Managing cost of governance in Nigeria: A paradigm shift
The management of cost of governance has been a vexed issue in the economic discuss in Nigeria. So many opinions have been expressed on the issue without positive indications that those charged with the responsibilities of ensuring an effective and efficient management of the cost of governance are prepared to have a change in the status quo. This has made it more imperative to talk about it now that the country has a new government.
Cost of governance has been defined by several authors each focusing on what it cost government to run its administrative structures. F luvian (2006) defined cost of governance as any expenditure in maintaining government administrative structures. Drucker (2007) opine that cost of governance is government budget allocated to both capital and recurrent expenditures on maintaining government administrative structures. Adewole and Osabuohien (2007) also break down cost of governance into two: recurrent administrative expenses and capital administrative expenses
There is no gainsaying the fact that for any entity, public or private, to exist cost must be incurred but the major issue of concern is when cost is not economically commensurate and justifiable.
In Nigeria just as in many African countries the cost of governance is very enormous with obvious absence of efficiency in governance. Soludo (2013) had alluded to this fact that it has been a problem that has gone on for two long. He also stated that it was without doubt too high and actually outrageous. Obi (2014), while speaking at the World Bank Youth Forum Interactive session obviously accepted there was high cost of governance in Nigeria and blamed it on the inability of government officials to curb wasteful expenditure that do not contribute to economic growth and wellbeing of the citizens.
The principal responsibility of government is to ensure that public funds are spent judiciously, while public goods and services are adequately provided.
There is therefore a convergence of opinion on the obvious fact that there exists high cost of governance in Nigeria.
While government must be run and cost must be incurred, the effective and efficient deployment of the available and limited resources remains the key challenge that confronts government. The inability of the government of Nigeria at all level to address the issue has and will continue to impact on the development of the nation socially and economically. Sanusi (2012) collaborated this opining that it has become impossible to develop under such situation. Government spending could impact positively or negatively on the growth of any nation.
According to Yasin (2000), in examining the effect of government spending on economic growth using panel data set from Sub-Saharan Africa indicated that government spending had positive and significant effect on economic growth. He opine that by nurturing productive activities, reducing unproductive ones and implementing appropriate policies, the relationship between government spending and economic growth can be maintained in the positive direction. Therefore, a rise in the level of cost of governance hampers the pace of economic growth and development.
Opinion on the way forward on managing cost of governance have however differ with some recommending outright cut in government spending, a deliberate realignment of capital to recurrent expenditure ratio in the Nigerian annual budget as well as downsizing of the civil service.
This paper is therefore, intended to bring the issue more to the front burner of the new government economic, social and political decision and also address it from a more systematic perspective with a view to providing a lasting solution. This will be leveraged on the pedestal of the understanding and application of the concept of Cost Drivers. Managing Cost of Governance with the understanding of cost driver will provide a paradigm shift in economic decision process of government.
Conceptual Issues and Discussion
The Economy – A review of Wikipedia dictionary provides useful and insight explanation to the term economy. An economy consists of the economic system of a country or other area; labour, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area. An economy may also be described as a spatially limited and social network were goods and services are exchanged according to demand and supply between participants by barter or medium of exchange with a credit or debit value accepted within the network. Therefore, a given economy is the result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resources endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.
All professions, occupations, economic agents or economic activities contribute to the economy. Consumption, savings and investment are core variable components in the economy and determine market equilibrium.
Developed community includes the Public sector, private sector and social sector or voluntary sector. The public sector or state sector consists of the parliament, law courts and government organizations including its agencies and organs of administration. The private sector consists of the privately owned and run businesses. The social sectors are voluntary or non for profits non-government organizations.
Due to growing importance of the financial sector in modern times the term real economy is used by analysts as well as politicians to denote the part of the economy that is concerned with actually producing goods and services as distinct from the paper economy, or financial side of the economy which is concerned with buying and selling on financial markets.
In the context of this paper, the discussion shall focus on the Public sector activities as the platform for analyzing the drivers of cost in the Nigerian economy. However, it is important to take a look at the interacting forces between the public and private sector in any given economy.
Public and Private Sector circular flow of activities
There exist a lot of interdependencies and relationship between the public and private sectors in driving the economy. This relationship is expressed in flow diagram below:
Between the sectors exist the exchange of resources; labour, capital, land etc as well as provides the market for exchange of goods and services for each other resulting in enormous impact and influence on their separate activities and therefore costs. In discussion cost of governance in the public sector mention must be made of the impact of the private sector in either directly or indirectly driving the cost.
The private sector provides a major source of locally derived driving factors of cost in the public sector. For instance, the private sector is the main medium of execution of the public sector budgets. Given the profit maximization motives of the private sector their drive for profit optimization could in many instances undermine the processes in the public Sector thereby constituting a dysfunctional pressure on the public sector cost. The operators of the private sectors are involved in providing inputs even at public sector budgeting process.
Past attempts by government to manage cost of governance – there is no doubting the facts that previous governments have made attempts at curbing the rising cost of governance in Nigeria. Most of these efforts have yielded no positive result instead it would seem that it is case of ‘adding salt to injury’. Starting with the civilian political era of President Obasanjo in 1999, government showed to the public attempts aimed at addressing the issue. It is either government paid lip service to the effort or there were no good policy initiative that could adequately drive down the cost. I recollect vividly the high sounding Due Process mechanism championed by Dr. Obi Ezekwesili of the then Budget Monitoring and Intelligent Unit under the Presidency in the Obasanjo administration. The major weak link in the policy was the focus on only the less than 30% of government expenditure i.e the capital expenditure. While the process metamorphosed into the today Bureau of Public Procurement (BPP), the structure of the bureau was laid on a very defective pedestal.
I recollect too that at the formation stage of the Bureau, I represented my Institute (Institute of Cost of Nigeria) as a stakeholder during the formative stage of the bureau. Some of us were of the opinion that the scope of the bureau was too limited to capital expenditure and also that the bureau should be devoid of government interference and should therefore be professionalized with personnel duly guided by relevant cost management professional ethics. This we also pointed out at the presentation of the BPP formation report to President Obasanjo.
For me BPP was another government Institution formed without the much needed teeth to bite and without the much needed paradigm shift from government bureaucratic weaknesses. After the initial ‘hulabalu’, the bureau has gone into comatose having been swallowed up by government bureaucracy.
During the Jonathan administration the focus was essentially on stemming the tide of corruption and leakages through the setting up of the Pension Transition Arrangement Department under a new Director General, prosecution of those involved in robbing retired people, stemming oil theft and pipeline vandalism, review of foreign trade policy as it affect the personnel of MDAs and parastatals, introduction of new technologies such as biometrics and digitalization of government payments e.g treasury single account (TSA), government integrated financial management information system (GIFMS) and the integrated Payroll and personnel information System (IPPS) which were all geared towards improving efficiency and transparency in public finance. In the 2014 budget address by the theme “ a budget for jobs and inclusive growth”, government claimed to have saved N126bn in leaked fund through the above reforms. These are however not at the very core of the cause of the high cost of governance in Nigeria.
Cost Driver and Cost Driver Analysis – The term Cost Driver, describes the larger-scale causal events that influences the frequency, intensity, or magnitude of a workload and thus ultimately influences the amount of work translating into the cost of the activities (Cokins 2002).
Cost Driver Analysis is defined as the examination, qualification, and explanation of the effects of cost drivers (Miller 1996). Management often uses the results of cost driver analyses in continuous improvement programs to help reduce throughput time, improve quality, and reduce cost. The overall objective in Cost Driver Analysis is to identify as many cost drivers as possible and then prioritize for action based on the ability to influence the driver. Cost driver identify the cause of activity cost and are valuable because they point people to take action at the root cause level. All activities have multiple cost drivers, some of which are controllable and some of which may not. The value of identifying cost drivers for each activity is to direct improvement efforts to the cause of cost and avoid treating the symptom. For instance, it does not do much good to focus an improvement initiative on teaching people to respond quickly to product leaks if the cause of the work is an inadequately designed seal.
Conversely, it will not do much good to eliminate a cost driver if that driver is not truly the cause of cost. A thorough cost driver analysis must be performed to get to the root cause.