Public Sector Accounting and Finance · November 2021

(a) Harmony State Government Statement of cashflows for the year ended December 31, 2020

Notes N’000 Operating activities: Receipts: Statutory allocations:

- Share from federation (FAAC) i. 38,079,795 - Value Added Tax (VAT) 10,248,449 Total statutory allocation 48,328,244 Independent revenue: Direct taxes 7,188,886 Licenses 226,134 Mining rents 14,945 Fees 1,405,392 Fines 15,844 Sales 151,707 Earnings 724,019 Rent of government buildings 4,109 Rent on lands and others 73,377 Repayment – General 2,491,424 Re-imbursement 63,000 Earnings of parastatals 10,774,639 Total independent revenue 23,133,476 Other Revenue ii. 949,,504 Total other revenue 949,504 Total receipts 72,411,224 Payments: Personnel cost (including salaries on CRF charges) 13,951,945 Overhead charges 15,317,095 CRF charges (including service wide votes, pension and gratuity) 15,160,307 Parastatals recurrent cost 12,156,294 Other operating activities (JAAC and LGA bailout) 632,103 Other transfers (Deductions from FAAC and others) 1,818,779 Total payments 59,036,523 Net cashflows from operating activities 13,374,701 Investing activities: Capital expenditure: Funding from aids, grants and external loan 15,387,748s General public services 1,249,653 Public order and safety 120,000 93 Economic affairs 6,345,471 Housing and community amenities 958,396 Social protection 25,091 Environmental protection 27,000 Health 34,522 Recreation, culture and religion 17,862 Education 948,392 Net cashflows from investing activities (25,114,135) Financing activities: Proceeds from aids and grants 14,616,866 Proceeds from external loan 700,000 Proceeds from internal loan: FGN/State bonds 70,882 Proceeds of loans from others funds (commercial bank loan) 870,379 Repayment of external loans (including servicing) (463,804) Repayment of FGN bonds (commercial loan and salary bailout) (3,004,096) Repayment of loans from other funds (commercial bank loan) (2,295,835) Net cashflows from financing activities 10,494,392 Net increase/(decrease) in cash and cash equivalents (1,245,042) Cash and cash equivalents as at January 1, 2020 1,546,699 Cash and cash equivalents as at December 31, 2020 301,657

Workings: Share from Federal Accounts and Allocation Committee: N’000 i. Share of the State (Jan. - Dec.) 32,625,217 Add back: Deduction at source (Jan. - Dec.) 5,286,680 37,911,897 Add: Sharing of Excess Petroleum Tax by FACC 167,898 Total 38,079,795 ii. Other revenue sources Exchange difference 490,575 Refund of road repairs 65,483 Refund of bank charges 51,112 Refund from Paris Club 41,310 LGA bailout 301,024 Total 949,504 94

(b) Risks of Medium Term Expenditure Framework (MTEF)

i. Global development risk has led to fragile economic recovery and the emergence of new political risks, which can be mitigated through diplomatic engagements.

ii. Persistent oil price decline risk which is expected to remain in the medium term, can be mitigated through diplomatic engagements for oil cuts by producing countries and diversification of the revenue base.

iii. Oil production and oil sector management risk which have bedevilled by crude oil theft and oil pipeline vandalism, can be mitigated through engagements with host communities, improved technology in pipeline surveillance, etc.

iv. Non- oil revenue risks which are traceable to low remittance into the treasury by government’s owned enterprises for lack of transparency. This can be mitigated through improved non-oil revenue drive and capturing of more taxpayers into the tax net.

(c) Roles of Public Accounts Committee (PAC)

i. To examine the accounts showing the appropriation of the sum granted by the state house of assembly to meet the public expenditure; together with the Auditor-General’s report thereon;

ii. The committee not only ensures that ministries spend money in accordance with state house of assembly approval, it also brings to the notice of the assembly instances of extravagance, loss, unnecessary expenditure and lack of financial integrity in public services;

iii. The committee shall, for the purposes of discharging that duty, have power to send for any person, papers and records and to report from time to time to the state house of assembly and to sit notwithstanding the adjournment of the assembly;

iv. To examine any accounts or report of statutory corporations and boards after they have been presented to the state house of assembly and to report thereon from time to time to the assembly;

v. To enquire into the report of the Auditor General of the state with respect to any pre-payment audit query which had been overruled by the chief executive of the ministry, extra-ministerial department, agency or court of the state government and to report same to the state house of assembly: 95

vi. The committee has extended its scope of work in recent years to cover the examination of policy issues and accounts that are not part of the appropriation accounts; and

vii. The PAC has no executive power, but it has gained a high reputation in recent years through its active role in interviewing and questioning officials, obtaining and examining records, collecting and screening evidence from witnesses and reporting findings to the state house of assembly.

Examiner’s report This question tests candidates’ knowledge on the preparation of statement of cashflows using direct method in part (a) of the question, while part (b) tests candidates’ knowledge on the risks associated with reliance on the Medium- Term Expenditure Framework (MTEF) and ways to mitigate the risks. Part (c) of the question also tests candidates’ knowledge on the roles of the Public Accounts Committee (PAC). All the candidates attempted the question, but their performance was below average. The commonest pitfalls were the inability of the candidates to identify the risks and ways to mitigate the risks associated with reliance on the Medium-Term Expenditure Framework (MTEF) as well as the roles of Public Accounts Committee (PAC). Also some candidates were unable to incorporate the additional information given in the notes to the question in the preparation of statement of cashflows using direct method. Candidates are advised to have adequate knowledge of relevant provisions of International Public Sector Accounting Standards (IPSAS) and to make use of Pathfinder and Study Texts of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Preparation of cashflow statement using direct method Title ½ Calculation of net cashflows from operating activities 8¼ Calculation of net cashflows from investing activities 3½ Calculation of net cashflows from financing activities 2¼ Calculation of net increase/(decrease) in cash and cash equivalents for the year 1 Calculation of cash and cash equivalents as at December 31, 2020 1¼ Working note (i) on share from FAAC 1½ Working note (ii) on other revenue sources 1¾ 20 96

b. Risks associated with reliance on the Medium-term Expenditure Framework (MTEF) and ways to mitigate the risks Four risks associate with MTEF at ½ mark each 2 Four ways to mitigate the risks ½ mark each 2 4

c. Six roles of the Public Accounts Committee (PAC) at 1 mark each 6 Total 30

SECTION B

(a) Components of borrowing cost:

(i) Interest on bank overdrafts and short-term and long-term borrowings; (ii) Amortisation of discounts or premium relating to borrowings; (iii) Amortisation of auxiliary costs incurred in connection with the arrangement of borrowings; (iv) Finance charges in respect of finance lease; and (v) Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Types of borrowing costs that are eligible for capitalisation

(i) Only borrowing costs incurred that are directly attributable to a qualifying asset can be capitalised to the cost of the asset

(ii) When an entity specifically borrows funds for the purpose of obtaining a particular qualifying assets, the borrowing costs that are eligible for capitalisation should be the actual borrowing costs incurred on such borrowing during the period, less any income earned on the temporary investment of those borrowings.

(iii) Where funds are part of a general pool the eligible amount is determined by applying the capitalisation rate to the expenditure on that asset. The capitalisation rate will be the weighted average of the borrowing cost applicable to the borrowings of the enterprise that are outstanding during the period.

(b) What constitutes changes in accounting policies under the standard

i. A change in the accounting treatment, recognition or measurement of a transaction or event within the basis of accounting is a change in accounting policy; 97

ii. A change in the accounting policy should be made only if required by statute (including mandatory regulation), or by an accounting standard setting body, or if the change will result in more relevant or reliable information about the financial position, financial performance or cashflows of the entity;

iii. An entity shall change an accounting policy only if the change is required by a Public Benefit Entity (PBE) Standard; and

iv. Results in the financial statements providing faithfully representative and more relevant information about the effects of transactions, other events and conditions on the entity’s financial position, financial performance, or cashflows.

i. Disclosure requirements when initial application of IPSAS is made and has effects on current, prior or future periods are as follows:

• The title of the standard;

• When applicable, that the change in accounting policy is made in accordance with its transitional provisions;

• The nature of the change in accounting policy;

• When applicable, a description of the transitional provisions;

• When applicable, the transitional provisions that might have an effect on future periods;

• For the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected; and The amount of the adjustment relating to periods before those presented, to the extent practicable; and *(h) If retrospective application required by paragraph 24(a) or (b) is impracticable for a particular prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

ii. Disclosure requirements when voluntary changes in accounting policy is made and has effects on current, prior or future periods are as follows:

• The nature of the change in accounting policy;

• The reasons why applying the new accounting policy provides faithfully representative and more relevant information;

• For the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected;

• The amount of the adjustment relating to periods before those presented, to the extent practicable; and

• If retrospective application is impracticable for a particular 98 prior period, or for periods before those presented, the circumstances that led to the existence of that condition and a description of how and from when the change in accounting policy has been applied.

Examiner’s report Part (a) of the question requires candidates to identify the components and types of borrowing costs that are eligible for capitalisation as required by IPSAS- 5: Borrowing Costs, while part (b) tests candidates’ knowledge of what constitutes changes in accounting policies and disclosure requirements in accounting with IPSAS-3 Accounting Policies, Changes in Accounting Estimates and Errors. Few candidates attempted this question and performance was below average. The commonest pitfall was the inability of the candidates to identify the components and types of borrowing costs. Candidates are advised to have adequate knowledge of relevant provisions of International Public Sector Accounting Standards (IPSAS) and to make use of Pathfinder and Study Texts of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Highlighting components of borrowing cost that are eligible for capitalisation 6 Identifying borrowing costs that are eligible for capitalisation 4 10 b. Explanation of what constitutes changes in accounting policies under the standard 4 Disclosure requirements i. When initial application of IPSAS is made and has effects on current, prior or future period 3 ii. When voluntary changes in accounting policy is made and has effects on current, prior or future period 3 10 Total 20 99

(a) Observations on government accounting system in developing countries

(i) Relatively little has been given to social government accounting and budgetary control system.

(ii) Accounting procedures in government departments, which reflect complicated systems of checks and balances, tend to hamper the efficacy and timeliness of the accounting information and statistics produced.

(iii) Government accounting is seen mainly as an accountability device for public receipts and expenditure. Efficiency, effectiveness and economy of the operations tend to be neglected.

(iv) Bookkeeping or administrative legal compliance procedures are more common than modern accounting approaches.

(v) Accounting tends to be identified with expenditure control. The fact is that expenditure is subject to multiple checks.

(vi) The amount of paper work is much but no efficiency, accountability or financial control is achieved.

(vii) The accounting data upon which government budgets and plans are based are frequently inaccurate and incomplete.

(viii) Financial reports are delayed and generally in arrears. They consequently become obsolete at the point of implementation. Features of a good system of public sector accounting as contained in a United Nations Manual on Government Accounting. The system must:

(i) Comply with constitutional, statutory and other legal requirements of the relevant country;

(ii) Be related to budget classifications. Budgetary financial management must be closely integrated;

(iii) Be maintained in a manner that will clearly identify the objects and purposes for which funds have been received and expended, and the executive authorities who are responsible for custody and use of funds in programme or budget implementation; 100

(iv) Maintain records in a way that will facilitate audit by external review authorities and readily furnish the information needed for effective audit;

(v) Be developed in a manner that will permit administrative control of funds;

(vi) Be developed so that it effectively discloses the economic and financial results of programme operations, including the sources of revenue, identification of costs and determination of the operating results of government programmes and organisation; and

(vii) Be maintained in a manner that will provide financial data useful for economic analysis and identification of governmental transactions, and also assist in the development of the country’s accounts.

(b) Offences as well as their penalties as contained in the Act that established ICPC:

(i) Offence of accepting gratification: Any person who corruptly asks for, receives or obtains any property or benefit of any kind for himself or for any other person or agrees or attempts to receive or obtain any property or benefit of any kind for himself or for any other person, is liable to imprisonment for seven (7) years;

(ii) Offence of giving or accepting gratification through agent: Any person who accepts or gives gratification through an agent, shall be liable to imprisonment for seven (7) years on conviction.

(iii) Acceptor or giver of gratification: The officer will be guilty, notwithstanding that, the purpose was not carried out or matter not in relation to principal’s affairs or business; on conviction shall be liable to imprisonment for (seven) 7 years;

(iv) Fraudulent acquisition of property: Any person found guilty, shall on conviction, be liable to imprisonment for seven (7) years;

(v) Fraudulent receipt of property: Any person who receives anything which has been obtained by means of act constituting a felony or misdemeanour inside or outside Nigeria, which if it had been done in Nigeria would have constituted a felony or misdemeanour and which is an offence under the laws in force in the place where it was done, knowing the same to have been so obtained, is guilty of a felony and the offender shall, on conviction be liable to imprisonment for seven (7) years; 101

(vi) Penalty for offences committed through postal system: If the offence by means of which the thing was obtained is a felony, the offender shall on conviction be liable to imprisonment for three (3) years, except the thing so obtained was a postal matter, or any chattel, money or valuable security contained therein, in which case the offender shall on conviction be liable to imprisonment for seven (7) years;

(vii) Deliberate frustration of investigation being conducted by the Commission: Any person who, with intent to defraud or conceal a crime or frustrate the Commission in its investigation of any suspected crime of corruption under the Act or any other law destroys, alters, etc. any document shall on conviction be liable to seven (7) years imprisonment;

(viii) Making false statements or returns: Any person who knowingly furnishes any false statement or return in respect of any money or property received by him or entrusted to his care, or of any balance of money or property in his possession or under his control, is guilty of an offence and shall on conviction be liable to seven (7) years imprisonment;

(ix) Gratification by and through agents: Any person who corruptly accepts, obtains, gives or agrees to give or knowingly gives to any agent, any gift or consideration as an inducement or reward for doing, fore bearing to do any act or thing, shall on conviction be liable to five (5) years imprisonment;

(x) Bribery of public officer: Any person who offers to any public officer, or being a public officer solicits, counsels or accepts any gratification as an inducement or a reward, in the course of official duties shall on conviction be liable to five (5) years imprisonment with hard labour;

(xi) Using office or position for gratification: Any public officer who uses his office or position to gratify or confer any corrupt or unfair advantage upon himself or any relation or associate shall be guilty of an offence and shall on conviction be liable to imprisonment for five (5) years without option of fine; and

(xii) Inflation of contract: Any public officer who in the course of official duties, inflates the price of any good or service above prevailing market price or professional standards shall be guilty of an offence under this Act and liable on conviction for a term of seven (7) years and a fine of one million naira (N1,000,000.00). 102

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the features of good system of public sector accounting in the developing countries as contained in the United Nations Manual on Government Accounting. Part (b) tests candidates’ knowledge on the offences as well as the penalties contained in the Corrupt Practices and Other Related Offences Act, 2000. Majority of the candidates attempted the question and performance was above average. The commonest pitfalls were the inability of the candidates to differentiate between developing countries and advanced countries. Most of the observations provided by candidates were for advanced countries as against developing countries. Candidates are advised to make use of Pathfinder and Study Texts of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Discussion of five observations of government accounting system in developing countries at 1 mark each 5 Discussion of five features of good system of public sector accounting at 1 mark each 5 10

b. Offences as well as their penalties as contained in the Act that established ICPC: 4 Identification of five offences at ½ mark each 2½ Explanation of the penalties identified at 1½ each 7½ 10 Total 20

(a) Responsibilities of selected participants for smooth operation of TSA are detailed below: Roles of Central Bank of Nigeria (CBN)

i. Deployment of gateway for use by other stakeholders. ii. Ensures that Remita platform facilitates the transmission of all instructions. iii. Designs the payment and collection process across all banks based on operational standards. iv. Maintains the Treasury Single Account (TSA) of the government 103

v. Ensures maintenance, security and optimum performance of the gateway to meet its obligations. vi. Issues the guidelines to Deposit Money Banks (DMBs) on the operation of the TSA. vii. Abides by all terms and conditions for the operation of TSA. Roles of the Deposit Money Banks (DMBS)

i. Ensures that payments to government are given prompt attention. ii. Ensures that all collections in favour of FGN are promptly remitted and complains are lodged with Office of the Accountant-General of the Federation (OAGF), CBN and REMITA without delay. iii. Liaises regularly with OAGF to ensure smooth operation of the TSA. iv. Liaises with relevant departments of OAGF and CBN on the operations of TSA. v. Ensures that terms and conditions enshrined in the MoU are effectively discharged. Roles of service provider

i. Works with CBN, OAGF and other stakeholders to articulate system requirements. ii. Provides a robust stable and effective integrated processing platform. iii. Ensures the optimal availability of all relevant systems and platforms. iv. Provides effective and efficient support to users of the platform.

v. Provides users with relevant reports. vi. Training of users on the use of the payment gateway. Roles of Office of Accountant General of the Federation

i. Ensures effective implementation of e-collection reform. ii. Ensures proper monitoring of the e-collection gateway. iii. Ensures prompt reconciliation of all collections. iv. Provides Ministries, Department and Agencies (MDAs) with periodic report of collection. v. Supports MDAs, banks and payers on the operation of e-collection. vi. Ensures regular monitoring of all collections to ensure prompt remittance and accounting for collection. vii. Ensures continuous update of e-collection guidelines and processes. viii. Abides by the provisions of the MoU with stakeholders 104

(b) Components of TSA

i. E-Payment - The Federal Government of Nigeria commenced the implementation of Treasury Single Account (TSA) in April 2012, with the e-payment component. It is a direct payment through electronic transfer to an individual or an organisation using the medium of information and communication technology.

ii. E-Collection -The e-collection component of TSA commenced in January 2015. The first Treasury Circular on e-collection was issued on the March 19, 2015 followed by guidelines in September, 2015. It is a comprehensive electronic solution for the remittance, management and reporting of all Federal Government receipts (revenues, donations, transfers, refunds, grants, fees, taxes, duties, tariffs, etc.) into the TSA and sub-accounts maintained and operated at the CBN.

(c) Contents of E-payment Teller

i. Account name of the beneficiary ii. Account number of the beneficiary iii. Bank and Branch of the beneficiary iv. Sort code (if not part of Account Number)

v. Amount payable vi. Purpose of the payment vii. Signature and thumbprint impression of the account’s signatories

Examiner’s report Part (a) of this question tests candidates’ knowledge of responsibilities of Central Bank of Nigeria (CBN), Deposit Money Banks (DMBs), Office of the Accountant-General of the Federation and service providers in the smooth operation of the Treasury Single Accounts (TSA). Parts (b) and (c) test the components of TSA and contents of an electronic payment teller, respectively. Majority of the candidates attempted the question and performance was average. The commonest pitfalls were the inability of the candidates to understand the role of some agencies in the Treasury Single Accounts (TSA) implementation, as well as its components. Candidates are advised to have adequate knowledge of relevant provisions of Treasury Single Account (TSA) and other regulations relating to public sector account for better performance in the Institute’s future examinations. 105

Marking guide Marks Marks a.i. Roles of Central Bank of Nigeria (CBN) for smooth operation of TSA 3

ii. Roles of the Deposit Money Banks (DMBS) for smooth operation of TSA 3 iii. Roles of service provider for smooth operation of TSA 3 iv. Role of Office of Accountant General of the Federation for smooth operation of TSA 3 12 b Identification of the components of TSA 1 Explanation of the components of TSA 2 3 c. Contents of e-payment teller 5 Total 20

SECTION C

(a) Patterns of revenue allocation Revenue sharing in a federation involves two distinct strands, namely vertical or horizontal. Vertical allocation refers to revenue sharing among the different tiers of government within a federation based on a given pattern. This implies sharing among the Federal, State and Local governments. Horizontal allocation on the other hand refers to revenue sharing among the component states and local governments on the basis of acceptable principles.

(b) Principles of revenue allocation

(i) Derivation: This principle was originally applied to the proceeds of export taxes on agricultural produce. The principle asserts that the state from which the bulk of the revenue is obtained should receive extra share over and above what other states receive.

(ii) Even development: The objective of government is that the federation itself should grow and develop at an optimum rate and that each of the constituent states should grow and develop at the optimum (not necessarily equal) rate. The principle requires that growth and development should be spread so that serious inequalities or imbalances are reduced in the federation. These may be achieved by sacrificing efficiency in the form of a reduced overall growth. 106

(iii) Need: The rate of growth and development a state is able to achieve depends on the revenue the state is able to generate. It requires financial as well as other resources not only to maintain its existing facilities but also to develop additional capacities. Given a set of these other resources, a state requires funds to enable it realise its potential. When the need of a state is compared with the need of others, it may be necessary to transfer financial resources from one state to another in the interest of efficiency.

(iv) National interest: This principle is used residually by the highest level of government to intervene and transfer funds to lower levels or units in the lower levels to serve various considerations. It lies therefore in the sphere of discretionary grants to be administered by the highest tier, that is, government of the federation.

(v) Independent revenue: The principle is of the view that each level of government should be able to raise and keep some revenue for its use. The bulk of the revenue of the state revenue comes from what is raised and collected by the federal government. The main sources left to the state governments are those on personal income taxes, capital gains tax and stamp duties, which should be exploited.

(vi) Continuity of government services: The principle suggests that each level of government has a certain minimum responsibility and that the level of services provided should not be allowed to fall below a certain standard. Where a state is unable to function effectively due to lack of funds, such a state should be assisted with federally collected revenue.

(vii) Equality of state: All men are created equal but are endowed differently. Similarly, states are created equally but they arrive, at creation and through passages of time with different endowments of economic, financial and political power. The principle asserts that revenue sharing among the states should be done on equal basis.

(viii) Equality of access to development opportunities: This was introduced to correct unequal endowments of the states. The principle asserts that preferential treatment should be given to those states which by some measures of development lag behind others or fall below certain norms. 107

(ix) Absorptive capacity: It represents the capacity of the state to make proper use of funds. It is on exceptional and efficiency grounds, that is, funds should go to those states that are best able to utilise them.

(x) Population: This principle asserts that since government is about people, that development is also about people and that the essence of government should be the welfare of the people. Therefore, states with larger population should receive extra share above others with smaller population.

(xi) Tax effort: The principle, which applies in most federation, is designed to encourage states to exploit their tax capacities. The realisation of a state's potential in respect of tax revenues will widen its development possibilities.

(xii) Fiscal efficiency: This principle asserts that states should minimise the cost of fiscal administration or obtain maximum revenue from a given cost. Fiscal efficiency reflects not only on the ability to raise taxes and collect them, but it reflects also the structure of the tax base itself as well as the overall administrative machinery of government.

Examiner’s report Part (a) of the question tests candidates’ knowledge on the dimensions or patterns of revenue sharing, while part (b) tests candidates’ knowledge on principles of revenue allocation. Majority of the candidates attempted the question and performance was above average. The commonest pitfall was the inability of the candidates to discuss the patterns of revenue sharing. Candidates are advised to make use of Pathfinder and Study Texts of the Institute for better performance in the Institute’s future examinations. 108

Marking guide Marks Marks a. Discussion of patterns of revenue sharing 5 b. Identification of five principles of revenue allocation at ½ mark each 2½ Explanation of two principles of revenue allocation identified at 1½ marks each 7½ 10 Total 15

(a) The two principal causes of externalities are production activities and consumption activities. Production externalities: It exists where production activities result into gains or losses to the people within a locality without any form of price or compensation paid. For example, oil exploration will generate hazardous effects (losses) and employment and business opportunities (gains) to the people within the precinct of production activities. This shows that the profit that a firm makes does not only depend on its activities but is influenced by the activities of other economic units in the business environment. Consumption externalities: This occurs when consumption benefit cannot be limited and charged to a particular consumer. This arises when there is interdependence in the consumption activities of individuals within an area without any form of compensation or price paid to the externality generator. This implies that the utility of individual consumption activities will impact on the utility of another within the community.

(b) The following are the devices that government can use to achieve a more efficient allocation of resources in the presence of external benefits

i. Reduction in industries reserved for the public sector In the earlier year government may reserve some industries for the public sector. This meant that only the government could operate in these industries and no private capital would be involved. While the public sector must be credited with developing these industries, now the private sector is quite capable of taking them forward. Now the private and public sector co-exist and complement each other in these industries, for example, mining and air transportation. 109

ii. Disinvestment Disinvestment from public sector means to sell equity shares in public companies to the private sector and the public at large. Also, disinvestment allows for the new influx of capital and better efficiency and financial discipline in private hands. It also ensures that the government has additional funds to invest in social programmes such as public health and sanitation. Disinvestment also shifts the commercial and financial risks to the private sector. It brings the companies under the purview of corporate governance and reduces the amount of public debt. In some cases such as the telecom industries, disinvestment has also benefitted the consumers by lowering prices, through increase competition.

iii. Closure of uproductive units After the change in policies, all public sector units were to be reviewed by a committee put in place by the government. The committee would review the condition of the units and decide whether they were capable of rehabilitation or were to be shut down permanently. But this may upset the workers and employees of the unproductive units that were shut down. Since the government was not able to sustain such units, they had to be shut down. The workers were provided with a safety net as to prevent loss of income.

iv. Public provision: Under public provision, a public authority that receives payment from the government produces the good or service.

v. Vouchers: A voucher is a token that the government provides to households, which they can be used to buy specified goods or services.

vi. Patents and copyrights: Intellectual property rights give the creator of knowledge the property right to the use of that knowledge. The legal device for establishing an intellectual property right is the patent or a copyright. A patent or copyright is a government-sanctioned exclusive right given to an inventor of a good, service or productive process to produce, use and sell the invention for a given number of years. 110

Examiner’s report Part (a) of this question tests candidates’ knowledge of the principal causes of externalities while part (b) requires the candidates to discuss measures that government can use to achieve a more efficient allocation of resources in the presence of external benefits. Few candidates attempted the question and their performance was below average. The commonest pitfalls were the inability of the candidates to identify the two principal causes of externalities and discuss the measures that the government can use to achieve a more efficient allocation of resources. Candidates are advised to make use of Pathfinder and Study Texts of the Institute for better performance in the Institute’s future examinations.

Marking guide Marks Marks a. Identification of causes of externalities 1 Explanation of causes of externalities indentified 5 6

b. Identification of three measures to achieve a more efficient allocation of resources in the presence of external benefits 3 Explanation of three measures identified 6 9 Total 15 111

Otunba Local Government

(a) Calculation of Net Present Value (NPV) for each project Project A Project B Project C Project D Project E Project F Year DF (12%) CF DCF CF DCF CF DCF CF DCF CF DCF CF DCF N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 N’000 0 1 -2,460 -2,460 -1,800 -1,800 -1,750 -1,750 -1,800 -1,800 -1,800 -1,800 -1,500 -1,500 1 0.893 700 625.1 750 669.75 480 428.64 620 553.66 400 357.2 350 312.55 2 0.797 700 557.9 870 693.39 480 382.56 620 494.14 500 398.5 820 653.54 3 0.712 700 498.4 640 455.68 630 448.56 620 441.44 600 427.2 820 583.84 4 0.636 700 445.2 0 0 730 464.28 620 394.32 700 445.2 0 0 5 0.567 700 396.9 0 0 0 0 0 400 226.8 0 0 NPV 63.5 18.82 -25.96 83.56 54.9 49.93 Ranking 2 5 6 1 3 4 112 Project to be invested based on NPV Project Initial Investment NPV N’000 N’000 D 1,800.00 83.56 A 2,460.00 63.5 F 1,800.00 49.93 Total 6,060.00 196.99 Balance 140.00 Money Market Funds available 6,200.00 NB Based on NPV criteria projects D, A and F would be selected while the balance of N140,000 would be invested in money market at the rate of 9%, because the projects are not divisible. Project E with NPV of N53,700 would not be selected because projects A and E are mutually exclusive which means only one of the project could be selected. Since the NPV of A is higher than E, project A is thereby selected.

(b) Profitability Index (PI) Project A B C D E F N’000 N’000 N’000 N’000 N’000 N’000 Outlay 2,460 1,800 1,750 1,800 1,800 1,500 NPV 63.5 18.82 (25.96 83.56 54.90 49.93 PI = NPV Outlay 0.0258 0.0105 (0.0148) 0.0464 0.0305 0.0333 Ranking 4 5 6 1 3 2 Project to be invested based on Profitability Index Project Initial Investment NPV N’000 N’000 D 1,800 83.56 F 1,500 49.93 E 1,800 54.90 Sub-Total 5,100 188.39 B (Note) 1,100 11.50 Total 6,200 199.89 NB Project A, which is the 4th project in ranking will not be selected because it is mutually exclusive with project E which is already selected. We will now select the next project in ranking, which is project B. Only N1,100,000 is left for investment in project B. Project B requires a total investment of N1,800,000. However, since the projects are said to be divisible, therefore, the available amount of N1,100,000 will be invested in project B and the NPV will be a proportion of total NPV for project B. Thus, 1,100/1,800 *18.82 = N11,500. 113

(c) The rankings differ from (a) because NPV is an absolute measure whereas the profitability index is a relative measure that takes into account the different investment cost of each project.

Examiner’s report Part (a) of this question tests candidates’ knowledge of the calculation of Net Present Value (NPV) of projects and their rankings while part (b) requires the candidates to calculate the Profitability Index (PI) and rank the projects to determine how the fund available should be best invested. Part (c) requires the candidates to state why the rankings in (b) differ from that in (a). Majority of the candidates attempted the question and their performance was above average. The commonest pitfalls were the inability of the candidates to calculate Profitability Index (PI) and rank the projects accordingly. Also, some candidates could not state the reason why rankings under Net Present Value (NPV) and Profitability Index (PI) differ. Candidates are advised to make use of pathfinder and study Texts of the Institute for better performance in future examinations.

Marking guide Marks Marks a. Calculation of Net Present Value of projects A – F 61/2 Ranking 11/2 8

b. Calculation of Profitability Index for projects A – F 11/2 Ranking based profitability index 11/2 Decision on the projects to invest using profitability index 11/2 Decision on the mutual exclusive projects to invest on 1/2 Determination of how the balance of the total outlay should be invested 1 6

c. Explanation the reason why ranking between NPV and PI approach to project appraisal differs. 1 Total 15 114