- 15 Marks
Question
a. The design of fiscal transfers is critical to ensuring the efficiency and equity of local service provision and the fiscal health of sub-national governments.
You are required to identify and explain FIVE principles that should guide grant design of fiscal transfers. (7½ Marks)
b. Omidan State Government is considering investing in one of the five available projects using cost – benefit method. The following estimated costs and benefits relate to five different projects.
| A N’m | B N’m | C N’m | D N’m | E N’m | |
|---|---|---|---|---|---|
| Estimated cost of investment | 100 | 200 | 120 | 240 | 300 |
| Estimated benefit | 250 | 220 | 200 | 260 | 360 |
Assume that the state government has budgeted a sum of N520 million to be invested in undertaking the different projects.
Required: Calculate the cost benefit ratio of each project and using other appropriate techniques, rank the projects and advice the state government on the project that should be undertaken and the cost involved. (7½ Marks)
Answer
a. FIVE principles guiding grant design of fiscal transfers
- Equity: Equalize fiscal capacities for fair services.
- Efficiency: Encourage allocation without distortion.
- Transparency: Clear, predictable criteria.
- Accountability: Link to performance.
- Simplicity: Easy to administer.
b. Cost-benefit ratios and ranking
Ratios: A 2.5, B 1.1, C 1.667, D 1.083, E 1.2 Ranking: A, C, E, B, D Advice: Undertake A, C, E at cost N520 million, total benefit N810 million.
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