EL RUFAI AGAIN?

The Budget Conundrum (1) – Budgeting Process
2012 AUGUST 9
by Nasir El-Rufai

The nation’s attention has once again been captured by controversy over budget implementation. Indeed, the House of Representatives has passed a motion sponsored by my brother Femi Gbajabiamila threatening the commencement of impeachment proceedings against President Jonathan unless the administration rapidly improves on budget implementation. The Jonathan administration reacted in the hapless ways we have all become accustomed to. Honourable Gbajabiamila was accused of a non-existent offence, convicted by the PDP and called upon to resign, while high percentages of budget implementation were claimed by the executive branch. Both turned out to be indefensible at best and usual Jonathanian falsehoods at worst.

So what is the truth? Should policy directions anchor national and sub-national budgets? How are budget priorities determined and who does? How are budgets prepared, reviewed and implemented? What do all the jargons like expenditure warrants, Authority to Incur Expenditure (AIEs) and Cash-Backing mean? And what does sound budgeting mean for our political economy and progress as a nation? What can we learn from the past when things worked slightly better? And what country experiences are available for Nigeria as lessons for the future? We intend to spend the next couple of columns explaining budgeting and addressing some of these questions. Our hope is that our citizens will be better enlightened about the subject and demand accountability from those in power.

In the past several weeks, we have analyzed federal and states’ budgets; their context, content, effectiveness and relevance to critical development challenges. We came across wasteful spending, wrongful priorities and the absence of clear cut developmental visions and plans for the states and the federation as a whole. While the Federal Government has a statement of intentions for 2011-2015 encapsulated in a pathetic-27 page “Transformation Agenda” and a dodgy Medium Term Expenditure Framework (MTEF), most of the states did not even attempt that, and certainly had no articulated visions, plans and medium-term programmes to anchor their annual budgets.

Development theory and experience support the proposition that budgets need to be predicated on long-term visions, economic strategies and plans to be effective instruments of societal progress. Unfortunately, this is not the case for most of post-Independence Nigeria. Either the national or states’ government budgets are not anchored on coherent visions and plans or where there are development plans, the budgets are at variance with the visions. We will summarize our national experience in development planning and budgeting to throw some light on this disconnects between vision and budgeting which has become exacerbated since 2007.

Worse still, besides policy incoherence and perhaps in consequence of implementation discontinuities, Nigeria has been plagued by the phenomenon of abandoned projects. Recently, a Federal Government committee found that N2.7 trillion has been expended on about 11,800 abandoned projects which currently require another N7.28 trillion for completion. According to the House of Representatives, the Niger-Delta Development Commission (NDDC) only completed about 1,550 out of 5,100 contracts, a 30% performance without even analyzing the quality of the projects and spending.

Similarly, the Nigerian National Petroleum Corporation (NNPC) is alleged to have wasted over N300 billion on uncompleted projects in the four barely-functioning petroleum refineries. These and other examples point to a fundamental malaise – our failure to articulate a national vision, coherent economic strategy, national development plans and annual budgets to translate these into concrete outcomes and progress.

The importance of focusing on the national visioning and development planning process and their link to the budget cannot be over-emphasized. Unfortunately, this is not always the case in Nigeria. As a consequence, at all levels of government – federal, states and local government, budgets are at variance with government’s visions and plans. While the federal government has had various national development plans, at the state levels, governments do not have any articulated development visions and plans.

In the last fifty years, a handful of countries have transformed their countries from low to middle and high-income through careful visioning, sound development planning and focused implementation under competent leaderships. China has not only grown at more than 10% per annum on average for 30 years, but lifted more than 400 million people out of poverty since the leadership began implementing economic reforms from 1978. The five step process to replicate this feat is (1) articulation of national vision of progress and prosperity (2) consensus on a national economic strategy to attain the vision (3) preparation of medium-term development plans pursuant to the agreed strategy (4) preparing and legislating annual budgets to translate the development plans into real outcomes, and (5) the disciplined and focused implementation of the budgets and feedback to the next development plans.

We will first describe the federal government budgeting process today, which is also similar to what obtains in the states to enable us benchmark it against what has resulted in real progress in other countries. The first step in budget preparation begins around August of the preceding budget year. The President issues directives to the Minister of Finance and Budget Office to propose a budget in line with the federal government’s vision for Nigeria.

This is followed by producing a medium-term fiscal framework (MTFF), mandated in the Fiscal Responsibility Act (FRA) of 2007. The MTFF shows projected expenditure and revenue plans for a few years in advance. It is important to note that the FRA explicitly states that aggregate expenditure should not exceed aggregate revenues by more than 3% of national GDP.

Next in the budget preparation process are stakeholders’ consultations. This entails consulting with the international financial institutions, donors and national assembly (NASS) leadership on the broad budget direction, size and proportions. Then Ministry, Department and Agencies’ (MDAs) expenditure ceilings are set; that is each MDA is given an envelope – a maximum amount available for its recurrent and capital expenditure needs for the following year. The medium term sector strategies (MTSS) for MDAs are then prepared by the Budget Office, which translate into Medium Term Expenditure Framework (MTEF) for presentation and approval by the Federal Executive Council. It is expected by then that the NASS has approved the MTFF which will be the foundation for the annual budget.

After all the above is done, the Minister of Finance then issues a budget call circular which is like a framework for the MDAs to prepare their budget proposals, but within their ‘envelopes’. When the MDA budgets have been verified to comply with the requirements, the draft is forwarded to the President for his approval after which if satisfied, is presented to a plenary session of the Federal Executive Council for approval. The President then forwards it to the two houses of NASS.

The budget is a ‘money bill’ which is required by our constitution to be passed by the two houses, but clearly, the House with its 360 members and more representative of the Nigerian population, has the upper hand in event of disagreements with the Senate. Our constitution gives the Senate a greater say in presidential appointments, but confers inherent superiority to the House with respect to appropriation of public funds. Like every bill, the Budget – referred to as Appropriation Bill or Supplementary Appropriation Bill – goes through a First (or Introductory) Reading and debate in plenary sessions. It is then referred to the Appropriation and other sector committees for more detailed review and scrutiny to move the Bill to the Second Reading.

At this point, the various MDAs are invited to justify and defend their draft budgets in a way similar to “public hearings”. For instance, the Minister of Information and his staff defend the budget of his ministry and its parastatals before the NASS committees on Information or Media and so on. And it is at this point, MDAs ‘lobby’ NASS committee to increase their allocations, re-introduce projects that may have been screened out or rejected by the Executive Branch and promises of financial “quid pro quo” for budget distortions negotiated and agreed. The respective projects and numbers which constitute the revised budget are now referred back to the two houses for debate and passage in plenary sessions.

It is unlikely that the two houses will come up with the same list of projects and numbers which make up the budget for presentation to the president for assent. Some degree of harmonization is often necessary and the two houses usually appoint a Conference Committee to undertake this with equal membership from each. In the unlikely event that the Conference Committee fails to agree, the two houses go into a joint house to vote on the budget – a process that ensures that the House version of the Money Bill is passed for assent.

As soon as the budget has been harmonized, the finalized Appropriation Bill is sent to the President for his assent within 30 days. In the event the President fails to assent, the Bill lapses unless passed by two-thirds majority of the NASS thereby no longer requiring presidential assent. Once enacted the budget becomes a national law which cannot be changed or modified in any way without recourse to the legislature. The States and FCT go through a similar process of budgeting. What then happens after this point?

We will continue next week.....by God's Grace.....