Wednesday 3 December 2014

REVENUE ALLOCATION COMMISSIONS AND THE CONTRADICTIONS IN NIGERIA’S FEDERAL SYSTEM: A REVISITATION Orokpo, Ogbole F.E and Stephen, Makoji Robert Department of Public Administration Federal Polytechnic Idah, Kogi State



 

 

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,
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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
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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
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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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Revenue Allocation Commissions and the Contradictions in
Nigeria’s Federal System: A Revisitation


Orokpo, Ogbole F.E and Stephen, Makoji Robert

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