Olajide Olutuyi, Co-Founder/ CEO, Top-Olax Energy Limited

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Subjects of Interest

  • Frontier and Emerging Markets
  • Private Sector Development
  • Sustainable Development

Potentials of performance-based funding for Nigeria’s development 15 Dec 2023

One of the first approaches to governance I noticed in my early days in diaspora was how public projects were funded. I observed a particular funding style characterised by collaborations between the subnational government and the municipalities (local governments), the federal government and subnational governments, and sometimes between all three. The objective of the collaborative approach is to deliver better project outcomes, leveraging performance-based funding (PBF), which is also known as outcome-based funding.

PBF is considered a branch of results-based financing (RBF), the other arm being conditional cash transfers. But whereas conditional cash transfers target the demand side of a given market, PBF targets the supply side.

Public revenue allocation is one of the chronic governance challenges in Nigeria. It has so far defied all attempts at a solution. As a hot political issue that evokes sectional sentiments, politicians exploit it. Indeed, ‘fiscal federalism’ has been a subject of agitation in the country, as the federal political structure largely operates a highly centralised fiscal framework. The quest for a good share of federally collected revenues, which are shared amongst the constituents of the federation, has driven the structural fragmentation of the country into 36 states and constitutionally recognised 774 local government areas. (LGAs).

The country currently faces numerous development challenges which make optimum performance of the allocated revenue for projects much more important. One of the obstacles to Nigeria’s development, which has become more pronounced in recent years, is the delivery of federal projects whose outcomes impact people at the subnational levels.

According to the Federal Account Allocation Committee (FAAC), “All tiers of Government depend on revenue from the federation account to finance development projects and Section 165 of the Constitution of the Federal Republic of Nigeria 1999 as well as the Allocation of Revenue (Federation Account, etc.) Act No.1 1982, stipulates that the revenues generated by the Federal government should be credited into the Federation Account and disbursed monthly among the three tiers of government as defined in the Revenue Act 1982.” Many commentators on the fiscal arrangement believe that it has failed. It has encouraged indolence and does not promote local accountability. Even the oil-producing states that receive an additional 13 percent of oil derivation fund have little development to show for it.

Performance-based funding can serve as an incentive for improved performance of public projects by acting as a layer to baseline fiscal allocation – which would require constitutional amendment. Alternatively, it can provide a rationale for attracting federal funding at the subnational levels. States or LGAs that can demonstrate better outcomes for projects would attract federal project funding. This principle also applies to federal institutions.

In the context of Nigeria’s fiscal federalism, a PBF framework would have the national government, also known as the principal, set financial or other incentives for the sub-national government referred to as the agent to deliver predefined outputs or outcomes and reward the achievement of these results. The principal defines exactly which results achieved by the agent will be paid for or incentivised.

The adoption of PBF can lead to several advantages, including increased accountability, efficiency, and improved service delivery. Nonetheless, for a country like Nigeria, it is essential to adapt this model to the unique context and challenges faced by the country. The United States provides a very interesting case study of how PBF has been used at the subnational and local levels of government. Various federal programmes, such as the Social Innovation Fund and the Pay for Success initiative, have been introduced to encourage states and municipalities to prioritise performance.

A good example is the Maternal, Infant, and Early Childhood Home Visiting (MIECHV) programme where states are compensated to develop evidence-based home visiting programmes that target at-risk families. The goal is to reduce infant mortality rates, improve child health, and enhance family well-being. By tying funding to outcomes, the programme encourages states to innovate, collaborate, and continuously improve their services.

Several US state governments have implemented performance-based funding models for public universities and colleges. Funding is allocated to institutions based on factors such as graduation rates, degree completion, and student success. Tennessee's "Tennessee Promise" programme offers free community college tuition to high school graduates, and funding for this initiative is tied to metrics like student retention, graduation rates, and the number of students who transfer to four-year institutions. Some states employ PBF for primary and secondary education, where school districts receive additional funding based on specific academic achievement and improvement measures.

Similarly, Canada also uses PBF particularly in its healthcare sector. Under the Health Accord agreements, Canada has encouraged its subnational governments to focus on specific health outcomes, such as reducing wait times for medical procedures or improving access to primary care. Subnational companies that demonstrate progress towards these goals receive additional funding, while those lagging behind face funding constraints.

The federal government occasionally provides innovation funding to support experimental healthcare programmes or initiatives aimed at achieving better outcomes. A province may receive innovation funding to implement a new telemedicine programme for remote communities. The federal government may link the continued funding of the programme to the achievement of specific outcomes, such as increased access to specialist consultations and reduced healthcare costs.

Provinces are required to regularly report on their progress toward meeting performance targets. They submit quarterly or annual reports detailing their achievements in reducing emergency room wait times, increasing the number of patients receiving timely cancer screenings, or improving patient satisfaction with healthcare services.

In the United Kingdom, PBF is often referred to as ‘Payment by Results’ (PbR). The NHS uses the framework to fund healthcare providers, such as hospitals and clinics. Under this arrangement, providers are paid based on the volume and quality of the services they deliver.  For example, hospitals receive a set tariff for each patient treated and if hospitals meet specific performance targets related to patient outcomes, infection control, and waiting times, they may receive additional bonuses or incentives.

In education, schools in the UK receive funding based on the number of students enrolled and there is also a performance-based element known as the "Pupil Premium." The Pupil Premium provides additional funding to schools for each pupil from a disadvantaged background. Schools are encouraged to use this funding to implement strategies that improve educational outcomes for these students. The more progress disadvantaged students make, the more funding their schools receive.

If President Bola Tinubu wants to see rapid development in the country, he should employ the PBF approach for results. Similarly, state governors who want to see real development within their respective domains should utilise this arrangement with their local councils.

While the experiences of the United States and Canada provide valuable insights into the potential benefits of outcome-based funding, Nigeria faces unique challenges that must be considered when adopting such a model. To be clear, one is not advocating for the entire scrapping of how revenues are currently being allocated. However, a PBF framework would bring about healthy competition and innovation by the sub nationals.

To implement PBF in Nigeria accurately and appropriately would require accurate data and measurement techniques. PBF relies on data collection and measurement of outcomes. The country will need to invest in data infrastructure to solve this problem. We will also require training personnel in programme evaluation, project management, and data analysis.

Another challenge that must be considered is the development imbalance and the unique challenges within the geopolitical zones. Implementing performance-based funding must consider these regional disparities to ensure fairness and equity. Successful adoption of outcome-based funding in Nigeria will depend on political will and effective governance. There must be a commitment to transparency, anti-corruption measures, and the rule of law.

If implemented effectively, PBF has the potential to bring several benefits to Nigeria's subnational governments and the citizens in general. With PBF, there is typically a greater degree of transparency in the allocation and use of funds. This transparency helps in building trust between the government and its citizens, as taxpayers can see how their money is being spent and what results are being achieved.

By aligning funding with specific outcomes, Nigeria can prioritise key development goals, such as reducing poverty, improving healthcare access, increasing literacy rates, and addressing infrastructure gaps. This targeted approach can lead to more effective resource allocation.

Nigeria’s adoption of PBF would present a significant opportunity to improve governance and development outcomes. By drawing inspiration from the experiences of other developed economies, Nigeria can design a model that suits its unique context and challenges.

The good news about performance-based funding is that the nonprofit sector is not left out. Federal and state grants for nonprofit organisations and community services may be awarded based on performance and measurable impact in areas such as homelessness prevention and substance abuse treatment. Programmes aimed at reducing homelessness or poverty may provide funding to organisations that demonstrate success in placing individuals in stable housing and improving their overall well-being.

The problem with revenue allocation in Nigeria started when the country switched from a unitary constitution to a federal constitution in 1946. It remains unresolved and with little to show for it over the years. As a nation, there is no better time to start implementing a results-based approach to funding than now.

To introduce PBF to the governance in Nigeria, the federal government should consider piloting PBF programmes in a few select regions or sectors before scaling up. This allows for testing and refining the approach based on real-world experiences. We can also study successful international examples of outcome-based funding, such as those in the United States and Canada, to learn from their experiences and adapt best practices to the Nigerian context.

Olajide Olutuyi, a Financial Nigeria Columnist, holds first degrees in Computer Science from the Federal University of Technology Akure (FUTA) and Management from the University of Lethbridge, Canada; an MBA from the Australian Institute of Business; and a certificate in Social Impact Leadership from University of California, Berkeley, Haas School of Business. He is an Instructor at Bow Valley College's Chui School of Business, Calgary. He is also the Co-Founder/CEO Top-Olax Energy Limited and the Executive Director, Samuel Olutuyi Foundation. Email: Olajide@samuelolutuyifoundation.org.