ABSTRACT
Whatever the theoretical and
practical imperatives of federalism are, revenue allocation (livewire in
authoritative value allocation or who gets what, when, how and where?) remains
an object of intense politics and, unquestionably, a major source of inter-group
or inter-regional antagonism. Nigeria is no exception to this rule. Politics,
well-anchored possess the potential of balancing conflicting interests and
resolving socio-economic and political contradictions in the society. How far
have politics in Nigeria gone in resolving contradictions associated with
revenue allocation? This paper identifies six major contradictions/challenges
confronting revenue allocation practice and concomitant inter-governmental
fiscal relations in Nigeria, name: Non-Correspondence Problem; Fiscal Autonomy
and Independence; Who Owns the Golden Goose (Federal Government, States, Local
Governments or Communities?); Federation Account and Derivation Fund;
OilProducing Areas and the Derivation Principle; and Inter-governmental Fiscal
Relations and the Economy. Upon analysis, the paper argues that the Nigerian
State have not, and may well not be able to, resolve these nagging issues. The
politically and economically fragile Nigerian state, operating in a highly
unstable, fragile and geo-politically polarized society shows limited capacity
to deal with these challenges. By this default, the paper argues, the promise
of inventing development-promoting revenue sharing formula is lost in Nigeria.
National progress is the ultimate casualty.
Keywords: Revenue allocation,
federalism, Nigeria
INTRODUCTION
The question of an acceptable formula for revenue sharing
among the component tiers of the Nigerian nation is one of the most protracted
and controversial debates in the political and macroeconomic management of the
economy. This debate has its foundations in the history and evolution of the
Nigerian federation.
“Revenue allocation or the statutory
distribution of revenue from the Federation Account among the different levels
of government has been one of the most contentious and controversial issues in the
nation’s political life. So contentious has the matter been that none of the
formulae evolved at various times by a commission or by decree under different
regimes since 1964 has gained general acceptability among the component units
of the country. Indeed, the issue, like a recurring decimal, has painfully
remained the first problem that nearly every incoming regime has had to grapple
with since independence. In the process, as many as thirteen different attempts
have been made in devising an acceptable revenue allocation formula, each of
which is more remembered for the controversies it generated than issues
settled” (Report of the Political Bureau, 1987:169).
A federal system of government often arises from the desire
of the peoples to form a union without necessarily losing their identities.
Federalism would, therefore, seem to provide an attractive system of government
especially in the context of ethnic pluralism found in many African states.
Federalism is generally accepted by many as necessary for managing the
country’s ethnic diversity as reflected in the adage “unity in diversity”.
Federalism in principle implies the construction of a system where consensus is
reached between current demands of the union and the territorial diversity
within an emerging society, by the creation of a single political system within
which central and provincial governments are assigned coordinated authority in
a manner defining both the legal or political limits of equality or subordinate
functions (Agbu, 2004). The choice of federalism as the preferred system of
government for Nigeria was not accidental. The eventual transformation of
Nigeria into a federal state started in 1954 as a result of the 1953 Lyttleton
constitution conference.
In a federal structure, adequate autonomy is given to each
level of government to enable it perform its responsibility without
frustration. Table 1 outlines the functions of the three tiers of government.
This is the essence of fiscal federalism. Fiscal federalism refers to the scope
and structure of the tiers of government responsibilities and functions as well
as the allocation of resources among the tiers of government. Perhaps the most
important issue of fiscal federalism is the revenue allocation formula, the
sharing of national revenue among the various tiers of government (vertical
revenue sharing) as well as the distribution of revenue among the state
governments (that is, horizontal revenue allocation). The centralization of
Nigeria’s fiscal federalism began with the report of the Dina Commission (1968)
which argued that an appropriate revenue allocation system should result in a
more equitable distribution of revenue among the states to achieve a balanced
development of the federation.
Revenue allocation can be described as a method(s) of
sharing the centrally generated revenue among the different tiers of government
and how the amount allocated to a particular tier is shared among its
components. Nigeria is a federal state – under the federal system of
government, federation or centrally-generated revenue is shared among the three
levels of government, namely; the federal government, the states and the local
governments. The theory of revenue sharing in a federal state is that each
level of government receives an allocation of financial resources tailored to
their specific requirements as defined by the mandate of legislative
competence, their actual situation and the statutory indices of calculation. In
Nigeria, decisions as to what proportion of centrally-generated revenue that
would be retained by the federal government, the proportion that will be shared
among the state governments and the proportion that will go to the local
government has always been a problem, due to the fact that there is no
consensus of opinion as to what could be seen as an ideal formula. In the words
of Obi (1998:262), “the issue of revenue allocation strikes at the very basis
of existence of the Nigerian federation and the rules of entry and exit from
the ruling class”.
The struggle for the control of the nation’s resources have
also, to some extent been based on the regional cleavages. This, entwined with
political conflict, has sometimes led to political manipulations and
delineations with the aim of influencing wealth allocation. This has been especially
so since 1958, revenue from oil gained prominence as the major source of
revenue in the country. Along these lines, it has been suggested that: the
setting up of three commissions on revenue allocation within a short period of
twelve years is a manifestation of the instability that characterized the
Nigerian polity. Between 1968 and 1980, income from petroleum constituted over
80 percent of federal revenue. The importance of the federal centre therefore
increased proportionately. As a consequence of this major shift in revenue
generation, a desperate struggle to win control of state power ensued since
this control meant for all practical purposes, being all powerful and owning
everything. Wantchekon (1999) conducted an empirical study that sought to establish
that natural resource dependence and rentier economies generate authoritarian
governments, very slow process of political reforms and socio-political
instability.
The most recent development in the struggle for the control
of oil resources in Nigeria is the recent Supreme Court action instituted by
the federal government against the oil producing states with respect to the
offshore/onshore oil dichotomy. The April 2002 decision of the Supreme Court to
exclude the revenue derived from offshore drilling in the calculation of the
revenue attributable to the oil producing states based on the derivation
principle, has failed to resolve the controversy. “There arose a dispute
between the federal government on the one hand and the eight littoral states of
Akwa Ibom, Bayelsa, Cross River, Delta, Lagos, Ogun, Ondo and Rivers States on
the other hand as to the Southern (or seaward) boundary of each of these
states. The federal government contends that the southern (or seaward) boundary
of each of these states is the low water mark of the land surface of such
state…. [or] the seaward limit of inland waters within the state, as the state
so requires. The federal government therefore, maintains that natural resources
located within the Continental Shelf of Nigeria are federal government’s
contentions. Each of the states claims that its territory extends beyond the
low water mark onto the territorial water and even onto the continental shelf
and the exclusive economic zone. They maintain that natural resources derived
from both onshore and offshore are derivable from their respective territory
and in respect thereof each is entitled to the “not less than 13 percent”
allocation as provided in the proviso to subsection (2) of section 162 of the
Constitution” (Judgement by the Supreme Court, 5 April 2002).
This persistent struggle for revenue has however the wide
ranging effect on the sustainability of programs and reforms for the economic
transformation of the entire Nigerian economy. This paper therefore, seeks to articulate
and document what the divergent contending issues have been and argues that the
focus on revenue sharing, as opposed to revenue generation and accountability
in the utilization, is the primary cause of economic, social and political
decay in the country.
PRINCIPLES OF FISCAL FEDERALISM
The principles that guide the implementation of
intergovernmental fiscal relations include:
(a)
The Principle of Diversity: The federal system must
have the ability to accommodate a large variety of diversities. Hence, the
fiscal system must provide scope for variety and differences to supply
national, regional and local public goods.
(b)
The Principle of Equivalence: Based on the geographical
incidence of different public goods, allocative efficiency requires the
equalization of locational advantages arising from inter-jurisdictional
differences with a combination of taxes and public goods and services.
(c)
The Principle of Centralized Stabilization: This
requires the use of fiscal instruments for achieving macroeconomic objectives
of growth, stabilization and full employment by residents of different
geopolitical units; this requirement controls for what is often referred to as
“central city exploitation thesis”.
(d)
Minimum Provision of Essential Goods and Services: This
ensures that fiscal federalism guarantees all citizens, irrespective of where
they reside, the minimum provision of certain basic public goods and services.
(e)
Principle of Fiscal Equalization: In order to ensure a
minimum level of public goods and services same degree of fiscal equalization
is required. This is as a result of differences in resource endowment.
(f)
The Efficiency Principle: This principle implies that
efficiency must be applied in the allocation of resources. In addition, each
level of government should maximize its internal revenue earnings at minimum
tax efforts.
(g)
The Principle of Derivation: The component units of a
system should be able to control some of its own resources as they desire.
(h)
The Principle of Locational Neutrality: Interregional
fiscal differences tend to influence location choices of individuals and firms.
Based on different resource endowments, differences in tax capacity and effort,
some decree of locational interference seems to be an inevitable cost of
intergovernmental fiscal relations. Therefore, policy should focus on
minimizing distortions due to some interference. Hence, differential taxes
which create locational distortions should be avoided as much as practicable
(Agiobenebo, 1999:43).
(i)
The Principle of Centralized Redistribution: This
principle states that the redistribution function of fiscal policy through
progressive taxation and expenditure programmes should be centralized at the
federal level. This seems consistent with the principle of locational
mentality. That is, if the redistributive function is decentralized, it can
result in distortions in location decisions.
It should be noted that the above principles are not
mutually consistent. They are difficult to apply simultaneously. Therefore,
tradeoffs are necessary in order to avoid conflicts. There is no doubt that the
general principles of fiscal federalism appeared to have informed Nigeria’s attempt
at intergovernmental fiscal relations. The different principles have been
dictated by a combination of historical experiences, political, cultural and
social factors. After almost forty years in search of a workable fiscal
federalism, there still exist challenges which policymakers must address.
“It is an act of self-deception for
anyone to argue that there is nothing wrong with the revenue formula. We have
had basically two systems of revenue allocation in Nigeria. The first system
which we practiced during the First Republic allowed the North to keep the
proceeds from its groundnut and cotton, the West to keep the proceeds from its
cocoa, and the East to keep the proceeds from coal and oil produce. Then we
changed the system so that the federal government got its hands on the proceeds
from onshore and offshore crude petroleum proceeds, and yet we don’t expect the
minorities in the oil producing areas to perceive that is an injustice done to
them. I have even heard some people turning history on its head by arguing that
the country was developed on the proceeds of groundnut, cocoa and oil palm.
Perhaps, [one could be correct] if you are arguing that the whole is the sum of
its parts. But the oil producing minorities has a point that the rule of the
revenue allocation game were changed to disfavour them (Professor Bolaji
Akinyemi, COMET , June 6, 2001)”.
It is against the backdrop of the preceding assertion,
delivered by a Nigeria academic and a delegate to the National Political Reform
Conference, that the complicated discussion regarding the revenue allocation
formula at the National Political Reform Conference might be visualized. The
South-South zone (in the imagined or putative division of Nigeria into six
geopolitical zones) insists on this confabulation that in order to address past
anomalies in the allocation scheme that it should be given 25% instead of 13%
(or 17%) as a first step toward boosting the percentage to 50%. In spite of the
empirical evidence to support the claims of the South-South at the confab, the
north, as represented by some of its oligarchs argue against a change in the
formula that would address the needs of the ethnic minorities whose territory
houses the country’s bread winner – crude oil. The north argues for a 17%
derivation for the oil producing area.
THE POLITICAL
ECONOMY OF OIL REVENUE ALLOCATION IN NIGERIA
Welfare economics and political theory are the two stands of
theory which significantly guides revenue allocation. The main theme of the
economic argument is the bridging of inequality gap. This gap exists because of
unequal endowment of natural resources which result in an imbalance in the
physical development of the communities. According to Oyediran and Olagunji
(1984) higher spatial poverty in natural resource endowment increases the
agitation for equality as a revenue allocation criterion. Fiscal policy is the
deliberate use of revenue generating and spending machinery of the government
to steer the economy in the desired direction. The major economic roles of
government are resource allocation, income distribution and macroeconomic
stabilization. Through fiscal activities, taxes are levied on economic
activities in the regions with concentrated economic resources and some of the
proceeds transferred to the scant resources region, in a way that will
guarantee equitable distribution across sectors and geographical regions within
a fiscal system. The centrally collected revenue across sectors shared such
that horizontal fiscal disparities among localities and vertical imbalances
among tiers of government are minimized (Akpan and Umodong, 2003:338).
Federalism
provides a framework for solving the political problem of administration and
the economic problem of resource distribution. In practice, sometimes, the
optimization of administrative costs is an economic issue, where also the
distribution of resources involves some political issues in determining the
constitutional criteria for such allocation in such a way that will ensure
equality and/or equity. An efficient distribution is that in which no section
of the society is worse off, while making the other better off. However,
Musgrave and Musgrave (1982) observe, that the problem of efficiency is beset
with major measurement difficulties when the issue of redistribution is
evaluated. This is because redistribution entails balancing of value with gains
accruing from all parts of the society from fiscal operations. Akpan and
Umodong (2003) observe that redistribution that can ensure equality will not
guarantee efficiency, thus the question of balancing the inefficiency and
equality in an acceptable way encompasses the use of economic and political
means to induce compromise and agreement. This may involve the use of
consultation approach to power balancing and the protection of rights. The use
of the government revenue allocation principle to engender development in resource
poor region is based on the theory of balanced growth, which emphasizes the
need to provide the basic minimum developmental conditions (infrastructures)
necessary for each region to rise above the low-level equilibrium trap and
accumulate the preconditions for the take off. Planned development therefore
calls for inter-regional transfer of resources through some fiscal processes.
Although the consumption of public goods increases the
welfare of the beneficiary, the provision of public goods entails the transfer
of resources from individuals to the public sector. Such transfers reduce the
level of consumption of private goods on which the affected individuals could
have used the transferred resources. As a result, the costs of provision of
public goods and the cost of government activities generally constitute some
transfer of purchasing power by individuals from public goods to the private
sector. It is these losses of purchasing power that make every individual a
stakeholder in every government decision. These losses also provide a
fundamental reason for which individual taxpayers must enter into bargaining
and negotiation with the government and among groups that constitute the
government bargaining and negotiation are better political science, but on account
of resource transfer, there is an economic interface.
The use of derivation as a criterion for revenue allocation
is associated with changes in the social state of welfare that results from
production activities and the compensation of losers by gainers in production
activities. As production takes place in any society, value is created for some
members of the society while some members suffer losses due to externalities. A
production activity is said to enhance the society’s level of welfare, in Pareto
optimality sense, if it is possible for those who gain value (and attain higher
welfare level) to compensate those who made losses (and incur a reduction in
welfare level) such that the latter is at least left at the level of welfare as
before the production with the former group still better off after the
redistribution. This principle of redistribution of gains from production in a
way that guarantees the removal of welfare losses caused by externalities of
production is referred to as compensation principles.
The compensation principle is the basis on which derivation
as a criterion for sharing fiscal revenue is anchored. The production of oil,
for instance, entails losses to the oil communities in three major ways,
namely; natural resources losses – these include the extracted depletable crude
petroleum and losses on the vegetative part of the land used in the mining;
externalities of oil production – these include environmental pollution, high
costs of living, unemployment and loss of means of livelihood due to
environmental degradation, etc; social costs of production – for example,
breakdown in social value system, high crime, etc. These losses by the oil
producing communities due to oil production activities can be compensated for
using fiscal means of revenue allocation based on losses suffered by those
communities.
THE EVOLUTION OF REVENUE ALLOCATIONS FORMULA TILL 2005
The discovery of oil in some parts of Eastern Nigeria and
the potential it had for growth altered the thinking about the place of
minerals in the revenue allocation formula. As already mentioned, up till then,
royalties from minerals fully belonged to the region of origin. In 1958,
however, the discovery of oil in Nigeria coincided with the need to review the
existing revenue allocation schemes, which were fallouts of the 1957/58
Constitutional Conference and the imminence of political independence. The
colonial government subsequently appointed Sir Jeremy Raisman and Professor
Ronald Tress to review the federal fiscal structure. The committee, in the
main, recommended that the regions should have authority over produce sales tax
and sales tax on motor vehicle fuel. It also recommended the establishment of a
Distributable Pool Account (DPA) for the purposes of sharing federally
collectible revenues. The commission recommended that the then practice of
returning mining rents and royalties to the regions should be discontinued.
Such revenues were now to be shared through the DPA with the region of origins
getting 50 percent, the federal government, 20 percent and all the other
regions, 30 percent. Although oil was a new discovery in the colony, and the
revenue from it at the time (1958/59) was estimated to be only 65,000 pounds,
it had great prospects. According to the report:
“… The problem is oil. Test production
of oil has already started in the Eastern Region and exploration is being
undertaken in both the North and the West. While the yield from oil royalties
is at present comparatively small, … a double obstacle in our recommending the
simple continuation of the existing method of allocating mineral royalties.
First, it would involve us, in our revenue assessment for the next few years,
in crediting the Eastern Region with a source of income which is at once too
uncertain to build upon, and too sizeable to ignore. Secondly, it would rob our
recommendations of any confident claim to stability for the future since oil
development might take place in any one of the Regions on a scale, which would
quite upset the balance of national development, which is part of our task to
promote… Our considered conclusion therefore is that the time for change is
now, while there is still uncertainty as to which of the Regions may be the
lucky beneficiary or which may benefit the most”.
Based on the above, the Raisman Report significantly reduced
the use of derivation as a principle for sharing the DPA. In its place, it
introduced four variables: continuity, minimum responsibility, population and
balanced development of the federation.
As stated above, oil was the first natural resources to be
exploited in Nigeria. Prior to its discovery, tin and bauxite were being
exploited in the Northern region solely for the benefit of the North. The West
could not be bothered because it was the wealthiest of the three regions,
thanks to the cocoa boom. The East had very little natural or agricultural
resources. Although it was unhappy with the concept of derivation, it was
forced to develop other sources of income in its bid to survive.
Technical committee on allocation was then appointed, under
the chairmanship of Professor Aboyade. Its propositions were to be submitted to
the CDC and if adopted, made part of the new Constitution. In summary, the
Committee recommended that all federally collectible revenues, without
distinction, should be paid into the federation account. It also, for the first
time, took into account, local governments in the vertical distribution of the
federation account. It, for instance recommended that the proceeds of the
federation account should be shared between the federal government, state
governments and local governments in the following proportions: 60 percent, 30
percent and 10 percent respectively. From its share, the federal government was
required to set aside 3 percent for the benefit of mineral producing areas and
areas in need of rehabilitation from emergencies and disasters.
On the
horizontal allocation of revenue amongst the states, the Committee jettisoned
the existing principle of revenue sharing arguing that: population has been
characterized by illogicality, inconsistency and inequity; derivation had done
much to “poison intergovernmental relations and hamper a sense of national
unity”; need had “little if any operation relevance”; even development was
analytically ambiguous… (and was) not technically feasible to measure in any
meaningful way”; equality of status of states was a “consolation prize to
states not favoured by the population and derivation principles”; geographical
peculiarities defied any “concise definition… (and had) little or no merit”;
national interest was “capable of many interpretations (and) circumstances”. It
then recommended the adoption of five new principles. These were: equality of
access to development opportunities, national minimum standards for national
integration, absorptive capacity, independent revenue and tax effort and fiscal
efficiency.
The Aboyade Report was however extensively criticized. The
economic background of its prescriptions was especially attacked. Sylvester
Ugoh, a member of the Constituent Assembly, for instance, questioned the wisdom
behind the Reports reliance on its data based on the 1975-1980 National
Development Plan. According to him, some sections of the report were based on
the implicit assumption that the 1975-80 Plan would be fully or largely
implemented. As such, the projects which are represented by these allocations
would be realized. In such a situation, what the measure would show would be
the socioeconomic gaps that will arise from the full implementation of the
Plan. But the fact is that our National Plans, and especially that of 1975-80
Plan has proved to be mostly a national dream. And if that is the situation,
how can we use such dream-like allocations, which are unrealistic and
unrealizable to measure socioeconomic gaps in our development. Another member
of the Constituent Assembly, Dr. Pius Okigbo, criticized the vertical
distribution of revenue amongst the various tiers of government arguing that
the Aboyade Report unduly favoured the federal government. Based on such
criticisms, the Constituent Assembly rejected the Aboyade Report.
In 1979, the newly elected government of President Shehu
Shagari appointed a new Committee headed by Dr. Pius Okigbo to review the
“formulae for revenue allocation having regard to such factors as the national
interest, derivation, population, even development, equitable distribution and
the equality of states”. On the sharing of revenue, among the various tiers of
government (vertical allocation), the Okigbo Committee recommended the
following formulae: federal government (53 percent), state governments (30
percent), local governments (10 percent). 7 percent was to be set aside as
special funds for the following purposes: development of the federal capital
territory, 2.5 percent; special problems of mineral producing areas, 2 percent;
ecological problems, 1 percent; and revenue equalization fund, 1.5 percent. For
the horizontal allocation of revenue among the states, the Report adopted four
criteria. These were: minimum responsibilities of government (40 percent),
population (40 percent), social development factor/primary school enrolment (15
percent) and internal revenue effort (5 percent).
The Government White Paper adopted the Okigbo
recommendations only with slight modifications. This culminated in the
promulgation of the Revenue Allocation Act No. 1 of 1981. In summary, the Act
provided that the federation account shall be shared amongst the various tiers
of Government as follows: federal government, 58.5% percent; state governments,
31.5%; local governments, 10%. 26.5 percent of the state allocation shall be
allocated to all states, while the remaining 5 percent shall be allocated on
the basis of derivation. Two-fifths of the 5 percent of this derivation fund
shall be paid out to the states in direct proportion to the value of minerals
extracted from their areas while the remaining three-fifths shall be paid into
a special fund to be administered by the federal government for the development
of the mineral producing areas. The 26.5 percent outstanding to the credit of
all states shall be distributed amongst them using the following criteria:
equality of states (50 percent), population (40 percent) and land area (10
percent). Finally, the 58.5 percent allocated to the federal government shall
be subdivided as follows: responsibilities and duties of the federal government
(55 percent), development of the federal capital territory (2.5 percent) and
ecological problems (1 percent). This Act was however widely criticized mainly
on the grounds that it allocated too much revenue to the federal government to
the detriment of the states and local governments. The result was that the
federal government could afford to waste valuable resources in the financing of
unprofitable white elephant projects while the states and local governments
were starved of funds. According to an Editorial by the Daily Sketch at the
time: “On the vertical distribution
of revenue amongst the various tiers of government, for instance, the federal
government modified the Okigbo recommendations as follows: federal government
55 percent; state government, 30 percent; local government, 8 percent; and
special funds, 7 percent (Government Views on Okigbo Report, 1980:13). To
expect an allocation which gives the federal government 55% and the 19 states
only 30% to achieve the contrary will be like living in a world of fantasy.
There is sufficient evidence to prove that the ugly phenomenon of growth
without development arises from the spending of too much money on a few growth
industries to the neglect of people-development oriented projects… millions to
build giant industries and make our people sub-human? Tens of millions of our
people are wallowing in abject poverty. States and local governments whose
preeminent jobs are to see to their welfare are helpless. They are starved of
funds while the federal government soaked in billions of naira, fritter away
much needed money on fruitless and worthless grandiose projects. How human is
it to give Abuja 2.5% while even the most populous state cannot get 2%? The
average is less than 1.6% for millions of people. This 1981 Act was however,
technically declared null and void by the Supreme Court of Nigeria.”
It was subsequently replaced with the Allocation of Revenue
(Federation Account) Act No. 1 of 1982. Essentially, this increased the share
of the states in the vertical revenue allocation from 31.5 to 35 percent. The
FCT was however now classified as a state. Furthermore, the funding for the 1
percent ecological fund was also transferred from the federal government to the
states. Finally, the fund for the development of mineral producing areas was
reduced from 3 percent to 1.5 percent. The net effect of this was that the
federal government’s share of the federation account remained unaltered. On the
horizontal sharing of revenue amongst the states, the Decree adopted the
following criteria: minimum responsibility of government, 40 percent;
population, 40 percent; social development factor, 15 percent; and internal
revenue effort, 5 percent.
Shortly after the promulgation of this Act, the military, in
December 1983, overthrew the government of Alhaji Shehu Shagari and Major
General Mohammadu Buhari became the new Head of State. His government,
subsequently, promulgated the Allocation of Revenue (Federation Account)
Amendment Decree No. 36 of 1984. This, in the main, only altered the existing
formulae for revenue allocation marginally. It reserved 55 percent of the
Federation Account exclusively for the federal government and maintained the
local governments’ share at 10 percent. The 1 percent and 1.5 percent for the
development of mineral producing areas were also retained. The share of the
state governments’ in the Federation Account was 32.5 percent. Out of this, 2
percent were to be paid directly to the mineral producing states in direct
proportion to the value of minerals extracted from such states. Finally, the
Decree retained the Shagari regime basis for the horizontal sharing of revenue
amongst the states.
In 1989, the military government then headed by General
Ibahim Babangida, appointed a permanent revenue allocation committee: National
Revenue Mobilization and Fiscal Commission (NRMAFC). The committee prescribed
the following formulae for the horizontal allocation of revenue amongst the
states: equality of states, 40 percent; population, 30 percent; internal
revenue effort, 20 percent; and, social development factor, 10 percent. The
committee also vested the powers to determine the vertical allocation formulae
on the National Assembly. The second part of the committee’s recommendations
were later adopted and inculcated in the
1989 Constitution. Although some
partial democracy took place at the time, it did not last as full military
government was restored in 1994 under the leadership of General Sani Abacha.
The new government immediately set up a constitutional conference.
Expectedly, the issue of revenue allocation was one of the
contentious issues. It has, for instance, been asserted that: in 1994, the
mineral producing states at the so-called Constitutional Conference, convened
by the federal military government requested that the allocation of revenues
derived from their areas be restored to what it was in 1957, namely; 65 percent
thereof. Despite numerous discussions at several committee meetings and at
plenary session, no agreement was reached. Eventually, it transpired that the
powers that be had agreed to allocate 13 percent of the revenues derived from
mineral producing areas to the affected state governments. But this was not to
be until the proposed new constitution was promulgated in May 1999.
Despite this constitutional provision, the elected civilian
government of Chief Olusegun Obasanjo refused to implement it. Instead, it
appointed a Committee to review the 1999 Constitution. On the issue of revenue
allocation, the Committee recommended that the derivation formulae be increased
substantially beyond the 13 percent minimum recommended in the 1999
Constitution. The government again refused to accept this recommendation.
Rather, the government asked the Supreme Court to declare that the derivation
principle does not apply to offshore oil. The Supreme Court, in its landmark
judgement in April 2002 agreed with the position of the federation government.
The uproar, especially from some of the affected oil producing states, and the
imminence of the April 2003 general elections however made the federal
government to cede some grounds to the states on the issue. The legitimacy of
such concessions however remains in doubt. This is especially so given the fact
that the Supreme Court has already interpreted the constitutional provisions on
the matter. It could therefore be argued that only a constitutional amendment
can effect a change to the existing position. The revenue allocation debate is
therefore likely to continue unless a new system is enthroned which will change
the nation’s focus from revenue sharing to revenue generation.
THE CHALLENGES
There are several challenges and contending issues
confronting intergovernmental fiscal relations in Nigeria:
1) Non – Correspondence Problem
Ideally, each level of government should be given adequate
resources to allow it discharge its responsibilities. Because this is not
possible, there is usually a lack of correspondence between the spending
responsibilities and the tax powers/revenue sources assigned to different
levels of government. It is this incongruence that is often referred to as the
non-correspondence problem. In Nigeria, most of the major sources of revenue
come under the jurisdiction of the federal government yet lower levels of
government are supposed to generate internal revenue. There is, therefore, the
need to resolve the imbalance between assigned functions and tax powers.
The issues
concerning fiscal relations among the constituent units of the Nigerian
federation that remain mostly unresolved are the divergence between assigned
functions and tax powers, principle of horizontal and vertical revenue
allocation, dependence of states and local governments on federal sources of
funding, tendency towards concentration and federal presence in the states
(Fadahunsi, 1998). The five principles currently applied in the horizontal
revenue allocation formula are far from acceptable to all the stakeholders.
Other non-correspondence problems highlighted by the Okpe
Union of North America (2005) in their “Towards a renewed federalism in
Nigeria” are the notion of unified national wage structure for federal and
state civil service, and the educational institutions. To them, drawing
copiously from the United States, contend that each federating unit should
establish its own salary structure based on its capabilities. In similar
challenge, Fadahunsi (1998) challenges the formula for the distribution of the
Value Added Tax (VAT) – a direct consumption tax. “What can for instance be the
rational basis for the federal government acquisition of 35 percent share of
the VAT revenue? Accordingly, it has been suggested that Nigeria should return
in principle to the 1960 constitution position on revenue sharing, which
recognizes the principle that launching or consuming state ought to be the
primary beneficiary of import/consumption activity (but excluding the formula
prescribed in Section 135 thereof): that the states within whose territories
PMS are consumed shall receive 35 percent of the duty and taxes on such goods
or consumption without prejudice to and in addition to what accrues to the
state under the existing revenue allocation formula as determined by the
National Assembly. To Adawo and Ekong (2003), on vertical formula for VAT, the
federal government share should reduced to 10 percent, where the Federal Inland
Revenue Service (FIRS) that centrally administers VAT should receive 5 percent,
state government 55 percent and local government 30 percent. On horizontal
formula for sharing VAT, they suggest the following ratios – equality 40%,
financial efficiency 10%, financial responsibility 10%, education and health
10%, derivation 20% and population 10%.
2) Fiscal Autonomy and Independence
The issue of relative fiscal autonomy and independence of
the state and local governments in a true federal structure goes with the
corollary issue of the correspondence of governmental functions and revenue
sources. Since the creation of the twelve-state structure in 1967, states and
local governments have been excessively dependent on the Federation Account.
This independence must be reduced if the federating units are to be free to
pursue their own development goals without being hampered by the unpredictable
fluctuations in their shares of the Federation Account. It is important that
revenue sources should be reallocated and made compatible with the fluctuations
stated for each tier of government to enhance steady and proper funding of
administrative and developmental activities instead of the often experienced
unexpected financial constrictions at the two lower tiers of government.
3) Oil Producing States, Oil Producing Local Government Administrative Areas or Communities
Professor Omo Omoruyi in his treatise “the Politics of Oil:
who owns the oil, Nigeria, states or communities” (2000) raised three salient
questions on true ownership of oil in Nigeria. The question of local control
over local resources is an established constitutional principle in federal
systems. But the way the Nigerian federal system developed under the external
colonial order (1954-60) and continued under the period of geo-ethno-military
internal colonial order (1960-1999) and in the democratic dispensation between
1999 to date is yet an unresolved contending issues in the discourse about
Nigeria’s federalism. He challenged the “Tripod” approach to Nigeria’s problem
where the three major ethnic nationalities decide the content and the trend of
national issues. “This tripod approach to Nigerian politics, should have been
done away with by now, with the introduction of the notion of ‘federal
character’, which takes states in the federation as the units of
representation. The tripod approach to Nigerian politics also applies to how
the oil, which comes from the non-majority areas, is approached in the
political and economic discourse. We should also be aware of the feeling among
the majority ethnic nationalities that the areas producing oil by virtue of powerlessness
in the military and politics should not be allowed to lay claim to the oil from
their areas as of right”.
However, Professor Omoruyi drew a distinction between oil
producing communities and oil producing states. This is the basis of the
activities of the Traditional Rulers of the Producing Communities who are
dealing with the President and want the money due to states on the basis of the
13% derivation in the Constitution should be paid to the “oil producing
communities/local government areas”. The Traditional Rulers’ argument is that
“communities” own oil and not “states”. This is an unresolved issue and
separates the communities in riverside areas directly affected by oil spillages
from their compatriots in landed areas from enjoying the full benefits of
allocations to producing states. One does not know the end of this argument.
How should the National Assembly address this matter? The federal government
should find a way of making the oil producing local government administrative
areas as shareholders in the joint venture arrangements with the oil companies,
thus making them stakeholders in the oil industry.
There was the issue of who should be spending the oil money.
Should it be the Nigerian government in conjunction with the oil producing areas?
Should it be the oil producing areas alone? The Constitution from 1960 till
after the civil war up till 1978 gave the right of ownership to the federal
government but the proceeds were shared between the federal government and the
regions or states on the basis of derivation like the agricultural crops.
Professor Omoruyi (2000) further averred, “for the avoidance of doubt, the
ownership question was clearly spelt out in the 1979 Constitution and in
subsequent enactments. From the 1979 Constitution, any claim of the right of
ownership of minerals was denied the units in the federation called states.
This rule also denies the right of ownership to local communities. We need to
ask the extent to which this portends any solution to the Niger Delta crisis and
its implication for a constitutional amendment.
4) Federation Account and the Derivation Fund
It is important to define what constitutes the Federation
Account – to which the various vertical revenue allocation formulae have been
applied and what should be directly financed from it. Up to 1990, the amount
accruing yearly to the Federation Account was still over 96% of totally
federally collected revenue; but since 1991, when it first dropped to about 75%
and nose-dived to around 35% by 1997, it showed no sign of recovery (Olowononi,
1999). It is therefore clear, that in such a situation, whatever the vertical
formula applicable, there must still be a serious fiscal imbalance between the
federal government and the two lower tiers of government. It is crucial to
redress this revenue imbalance in the spirit of balanced true federalism. What
appears to account for this imbalance is the assertion of the self-claimed
right by the federal government to finance various first-line charges from the
Federation Account before the application of the vertical formula. The
first-line charges include funding for external debt service, national priority
projects, NNPC priority projects, special reserve account, and excess proceeds
of the crude oil sales account, and in addition, the joint venture cash calls
account. These deductions are made from the proceeds of crude oil sales before
the derivation fund in the Federation Account is arrived at, and after which
further deductions for special funds and the funding of the federal capital
territory are made. It will seem more logical, with the exception of the joint
venture case calls, that these various charges which are federal government
obligations be financed solely from the federal government’s revenue proper,
that is, from its share of the Federation Account or from its revenue from
other sources. Therefore, in order to determine what constitutes the derivation
fund, resolving the issue of the Federation Account is crucial. Thereafter, the
derivation formula to be utilized can be arrived at.
5) Oil – Producing Areas and the Derivation Principle
The crude oil production has been the most important
economic activity in the Nigerian economy since the early 1970s is not subject
to debate. Its impact is not limited to its contributing almost 90% of
Nigeria’s total foreign exchange earnings but also to the fact that the
national budgets are predicated on the expected annual production and price of
crude oil. Thus, crude oil is the primary engine for national economic growth and
development. It is, therefore, quite reasonable to expect that the areas
producing the nation’s crude oil would be very highly developed as compensation
for what is taken away as well as for the devastation on the land engendered by
the exploration process. There should have been development of physical and
social infrastructures, human capital creation, and economic empowerment of the
general citizenry in those areas.
The Niger Delta area suffers near total neglect by both the
federal government, which claims ownership of the oil, and the multinational
companies, which actually exploits the oil reserves. It is a picture of wanton
environmental degradation of all types – land (despoliation of farmlands),
water (destruction of fishing areas and sources of drinking water), and air
(release of many pollutants causing diseases in humans, animals and plants).
The people in the Niger Delta states who hitherto were able to cater for their
needs are now being confronted with poverty through loss of their means of
livelihood. The intervention of the federal government through the Niger Delta
Development Commission (NDDC) seems to be a welcome development. However, the
missing factor seems to be the proper treatment of the derivation principle in
a way that would enable the state and local governments of the oil producing
areas to handle their developmental problems according to their own felt needs
and priorities. The minimization of the derivation factor over the years – from
the earlier 50% to 1% and now 13%, only as it affects crude oil – is unjust and
unfair when one considers that Igbeti Marble attract 55% derivation and the
Value Added Tax (VAT) still attracts 20% derivation. The challenge will be to
reexamine the issue of derivation particularly in line with the new democratic
experiment.
6) Intergovernmental Fiscal Relations and the Economy
It is expected that fiscal decentralization would stimulate
growth and development. There is the need to ascertain whether this has taken
place in the country particularly as large amount of resources have been
transferred from the center to both State and Local Governments.
The latest of several official and unofficial constitution
reform initiatives, the NPRC is charged with forging a national consensus on
new constitutional blueprint for “reinforcing the unity, cohesion, stability,
security, progress, development and performance of the Nigerian federation”
(Obasanjo, 2005:72). Yet, halfway into its proposed four-month tenure, the NPRC
is already embroiled in the contradictions and divisions often associated with
the politics of mega-constitutional change in deeply divided societies.
Especially palpable is the increasing polarization of the Conference along a
geopolitical fault-line that pits putative southern Nigerian constitutional
reformers against more pragmatic northern conservatives.
SUMMARY AND CONCLUSION
Fiscal federalism refers to the scope and structure of the
tiers of government responsibilities and functions as well as the allocation of
resources among the tiers of government. Contemporary issues in Nigeria’s
political economy show that perhaps the most important issue of fiscal
federalism is the revenue allocation formula, the sharing of national revenue
among the various tiers of government (vertical revenue sharing) as well as the
distribution of revenue among the state governments (that is, horizontal
revenue allocation). In Nigeria, decisions as to what proportion of centrally-generated
revenue that would be retained by the federal government, the proportion that
will be shared among the state governments and the proportion that will go to
the local government has always been a problem, due to the fact that there is no
consensus of opinion as to what could be seen as an ideal formula.
Since the 1946 Richardson Constitution which granted
internal autonomy to the thenexisting three regions, there have been several
attempts to provide equitable revenue allocation formula consistent with the
sharing of responsibilities between the federal and regional/state governments.
The most recent development in the struggle for the control of oil resources in
Nigeria is the recent Supreme Court action instituted by the federal government
against the oil producing states with respect to the offshore/onshore oil
dichotomy. The April 2002 decision of the Supreme Court to exclude the revenue
derived from offshore drilling the calculation of the revenue attributable to
the oil producing states based on the derivation principle, has failed to
resolve the controversy.
There are several challenges and contending issues
confronting intergovernmental fiscal relations in Nigeria: The five principles
currently applied in the horizontal revenue allocation formula are far from
acceptable to all the stakeholders. There is usually a lack of correspondence
between the spending responsibilities and the tax powers/revenue sources
assigned to different levels of government. There is, therefore, the need to
resolve the imbalance between assigned functions and tax powers.
On the issue of relative fiscal autonomy and independence of
the states and local governments, this dependence of sub-national units of
government must be reduced if the federating units are to be free to pursue
their own development goals without being hampered by the unpredictable
fluctuations in their shares of the Federation Account.
The question of local control over local resources is an
established constitutional principle in federal systems. But the way the
Nigerian federal system developed under the external colonial order (1954-60)
and continued under the period of geo-ethno-military internal colonial order
(1960-1999) and in the democratic dispensation between 1999 to date is yet an
unresolved contending issues in the discourse about Nigeria’s federalism.
Do we need to constitutionally recognize a distinction
between oil producing communities and oil producing states? This is an
unresolved issue and separates the communities in riverside areas directly
affected by oil spillages from their compatriots in landed areas from enjoying
the full benefits of allocations to producing states. Also, the federal
government should find a way of making the oil producing local government administrative
areas as shareholders in the joint venture arrangements with the oil companies,
thus making them stakeholders in the oil industry. It is expected that the
areas producing the nation’s crude oil would be very highly developed as
compensation for what is taken away as well as for the devastation on the land
engendered by the exploration process. There should have been development of
physical and social infrastructures, human capital creation, and economic
empowerment of the general citizenry in those areas. The missing factor seems
to be the proper treatment of the derivation principle in a way that would
enable the States and local governments of the oil producing areas to handle
their developmental problems according to their own felt needs and priorities.
What solutions can be deduced for the problems emanating from the challenge of
the “Tripod” approach to Nigeria’s problems where the three major ethnic
nationalities decide the content and the trend of national issues?
There is the issue of deductions that are made from the
proceeds of crude oil sales before the derivation fund in the Federation
Account is arrived at, and after which further deductions for special funds and
the funding of the federal capital territory are made. It will seem more logical,
with the exception of joint venture cash calls, that these various charges
which are federal government obligations be financed solely from the federal
government’s revenue power, that is, from its share of the Federation Account
or from its share revenue from other sources. Therefore, in order to determine
what constitutes the derivation fund, resolving the issue of the Federation
Account is crucial.
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