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Nigeria and the Politics of Revenue Allocation (Posted 5th Dec 2005) Tell your friends about this page! Email it to them.
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 Government.
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 legislature 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.
The States have often accused the Federal Government of holding too large a share of entire federal revenue to their detriment, particularly at the local government levels where meaningful development has virtually been made impossible due to their deprivation of funds and corruption.
The problem becomes even more acute due to the political dimension the issue has assumed with tempers flaring along geo-political lines over perceived injustices in the way the country’s revenue is being shared.
It will be recalled that since the 1946 Richardson Constitution which granted internal autonomy to the then-existing three regions, there have been several attempts to provide equitable revenue allocation formular consistent with the sharing of responsibilities between the federal and regional/state governments.
a) Before Independence- four ad-hoc Revenue Allocation Commissions namely; Phillipson Commission (1946); Hicks- Phillipson Commission (1951); Chick’s Commission (1953) and Raisman Commission (1958).
b) Two post-Independence ad-hoc Revenue Allocation Commissions namely: Binns Commission (1964) during the Prime Minister Balewa government and Dina Committee (1969) during the Gowon regime;
c) Four Military – government – issued decrees (all during the Gowon regime) namely: - 1967; Decree 13 of 1970; Decree 9 of 1971 and 1975;
d) Two comprehensive revenue allocation commissions namely: - The Aboyade Committee (inaugurated June 15, 1977) established by the Obasanjo military regime and the Okigbo Commission (appointed November 21, 1979, report submitted June 30, 1980), established by the Shagari regime;
(e) Two revenue allocation legislative acts namely: - Allocation of Revenue Act (Federation Account) (1981) during the Shagari civilian regime, and Allocation of Revenue Amendment Decree (1984) during the Buhari/Idiagbon military regime and finally, the establishment of a permanent Revenue Mobilization, Allocation and Fiscal Commission (NRMAC) through Decree 49 of 1989, a commission which continues with us today even in the 1999 constitution.
Under the colonial administration there were not too many problems over revenue sharing because the extent of the powers of the centre and regions in respect of revenue was defined. For instance, under the Macpherson Constitution of 1951, the Revenue Order in Council provided that pubic revenue derived from matters stated in the schedule to the instrument itself should belong to the region. It further stipulated the payment to the regions by the centre, of annual grants in respect of expenses relating to education and politics. The other provision that the centre could not interfere with specific revenue allocation by the Revenue Order in Council to the Regions reflected the extent of the independence of the Regions.
It was during the Nigerian Second Republic, specifically on November 3, 1980, that the most serious face off over revenue allocation actually emerged, when a bill for an Act to prescribe the basis for distribution of the Federation Accounts between the three tiers of government was laid before the House of Representatives.
This bill gave the Federal Government 55 percent, state governments 34.5 percent, local governments eight percent and initial development of the capital territory, 2.5 percent. The 34.5 percent allocated to the states was sub-divided and allocated as follows: 30 percent to all the states and 4.5 percent to a special fund. The special fund was sub-divided and allocated as follows: 2 percent to mineral producing states to be shared on the basis of derivation; development of the mineral producing areas 1.5 percent and other continuing ecological problems 1 percent.
Petty political bickerings, alliances, accords, divisions, lobbying followed the recommendations, and by February 1981, there was a stalemate. The House of Representatives and the Senate could not agree on the points and extent of amending the Bill while the House of Representatives had on December, 9, 1980, passed the Bill with the following amendments: 50% of the Federation Account to the Federal Government, 40% to the states, and 10% to the Local Governments, the Senate on January 14, 1981, passed the Bill with the following amendments: 58.5% of the Federal Government, 31.5% to the states and 10% to the Local Government.
The Senate also decided the 5% allocated to the oil producing states should come from the states share and that the funds in the State Joint Account (SJA) be disbursed as follows: 50% according to the principle of equality, 40% according to population and 10% by “land use area”- the interpretation of which was that the states were really to share 26.5%.
With these points of disagreement between the House of Representatives and the Senate, the National Assembly had to set up a joint committee, the Joint Finance Committee (JFC) to resolve the decisions arrived at by the two houses.
The JFC voted in favour of the Senate by 13 to 11 votes and on February 3, 1981 President Shagari signed the Bill into law.
The Revenue Allocation Bill was however a pyrrhic victory as no less than 12 states jointly resolved to seek court redress on the matter. By April 1981, seven such cases had been filed by state governments in the Supreme Court, seeking similar ends. The Bendel State suit was taken as a test case and after a protracted court action, the Supreme Court ruled in favour of the states. In its ruling, the Supreme Court declared the Revenue Allocation Act of 1981 unconstitutional, illegal, null and void, and directed that all Federal and State Government Officials to refrain from allocating federal revenue according to the provisions of that Act.
Following the nullification of the Bill, another Bill was presented to the National Assembly in December 1981. The House of Representatives proposed no amendments, and those proposed by the Senate were thrown out by the JFC, which met under the chairmanship of Senator Ameh Ebute on December 17, 1981. The State bourgeoisie remained silent on the bill and the Act, eventually signed by the President was used in allocating revenues in 1982 and the remainder of the Second Republic.
The formula adopted for revenue sharing was as follows: 55% to the Federal Government; 35% to the State Government and 10% to the Local Governments. The SJA was to be sub-divided as follows: 30.5% to all the states, 1% to be paid into a special fund to be administered by the Federal Government for the amelioration of ecological problems in any part of Nigeria, and 3.5% to be shared on the basis states directly and by derivation, and 1.5% should be paid into a special fund to be administered by the Federal Government for the development of the mineral producing areas. The funds in the SJA (30.5%) were to be shared according to the following principles: equality of states (40%), population (40%), social development factor (15% made up of Direct Primary School Enrollment – 11.28%; Inverse Enrollment – 3.75%) and internal revenue effort (5%).
The revenue allocation battle resurfaced in 2002 when the Federal Government initiated a suit against the 36 states of the Federation on April 5,2002, in which the Supreme Court was asked to determine the seaward boundary of littoral states within the Federal Republic of Nigeria for the purpose of calculating the amount of revenue accruing to the Federation Account directly from any national resources derived from that state pursuant to section 162 (2) of the Constitution of the Federal Republic of Nigeria 1999.
The Supreme Court went ahead to rule in a unanimous decision among other reliefs that the seaward boundary of a littoral state within the Federal Republic, for the purpose of calculating the amount of revenue accruing to the federation account directly from any natural resources derived from that state pursuant to the constitution of the Federal Republic of Nigeria, 1999 is the low-water mark of the land surface thereof.
It however nullified the special funds and abolished the first-line charges, which included allocations for FCT, ecological funds, stabilization, NNPC priority projects and JVC accounts.
Following the judgment, President Olusegun Obasanjo amended the revenue sharing formula using an executive order. The modification order changed the formula for revenue allocation among the constituent governments in the federation and also increased the Federal Government’s share from 48.5percent to 56percent, thus leaving the states and local governments to share 44 percent - 24 percent for the state governments and 20 percent for the local governments.
There were several dissenting voices, the loudest coming from the Revenue Mobilization and Fiscal Commission (RMAFC), which saw the entire action as unconstitutional and therefore illegal. The Federal Government was thus forced to cede 1.32 percent from its allocation.
Under the current arrangement, the Federal Government still receives the lion’s share of allocation in the revenue formula with 52.68 percent, while the 36 state governments and local governments receive 26.72 percent and 20.60 percent respectively.
Political observers believe that the lion’s share of the national revenue given to the Federal Government runs against the grain of the current global trend in federalism where the expectation is that the states and local governments would increasingly constitute the hub of economic development and centers for the provision of social amenities and infrastructure.
Under the prevailing arrangement, state governments cannot be regarded as coordinate with, or independent of the central government in the management of their affairs. This is because the concentration of the resources at the centre makes the other tiers of government subservient to the Federal Government.
Besides, many of the other tiers of government have little internally generated revenues. Therefore, their survival, like the Federal Government, depends largely on the revenue from crude oil, the mainstay of the Nigerian economy.
Against this background, there is widespread clamour for the return to “true federalism”, which was thwarted with the creation of 12 states by General Yakubu Gowon (rtd) in 1967 at the outbreak of the Nigerian Civil War.
Since then, all federal principles including revenue allocation have been in favour of the federal Government – a situation some political scientists feel has encouraged extravagance because the centre is believed to have too much power at its disposal, while the states have to go cap in hand to Abuja, the nation’s capital to “beg” for sustenance.
In addition, the high percentage of Federal Government’s share of the revenue, to some analysts, is not only the main source of injustice but also the principal cause of corruption, alienation, marginalisation, instability and reckless agitation for restructuring in the country.
In January 1993, General T.Y Danjuma, the former Federal Minister of Defence, former Chief of Army Staff of the Federal Military Government of Nigeria (1975-1979) and writing then as the Chairman of the National Revenue Mobilization Allocation and Fiscal Commission (NRMAFC) analyzed the revenue allocation problem in his paper titled “Revenue Sharing and the Political Economy of Nigerian Federalism” as follows:
“Currently, Nigeria operates a federal political economy implying a series of legal and administrative relationships established among levels of government possessing varying degrees of real authority and jurisdictional autonomy. Within a period of 34 years of its corporate existence as a nation, the Nigerian federal system has metamorphosed from a two-tiered federal arrangement initially comprising three unequal political and administrative regions to a three tiered system of 30 (now 36) states, one Federal Capital Territory and 589(now 774) Local Governments each of which is constitutionally recognized… with the increasing number of units, and, with what there is to be shared not varying much, greater pressure is put on available resources, hence, the ‘national cake’ is fragmented among many units. With such fragmentation, no unit gets fully satisfied at the end of the day.”
Similarly, the Central Bank of Nigeria in its 1996 Annual Report unveiled some standard complaints about the relative excessive dependence on the federal government by the two lower tiers:
“CBN Annual Report Year Ended 31st December 1996, Box 4.1 “Improving the Revenue Generating Capacity of the Three Tiers of Government”, page 72-73. The need for adequacy of revenue at the three levels of government - Federal, state and local becomes critical, given their expenditure programmes aimed at influencing the levels of income, savings, production and distribution for the ultimate goals of achieving equity and increasing prosperity…. The size of revenue that government generates at any point in time is influenced by its resource endowment, level of economic activities and the efficiency of its revenue collection machinery. The stability and growth of revenue is a function of the ability of government to stimulate and sustain a high level of economic activity and an optimal mix of revenue generating instruments. The foregoing analysis shows that, although revenue accruing to the governments over time has increased in absolute terms, their revenue profile has depended largely on statutory allocations while the performance of internally-generated revenue has remained unsatisfactory.
Prior to the introduction of VAT, the three tiers of government relied heavily on their share of Federation Account, which in turn depended on developments in the international petroleum market. This had implications for government finances. Thus, government revenue had been unstable, showing up in deficits and poor delivery of services with expenditures concentrated on recurrent activities in the case of state and local governments. This explains the use of tax contractors (consultants) by some State Governments and introduction of various kinds of levies by State and Local Governments to improve their revenue standing.
It is therefore important that advantage is taken of the country’s resource endowments to enhance the revenue profile and raise the level of total federally collected revenue with the ultimate aim of improving revenue accruable to Federal, State and Local Governments through statutory allocations. Apart from petroleum, there are other mineral products that have remained untapped…”
Recently, the Honorable Commissioner for Finance, Lagos State, Mr. I.A. Adewusi, presented a paper at the 25th Anniversary of the Master of Business Administration Students Association, University of Ibadan, titled “Fiscal Federalism and Revenue Allocation Formula” in which he described the present revenue allocation sharing arrangement as unprogressive, discriminatory and grossly unfair to the states.
Tracing the root of the problem to the 1999 Constitution, Adewusi said, the constitutional provision of “equity of states’ had been wrongly interpreted and applied, thereby giving some states undue financial advantage over others.
“A brief recap of the 1999 Constitution provide clear and unambiguous interpretation of the use of derivation principle in sharing revenue accruing to the Federation Account from all sources as follows:
Section 162 subsection 2 of the Nigerian Constitution states that: The President, upon receipt of advice from the Revenue Mobilization Allocation and Fiscal Commission, shall table before the National Assembly proposals for revenue allocation from the Federation Account, and in determining the formula, the National Assembly shall take into account, the allocation principle especially those of population, equality of states, internal revenue generation, land mass, terrain as well as population density.
Provided that the principle of derivation shall be constantly reflected in any approved formula as being not less than thirteen percent of the revenue accruing to the Federation Account directly from any natural resources … However for the purpose of sharing the national revenue due to local government, the constitutional provision of equality of states has been wrongly applied. From the point of the constitution, what is stated is the EQUALITY OF STATES as one of the allocation principles and not EQUALITY OF LOCAL GOVERNMENT .Therefore replacing the former (EQUALITY OF STATES) with the latter (EQUALITY OF LOCAL GOVERNMENT) in the calculation of allocation of indices and the disbursement of the amount standing to the credit of local government councils has drastically reduced the monthly revenue allocated to states with lower number of local government councils … Why the attention on 'EQULITY OF STATES?’… This is simply because, of all the principle ‘EQUALITY OF STATES’ has the highest weight attached to it i.e. 40 and 45 .23 percent respectively for the present and newly proposed (Revenue Mobilization Allocation and Fiscal Commission) Formula. Thus one cannot but understand how its misapplication has given some states undue financial advantage over others.”
He subsequently made the following recommendations:
“The Federal Government must ‘right size’ itself by defining its ‘minimum responsibility’, working within the reality of a weak monocultural revenue base of the country, and at the same time understanding that the states and local governments also have their own minimum responsibilities which they too must not shirk. Then and only then will any revenue allocation formula make sense.
There is an urgent need to re-write our 1999 Constitution because the changes have to be quite fundamental, as the Supreme Court ruling eloquently suggests - to give (among other things) more personal income and business-profit taxing powers to the state(s) and local government(s).
A 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) to wit: 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.
Derivation States can be termed Special Category States and the criteria to determine revenue sharing will include but not be limited to: population, income, land area, index of infrastructure, tax effort, fiscal discipline, environmental impact of federal enabled activity, revenue accruing to federation from activities within the states, social services burden on state due to immigration.
The principle of appropriateness (i.e. which order of government is more appropriate to deal with a particular administrative problem) should guide the devolution of powers from the federal to the states.
There should be two tiers or orders of government, the federal and states, and that local governments be left as the exclusive preserve of the states;
There should be two exclusive legislative lists in the constitution, one for the federal government and one for the states and the FCT;
The items on the federal list should be substantially reduced to reflect the principle of appropriateness and non-subordination in line with the need for the Federal Government to right size itself as stated in recommendation 1 above;
States should be recognized as constitutional partners with the federal government and be provided legal guarantees and further autonomy on issues relating to preserving their distinctiveness and ensuring commensurate economic and social advantages.”
The crux of the matter concerning revenue allocation and sharing is power control. From 1966 till date, the Nigerian Federation has increasingly been built around power and resource control. Those who have managed to exercise the utmost control of this power and resources are finding it difficult to detach themselves. Consequently, all sorts of legally-backed schemes and tactics are being employed to retain power at the center and ensure that ample resources exist to maintain “glamour at the centre”.
Unfortunately, this myopic attitude is robbing Nigeria of her much needed development and almost creating a near state of anarchy in the country, with the states and local governments at daggers drawn with Federal Government.
To avoid chaos therefore, there is the need for equitable sharing of power and resources among the three tiers of government to ensure overall growth and development, as well as a mindset of “leave and let live.”
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