-year. By the beginning of the fourth quarter, the finance ministry is already calling for return of unspent balances of the capital vote to the public treasury.
There are other factors that add to the woeful record of the capital budget performance in Nigeria. One is the lack of synchrony between the budget cycle and the nation’s climate. Consequently, funds for construction projects are often released when the rains have started, making it nearly impossible to implement road or building projects during the year. This is an issue begging for resolution.
In conclusion, Nigeria’s fiscal managers must beat a retreat from basing national economic management decisions on erroneous premises and myths. The executive owes it a duty to educate lawmakers and citizens alike about the peculiarities of our contemporary situation and embrace evidence-based policymaking.
Weneso Orogun
