THE PROBLEMS AND PROSPECTS OF LOCAL GOVERNMENT FINANCING IN NIGERIA (A COMPARATIVE STUDY OF ENUGU – NORTH AND ENUGU – SOUTH)

Abstract

This research study is based on the problems and prospects of local government finance in Nigeria, it is a comparative study of Enugu – North and Enugu –South local government of Enugu State. Local government is faced with varieties of difficulties to source adequate revenue from federal government, state government and the internally generated revenue, such problem are cogwheel to the smooth running of local government administration. The objectives of the study are: to review the revenue collection in local government, to analyze the machinery of internally generated revenue, to determine the impact of revenue generated in Nigeria local government, to review the various sources of internally generated revenue.The information for the study was collected using primary and secondary methods of data collection. For the primary data collection, questionnaires, personal observations and oral interviews were used while existing literature relevant to the topic was consulted for the secondary data. The researcher used chi-square statistical model to analyze the data. At the end of the research work the researcher made the following recommendations:The local governments should intensify the collection of revenue of local taxation especially as the federal and state governments, cannot provide sufficient finance for the needs of the local governments.The local governments should return to the capital expenditure projects.  There is also the need for them to utilize all the rates, fees, licences, constitutionally collectable by them and introduce such other taxes like:- development levies, land tenure tax, registration of business premises among others which are already being exploited by some other local governments in Nigeria.  There is also the need for the local governments to emphasis the recruitment of qualified, experienced, properly selected and well trained personnel for the assessment, collection and general administration of local taxes and rates.

TABLE OF CONTENTS

Cover page

Title page

Certification page

Dedication

Acknowledgment

Abstract

Table of content

List of tables

CHAPTER ONE

1.0      Introduction

1.1 Statement of the study

1.2 Objective of the study

 1.3 Significance of the study

1.4 Statement of Hypothesis

1.5 Scope and Limitation of the study

1.6 Definition of Terms

CHAPTER TWO

2.0      Review of Related Literature

2.1        Introduction

2.2      Functions of Local Government

2.3      Statutory base of local government finance in Nigeria

2.4      Source of local government revenue

2.5      Local government expenditure pattern 

2.6      Management and control of local government finance

CHAPTER THREE

3.0      Research Design and Methodology

3.1      Source of Data

3.2      Population definition

3.3      Population Sample

3.4      Statistical treatment of data and problem of data collection

CHAPTER FOUR

4.0      Data Presentation and Analysis

4.1      Analysis of data

4.2      Testing of hypothesis

CHAPTER FIVE

5.0      Summary of Findings, Conclusion and Recommendation

5.1      Summary of Findings

5.2      Conclusion

5.3      Recommendations

Bibliography

Appendix

LIST OF TABLES

Table 4.1 (a)   Data relating to the sources of revenue of Enugu                     north local government from 2002 to 2004  53

Table 4.1 (a)   Data relating to the sources of revenue of Enugu                     south local government from 2002 to 2004  55

Table 4.1 (b)   Data relating to sources of revenue of Enugu                                 south local government and their percentage                                 contribution to total revenue between 2002 to                        2004                                                              59

Table 4.1 (b)   Data relating to the sources of revenue of Enugu                     north and the percentage contribution to total                        revenue between 2002 to 2004 of Enugu north

                     local government                                      61

Table 4.1.3     Expenditure estimate/actual of Enugu north local                            government for 2002, 2003 and 2004          66

Table 4 (c)      Annual revenue and expenditure statement for the                   period 2002 to 2005                                  71

Table 4.4        Analysis of the contribution of internal and                              external source of review of both Enugu north and                    local governments for the period 2002 to

                     2004                                                              72

CHAPTER ONE

1.0     INTRODUCTION

A local government is the third tier of government in Nigeria.  Like any level of government, it has administrative structure, statutory assigned functions, social commitment and financial arrangement necessary for it to maintain itself and perform its statutory in Nigeria was legally recognized for the first time, as the third tier of level of government by the 1979. Constitution of the Federal Republic of Nigeria; section 7 (1) and decree N0. 12, the constitution of the Federal Republic of Nigeria, 1989 that spells its functions.  Since 1979, there has been a tremendous growth in local government expenditure in line with greater emphasis on grassroots participation.  For instance, in 1992 while complete political, administrative and financial autonomy was granted to the local government from state control, its responsibility was enlarged.  In addition to the functions assigned to it by the constitution the local government is now (with effect from 1992) directly responsible for primary and adult education, primary health care and rural water supply.  Faced with these increased responsibilities and the enormous expenditure associated with them, it is pertinent that the local government expands its sources of revenue beyond the present level.

An action in this direction is necessary, as it would enable the local government to discharge its current functions and bring socio-economic development to the local populace.

Before now, the local government relied heavily on grants from the state and federal government relied heavily on grants from the federation account 20% in addition to a percentage of the internally generated funds of the state.

This being the case, government grants and statutory allocations are only supplementary sources of revenue to the local governments. For the local government to be self-sustaining financially, without reducing the level and quality of its services to the people, it is important that it reaches out for potential internal revenue sources which would supplement existing ones.  This also implies that existing sources be fully exploited and more carefully managed.

SOURCES:     Federal Republic of Nigeria; Constitution of Federal Republic of Nigeria (1979) fourth schedule part p section 7 (1); decree No 12 of 1989 official gazette, No. 29.  Babangida, I.B. Watershed on our National evolution; 1992 Budget Address to the National on January 1, 1992.

1.1  STATEMENT OF PROBLEMS

One of the major problems confronting the Local Government in Nigeria has been identified as that of its inability to raise funds to finance its expenditure commitments and achieve enhanced grass root development.  This problem facing the local government could be attributed to the following factors.

a.          Over dependence of the local government on funds from state and federal government which comes in the form of statutory allocation or giant or aid.  This problem of finance has remained with local government.  By their nature, such external funds are provided to supplement the internal generated fund of the local government.  More so regardless of the amounts transferred or generated by the local government through this means, they often arrive late (that is they are paid in areas) towards the end of the fiscal year to which they are related. This financial arrangement makes it difficult for the local government to be able to plan, coordinate and better control its financial engagements.

b.          Inability of the local government to utilize all the internally revenue generating opportunities.  This problem results from the financial relationship, which exists between the local government and the higher levels of governments.  The local government tends to under utilize its numerous internal sources of funds because of its heavy dependence on statutory allocation and grants from the state and federal governments. The inability of the local government to exploit all the available internal revenue sources augment its overall financial base has made it increasingly difficult for it to generate enough finds to match its expenditure estimates.

c.           Improper planning, management and control of available funds. The problems of inadequate finding sometimes emanates from the inability of the local government to properly utilize the funds at its disposal due to poor financial planning.

1.2     OBJECTIVES OF THE STUDY

Finance is the bedrock of every organization in any economy.  It is a crucial pre-requisite which enables an organization, either private or public to maintain itself and effectively meet its commitments to individuals and groups who consume its output of goods and services.  It is therefore, the intended objective of this study to do the following: -

a.    To examine the present statutory functions of the local governments in Nigeria and determine the extent to which it is performing these functions with the resources available at its disposal.

b.    To examine the existing financial arrangement relevant to the local government with reference to their various sources of revenue.

c.    To evaluate the expenditure patter of the local government

d.    To examine the various instrument of finance

e.    To examine the various constraints of local governments finances and ascertains their bearing on the financial autonomy of the local government.

f.     To examine the prospects of improving existing sources of local government finance and,

g.    To uncover potential internal revenue sources for the local government.

1.3     SIGNIFICANCE OF STUDY

Given the present financial crisis facing the local government in Nigeria, and the recent financial autonomy granted to it, the need for a study of the problems becomes imperative.  The study critically examines the problems facing existing revenue sources of the local government and appraises potential revenue sources, which could be used to expand the overall revenue base of the local government.  It is thus significant because it emphasizes the need for the local government to be self-dependent financially by fully availing itself of available but unexplored internal revenue sources which could supplement existing ones.

Finally, this study is intellectually stimulating as its introduces a new dimension and direction of financial policy of local government administration, researchers, local government administrators. Particularly those who are involved in financial planning and management and staff of the revenue unit of the Treasury Depart of the Treasury Department of Local Government Council will also find this research work valuable.

1.4     STATEMENT OF HYPOTHESIS

The hypothesis upon which the study is based are:

HYPOTHESIS 1

That the local government funds are sufficient to finance the expenditure, projects for which they are made.

HYPOTHESIS 2

That the local government funds are not sufficient to finance the expenditure, projects for which they are made.

HYPOTHESIS 3

Local government has not been employing loan financing in the funding of its expenditure projects.

HYPOTHESIS 4

Local government has been employing loan financing in the funding of its expenditure projects.

1.5     SCOPE AND LIMITATION OF STUDY

Local government finance is a very wide area of study.  Therefore, it is not the intention of the researcher to make an all embracing study of the topic in this research work.  This study confines itself to the evaluation of the various revenue sources and expenditure patter of the local government examination of the problems associated with them and the prospects for improving them and the prospects for improving them.  Since it is not possible for a research project of this nature to delve into a study of the entire local government in Nigeria individually.  This researcher limits her work to information gathered from the two local government under study.  During the researcher work, a number of constraints were encountered.  These placed a limitation on the adequacy or otherwise of the information at the researcher’s disposal for the purpose of this study. 

The following limitations are worthy of note:-

a.    Finance:-      This research was conducted within the limits of the financial resources of the researcher for instance in collecting relevant data and other necessary material in conducting interviews and in the distribution of questionnaires, the research sample was limited  to a number which through representative of the population was within the   financial resources available to the researcher.

b.    Time factor:  Time was a major constraining factor.  This was obvious since the research work had to be completed within a specified period of time in addition to other academic matters which the researcher could not dispense with during the period.  Time and financial problem made it practically difficult for the researcher to repeatedly follow non-respondents and the not at homes in the course of questionnaire distribution and collection and interviews purposes of the present study.

Bureaucracy:       Another major problem encountered was that of bureaucracy.  To obtain the relevant information needs a lot of forms to be filled on a number of top local government officials and to be met.  The greatest difficulty was encountered in the process of obtaining the revenue and expenditure extracts and other quantities information’s used for this research work.

1.6     DEFINITION OF TERMS

1.6.1 LOCAL GOVERNMENT:      It is the third tier of government. “It is that level of government which is organized as close as possible to the people at the grass root and vested with statutory powers to perform certain function both inherent and ascribed, confirming its activities and authority within a particular distinct or neigbourhood and subject to the control of the central government.

1.6.2 FINANCE: Finance refers to the generation, control and utilization of available funds in running an organization, whether private or public co-operation.

1.6.3 FUNDS:       Fund is defined as “a separate fiscal and accounting unit in which resources are held, governed, by special regulation, segregated from other funds and established for specified purpose on which the resources so held any be used”

1.6.4 REVENUE: Revenue refers to all those monies, cash and otherwise received by way of statutory allocation, grants, subvention from higher levels of government, taxes, rates licenses, fees, royalties, loans and charges which enables the government to meet its day to day expense and its capital expenditure programmes.

1.6.5 EXPENDITURE: It involves the outflow of money expenditure refers to all the activities/services performed and rendered by the government with available resources.

1.6.6 RECURRENT EXPENDITURE: Recurrent expenditure is defined as those expenditures, which are usually re-occurring within a fiscal year.  They are used to maintain existing labour and capital resources.

1.6.7 CAPITAL EXPENDITURE: Capital expenditure describes that expenditure on some objects of lasting value ever though the value may diminish in the course of time and use.

1.6.8 BUDGET: A budget is a formal plan expressing a chosen course of action in quantitative terms and usually in monetary terms.  It shows planned revenue form all sources and estimates of expenditure for the coming fiscal year.

1.6.9 ESTIMATE: An estimate is a proposed budget, which is yet to be approved.  It is a statement of planned revenue and expenditure of the government for the coming year.  The estimate, like the budget is usually expressed in monetary units.

1.6.10 REVENUE ESTIMATE: A revenue estimate is that aspect revenue from all sources of the government for the coming fiscal year.

1.6.11 RECURRENT EXPENDITURE ESTIMATE:     This aspect of the estimate outlines in details form, the expected recurrent expenditure of the government for the next fiscal year.

1.6.12 CAPITAL EXPENDITURE ESTIMATE: The capital expenditure estimate deals with all the expected capital expenditure project of the government for the coming fiscal year.

1.6.13 REVENUE ABSTRACT: This is a record, which shows at a glance, in a summary from, all the revenue receipts head by head, and subhead-by-subhead that accrues to the local government in a particular financial year.

CURRENT ISSUE ON TAXATION

VALUE-ADDED-TAX (VAT)

Vat is one form of sales tax, like every other type of sales tax, it is a single tax on affected goods or services.  Vat is a multi stage tax collection strategy.

Under Vat, tax is levied and collected at every stage in the production and sale of affected commodities.  However, the tax levied and collected at each stage is not based on the gross value but on the additional value gained by the commodity at that stage