Revising Nigeria's Revenue Allocation Formula -

Aftermath of a Supreme Court Ruling

By

Mobolaji E. Aluko, Ph.D.

Burtonsville, MD, USA 

1. THE CONCERN ABOUT THE 2002 BUDGET

As expected, on April 5, 2002, the Supreme Court of Nigeria ruled UNANIMOUSLY against the 36 States of the federation and in favor of the Federal government over who controls offshore resources. It clearly reaffirmed the supremacy of international laws over municipal ones. However, in the face of aggressive counter-claims by the 36 states represented by their Attorneys-General, the Federal government - no thanks to late Attorney-General Bola Ige who filed the suit back in February 2001, and who must be smiling broadly in Heaven right now - seems to have bitten more than it could chew. What it now has is a serious headache, a serious concern over the fiscal structure of the country as a whole. In particular, it had just passed a N1.55 trillion 2002 Budget, only for the Supreme Court ruling to threaten the Federal Government with statutory loss to the state and local governments of as much as N400 billion.

How is this so?

Let us quickly look at the budget figures: Nigeria's approved 2002 budget as revised by the National Assembly - and signed rather surreptitiously by the president, without any fanfare - pegs expected government revenue at N1.55 trillion (as against the N1.156 trillion earlier proposed by the executive arm of government). N1.312 trillion of that revenue would be due to crude oil earnings, calculated rather ambitiously to be 1.788 million barrels a day, $18 /barrel at a budget exchange rate of N112/$ . For our purposes here, we take roughly N1 trillion (almost 80%) of that N1.312 trillion to be onshore oil and gas, which would be subject to the minimum of 13% derivation. This onshore/offshore distinction has now become settled law according to the Supreme Court, although it will remain a hot political potato for a while.

Furthermore, the Supreme Court has (in effect) ruled that the following FIRST CHARGES currently in the 2002 budget are illegal:

Joint Venture Calls...............N0.350 trillion.

NNPC Priority Projects............N0.002 trillion

National Judicial Council.........N0.028 trillion

External Debt Service.............N0.168 trillion

--------------------------------------------------

Total.............................N0.548 trillion

It has also ruled that the 1% FCT deduction is illegal, among a few other rulings. So what are the implications of all of this illegalites? This is what the budget looks like:

BEFORE THE APRIL 5 SUPREME COURT RULING (all in trillions):

Total Revenue...............................N1.55

Less First Charges..........................N0.548

--------------------------------------------------

Remainder...................................N1.002

Of the Remainder (for simplicity, we will ignore the VAT pool percentages for now; it would not alter the results significantly):

48.5% to the Federal Govt..................N0.485

24% to the States..........................N0.240

20% to the Local Governments...............N0.200

7.5% distributed as follows:

1% to FCT..................................N0.01

1% for Derivation..........................N0.01

2% Ecological Fund.........................N0.02

3% NDDC....................................N0.03

0.5% Stabilization.........................N0.005

Summary:

Total Under Federal Control................N1.11

(for its use and for distribution as

it sees fit)

Total to the States (statutory)............N0.240

Total to Local Governments (statutory).....N0.200

-------------------------------------------------

Total......................................N1.55

Note:

Total State +Local Govt....................N0.440

Overall Percentages:

Federal Government..........................71.6%

State Government............................15.5%

Local Government............................12.9%

Some Ratios of Allocations:

(State+Local) / Federal.....................0.40

Local Government / State ..................0.83

Derivation/(State + Local)................. 0.006

Thus, we see that the federal government is fiscally "bigger" than the two lower tiers of government by more than a factor of two; the local government is 20% smaller than the state level, and despite that about 65% of the revenue is onshore oil, the fraction of total to the states and local governments is not up to 1% directly traceable to derivation. All talk of 13% is therefore really a sham.

Now what about after the Supreme Court ruling?

AFTER THE APRIL 5 SUPREME COURT RULING (all in trillion)

Total Revenue...............................N1.55

Less Minimum 13% Derivation.................N0.130 [Goes to the States statutorily]

--------------------------------------------------

Remainder...................................N1.42

Of Remainder (for simplicity, we will again ignore the VAT pool percentages):

48.5 % to the Federal Govt.................N0.689

24% to the States..........................N0.341

20% to the Local Governments...............N0.284

7.5% To who?...............................N0.106

My Suggestion # 1 (to make total remainder distribution 50% to the Federal, 27% to States, 23% to LGs):

1.5% to Federal Govt.......................N0.022

3% to the States...........................N0.042

3% to the Local Governments................N0.042

Summary Allocations (following Suggestion # 1):

Total under Federal Govt...................N0.711

Total to State Govt........................N0.513

(includes derivation)

Total to Local Gov.........................N0.326

-------------------------------------------------

Total......................................N1.550

Note:

Total Min to State + Local...................N0.839

Overall Percentages:

Federal Government..........................45.9%

State Government............................33.1%

Local Government............................21.0%

Some Ratios of Allocations:

(State+Local) / Federal.....................1.18

Local Government / State ..................0.63

Derivation/(State + Local)................. 0.08

Under this new regime, state and local governments are collectively bigger than the federal government, the local government is only roughly 60% of the state, but the derivation component of the total of state and local is 8%, and more akin to the touted 13%.

Thus, with doubt, this inspection of the Before- and After-Supreme Court ruling budgets clearly shows the shift of fiscal control from the federal government to the state and local governments is quite significant: It requires the federal government to fundamentally restructure its responsibilities since it could lose up to N400 billion from under its control!

Consequently, there is panic, understandable panic by the Federal government of president Obasanjo, Speaker Na'Abba and Senate President Anyim who now have to wonder how they will fund their numerous foreign travels, their fat salaries and fatter allowances, that Abuja stadium, all in this election year, etc.

For example, one report had the president lamenting: http://allafrica.com/stories/200203310050.html:

"I Cannot Implement Budget As Passed, Says Obasanjo, This Day (Lagos) March 31, 2002

Another report states that the President had set up a 5-man panel, while the National Assembly set up a 20-man panel to study the Supreme Court ruling: http://allafrica.com/stories/200204110094.html: Aftermath of Supreme Court Judgment... This Day (Lagos) Thursday, April 11, 2002

QUOTE
The Federal Government yesterday appointed Secretary to the Government
of the Federation (SGF), Chief Ufot Ekaette, to head a five-man committee to thoroughly study the implications of Friday's judgment of the Supreme Court on on-shore/off-shore suit. Also, the National Assembly will today hold a joint session to discuss the Supreme Court judgment and the parlous state of the economy, among others. The Supreme Court had last Friday fundamentally restructured the Federation Account while delivering judgment in a suit instituted by the Federal Government against the 36 states of the federation for the determination of the seaward boundary of a littoral state within the country.

Information and National Orientation Minister, Professor Jerry Gana who announced the membership of the committee after the Federal Executive Council (FEC) meeting named other members as the Attorney General of the Federation, Kanu Agabi, SAN, Minister of Finance, Mallam Adamu Ciroma and two other persons whose name he failed to disclose. Gana added that the committee's term of reference is to "look into the interpretation of the ruling or judgement with a view to bringing the findings to the attention of the Federal Executive Council (FEC)."

Gana allayed the fears that the judgment of the Supreme Court, will affect the details, figures and implementation of the 2002 budget, which the president has signed into law. He explained that given the briefing Ciroma gave the president, "there is not going to be fundamental changes. In other words, the budget is not going to be fundamentally affected." Gana noted that contrary to public impression, President Olusegun Obasanjo had signed the Appropriation Bill into law "the same day it was presented to him." Although Obasanjo had said he would not be able to implement the budget as passed, the Federal Executive Council, yesterday advised all ministries to effectively implement the 2002 budget and ensure the due process of contract award and payments is followed. It was, however, gathered that the details and breakdown of the budget has not been sent to the president from the National Assembly.....
UNQUOTE

Jerry Gana here is a wishful thinker, otherwise why would yet a third report state that the president was suspending the application of the revenue allocation formula - including what the Supreme Court sarcastically called that "gentleman's agreement" "magic figure" of 13% of "natural resources"- pending action by the Revenue Mobilization Allocation and Fiscal Commission? Note that the Supreme Court ruling said that the presently applied stipulation was first in violation of existing law (Babangida's Cap. 16 (as mended by Decree 106 of 1992; "1% of mineral resources"), which is itself INCONSISTENT with the Constitution (which merely stipulates A MINIMUM of 13% of natural resources).

Although the president was empowered to do so, by law, to simply order alteration of Cap. 16 to bring it into conformity with the 1999 Constitution, he had not done so in all the time he had been president. Supreme Court Justice Ogundare stated that "a minimum of 13%" is not a specification, rather it is discretionary, so neither the States nor the Supreme Court or the States could use it as a basis to ask for or grant relief to counter- claiming states until and unless the president and/or the RMAFC acts according to the Constitution to so specify a percentage.

What a complete mess!

2. HISTORY OF NIGERIA'S PROBLEMATIC FISCAL FEDERALISM
------------------------------------------------------

One of the many problems bedeviling the Federal Republic of Nigeria is that the description "federal" is in name only - rather than in deed and in truth. Due to incursion of military rule in 1966, and the unitary proclivities of such a rule, our delicately negotiated federal constitution has been bastardized and bent out of shape. No where is that assertion more clear than in our current revenue allocation formula, where since 1970, the federal government has been playing "musical chairs" with the lower levels of state and local government over distribution of the total collected revenue: it has often been a case of "now you see it, now you don't." [See Table 1.]

The irony is that various federal documents indicate that the government and a number of its top functionaries are keenly aware of the various defects and the resulting lack of development that the republic has faced from this bad situation, but they have done little or nothing to fundamentally change them. For example, in January 1993, in a paper titled "Revenue Sharing and the Political Economy of Nigerian Federalism", General TY Danjuma, the present Federal Minister of Defence, formerChief of Army Staff of the Federal Military Government of Nigeria (1975-1979) and writing as the then-current chairman of the National Revenue Mobilisation, Allocation and Fiscal Commission (NRMAFC), stated viz (See Reference 1):

QUOTE
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 federal system of 30 states, one Federal Capital Territory and 589 Local Governments each of which is constitutionally recognised. Between 1962 and 1992, for instance, the Federal system comprised 3 Regions (1960), 4 Regions (1963), 12 States (1967), 19 States (1976), 21 States (1987) and since 1991, 30 States.

The Local Governments have also increased from 299 in 1970 to 301 (1979); and then to 781 (1981) before they reverted again to 301 (1984) and increased first to 449 (1987), 500 (1991) and to 589. As can be seen.....the Constituent units in the Nigerian federation had been tinkered with eleven times either at the State or Local Government level. 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. UNQUOTE

In 1997, a Central Bank document released in April 1998, which was a few months before Abacha's death at a time deeply in the throes of Abacha's self-succession bid into a new democracy, stated as follows:

QUOTE
CBN Annual Report Year Ended 31st December 1997, Box 4.2 "Problems
of Fiscal Federalism in Nigeria", page 70-71. The Federal government in its attempt to provide some public services nationwide often assumes more responsibilities than would ordinarily be the case under the Federal Constitution. Examples of these include provision of accommodation, mass transit, bore holes for water supply, roads, etc. Inevitably, the functional responsibilities outweigh the available financial resources in line with statutory allocation from the Federation Accounts under the suspended constitutions. Hence ad-hoc policy measures are adopted by the Federal Government transferring federally-collected revenue to itself and effectively neutralizing the statutory allocation formula. These ad-hoc measures include the use of Dedication Accounts, Stabilization Funds, Petroleum (Special) Trust Fund and AFEM intervention Surplus, which substantially reduce the statuary allocations that are received by state and local governments.....

The overall impact is that fiscal federalism in Nigeria has not been able to contribute optimally to social and economic development. Despite the considerable increase in the number of administrative units, real economic growth has been low and the per capita income has declined considerably from the level attained in the 1980s. As the nation moves into another era of democracy under a federal constitution, there is need to critically review the division of functions among the various tiers of governments as well as the revenue sharing arrangement in order to substantially improve the delivery of public goods and services as well as promote real economic growth......
UNQUOTE

Finally, in another CBN report, the apex bank unveiled some standard laments about the relative excessive dependence on the federal, government by the two lower tiers:

QUOTE
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 programs 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 activities 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 depend 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 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 potential 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....
UNQUOTE

The last statement is obviously one of exasperation - "Heck, we have other resources, don't we?" - and was the greatest understatement of the 1996 CBN report. Nigeria's proliferation of unproductive, money-sucking administrative units, combined with its monocultural dependence on oil make us into nothing more than an oil-selling company masquerading as a country, with a president (and "Commander- in-Chief of the Armed Forces") being the "armed" managing director of the badly-managed company. The state governors then act as company division chiefs distributing" dividends of democracy" to citizens masquerading as indolent company workers, with local government chairmen acting as subalterns.

Even without a penny stolen from our oil sales - and that is impossible to imagine - to depend almost solely on 2 million barrels of oil per day sold at even $27 per barrel (the latest price in the face of new Middle East tensions) translates to roughly $0.50 per person per day in Nigeria.

When you take away production costs and company profit, that readily drops to $0.25 per day. In short, while we are an oil-rich country, however, based on our needs, we are not a rich country. The greed of our leadership - and ourseeming inability to cut our coats according to our cloth - even makes us poorer.

 3. THE MATHEMATICS OF A MONOCULTURAL REVENUE ALLOCATION

Nevertheless, no matter the situation, what is there to be allocated must still be allocated fairly between the three tiers of government. With Nigeria's monocultural "kalokalo" economy, that should be simple enough, if only we would apply some mathematics. So let us adopt a simple approach without hiding monies here and there. Suppose in a particular year, the total federally-collected revenue is X billion Naira, out of which a percentage of 100y% is from derivation-deserving sources - that is P states out of a total of T states contribute to the derivation pool an amount D (equal to Xy billion Naira).

Next suppose that by law it has been determined to allocate 100z% from the derivation pool to the worthy P states to keep them somewhat happy.

Next assume that by law whatever is not distributed by derivation is then distributed to the Federal government, State Government and Local Governments respectively in the ratio 100f%:100s%:100(1-s-f)%. Now let G be the total number of local governments in the country and N the number of local governments in the P derivation-deserving states.

Then the following formulas are readily confirmed:

 Fraction accruing to all the T States = yz + (1 - yz)s

Fraction accruing to all the G LGs = (1-yz)(1-s-f)

Fraction accruing to the Federal Gov. = (1-yz)f

----------------------------------------------------------------------

Total fraction accruing to all levels = 1

 Then I submit that given G, P, T and y, the STIPULATION of z, s and f - that is the Revenue Allocation Formula - should be based on what our financial and fiscal planners desire the following quantities (FR, RSGF, RGS and RNO) to be in order for a united, efficient, just, united and hence happy federation to exist:

 (i) FR - the responsibility of the Federal Government i.e. FR = X(1-yz)f

This determines how "big" we want the federal government to be relative to our revenue base and its constitutional responsibilities. This formula can also be considered as a formula for calculating f once FR, X, y and z have been determined: f = FR/{X(1-yz)} f , y, z < 1

 (ii) RSGF - ratio of total allocations to all state+LGs to that of the federal government; RSGF = {1-(1-yz)f}/{(1-yz)f}

This reflects how "big" or "small" the federal government is relative to the lower levels - ie a measure of its fiscal devolution from federal to lower levels of governance.

 (iii) RGS - ratio of the total allocation to all of the local governments relative to all the state governments. RGS = {(1-yz)(1-s-f)}/{yz + (1-yz)s}

This reflects how "big" or "small" the state governments are in aggregate relative to the local governments - ie a measure of fiscal devolution from states to local governments.

(iv) RNO - ratio of total allocation to non-derivation-worthy states+LGs to that of the P derivation-worthy states.

 RNO = {1-yz)s(T-P)/T + (1-yz)(1-s-f)(G-N)/G

_____________________________________

yz + (1-yz)sP/T + (1-yz)(1-s-f)N/G

 This third ratio is an important one: it measures the level of imbalance between the states that are resourceful to those that are not. At the same time, it enables the resource-rich states to have a sense of whether they are being unjustifiably milked or not.

A critical inspection of these ratios will show that for consistent fiscal devolution, RSGF ~ RGS

That is, the states should devolve to the local government to the same extent as the federal devolves to the states.

Furthermore, for a balance between equity among states and fairness to the resource-rich states, we should require that:

(1-y)/y < RNO < (T-P)/P if (T-P)/P > (1-y)/y or RNO > larger of (1-y)/y and (T-P)/P

 A quick historical note is in order here: late Prof. Ojetunji Aboyade, the noted economist, back in 1977, during General Obasanjo's regime, once gave some mathematical reasonings to his Revenue Allocation Technical Review Committees' suggestions. Not being privy to that report, I do not know whether they contained some of these same considerations that have been outlined above. Anyway, chairman Aboyade's mathematics were then dismissed by Shehu Shagari as being "too technical", while Okigbo (during Constitutional Drafting debates) stated they were rather "fine...but without political context". Some other critics described Aboyade's formulae as "probably a device to deceive the citizens under the cover of being intellectually sophisticated." [For more details, please see historical notes of Table 1 below .]

Aboyade's report, adopted by Obasanjo's regime, was promptly rejected when Shagari became president in 1979, and immediately set up the Okigbo commitee to re-do Aboyade's work. This committee introduce for the first time the first charge items which have now been declared illegal by the Supreme Court. It is also interesting to note that in a minority report written in 1980, a member of the commission, economist Prof. Dotun Philips, warned that the Federal Capital Territory should not be treated separately in the sharing of the Federation Account. He was criticized for then "repeating the stand of the UPN", but is now vindicated by a ruling of the Supreme Court. I hope that my present write-up does not suffer the same fate of Oje Aboyade and Dotun Phillips of more than twenty years ago now.

 4. THE PRESENT NIGERIAN SITUATION

 Let us now particularize our work to the Nigerian monocultural economy, where roughly 80% of our total income comes from oil in 9 oil- producing states out of 36, which have between them 185 local governments.

That is:

P = 9; G = 185; T = 36 and y = 0.8

Ie 0.25 < .RNO < 3

Our computations of various ratios for various values of z, f and s are given in Table 2. We see that only when we have a 40:20:40 or 40:30:30 split for lower values of z do we get anywhere near the compromise values of RSGF, RGS and RNO outlined above.

5. SUGGESTIONS FOR NEW IMPROVED REVENUE ALLOCATION FORMULAS

Let me state at the onset that I believe that we should fix the derivation equation once and for all at 13% and thereby remove it as a slack variable from all the percentages floating around our revenue allocation enterprise. Then, I make the following two sets of suggestions:

SUGGESTION SET 1

We take the entire totally collected revenue (X) and remove the 13% of derivation pool D and distribute that to the state and local governments. WE then consider dividing up the rest as follows by one of the following stipulations:

(i) Federal Government: 50%; State Government:25%; Local

Government:25%. We divide 0.13 D equally to State and Local Government.

(ii) Federal Government: 36% State Government: 28% Local Government:

36%; add 0.13D to State Government.

(iii) Federal Government: 36% State Government: 36% Local Government:

28%; add 0.13D to Local Government. This is a flip of (ii) between the state and local governments.

Recommendations (i) - (iii) amount to the following allocation formulae being applied to the ENTIRE Federally collected revenue (not just the Federation Account):

(i) (ii)

Federal: 0.5(X-0.13D) 0.36(X-0.13D)

State: 0.065D + 0.25(X-0.13D) 0.28(X-0.13D) + 0.13D

Local Govt: 0.065D + 0.25(X-0.13D) 0.36(X-0.13D)

After dividing through by X, the relative percentages would be a function of D/X only. It is reasonable to desire that they vary only in quite a narrow band as D/X changes. For D/X = 0 (no derivation fund), and D/X =1 (all available funds are by derivation), then the overall percentages

are:

Ratios: (i) (ii)

D/X = 0 50:25:25 36:28:36

D/X = 1 43.5:28.25:28:25 31.32:37.36:31.32

Swing: 6.5 - 3.25 - 3.25 4.68 - 9.36 - 4.68

It is as simple as that, and would be a good political compromise. It will not lead to too much shock in the system as D/X moves up or down, in which case Choice (i) is better than (ii) and (iii).

What all of this analysis lead up to so far? The claim here is that the recent full pronouncement of Nigeria's Supreme Court on littoral states' (non) resource control DEMANDS that our country Nigeria NOW simplify its revenue allocation formula in order to establish accountability and transparency, and yet satisfy the Constitution. Thus I am recommending we do indeed "Keep It Simple...!"

My preferred recommendation here? After dividing 13% of the derivation fund equally among state and local governments, let Federal Government have 40% and the State + Local have 60% of the remainder. Then, in a spirit of true federalism and devolution of power, let the Constitution merely specify that none of the two lower tiers get lesser than 20% . Each state then determines its own ratio between State and Local Government (to add up to 60%) based on its own peculiar circumstances.

SUGGESTION 2

Based on the analysis in Section 3 as well as political realities, I am however now prepared to make an alternative suggestion for new revenue allocation which considers three different revenue pots and applies different percentages to the different pots. This will be seen to be a more complex variation on Suggestion 1, but an important one.

Here it is:

1. We collect ALL federal government monies into three pots:

(i) Federation (Onshore Natural Resources + VAT Income) Account. We distribute this among the various states according to certain formulas consistent with 13% derivation.

(ii) Federation (Offshore Natural Resources Income) Account. We distribute this among the various tiers of government according to certain formulas (no derivation consideration).

(iii) Federal (Non-Natural Resources, non-VAT funds + Independent Income) Account - all of this goes to the Federal Government ONLY 100%.

More specifically:

2. We divide the Federation (Onshore Natural Resources + VAT Income) Account vertically on a 40:20:40 basis as follows:

Federal Government - 40%

State Governments - 20%

[X% distributed horizontally to States by Derivation]

Local Governments - 40%

[Y% distributed horizontally to LGs by Derivation]

Total - 100%

Yet-to-be determined X% and Y% of the state and local government components respectively would be distributed HORIZONTALLY to these tiers by derivation such that overall derivation follows constitutional mandate minimum of 13%: 20X/100 + 40Y/100 ~ 13

For example, we could choose one of the following:

X = 0 Y = 33.3 --> Derivation is 13.3%; one-third of LG fund distributed by derivation

X = 25 Y = 25 ---> Derivation is 15%,; one-quarter each of LG & State funds by derivation

X = 66.7 Y = 0 ---> Derivation is 13.3%; two-thirds of state funds distributed by derivation

My own preference is for X = 0 and Y = 33.3%. (that is allocation to the local governments takes care of the derivation component.)

3. We divide the Federation (Offshore Natural Resources Income) Account on a 50:30:20 basis as follows:

Federal Government: 50%

State Governments: 30%

Local Governments: 20%

Total 100%

4. Whatever is distributed to the states and local government other than by derivation should be STRICTLY and ONLY on the basis of equality (considerations of population, population density, land mass, terrain can each be nominally set at 0.0025% each (to satisfy present constitution) and put in escrow for 400 years!):

(i) To States, based on thirty-six of them.

(ii) To local governments, based on 768 (excludes FCT councils) of them;

(iii) if states additional to the 36 are created, re-distribution of funds must be within each of the six political zones as if there were 36 states;

(iv) if local governments additional to 768 are created, re-distribution of funds within each state as if there were the present number of LGs within each states as of May 29, 1999.

Conditions (iii) and (iv) are to discourage proliferation of states and local governments purely for financial reasons.

5. 2002 BUDGETS AFTER SECOND REVENUE ALLOCATION SUGGESTION

So what will the 2002 budget look like after my second suggestion?

(All in trillions)

Total Revenue........................N1.55

Of which:

Onshore Resources................N1.00

Offshore Resources...............N0.32

Non-Oil Resources................N0.23

Total to the Federal Govt................N 0.79

(=0.40+0.16+0.23)

Total to the States......................N0.296

(= 0.20 + 0.096)

Total to the Local Governments............N0.464

(= 0.40 + 0.064)

Total.....................................N1.550

Note:

13% Derivation............................N0.130 [Goes to Local Govts. statutorily]

Total Min to State + Local................N0.76

Overall Percentages:

Federal Government.......................51%

State Governments........................19%

Local Governments........................30%

Some Ratios of Allocations:

(State+Local) / Federal.....................0.96

Local Government / State ..................1.57

Derivation/(State + Local)................. 0.17

 

In effect, this is an overall 50:20:30 split for this particular budget, but the federal government is at par with the two lower tiers, there is one-and-a-half times more resource available at the grassroot local government than in the states, and the "13% by derivation" at least has some relevance with respect to the state and local governments!

7. EPILOGUE:

I have outlined above what I believe are reasonable approaches to obtain a new and simplified revenue allocation formula in our country. Clearly, political jostlings and constitutional reform must still take place before it can be fully enacted.

The fundamental notion here is that the Federal government must "right size" itself by defining its "minimum responsibility", working within the reality of the 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.

Finally, despite my best effort here at revising our messy revenue allocation formula, I have this uneasy feeling that one is merely putting lipstick on an ugly frog in a vain attempt to beautify it. On the long run, there is no alternative to moving away from our center-controlled, oil-dominated monoculture, which oil contributes almost 80% of our federal government revenues, 90-95% of our export earnings, 80-90% of our foreign exchange earnings, and yet contributes only about 20% to our GDP. We must also re-write our 1999 Constitution - via a Sovereign National Conference 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 states and local government. De-emphazizing population in revenue allocation will also mean that our census might become reliable for once, making planning for development more effective.

I rest my case.

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APPENDIX  I:

Historical notes on Table 1:

HISTORY OF OFFICIAL REVENUE ALLOCATION FORMULAS IN NIGERIA - PAST, PRESENT AND PROPOSED

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 formulas consistent with the sharing of responsibilities between the Federal and regional/state governments.

These include

(a) before Independence: four ad-hoc Revenue Allocation Commissions -

(i) Phillipson Commission (1946) (ii) Hicks - Phillipson Commission (1951),

(iii) Chick's Commission (1953); (iv) Raisman Commission (1958);

(b) two post-Independence ad-hoc Revenue Allocation Commissions:

(i) Binns Commission (1964) during the Prime Minister Balewa government; and

(ii) Dina Committee (1969) during the Gowon regime;

(c) four Military-government-issued decrees, all during the Gowon  regime - in

(i) 1967; (ii) Decree 13 of 1970; (iii) Decree 9 of 1971 and (iv) 1975.

(d) two comprehensive revenue allocation commissions (I) Aboyade Committee (inaugurated 15 June, 1977), established by the Obasanjo military regime ; (ii) the Okigbo Commission (appointed 21 November, 1979, report submitted 30 June, 1980), established by the Shagari regime.

(e) two revenue allocation legislative acts:

(i) Allocation of Revenue Act (Federation Account) (1981) during the Shagari civilian regime;

(ii) Allocation of Revenue Amendment Decree (1984) during the Buhari/Idiagbon military regime; and finally establishment of a permanent National Revenue Mobilization, Allocation and Fiscal Commission (NRMAC) through Decree 49 of 1989, a commission which continues with us today even in our 1999 Constitution.

1. Members of the Dina Committee (1968): Chief Isaac Dina (Chairman);

Dr. Ojetunji Aboyade, Prof T.M. Yesufu, Dr. Ibrahim Tahir, Alhaji Mamman Daura, etc.

2. Members of the Aboyade Technical Committee on Revenue Allocation (1977): Prof Ojetunji Aboyade (Chairman), Prof Ayo Teriba, Dr. Green Nwankwo, Alhaji Mamman Daura, Chief Olumese (Secretary) , etc.

QUOTE
Page 161 ff of Ref. 3:
Aboyade was still Vice-Chancellor in Ife when, in 1977, the Obasanjo government appointed him Chairman, Technical Committee on Revenue Allocation..

When the [ABOYADE] committee finished its job, the Obasanjo government received its report. Among other technical details, the Committee set up parameters and models for administrative and fiscal controls which no effort in the past ever worked out. It recommended that all federally-collected revenue (except personal income tax of the Armed Forces, External Affairs Officers and the Federal Capital Territory) should be consolidated into the State Joint Account. This would then be shared [VERTICALLY] by the Federal, States and Local Government using 57:30:10 percentages respectively. In addition, it created special grants accounts [3 PERCENT ALLOCATION WITHOUT SPECIFIC CATEGORIES] to cater for problems like general national ecological degradation, national emergencies, disasters, oil pollution and the like.

Each state was also to contribute 10 percent of its total revenue receipts to the share of its constituent local government from its total revenue. The Committee recommended the establishment of a joint fiscal and planning commission to periodically review federal fiscal system, while it added a set of new criteria for [HORIZONTAL] allocation [ie OF THE 30% SHARE TO THE STATES]: equality of access to development [25%]; national minimum standards for national integration [22%]; absorptive capacity of the national and state economy [20%]; independent revenue and minimum tax effort [18%] and fiscal efficiency [15%]. The government then sent the report to the Joint Planning Board (JPB) where state governments worked on it. The draft was finally fine-tuned by the Federal Government which adopted and implemented it.

A number of Federal constituencies that were dissatisfied with the policy unleashed a spate of criticisms. Some people felt that "need" was not adequately taken care of. These people were mostly from eastern Nigeria. The Northern elite felt that "population" was not given its deserved place. Some areas that were not populous but which had a large geographical space and land area felt the report did not give enough attention to "physical area." Some, mainly minorities in the oil producing areas, argued that the treatment given to "derivation principle" was faulty. They felt that oil was dominant and important and that if the members of the committee had been from oil producing areas, they would have given derivation a greater percentage.

Others felt that if the Committee's principles of allocation as established in its report and the White paper were good and defensible, the numbers could be questioned. Those who were more technically minded, Dr. Pius Okigbo being the strongest, felt that the method of translating principles to money was too complicated, hence the succeeding government of Shagari's conclusion that Aboyade's report "was too technical" as reported in the national newspapers. In a sense, this may have some foundation. In the report one finds mathematical expansions like the ratio of this and the inverse of that other ratio, and calculus like this weight when pushed to this side gives the coefficient of that. It was truly a technical report and, therefore, required to be simplified so that it could be easily intelligible to the average civil servant and commentator. The critics of the report felt that it was possible to have a formula which would involve less mathematical calisthenics. Some of them argued that Aboyade's formulae were probably a device to deceive the citizens under the cover of being intellectually sophisticated...

The first major criticism against the Committee's report, however, was the stricture rendered on the floor of the Constituent Assembly in 1978 by Dr. Pius Okigbo. Okigbo criticised the method and the logic of the report. Alhaji Shehu Shagari labelled the report as "too technical." Thus, when Shagari became President of the country in 1979, it was only to be expected that the report would be subjected to further review.
UNQUOTE

3. Members of the Okigbo Commission on Revenue Allocation (1979): Dr. Pius Okigbo (Chairman); Alhaji Ahmed Talib, Alhaji Balarabe Ismaila, Dr. Dotun Phillips, Alhaji Muhammed Bello, Dr. W. Uxoaga and Dr. G. B. Leton.

QUOTE
From REFERENCE 2: The Presidential Commission on Revenue Allocation, popularly known as the Okigbo Commission, was inaugurated on 23 November, 1979.....The Commission embarked on a tour of the states in the months of January to March 1980.... The Committee submitted its report on 30 June 1980 and the Federal Government's White Paper on the report was released on 1 September 1980. Given the lack of interest of the State governments in revenue collection, it should not come as a surprise that the Commission's treatment of the problem of revenue generation did not give rise to any disagreement. For instance, the Commission argued that the produce sales tax [which used to be levied and collected by the regional governments before it was abolished by the military in the wake of the oil boom] should be vested in the National Assembly. This argument was meekly accepted by the states, even when they all knew that produce tax constituted a veritable source of independent revenue. Also, the commission's recommendation that companies income tax should be collected by the Federal Government was accepted by the states. On this count, the states had acquiesced in the commission's rejection of the suggestion earlier made by some state governments that their internal revenue departments be allowed to assess and collect companies income tax from companies based in their states, and that companies in which the state government had controlling equity shares should be given tax concessions.

In short, the states did not gain additional sources of revenue from the Okigbo commission; and they did not seem to mind the fact that, by not being able to generate substantial revenue locally, they thus depended totally on Federally collected revenue. Therefore, rather than raise all the dust on the allocation to tax jurisdiction, the politicians and other interested parties felt concerned and agitated over the sharing of what was Federally collected.

The Commission's recommendation on the sharing of the Federation Account was as follows: 53% to the Federal Government; 30% to the State Governments; 10% to the Local Governments; and 7% as Special Fund which is also to be distributed as follows: 2.5% for the initial development of the Federal Capital Territory; 2% for special problems of the mineral producing areas; 1% for other ecological problems such as soil erosion, desert encroachment, flood control, etc., 1.5% for the revenue equalization fund.

[Footnotes: 1. Page 40 "There were three reports: a majority report, and two minority reports; one by Dr. Leton, who wrote on behalf of the oil-producing states, and the other by Dr. Phillips who was criticised as having "repeated the stand of the UPN [UNITY PARTY OF NIGERIA OF AWOLOWO]". 2. Page 41: "As could be expected, bearing in mind the emphasis of the Shagari administration on Abuja, the Federal Government rejected the minority submissions of Dr. Phillips that the FCT should not be treated separately in the sharing of the Federation Account." ]

It was clear that these were provocative and unacceptable recommendations. Opposition to them began with the Federal Government's White Paper which proposed an amendment to the National Assembly seeking to increase the Federal Government's share from 53% to 55%. The proposal still leaves the states with 30%, but lowered the Local Government's share to 8%. The Special Fund, which was left at 7%, receive a new disbursement formula from the Federal Government's White Paper: 3.5% to the mineral-producing states, to be shared on the basis of derivation, 2.5% to the Federal Capital Territory, and 1% for continuing ecological problems. Of the 3.5% meant for the mineral producing states 2% should be allocated directly while the remaining 1.5% should be managed by a special agency for the development of mineral-producing areas....

An intense political crisis followed the report....By the last months of 1980, it was clear that the {SHAGARI] executive arm of the Federal Government had bungled the revenue allocation issue. It had set aside the recommendation of the commission it appointment, and had made even more absurd suggestions...

Petty political bickerings, alliances, accords, divisions, lobbying characterized the debates, and by February 1981 a stalemate had been reached. The House of Representatives and the Senate could not agree on the points and extent of amending the Bill. On 9 December 1980, the House of Representatives had 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. On 14 January 1981, the Senate passed the Bill with the following amendments: 58.5% to the Federal Government, 31.5% to the States and 10% to the Local Government. The following day, the SJA (State Joints Account) suffered another set-back in the Senate as it was decided that the 5% allocated to the oil-producing states should come from the states share. This meant that the states were really to share 26.5%. The Senate also decided that the funds in the SJA be disbursed as follows: 50% according to the principle of equality; 40% according to population, and 10% by "land use area.".....

With these points of disagreement between the House of Representatives and the Senate, it was decided that the Bill be referred to the Joint Finance Committee [JFC] for reconciliation. The JFC endorsed [ON JANUARY 29, 1981] the amendments made by the Senate, and on February 3, 1981, the President signed the Bill into law....by March 1981, either jointly or severally, no less than twelve states had taken the revenue allocation bill to court, demanding its nullification. Some filed their cases at the Supreme Court, others went to the lower courts. By April 1981, seven such cases had been filed by state governments in the Supreme Court, seeking similar ends. Thus, on 21 April 1981, the court decided that all suits would be heard at the same time, and that Bendel State suit would be taken as a test case...

The states were not disappointed. Bendel State won the case. In its ruling [ON OCTOBER 2, 1981], the Supreme Court declared the Revenue Allocation Act of 1981 unconstitutional, illegal, null and void, and directed all Federal and State government officials to refrain from allocating Federal revenue according to the provisions of that Act..

By December 1981, all the parties concerned seemed to have learnt their lessons...It was perhaps this lesson of caution that informed President Shagari's new Bill sent to the National Assembly in December 1981, as well as the debates on the Bill in the Assembly. 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 17 December 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 life of the Second Republic.

Here is a summary of the adopted formula: 55% to the Federal Government; 35% to the State Governments 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%] was 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 - 11.25%; INVERSE ENROLLMENT - 3.75%], internal revenue effort [5%]. UNQUOTE

4. Members of the Tukur Revenue Mobilisation Allocation and Fiscal Commission (1999 to date): Engr. Hamman A. Tukur (Chairman); Barrister Nwadiala Emeka Wogu, Chief Frank Akpoebi, etc. [A total of 38 members: Chairman, one per state and one for the FCT.]

 APPENDIX II

SUPREME COURT RULING ON RESOURCE CONTROL

Revenue Allocation: The Supreme Court Judgment

In The Supreme Court of Nigeria, holding in Abuja on Friday 5th Day of April, 2002 before the Lordship Muhammadu Lawal Uwais, Chief Justice of Nigeria; Abubakar Bashur Wali, Justice Supreme Court; Idris Degbo Kutigi, Justice Supreme Court; Michael Ekundayo Ogundare, Justice Supreme Court; Emmanuel Obioka Ogwuegbu, Justice Supreme Court; Sylvester Umaru Onu, Justice Supreme Court; Anthony Ikechukwu Iguh, Justice Supreme Court

SC28/2001

Between

Plaintiff - Attorney-General of the Federation

And

Defendants - [36 State Attorneys-General]

THE SUMMARY

In summary, I adjudge as follows:

1. Plaintiff's case succeeds and I hereby determine and declare that the seaward boundary of a littoral State within the Federal Republic of Nigeria 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 Section 162(2) of the Constitution of the Federal Republic of Nigeria 1999, is the low-water mark of the land surface thereof or (if the case so requires as in the Cross River State with an archipelago of islands) the seaward limits of inland waters within the State......

3. The 6th Defendant succeeds in his claim (a) and, accordingly, I determine and declare that the Constitution of the Federal Republic of 1999 having come into force on 29/5/999, the principle of derivation under the proviso to Section 162(2) of the Constitution came into operation on the same day -- that is to say, 29/5/99 and Plaintiff is obliged to comply therewith from that date........

6. Claims (a), (b), (c) and (d) of the 10th Defendant's counterclaim are hereby dismissed; claims (e) and (g) are, however, struck out. The 10th Defendant succeeds on his claims (f) and (h). It is hereby declared that the underlisted policies and/or practices of the plaintiff are unconstitutional, being in conflict with the 1999 Constitution, that is to say:

(i) Exclusion of natural gas as constituent of derivation for the purposes of the proviso to section 162(2) of the 1999 Constitution.

(ii) Non payment of the shares of the 10th Defendant in respect of proceeds from capital gains taxation and stamp duties.

(iii) Funding of the judiciary was a first line charge on the Federation Account.

(iv) Servicing of external debts via first line charge on the Federation Account.

(v) Funding of Joint Venture Contracts and the Nigeria National petroleum Corporation (NNPC) Priority Projects as first line charge on the Federation Account.

(vi) Unilaterally allocating 1 per cent of the revenue accruing to the Federation Account to the Federal Capital Territory. I also grant an injunction restraining the Plaintiff from further violating the Constitution inn the manner declared in claim (f) above....

(CERTIFIED TRUE COPY and SIGNED)

M. D. Ogundare,

Justice, Supreme Court

Dr. Mobolaji E. Aluko is Professor & Chair of Chemical Engineering at Howard University, Washington, DC. He can be reached on Alukome@aol.com.

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