ABSTRACT
One of the perennial problems
which has not only defied all past attempts at permanent solution, but also has
a tendency for evoking high emotions on the part of all concerned each time it
is brought forth for discussion or analysis is the issue of equitable revenue
allocation in Nigeria. It is an issue which has been politicised by successive
administrations in Nigeria both military and civilian regimes. It is consequent
on this that various regimes had attempted at establishing various
commissions/committees on revenue allocations which attempted various criteria
for sharing national revenue which have been distilled into a number of
principles as enunciated in this paper. The imperative of competition over
sharing common wealth in the context of a plural society like Nigeria have
resulted into a lot of contradictions despite the plethora of commissions which
is the focus of this paper. The paper among other things concludes that an
acceptable formula that would foster a more balanced development and harmonious
fiscal federalism among the component groups in the country is very
fundamental.
Keywords:
Federalism, Revenue Allocation, Fiscal Federalism, Revenue Allocation
Commission
INTRODUCTION
According to Ojo (2010), the
perennial problems which has not only defied all past attempts at permanent
solution, but also has a tendency for evoking high emotions on the part of all
concerned (each time it is brought forth for discussion or analysis) is the
issue of equitable revenue allocation in Nigeria. It is an issue which has been
politicised by successive administrations in Nigeria both military and civilian
regimes. Indeed, in virtually all federations in which the constitution shares
power between the central and regional or state governments and, for each level
to be “within a sphere co-ordinate and independent” (Wheare 1963:93) enough
resources need be allocated to each tier to justify their existence. The nature
and conditions of the financial relations in federal systems particularly one
that is transfixed on a multi-ethnic society like Nigeria is crucial to her
continuing existence (Badmus 1989:7) for fiscal matters transcend the purview
of economics alone. They have in most cases in Nigeria assumed political,
religious and social dimensions (Adesina 1998:234). In the words of James
O’Connor, allotments of money (and resources) must reflect “social and economic
conflicts between classes and groups” (O’Connor 1993:276). It is not surprising
therefore, that the basis of federal statutory revenue allocation has always
been one of the “most contentious and destabilizing factors in the Nigerian
polity”. No doubt, ‘public finance is one of those subjects which lie on the
borderline between economics and politics’ (Dalton 1929 also cited in Ekeh
1994:234). It needs be emphasized that whatever may be the origin of a
federation, whether aggregation or devolution, its establishment at once raises
three salient problems: “how to allocate functions rationally; how to allocate
taxing powers; and how to share revenue between the governments of that
federation” (Phillips 1971:389 also cited in Adebayo 1990:246). Revenue
allocation formula must accomplish via: (i) national unity; (ii) economic
growth, (iii) balanced development, (iv) self-sufficiency and (v) high standard
of living for the citizens (Nigerian Tribune editorial comment 11th August,
1995:1). The hitch however in Nigerian context is how best to resolve these
complex revenue allocation problems that will achieve the aforementioned
objectives. Thus, on several occasions, successive governments have been
revising revenue allocation formula till date. So far, an acceptable formula is
yet to be arrived at; in view of the agitations here and there for an acceptable
formula. Meanwhile, it is imperative to note that Nigeria’s revenue sharing
debates have revolved basically around three issues namely: (i) the relative
proportions of federally collected revenues in the federation account that
should be assigned to the centre, the states, the localities and the so-called
‘Special Funds’ (vertical revenue sharing), (ii) the appropriate formulae for
the distribution of centrally devolved revenues among the states and among the
localities i.e. local governments (horizontal revenue sharing) and (iii) the
percentage of federally collected mineral revenue that should be returned to
the oil-bearing states and communities on the account of the principle of
derivation and compensation for the ecological risks of oil production (Suberu
1995:8-9). It is equally important to note that since the oil boom in the early
1970s, the revenue allocation formula has been bedevilled by time
inconsistencies – a tendency of one of the parties in a consensual agreement to
change the terms after the negotiations have been completed. The formula has
been continually manipulated in the service of interregional and inter-ethnic
cross-subsidization (Olopoenia 1998:51). Suffice to say that revenue allocation
formula are warped because they are have not been ‘‘open covenants openly
arrived at’’. Rather, they reflect the views of commissions, individuals, or
groups within the commissions, which have shown proclivity for embracing
theories, beliefs ideals and approaches which have not only proved unrealistic,
but have thereby contributed to the dislocations within the Nigerian state
(Adesina, 1998: 232). The historical analysis of the revenue allocation
commissions is vitally important in unravelling the paradoxes our time, and to
understand our contemporary predication. The thrust of this paper therefore is
to access the challenges of evolving a viable revenue allocation formula cum
commission vis-à-vis the contradictions in Nigeria’s federal system.
The Challenges of Revenue Allocation in Nigeria’s Federalism
In a federal system of government,
revenue allocation involves two schemes. The first is the vertical sharing
between the federal or inclusive government and the other tiers of governments.
The subject of these sharing schemes is the federally collected revenues. This
is because the revenues generated within the jurisdictional areas of the units
– states and local governments – are not subject to the national sharing
formula.
In the annals of federal countries’
revenue sharing arrangements, the sources of the federally collected revenue
that form the subject of the sharing formula have remained largely unchanged.
These sources which are not amenable to other units include import duties,
Journal of Social Science and Policy Review Volume 4, June 2012
mining rents, excise units, export
duties and royalties (Ovwasa, 1995:102-117). The implication of this is that,
since these sources of revenue are not amenable to the jurisdiction of the
other units of government, the problem of revenue allocation has focused on not
who should raise the taxes, but on how to share the proceeds that is, the
actual revenue collected by the federal government. The imbalance between
functions and resources base, calls for higher level government to transfer
revenue to the lower level. Graham in a perceptive work, described such
transfer as “deficiency transfer or balancing” (Graham, 1964). It is so
described because the transfer seeks to make up for the differences in the
levels of functions devolved to the lower government and the resources
available to it. Another principle of revenue transfer which is horizontal
revenue sharing arises out of the variations in revenue generation capacities
of the component units. Where the revenue raising capacities are low, heavier tax
burden is imposed relative to higher revenue raising capacities area. This
transfer is called “equalization transfer”. This transfer is necessary because
higher taxation will scare away businesses and the economy of the unit will
become more depressed. To avoid this, the higher the federal level of
government has to transfer to the lower unit, the better, to enable it make up
for the differences between its internally generated revenue and those required
for maintaining the minimum standard of services.
The two types of resource transfer
discussed above are known as intergovernmental grantsin-aid. The third
principle has been given different names by different scholars. Beak (cited in
Graham 1964) called it “simulation”, “incentive” or “conditional” grants. This
grant is also known as categorical grants because such grants are designed
basically to undertake certain projects. This is also known as categorical
grants because they are desired for particular purposes. Nevertheless, in view
of the fact that no federation has all its component parts equally developed,
the transfer of funds within a federation is a potent weapon in the hands of
mangers of the state more so in a plural society with diverse cleavages to
satisfy hegemonic interests. On the other hand it can help in ensuring that all
parts of the federation have resources to carry out their functions. The
government can thus ensure that the revenue from resources located in a part of
the country is used for the benefit of all parts (Nyemutu-Roberts 2005:328). To
this extent, revenue allocations can foster national integration. However, when
misused, it engenders political altercations and contestations which
destabilise the political economy and tend to undermine the efficacy of
federalism in fostering political accommodation and economic development. This
is why the most common source of friction in a federation is the distribution
of fiscal resources (Aluko 1976:1). It is important to add that fiscal
relationship in a gamut of intergovernmental relations is no longer only
federal-state but also state-federal, federal-local and state-local. This is
one of the most significant recent trends in inter-governmental fiscal
relationships in federal systems across all regions and climes of the world
(Aluko 1976). In developing countries like Nigeria, studies have shown that the
state and local governments rely mainly on allocations from the federal
government (Ekpo, 1994; Olowononi 1998). The allocation from the federal
government usually constitutes about 70 to 90 percent of the state or local
government revenues. Some major implications of this dependence are that the
situation of the local governments would be worse; the agitation for constant
review of revenue allocations in favour of the States and local governments
will persist and continue to be a major friction in the political equation of
the country. Moreover, the States will remain inefficient in tax collection and
consequently remain underdeveloped in tax and general revenue administration.
All these will continue to generate unnecessary tension (Tella, 1999) as the
case with Nigeria. According to Dunmoye (2002), four interrelated factors can
initiate or ruin a viable federation. These are:-
•
the issue of political power sharing or
representativeness especially at the centre;
•
the problem of equitable employment to members
of all sectors or all constituent units in the federation;
•
location of industries or infrastructures and
projects especially those funded by the federal government and
•
The sharing of resources or what is known in
Nigeria as revenue allocation.
Each of these four is related to the whole gamut of the
political economy of federalism. Any lapse in one or more of these factors can
mar any federal system especially a fragile federation with a dependent
capitalist polity like Nigeria.
The debate on Nigeria’s fiscal
federalism and relations hinges on the fundamental question of who gets what of
the national cake, when and how. This is fundamental given that Nigeria as a
monolithic economy gets over 80% of its revenue from crude oil, by virtue of
the constitutional provision, this revenue must be disbursed to the three tiers
of government. It also explains why the formula for revenue allocation has
continued to be at the heart of public debate and why public office holders are
hardly held accountable for the misuse of revenues derived from the national
oil wealth. It is obvious that the nature and conditions of the financial
relations in any federal system of government is crucial to the survival of
such a system. A major source of inter-governmental disputes under a federal
system centres on the problems of securing adequate financial resources on the
part of the lower levels of government to discharge essential political and
constitutional responsibilities (Olaloku, 1979:109). In all federations, there
are always constitutional wrangling or how resources should be shared among the
constituent units since there are always poor and relatively rich units for
instance, in Nigeria, the poor units/regions/states often prefer a
re-distributive system of federal resource while the richer or more endowed
States are in favour of more financial autonomy and revenue allocation based on
the relative contribution of each constituent units to the federal purse. In
Nigeria revenue allocation largely implies the allocation of oil revenue,
therefore, oil is central to the politics of inter-governmental fiscal
relations thus, the contending forces over power and access to oil, extraction
and accumulation of resources constitute the major conceptual issues that must
be objectively confronted in seeking to understand the political economy of
federalism in Nigeria and revenue allocation.
Revenue Allocation Commissions and the Contradictions in Nigeria’s Federal System: A Review
The history of revenue allocation
formula and commission all in an attempt to arrive at an acceptable sharing
formula for Nigeria occurred long before independence. The first set of
Journal of Social Science and Policy Review Volume 4, June 2012
commissions was ad hoc in nature. The
first commission ever set up by the colonial masters was in 1946. The name of
the Commissioner was Phillipson. Recommendation of the commission was to take
effect from 1948/49. The commission placed emphasis on three principles for
revenue sharing, derivation, population and even progress. This period was
characterized by strong federal government’s presence in fiscal matters
(Olaloku 1979). The newly created regional councils at the time were allocated
the residue or excess of the budgetary needs of the Central government because
they had no legislative powers whatsoever. So they could not collect or
appropriate revenue. By 1951, the recommendations of that Commission became
unacceptable to Nigerians in general and nationalist leaders in particular and
another one was set up that year known as Hicks Phillipson commission. This
commission recommended three principles: Derivation, Needs and National
Interest. The recommendation of this commission was to take effect in 1952/53 (Phillips
1971). It needs be added further that the regional councils during this period
had the fiscal powers with independent revenues and tax jurisdictions with the
aim of prompting a truly federal system. The Central Government now shared
equally with the Regions (East, West and North), the centrally-collected
revenue. The Regional portion of this revenue was in turn shared among the
Regions largely on the basis of derivation. Mention must be made of the
introduction of special grants to the Regions to take care of education and
police protection (Phillips 1971, Omitola 2005:149). The major difference or
departure of this commission with the previous one’s recommendation is that it
de-emphasised population criterion.
In 1953, Chick`s Commission was raised
to review the formula again. In its report, the commission adopted and
emphasised the derivation principle as the basis of allocation of revenue to
the Regions. For effective application of the derivation principle, the
following weights were allocated for each region. Eastern and Northern Regions
each had 30 percent while the Western Region had 40 percent (Omitola 2005).
Still in search of acceptable revenue allocation formula in 1958, Raisman
Commission was raised to review same. In its own recommendation it reduced
considerably, the importance of principle of derivation, and retained the
principle of fiscal autonomy for the Region; it emphasised that of needs with
population used as an approximate index of fiscal needs and the basic
responsibilities of the regional governments and the need for even-development
of the country which it called “unified national policy”. This commission
recommended further that the North which had over half of the country’s
population was to receive 40 percent; Western Region was to receive 37 percent,
Eastern Region 18 percent and Southern Cameroon 5 percent; while the Northern
Region in addition received 1.5 million naira as compensation because the
principle of derivation worked against it in the past. Six years later in 1964,
Binns Commission did another review. This commission was established as a
result of a realignment of boundaries. First, with the referendum that
transferred Southern Cameroons to the Main Cameroon in 1961 and the creation of
the Mid-Western Region from Western Region in 1963. The Commission’s
recommendations contained the emphasis on the use of the principle of needs.
While the federation and the Regions continued to share the federally-collected
revenue, the commission recommended a change on the formula for sharing the
Distributable Pool Account (DPA). Northern Region had 42 percent; Eastern
Region 30 percent, Western Region 20 percent and the Mid-western Region 8
percent. The creation of the twelve state structure in 1967 brought about a
revision in the revenue sharing formula, with the retention of the basic
principle of allocation as recommended by the Binns Commission. In 1968, Dina
Committee – an interim system pending the working out of a new revenue system
following the creation of 12 states – was raised. The committee stressed the
most urgent problem facing the nation as the gross imbalance in economic
development among various states of the federation. Thus, it introduced minimum
responsibility of government as a revenue sharing criterion. While retaining
the principles of need, even-development and derivation that had been
introduced by previous commissions, it recommended the establishment of a
permanent revenue planning and fiscal commission. However, the recommendation
of the Dina committee was never implemented. Its Report has been regarded not
only as one of the best documentations on the country’s fiscal system, but also
one which was too far ahead of its times (Adesina, 1998 and Omitola, 1995).
Virtually all the revenue allocation formulas are warped because they have not
been “open covenants openly arrived at” (Omitola, 2005). Rather, they reflect
the views of commissions, individuals or groups within the commissions, which
have shown proclivity for embracing theories, beliefs, ideas and approaches
which have not only proved unrealistic but have thereby contributed to the
dislocations within the Nigerian State by the Military.
One striking feature of the
recommendations of various Revenue Allocation Commissions with respect to the
revenue allocation formula adopted from the 1970s is a phenomenon tagged the
“concentration process” in Nigeria’s fiscal federalism (Mbanefoh and Egwakihide
1998:22). This refers to situation whereby there is a gradual reduction of
State Government Accounts and this is further exacerbated with the
establishment of Special Account by the Federal Government (Mbanefoh,
Egwakihide 1998). This is because it was used to favour a few selected
states/Local Councils more often than not, it provoked inter-state hostility and
rivalry, thereby undermining the stability and corporate existence of the
country. Suberu (1995:4), observed that the subsequent periodic modifications
of the various allocative criteria have achieved three things. First, they have
effectively legitimized the criteria of demography and equality as the
prominent principles of horizontal revenue sharing in Nigeria. Second, the
periodic changes in the horizontal revenue sharing system have largely
compounded the schemes intensely political and divisive nature. For instance,
in 1990, the Babangida Administration re-introduced, and then assigned a weight
of ten percent to the discredited principles of land mass. Ethno-regional
opposition to this apparent bias to the North (which with only about half of
the nation’s population), encompasses some three quarters of the national
territory led some southern members of the National Constitutional Conference
to propose the inclusion of the countervailing ‘political’ principle of
‘population density’ in the horizontal revenue sharing scheme. The primary
effect of such regional political manoeuvres is to deprive the nation of the
development of a coherent revenue sharing scheme that balances ‘efficiency’ and
‘equity’ principles of allocation in a politically healthy and economically
productive manner. Third, and finally, Nigeria’s horizontal revenue sharing
policies and reforms give insufficient recognition to such largely
non-political principles of allocation as the social development factor and
internal revenue generation
Journal of Social Science and Policy Review Volume 4, June 2012
effort while blatantly ignoring such
other technical principles as budgetary obligation, absorptive capacity, fiscal
efficiency and fiscal equalizations (Ojo, 2010). The present formulae for
sharing the federal revenue vertically are as follows:
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