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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Mobilizing Local Government Tax Revenue for Adequate Service Delivery in Nigeria by Oghenovo Egbegbedia
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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
2
DEDICATION
This work is dedicated to God Almighty in appreciation of his
special love, care, mercy and protection.
3
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.
4
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
5
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.
8
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.
9
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
10
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
11
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
12
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
13
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
15
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.
16
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;
17
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.
19
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.
20
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.
21
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.
22
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-
24
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
25
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:
26
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).
27
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
28
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).
32
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,
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
REFERENCES
Buchanan, J., and R. Wagner 91977), Democracy in Deficit, New
York: Academic Press. Pg 8-10.
Friedman, M. (1978),: “The Limitations of Tax Limitation”. Policy
Review, 7-14.
Park, W. (1998): “Granger Causality Between Government
Revenues and Expenditures in Korea”. Journal of Economic
Development, 23, 145-155.
UNDP (2010): ‘Capacities for Local Service Delivery’; The Policy
Link, Global Event Working Paper. Pg. 13-14.
137
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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