THE PROBLEM OF INTERNAL REVENUE GENERATION IN NIGERIA (A CASE STUDY OF NJIKOKA LOCAL GOVERNMENT)
Background of Study
Local government plays a crucial role in the delivery of services to the citizenry. The success of any local government is its ability to utilize its human and material resources to achieve the desired objectives i.e. rendering needed services to the community. Local government is a government in which popular participation both in the choice of decision makers and in its recognition of a third tier of government. Prior to 1976, however, Nigerian local government has passed through various reforms. These reforms and re- organizations have affected the system financially, administratively, politically and functionally.
The historical evolution of the local government system in Nigeria dates back to the colonial era when it was called the colonial native authority system which existed between 1920’s and 1930’s (Orewa and Adewumi 1983). In their form, they represented a system of indirect rule whose aim was to establish a system of local authorities through traditional authorities. The main task of local government in this era was maintenance of law and order at grass root level. Also the issue of revenue generation in the local
government system has been in existence since in this traditional system of local government. In pre-colonial Nigeria the Chiefs, Obas and Emirs were responsible for revenue generation. This they usually did through levies and taxes, which they used in managing their communities. During the colonial era the British especially in the North introduced a system of indirect rule in which direct taxes were introduced in various local communities for running their affairs. By 1933, the powers of the local authorities were extended to cover expanded functions due to reliable performances. After the independence in 1960, local governments acquired more responsibilities that were assigned to them by the constitution. For instance, section 6 of the 1979 Constitutions of Nigeria provides that:
The functions to be conferred by law upon local government council shall include those spelt out in fourth schedule to this constitution
Also the constitution made provision for substantial funds to local councils. This is because there is no doubt that sound financial base is a prerequisite for effective performance of the roles assigned to local government. For instance, section 7(6) of the 1999 Constitution makes provision for the funding of local government as follows;
a) The National Assembly shall make provision for statutory allocation of public revenue to local government councils in the federation; and
b) The House of Assembly of a state shall make provisions for statutory allocation of public revenue to local government councils within the state.
More specifically, provision was made under the Revenue Allocation Act of 1981 for statutory allocation of 10 percent of national revenue to local government, became operational in 1989 and 20 percent in 1992. (Idike 1995:1). In addition, state governments were required to contribute 10 percent if their internally generated revenue to local government (Dasuki Report, 1985).
Under this fiscal arrangement, local government depended mainly on State and Federal Governments for revenue and grants. This source of revenue is in some cases unreliable and unstable. This is due to the fact that most state government have failed to release 10 percent of their internally generated revenue to their local governments. In addition, some State Governments interfere with the statutory allocations to local governments.
It is in recognition of this that the originators of 1976 Local Government Reform made genuine efforts to assist the local government system financially. For instance in 1976, the Federal Military Government after the reform as it was contained and noted in the Guidelines for Local Government Reform 196:11) stated that:
Lack of adequate funds and appropriate institution has continued to make local government ineffective and ineffectual. In embarking on the reforms, the Federal Military Government was essentially motivated by the necessity to stabilize and rationalize government at the local level. This must entail the decentralization of some significant functions of state government to local levels in order to harness local resources for rapid development.
This gave rise to provision of different sources of internal revenue generation for Nigerian local government in our subsequent constitutions. Also various measures were taken to take care of the financial problems of the local system. For instance there are many Edicts in various states like Anambra State Edict (1976) in favour of other sources of revenue for the local government system..
The aim for provision of internal sources of revenue generation to Njikoka local government is to supplement the statutory allocations from
both federal and state government. It is assumed that if local government can satisfactorily generate a large proportion of its revenue internally, it will cease relying heavily on the statutory allocations. Despite these constitutional provisions for sources of internal revenue, Njikoka local government and some other local government s in Nigeria are still unable to tap all these internal sources. Hence, the problem of poor internal generated revenue in most local government in Nigeria.
It is on this background that this study tends to examine factors that constitute impediments to maximum generation of internal revenue in Njikoka local government of Anambra state.
Statement of the Problem
In the words of Oguonu (2000:136) “what makes the difference between local governments is the ability of a local government to internally generate revenue”. The inability to generate income apart from resources from the federal government, has been a persistent problem in Njikoka local government. Revenue generation entails generating and exploring all the sources of revenue for the local councils. Njikoka government relies heavily on external sources for funds: it is evident that Njikoka local government area
has failed to explore the various sources of internal revenue generation open to the local government; hence the problem of internally generated revenue. Some factors are accountable for the poor internal revenue generation in Njikoka Local Government Area. It is in this light that we asked this broad research question-what then are the causes of poor internally generated revenues in Njikoka local government of Anambra state?
The study attempts to provide answers to the following questions.
1. What accounts for the inability on the part of revenue collectors to collect internally generated revenue in Njikoka Local Government Area
2. Does lack of financial autonomy constitute a problem to internal revenue generation in Njikoka local government area.
Objectives of the Study
The broad objective of this study is to examine the problem of internal revenue generation in Njikoka local government. The specific objectives of the study are as follows:
1. To determine what accounts for the inability of revenue collectors to collect internally generated revenue in Njikoka local government.
2. To find out if lack of financial autonomy constitutes a problem to internally generated revenue in Njikoka local government; and
3. To proffer solution to the problem of poor internal revenue generation in Njikoka Local Government Area.
There are reasonable number of existing literature on local government finance and internal revenue generation in Njikoka local government. Some scholars have made one or two contributions in this area.
The aim of this literature review was to familiarize ourselves with what other scholars have said about the subject matter, see how they approached the issue and determine whether the scholars have answered the question(s) we intend to answer satisfactorily. The literature review was specifically aimed at discovering the gap in the existing literatures. It was to know what other scholars have either said or not said.
For instance, L Rowland (1977:77), made some comments on the desirability for local governments to have their own sources of revenue.. He state’s that “an effective local government system cannot exist where the local authority has no power to improve and collect its own taxes”. Certainly, in many developing countries such as Netherland, local authorities have fewer sources for revenue generation”.
Orewa (1986:180), in his book titled “Local Government Finance in Nigeria”, described and discussed various sources of revenue open to local governments and problems in the collection and management of their finance. Such problems are-shortage of trained manpower, ignorance of the councilors over their duties and non-commitment to duty on the part of the staff and councilors alike..
Adediji (1979:87), blames poor internal revenue generation of local government on the following reasons
a. Lack of proper structure
b. Low quality of staff and
c. Lack of mission and comprehensive functional role.
According to him, these problems lead the local government into vicious circle of poverty. This is due to the fact that inadequate funding results in employment of low skilled and poorly paid staff.
Bello- Iman (1990:134), in the same vein states that “ the major constraint to internal revenue generation in local government is the shortage of well trained and qualified personnel which suppose to serve as tool for collection of taxes and rates at the local level”. According to him, even the few available are not peoperly trained in efficient budgetary and financial management systems. Also most of the local governments are short-stuffed to carryout their duties”.
Nkala (1985:60), talking about the problem of personnel in internal generation of local governments states that “at the inception of democratic local government system in the former Eastern region of Nigeria in 1950, early recruits into the local government service were mainly ‘sons of the soil’, party stalwarts, relations of councilors”. He blamed shortage of trained- staff in local government on politicization of recruitment, selection and placement.
Mugrave, R.A (1959:89), noted that “poor auditing has contributed immensely to problem of internal revenue generation of local governments”.
According to him, “local governments should have a means of ascertaining whether it’s financial operation is properly conducted, this can only be done through audit”.
In a more recent study, Ebo (2000:123), did a thorough work on how to enhance internal revenue of local government, using Nsukka as a test case. He corroborated the evidence of other scholars to the effect that there is a great loss of council’s revenue due largely to the loopholes in the management of revenue sources. He noted that collection procedure of the council could be streamlined in many areas especially where their facilities were used. Citing motor parks for instance, he observed “motor parks fees paid by taxis can be good money earned for local government councils if properly managed But as of now (2000) each of these taxis pays #10 a day to the local government no matter how many loads they made. In contrast to this, each taxi pays touts up to #30 per load and there may be several loads per day. Thus, the local council receives #10 per taxi daily. What a flagrant case of robbing peter to pay paul”.
As Ikejiani-Clark (1995:53) pointed out that, the growing prominence of corruption and fraud in local government as evidenced from massive data from the various parts of the federation has coincided with an increased academic interest in corruption and fraud in our public life\.
Still in the same view, Obi (1996) and Ikejiani-Clark (1995) produced massive data on cases of corruption and fraud in Nigerian local governments; for instance, Obi observed that
the poor state of accountability in the local government studied was as a result of interwoven tragedy emanating from the Nigeria factor, weak accounting control mechanism lack of prosecution of offenders, dishonesty, absence of adequately maintained financial records, conflict in role perception by the chairmen and many others. He concluded that “unaccountability was the major cause of poor internal generated revenue and low development in the local communities’ in Nigeria (Obi 1976:179)..
Further, Ezeani (2004:120), states
corruption remains a major problem which has constrained local government especially in developing countries from contributing meaningfully to the upliftment of the standard of living of the local people. It is rife in the areas of revenue generation and declaration by collectors to embezzlement of local government funds by officials of local government.
To stress the point, Obinna had (1995:47) stated that
some unscrupulous revenue collectors and senior financial officers of the local government defraud
the local government by printing fake receipts which they use to collect unaccounted revenue.
On the side of lack of adequate manpower for revenue generation by Nigerian local government, Nwankwo (1995:154) observed that why local governments have not paid proper attention to internal generation of revenue was due to poor staffing, sharp and fraudulent practices of the revenue collectors, lack of logistic support for revenue collectors and refusal of most citizen to cooperate in paying the necessary fees due to the local government.
Wraith (1972:68) stated that lack of foresight and entrepreneurial skills on the part of key local government function arises especially the revenue officials have contributed heavily to the failure of internal revenue generation for the local governments.
He maintained that local government functionaries who should look inwardly to identify and exploit fully more viable sources of revenue in their areas of jurisdiction unfortunately fail to do so mainly because they are not enterprising.
On the issue of the auditing system in Nigerian local government, Musgrave (1959:39) noted that poor auditing system in Nigerian local government has contributed immensely to problem of internal revenue
generation of local government. To him, local government should have means of ascertaining whether its financial operation, are properly conducted, this can only be done through audit. In this view, Oguonu (1995:143) pointed out that:
the dearth of qualify staff to conduct audit has resulted in using people who do not possess the requite experience and knowledge to face the challenges of the work.
Supporting this view, Ezeani (2004:124) pointed out that “inefficient supervisors do not effectively supervise the revenue staff and records”. Again, internal auditors lack independence required for effective performance of their duties. As Ezeani (quoting Oguonu 1993:860) succinctly put it:
The administrative set up in such that the internal auditor can hardly exercise his powers independently because; he depends on his superiors for recommendations, for promotions and career advancement.
Again, Oguonu (2003:135) pointed out that another fundamental reason for poor internally generated revenue is that Nigerian local governments were not created on the basis of their viability. She maintained that they are mere political creations. Further she stated that: “some of the
newly created local governments were as a result of political patronage to ruling party loyalists”.
Other reasons for poor revenue collection by Onyisi (1999), Adewale (1998) and Ezeani (2004) are the fact that most of local governments cannot enforce bye laws on revenue collection. In some cases the law of revenue collection is not updated. They also maintained that there is also poor communication network especially in the riverine areas.
Finally, Omopariolar and Adewale (1998:247), stated that
high incidence of tax evasion also plays a major role in poor internally generated revenue in the local government system. Most Nigerians are not willing to pay taxes.
Despite all these arguments presented by these scholars, the issue of poor internally revenue generation in Nigerian local governments has not been properly addressed. The scholars have failed to touch on the kind of fiscal relationship that exists between the local government and other levels of government and how this intergovernmental financial relations either enhances or undermines internal revenue generation in Nigerian local governments. For instance, the 1976 Local Government Reforms put into
consideration the relationship that exists between state and local government.
Local Government Guideline states
the defects of previous local government system are too well known to deserve further elaboration here. Local government has over the years suffered from the continuous whittling down of their powers. The state governments have continued to encroach upon what would normally have been the exclusive preserve of local government. Lack of adequate funds and appropriate institutions have continued to make local government ineffective.
Cameron (2001:213) defined intergovernmental relations “as an array of structures, processes, institutions and mechanisms for coping with the inevitable overlap and interdependence that is a feature of modern life”. Odugbemi (1989:175) defines it “as a system of transactions (behaviour patterns) among managers of hierarchically, structured levels of government in a state”. He goes further to argue that the objectives for intergovernmental relations is the achievement of the division of work, authority, resources sharing among levels of public and sometime extra government authorities in state.
Olaokun (1979:97) stated that:
there are variations in the capacity of the different levels of government may not have enough capacity to raise enough revenue when it is
realized that in a federation it is desirable for every state or locality to attain minimum level of services. It becomes imperative that for these areas that have low revenue-raising capacity to meet up with the national minimum they have to impose heavier taxes on inhabitants of such areas.
These existing literature have failed to explain the impact of state – local government intergovernmental relations on internally generated revenue.
Theory of fiscal federalism is applied in this work as our theoretical framework. The “theory of fiscal federalism” as originally developed by Musgrave (1959) and Oates (1972), concerns the division of public sector functions and fiancés in a logical way among multiple layers of government (King 1984). Fiscal federalism, as it is called, is used to refer to the fiscal arrangement among the different tiers of government in a federal structure (Ekpo, 2004).
Initially, stabilization and distribution were considered the cardinal points in federal arrangement. The focus in federalism then was always on how to divide functions among the federating units in order to avoid functional overlapping and conflicts. Recently, attention in federalism has
shifted to revenue mobilization and allocation among different tiers of government. This is due to the recognition of the fact that adequate finance is requisite condition for effective delivery of service by the federation units. According to Bello-Iman (1990:44), the most dominant area of intergovernmental relations is finance. This is because no level of government can perform its functions without strong financial base. In this perspective, the main analytical task of fiscal federalism is to define the appropriate functions and fiancés of different tiers of government as efficiently as possible that is in such a way as maximize community welfare.
The theory of fiscal federalism applies to local service units in metro- political area as to states in a federation (Gramlich 1977, Rubinfeld 1987). In principle, however, there are important analytical and policy differences, not only between local metropolitan problems and federal state problems but even between tight federal state problems but even between tight federations such as Germany and “Loose” federation such as Canada –with the United States somewhere in between. These differences arise in part from the differing nature and rigidity of the constraints imposed by political institutions. The question has attracted considerable attention in recent years in part because of the emergence of nascent “federal institutions” especially
in third world countries. For instance, in Nigeria, there are statutory provisions for revenue sharing an powers to generate revenue through specific sources. The 1999 Constitution of Federal Republic of Nigeria, established the type of fiscal relationships that would exist among the various levels of government. For example, section 149(2) of the 1979 Constitution or section 162(3) of the 1999 Constitution stipulates that any amount standing to the credit of the Federation Account shall be distributed among the federation, state governments and the local government councils in each state on such terms an in such manner as may be prescribed by the National Assembly.
Similarly, the 1999 Constitution provided for state-local financial relationship under section 162 sub-sections 8. This section states that the amount standing to the credit of the local government councils of a state on such terms and in such manner as may be prescribed by the House of Assembly of a state.
Apart from the constitutional provisions of external revenue to local government, the 1999 Constitution as contained in forth schedule and Model Financial Memoranda for Local Government (1991) and section 45 of Decree
No 36 of 1998 provide for internal sources of revenue generation by Nigerian local governments.
Despite all these constitutional provisions, in the words of Owens and Panella (1991:54), “Local governments almost invariably depend in part and sometimes very heavily upon transfers from upper-level governments to finance the services for which they are responsible”. This is due to the fact that in most countries whether formally federal or not, there is clearly vertical competition between levels of government for revenue; perhaps because as rule local government have access only to those revenue sources that higher level of governments do not want for themselves.
To answer our research questions, hypotheses were formulated. The formulated hypotheses are:
1. Negligence on the part of revenue collectors is a major problem to Internal Revenue generation in Njikoka Local Government Area.
2. Lack of financial autonomy constrains generation of revenue via internal sources in Njikoka Local Government Area.
Method of Data Collection
Both direct and indirect methods were used in collecting data for this research work. For instance, indirect method of reviewing was used by going through textbooks, journals, periodicals etc written by other scholars on the same subject matter. The direct observation was also used by going through government documents or publications like financial reports and annual estimates of Njikoka Local Government.
Population of Study, Sample and Sampling Techniques
The population of this study comprises of the staff of Anambra State Local Government Service Commission, members of Audit Alarm Committee, Auditor General of Anambra State, staff of Njikoka Local Government Council and some of Anambra State Government Officials.
A stratified random sampling technique was used to select the departments to be included in the study. Five departments were selected from Anambra State and Njikoka Local Government respectively; making it a total of ten departments. Ten respondents were chosen from each of the selected departments; and that will give us a total of one hundred (100) respondents. The respondents were mainly finance staff with some staff in management position that could influence the activities of finance staff. For instance, ten
respondents were drawn from Account Departments, ten from Planning and Statistics Units, ten from Audit Units, ten from Personnel Department, ten from the Anambra State Local Government Service Commission, ten from the Office of the Governor on Local Government Affairs and ten from the Office of Auditor-General of Anambra State.
The self-report techniques were used to obtain information from these respondents. Unstructured interview was conducted on fifteen (15) workers in Anambra State and (15) in Njikoka Local Government Staff. The respondents interviewed were not randomly chosen, but selected through judgmental sampling.
Ex Post facto (X O1 O2) was used in this research to obtain data we used to test our hypotheses or answer our research questions. According to Asika (1991:24); “ex post facto research is a systematic empirical study in which the research does not in any way control or manipulate independent variables because the situation for study already exists or has already taken place”.
According to White (1990), “ex post facto is often called simple experimental design. It is developed to provide alternative means for
examining causality in situations which were not conducive to experimental control and also to control as many threat to validity as possible”.
In this research, we hypothesize the relationship between y, dependent variable and x, independent variable. We say that there exists a form of linear relationship between x and y and y changes directly with any change in x. There is relationship between X1 Negligence on the part of revenue collectors
– Independent variable (x) and internal revenue generation in Njikoka Local Government Area (y). X2 Lack of finance (Autonomy (x) and Internal Revenue generation (y).
Since ex post facto research lacks control or manipulation in hypothesis testing; it is faced with the problem of precision. In words of Kerlinger (1973) “in spite of its lack of precision ex post facto research still finds a place in scientific business research. This is because it is a realistic approach to behaviourial science research. Since experimentation often does not take place in real life situations and may need one type of contrivance of research situation or another”.
Method of Data Analysis
In the area of method of data analysis, statistical tables or data tabulation is applied. Tabulation in the words of Asika (1991:114) “is the
process of creating data for further analysis by the use of tables. Unanka (2002:20) states that “statistical tables are commonly used in summarizing socio-political data. They are devices for organizing or presenting statistical information in a concise and comprehensive manner.
Quantitative descriptive analysis is used to summarize a mass of information generated in the study so that appropriate analytical methods could be used to further discover relationship among the variables.
Chi-Square is used in testing of independence among the variables in our hypotheses. Chi-square is a measure of the discrepancy frequencies. It serves as a test of significance or independence..