7.3. Revenue Allocation
7.3.5 Horizontal and Vertical Revenue Sharing Formulas Juxtaposed
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1992 (NRMAFC) Equality of states- 40%, population- 30%, social development- 10%, landmass- 10%, internal revenue- 10%
Proposal of the 1994/95 NCC Committee on Revenue Allocation
Equality of states (minimum responsibility of government)- 30%, population- 40%, internal revenue effort- 10%, landmass and terrain- 10%, population density- 10%
RMAFC in the Fourth Republic (Current as of 2020)
Equality of states- 40%, population- 30%, social development- 10%, landmass- 10%, internal revenue- 10%
Compiled by author from Babalola and Okafor (2019); National Bureau of Statistics (2020);
Suberu (2003)
The next section juxtaposes the vertical and horizontal formulas through the instrumentalities of Tables 7 and 8.
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government and the remaining 30% to the DPA11 (Abubakar, 2005: 63). It also explains why regional elites were more comfortable with operating from the regions as they were more focused on developing their regions. The fiscal features of this period were the epitomes of true federalism because each level of government had what it takes to carry out its responsibilities.
However, the preference of elites on which formula to use metamorphosed with the resources that generated the most income at every point in time. For the Philipson Commission, elites from the North and West were very pleased with derivation because groundnut and cocoa which are cash crops respectively grown in these regions were the major sources of revenue for the country (Ovwasa, 1995: 73). The elites from the Eastern region were not pleased with the derivation principle because these cash crops were not produced in their region (Ovwasa, 1995: 73). The Hicks-Philipson Commission (1952-1954) also resulted in elites’ differences.
The West was against taking the principle of derivation with levity, the North opposed less emphasis on the principle of need while the elites from the East supported national interest being the overarching principle (Elekwa et al., 2011: 415). The Chicks Commission (1953- 1957) widened the fiscal gap between the regions the more because the regions that had more resources received more (Elekwa et al., 2011: 415). Hence, elites from the regions with less resources advocated for equality of states, needs and national interest (Ovwasa, 1995: 74-75).
However, since the discovery of oil in 1956, Southern elites, especially those of oil producing parts want derivation as the overarching principle, while the North has not always been in support of this (Abubakar, 2005: 59). The Northern elites favour landmass and population because this is to their advantage.
The second period of 1968 to 1977 was symbolic with state structure and military rule. Hence, the centralised nature of the military government came with its attendant effects on fiscal federalism. Consequently, the federal government became more fiscally powerful, while the states became weak fiscally. The centralised nature of the military made it possible for it to usurp these revenue powers (Ovwasa, 1995: 76). In addition, the creation of states by the military whittled the ability to vigorously pursue revenue generation hitherto possessed by
11 Each revenue became structured such that a portion goes to the region, based on derivation, a portion went to the Distributable Pool Account, another one to the centre while the one that went to the Distributable Pool Account was to be shared among the regions (Elekwa, et al., 2011: 416).
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the regions. Finally, there was the need for the military government of Yakubu Gowon to prosecute the civil war and restructure the country after the war and all these required adequate funds.
The third phase covers the Second Republic up to the Fourth Republic. It is also a transition from pre- NRMAFC/RMAFC to the NRMAFC/RMAFC. As a result of challenges with accepting the existing revenue allocation formulas, the military administration of General Babangida set up a statutory commission to handle revenue allocation matters (Abubakar, 2005: 68). However, more attention will be given to the Fourth Republic because it is the focus of this study.
Federally collected revenue is paid into the federation account and shared based on a law proposed by the president and the RMAFC, which is ratified by the National Assembly (Suberu, 2003: 12). Federation Account Allocation Committee (FAAC) is chaired by the minister of finance and has state commissioners of finance as members allocate money from the federation account during its monthly meetings (Suberu, 2003: 25). There is no equivalent of the FAAC between states and local governments and through the ‘State-Joint Local Accounts’, states lord their will on local governments on financial matters (Suberu, 2003: 25- 26).
The current vertical formula is on the net federation account revenue distributable. That is after necessary deductions like 13% derivation and other charges and costs and excluding Value Added Tax (VAT) (National Bureau of Statistics, 2020). This also points to the fact that even in a democratic government, the states and local governments do not still have adequate funds to carry out most of their functions.
Furthermore, a look into how revenue has recently been shared will buttress the claim that fiscal federalism in Nigeria negates Abubakar’s (2005) (cited earlier in this chapter) view. In 2019, FAAC disbursed N2.93trn to the federal government, N2.47trn to the state governments, and N1.67trn to the local governments (National Bureau of Statistics, 2020:
82). Delta and Akwa -Ibom got the highest, N219.28b and N171.98b, respectively and this came because of derivation, being oil producing states while Osun received the least- N24.22b (National Bureau of Statistics, 2020: 82). This affirms the fact that Nigeria’s
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economy is monocultural and not being an oil producing state is almost tantamount to a poor state.
The poor Internally Generated Revenue (IGR) (for instance, only 20.2% of total revenue in 2018; check Central Bank of Nigeria, 2018) base of the states also questions the rationale behind the continued creation of states on the excuse of bringing about development as well as boosting a sense of belongingness and national integration. In contrast, the inability of these states to provide infrastructures has put ethnic based organisations and militia groups in a good position to woo people to their side. Hence, ethnicity and religion have become easy tools to challenge the poor performance of the states. The situation at the states also
‘justifies’ why political elites are more attracted to the presidency. They perceive power at the federal level is directly proportional to a better source of revenue. The case of weak revenue is not different in local governments.
Local governments that are the closest to the masses also had only 2.9% of their revenue coming from internal generation (Central Bank of Nigeria, 2018). PINWP 1 captured the situation in states and local governments as ‘gradually, we came to a situation whereby most of the states are just states by name because they cannot even exist without federal allocation’
(PINWP 1, January 2019). PICL 1, PICL 2, and PISEP agreed with PINWP 1 on this.
This view is supported by Abubakar (2005: 9) as most states and evidently, most local governments in Nigeria generate very low revenue internally, and this makes them financially unviable. This is further compounded by over-reliance on oil. The form Nigeria’s budget will look like at the federal, state, and even local government level is determined by the global oil market (Babalola and Okafor, 2019: 14).
Oil revenue is not invested into the productive sectors of the economy, or they are even diverted for personal use by public officials (Babalola and Okafor, 2019: 14). This challenge with diversification is why infrastructural development has eluded most parts of the country.
On the issue of corruption, this occurs at all levels of government. A recent case is the former chairman of the Pension Reform Task Team, Abdulrasheed Maina who has been tried and jailed for misappropriating funds under his supervision.
At the state level, a lot of former governors have been tried but convicting them of corruption has always been a herculean task. Although, some have been convicted recently, Joshua
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Dariye of Plateau and Jolly Nyame of Taraba. They have been granted state pardon with Nigerians questioning the rationale for the pardon. Even the Southern states that receive 13%
derivation are not better. The area is not developed as expected, considering the huge monthly allocation they receive.
PINEP submitted that:
When I went to the South South, I saw how people are suffering, with no pipe-borne water. Where is the 13% derivation? Where is the royalty? Where is the development levy from the multinational companies? Is it not the federal government that is responsible? You are given your share; you are given your 13% derivation. So, who is responsible for not developing the South-South? Ondo is part of the oil producing areas, which is South West, so who is responsible for not developing this place?
(PINEP, January 2019).
Babalola and Okafor (2019: 15-16) affirm that despite the huge amount that has been received by the Niger Delta regions, corruption has made it of little effect as there are poor basic social services there. If there are infrastructures and the youth are employed, there will not be militancy, and if the environment is well taken care of, there will be peace in the region. All these flaws have corruption as the root cause. For instance, former governors Lucky Igbinedion of Edo State, James Ibori of Delta State, and Diepreye Alamieyeseigha of Bayelsa State were all charged for corruption.
Over-reliance on oil is responsible for this revenue problem and therefore it is expedient to explore other resources that if well harnessed in the spirit of true federalism, will make all the states financially viable and development will receive a boost. The distribution of mineral resources and agricultural resources establishes the fact that every state in Nigeria has what it takes to be financially viable to discharge its responsibilities. That of agriculture may not pose any challenge as it falls under the concurrent list. However, the federal government should give states the space to explore their agricultural potentials without unhealthy federal hegemony. In addition, security has been a challenge to the sector. The incessant crises between farmers and herders might have discouraged some investors from investing in the sector.
The challenge that has made the solid mineral sector to not generate the expected revenue is because the federal government controls the sector. Hence, the states are less concerned about
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persuading the federal government to take the sector seriously. If resource control favours the oil and solid mineral producing states, such states will look inward and turn these products to correct the anomalies in their fiscal structure. However, the continued control of mineral resources has always pitched Niger Delta and Yoruba elites mostly against Northern elites.
The situation of these inter elites’ squabbles have been compounded by the double standard in the case of Zamfara’s control of its gold. Niger Delta elites feel relatively deprived on the ground that a president from the Northern elites’ block has favoured his constituency by making Zamfara enjoy the revenue from gold and sharing the oil from Niger Delta with other parts of the country. However, if every state is treated equally with respect to resource control, there will be fewer frictions. Hence, this would transform into development, poverty eradication and peace. If the poverty level is low, it will be difficult for political elites to manipulate the masses to involve in violence for the selfish interest of the former.