Revenue allocation formula: Feeding the wrong cows

With the inauguration of a committee to review of the existing revenue allocation formula for the country, KUNLE ODEREMI writes on the challenges and other major issues involved in the assignment.

THE few years before Nigeria freed itself from the shackles of British colonialism in 1960 till the first misadventure of the military into political power in 1966 have remained a watershed in the annals of the federation. The period was a turning point because of the accelerated pace of development and signs of prosperity that were in the horizon.

Nigerians are nostalgic about how the policy of fiscal federalism translated into a healthy competition among the initial three regions with manifest steady geometric leap in human capital development, infrastructure, public utilities and general economic boom. The magic wand was partly because of the fiscal federalism, coupled with the ingenuity of the political leadership, which especially turned the Western Region as a model and showpiece to the world.

A convoluted resource control foisted on the country has since created a quagmire in all fronts. Records showed that even as far back 1946, successive efforts to change the revenue sharing rights of the different tiers of government t formed part of all major constitutional changes and/or changes with about nine fiscal commissions appointed at different times to examine Nigeria revenue sharing arrangements between 1948 and 1988. The list included the Philipson Commission in 1948; Hicks (1952), Chick (1954), Raisman (1959), Binns (1964), Dina (1968), Aboyade (1977), Okigbo (1979) and Danjuma (1988) commissions.

Until the military struck in January 1966, each of the region had its own constitution. The regions also exercised vast powers over the resources within their individual territories, as the constitutions of the federation decentralized functions. While the Exclusive list spelt out the limits of the central administration, the Concurrent list defined the functions for the federal and the state governments, even as states had their other statutory powers contained in the Residual list. According to records, before 1959, the regional governments had rights to 100 per cent of mining rents and royalties.

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But following the Raisman Commission in 1959, the revenue from mining rents and royalties began to be based on mineral regions enjoying 50 per cent of the income with 20 per cent for the centre. Another innocuous development was witnessed in 1994 on sales tax that states (or regions) hitherto had 100 per cent right, as it was replaced by Value Added Tax (VAT) with only the federal government empowered to collect it. Today, it appropriates 35 per cent of the revenue accruing from VAT.

These are just snippets of the inherent lack equitable, fair and just allocation formula which many have described as akin to brazen robbery in some cases and robbing Peter to pay Paul in another instance. The iniquity has led to various agitations by various interests in the Nigerian project.

It has also created a phenomenon a former deputy Governor of the Central Bank of Nigeria, Dr Obadiah Mailafia, perceived as the desperation of the power elite to share the cake instead trying to bake it. “I think it’s sad that nobody is proposing ideas on how to bake a bigger national cake. The obsession is, rather, on how they will share an ever diminishing cake. The real issue, in my opinion, should be on how to grow the economy so as to boost long-term revenues. The revenue allocation formula is a second-order issue,” he said.

However, other concerned personalities and groups believe the issue of revenue allocation is far deeper than the mere baking of the cake. They say it more about the existing crooked system that deprives the federating units to explore their endowments based on the principles of federalism.

Economic areas which states should have powers and control have been usurped by the Federal Government thereby making the states to look unviable since they had to go cap in hand to the centre for federal allocations.  For example, the NBS in its report on the Internally Generated Revenue report for 2018, the agency stated that the 36 states and the Federal Capital Territory generated a total of N1.16trillion.

A further analysis of the figure showed that Lagos State, with total revenue of N382.18bn generated, led the IGR collection table. This was followed by Rivers and Ogun states with N112.78bn and N84.55bn respectively in 2018. The FCT followed with IGR of N65.51bn while Delta and Kano had N58.43bn and N44.1bn respectively. The report stated that Kaduna generated N29.4bn; Edo, N28.45bn; Oyo, N24.67bn; Enugu, N22.15bn; and Akwa-Ibom, N24.21bn; Kwara had N23.04bn; Ondo, N24.78bn; Anambra, N19.3bn; Imo, N14.88bn; Abia, N14.83bn;  Bayelsa, N13.63bn; and Plateau, N12.72bn. Similarly, Benue had IGR of N11.21bn, Sokoto, N18.76bn; Kogi, N11.33bn; Niger, N10.43bn; Jigawa, N9.24bn; Osun, N10.38bn; Bauchi, N9.69bn; Nassarawa, N7.56bn; Katsina, N6.96bn;  Adamawa, N6.2bn; Borno, N6.52bn; Ekiti, N6.46bn; Zamfara, N8.2bn; and Taraba  N5.96bn. The others are Ebonyi, N6.14bn; Gombe, N7.34bn;  Kebbi, N4.88bn; and Yobe, N4.38bn. Lagos, Rivers , Ogun , Abuja and Delta were the states with the highest IGR generating N87.1 billion, N22.9 billion,N20.5 billion,N14.1 billion,N13.1 billion respectively. While states with the least IGR includes Kebbi, Ekiti, Gombe,Yobe and Ebonyi with N1.1 billion, N1.2 billion, N1.26 billion, N1.26 billion and N1.3 billion respectively.

None of the 36 states of the federation could fund their budgets from total revenue received in 2018, the Nigerian Extractive Industries Transparency Initiative (NEITI) has reported. The transparency agency said the total revenues received by the states for the 2018 was about N3.95 trillion and that the gap between total revenues and budgets among the states was between N28 billion and N1.2 trillion.

According to the agency, the revenues received by the states against their internally generated revenues (IGRs), Federation Accounts and Allocation Committee (FAAC) receipts and the implications on their budgets for the year under review showed that  while Enugu State’s budget recorded the least deficit, the Cross River State’s N1.3 trillion ‘Budget of Kinetic Crystallisation’ recorded the highest deficit.

It added that total revenues to all the states came from federal allocations, as well as IGR, with the revenue receipts showing that out of the N3.9 trillion collected by states in the year, about N2.8 trillion was federal allocations, while N1.1 trillion was from IGR by the states.

The serious challenges posed by the absence of fiscal federalism are further underscored by the seeming inertia of states on economic areas that can shore up their revenues. In the same period, Lagos State had the highest revenue receipts of N501 billion. Osun had the lowest (N33 billion).

The review showed that Lagos State’s revenue was higher than Osun State’s by over 1,518 per cent.  According to NEITI, which did an analysis on the IGR of the six geo-political zones, the South-South zone had the highest combined revenue of N1.1 trillion, followed by the South-West zone (N887.8billion) and the North-West (N546.5 billion).

The North-Central was fourth (N378.7billion), then the North-East and the South-East zones with N351.5 billion and N340.1 billion, respectively. According to NEITI report showed that only four states received revenues above N50 billion.

The states are Delta, Lagos, Ogun and Rivers. However, a total of 13 states: Adamawa, Bauchi, Borno, Ebonyi, Ekiti, Gombe, Jigawa, Katsina, Kebbi, Nasarawa, Taraba, Yobe, and Zamfara generated an abysmally low IGR (below N10 billion) each. Also, 11 states: Abia, Anambra, Bayelsa, Benue, Cross River, Imo, Kogi, Niger, Osun, Plateau, and Sokoto States generated between N10 billion and N20 billion, while eight states, including Akwa Ibom, Edo, Enugu, Kaduna, Kano, Kwara, Ondo and Oyo, recorded between N20 billion and N50 billion. The NEITI publication said apart from Lagos and Ogun, all other states have continued to depend on “FAAC disbursements,” to the neglect of their IGR. Ironically, many of such states that look incapacitated in generating IGR have accumulated humongous debts. The lucre called federal allocation seems to be blindfolding them, while they are sitting on goldmines. The overall debt profile of the states jumped from the 2014 level of N2.13 trillion to 2017 level of N4.49 trillion. With the new national minimum wage of N30, 000 per worker, the trend can only get worse.

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The chairman, Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), Elias Mbam, who recently inaugurated the chairmen and members of the commission’s standing committees with Mr Philip Ajayi Amujo from Ekiti State as the chairman, Revenue Allocation Formula Committee, restated the mandate of the RMAFC to include the power to monitor the accruals to and disbursement of revenue from the Federation Account; review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity to changing realities, as well as  to advise the government at all levels on fiscal efficiency and methods by which their revenue can be increased; and Determine remunerations appropriate for Political/Public Office Holders. The 12 committees are the indices and Disbursement Committee, Federal Allocation Account Committee, Crude Oil Monitoring Committee, Inland Revenue Monitoring Committee and the Revenue Allocation Formula Committee, as well as the committees on Customs Revenue Monitoring, Solid Minerals Monitoring, Remuneration and Monetisation, Fiscal Efficiency and Budget, Mobilisation and Diversification as well as investment committee.

President Muhammadu Buhari has also made public his expectations from the RMAFC boss, including advising the federal, state and local governments on fiscal efficiency and methods by which their revenue is to be increased; determine remunerations appropriate for political/public office holders; make recommendations and submit findings by a report thereto to the government of the Federation or of the State, as the case may be, regarding the formula for the distribution of the Federation Accounts and the Local Government Accounts; and discharge such other functions as may be conferred on the Commission by Constitution or any other Act of the National Assembly it is also to advise on areas to be concentrated more on expanding the sources of revenue to the Federation Account and other non-oil sources including solid mineral; use all legal ways and means to strengthen its monitoring mechanism and block leakages of revenue from the Federations Account.  Buhari equally advised that the commission must be fair and just to the three tiers and arms of government without compromising its core mandate.

The sensitive nature of the issue of revenue allocation played out during the 2014 National Conference held in Abuja, as the more than 400 delegates could not arrive at a consensus on the matter. The conference had to leave the final decision on the issue to the executive arm of government. However, the conference Committee on Devolution of Powers, which was chaired by a former governor Akwa Ibom State, Chief Victor Attah, had proposed a new revenue allocation formula of 42.5 per cent for the federal government, states 35 per cent and local governments 22.5 per cent. It was even projected that the allocation to states could rise to 57.5 per cent if the Committee on Political Restructuring and Forms of Government sanctioned the scrapping of the local government as the third tier of government. “I will like to tell you that it was not just a consensual agreement but unanimous by the entire committee,” Attah had said about his committee’s recommendation.

Whatever might be the outcome of the exercise will be subject to the scrutiny of the National Assembly. Meanwhile, some observers say the ongoing effort at reviewing the revenue allocation formula appears cosmetic against the backdrop sustained clamour for the restructuring of the country, as it cannot cure the disease that had inflicted the nation. Their position is that the authorities should muster the political will to go back to the pre-independence Constitution that guaranteed a coordinate relationship between the centre and the federating units.

In the opinion of the leaders of the Middle Belt Forum (MBF), it is imperative to restructure the country so it can be rescued from “a slide into chaos. “We are resolutely of the view that the current federal structure is unbalanced, unfair, over-centralized and therefore unstable. Accordingly, we firmly support the demand to re-structure the federation, together with appropriate devolution of powers to the federating units and a new revenue allocation formula to capture the new realities,” the leaders through Mr. John Dara, the national secretary of the MBF.

Similarly, the Afenifere Renewal Group (ARG) believed that a new revenue formula that is based on equity, fairness and justice will tempered all frayed nerves in the country. In a proposal to the RMAFC by ARG national chairman, Honurable Olawale Oshun, the general restiveness across the land could have been avoided if revenue sharing formula and other fiscal policies had been genuinely and proactively managed to address the nation’s plurality. He objected to the centre getting the lion share of the federal allocation.

“There are about 193,000 kilometres or roads in Nigeria, of which only 34,000 kilometres are federal roads. The larger burden of road maintenance falls on states. There are about 1,000 secondary schools in Lagos State, out of which about 10 belongs to Federal Government. Again, we can see that the need is at state levels. The same can be said for health facilities.

“So, Federal Government’s allocation must be reduced and some of its responsibilities must devolve to states, whose percentage allocation must be increased to allow for purposeful governance,” the group said.

Therefore, the ARG proposed a sharing ratio of 35:65 between Federal Government and states, adding that local governments should subsume entirely under state governments based on the principle of federalism. The group also recommended that derivation be increased from 13 per cent to 25 per cent and argued that derivation principle should also be applied to the sharing of other taxes like VAT and others.

According to K I Ebienfa, I Kumokou, in his piece, oil economy and the revenue allocation debacle in Nigeria, equitable revenue allocation in Nigeria is one perennial problem which has not only defied all past attempts at permanent solution, but has equally evoked high emotions on the part of all stakeholders. He identified the shift from agricultural products to crude oil as the main source of national revenue, and the attendant relegation of the principle of derivation in revenue allocation, is the root cause of the revenue allocation debacle in Nigerian federalism. Coupled with it, he said was the emphasis on revenue sharing rather than revenue generation is the root cause of political, economic and social decay in the country and has equally led to the proliferation of unviable state and local governments.

Other experts, who dissected the path Nigeria had refused to take on revenue matters over the years said the earlier Nigeria had an equitable fiscal formula the better for the country. For instance, in their reflection on the National Political Reform Conference of 2006, Chibueze C. Ikeji, Utulu Paul Benedict, Edem Ebong and Theophilus Oyime Adejumo bemoaned the politics of revenue allocation that many claimed had often kept the country on the edge. Similarly, Asadu Ikechukwu of the Department of Public Administration and Local Government and Nwofia Johnson Emeka, Social Sciences Unit, School of General Studies, both of the University of Nigeria, Nsukka asserted that the imbalances in Nigeria’s federalism constituted a constant source of conflict in politics.

“The dissatisfaction among the federating units underlies an unending search for an acceptable revenue sharing formula contention. The problem identified is that the current formula gives more revenue to the Federal Government rather than to the state and local governments that have greater base and responsibilities for the provision of social welfare to the people. The arrangement stifles the sub national governments’ ability to provide social welfare and accomplish other statutory responsibilities, aggravates crises of relative deprivation, accentuates corruption and intensifies ethnic politics…..The country, therefore, needs to allocate more revenue to the sub-national governments in order to encourage an integrative, bottom-up, people-oriented development; and that the vertical revenue allocation formula be restructured in the following proportions: federal 35 per cent; state 40 per cent; local government 25 per cent. Moreover, derivation principle should be given primacy in horizontal allocation formula to encourage competition among the tiers of government,” they argued.

Though the view among most experts, including scholars, is that only the centre and states make up the federation, stakeholders at the local government level are insisting on the sanctity of the existing political structure and architecture. Acting under the platform of the Association of Local Governments of Nigeria, council chairmen across the 774 local government areas are advocating 35 per cent as against the current figure of 20.6 per cent the federal allocation to the local government. They kicked against the 23 per cent proposed by governors, who, their part, want 42 per cent as against their current 26.72 per cent, so that the centre will only be entitled to 37 per cent and the local governments’ share be increased from 20.60 per cent to 23 per cent.

In justifying their demand, the national president of Association of Local Governments of Nigeria (ALGON), Mr Alabi David, said the 35 per cent demand was informed by the quantum of responsibilities of the councils as the closest level of government to the people.

He said: “The model that we are using at the moment is the top-bottom system and that is why development is not going round the whole of the country. So, if we adopt the bottom-top approach, we would have a lot of development at the grass roots level and we are not asking for too much. If it is a minimum of 35 per cent that comes to the councils, then we are going to have meaningful development in Nigeria. I can assure you that we can tackle insecurity from the local government level in collaboration with major stakeholders. The councils are critical stakeholders to work with in order to solve security challenges facing Nigeria. They are not just critical stakeholders but also a major one in Nigeria.” Other stakeholders in the system such as the president of the Trade Union Congress (TUC), Quadri Olaleye, acquiesced to the necessity to have a formula that equitable and just in place. Because the ‘present sharing formula renders the state and the local government financially impotent and by extension, it takes the impact of governance away from the people at the grassroots. Because if this imbalance, the councils cannot execute any meaningful project for the good of the people; this must change for the people to feel the impact of the government they voted to power.”

But can the issue of revenue allocation be treated in isolation considering the calls for the full restoration of true ideals federation? How do authorities plan to go beyond the setting up of standing committees to guarantee that popular wish of the people is sacrosanct on the expected new formula? Will both the leadership of the National Assembly and the executive arm of government synergy on the assignment since it has a direct correlation with their earnings? Will local government still be constitutionally guaranteed its status as a third leg of the federation? How much premium will be placed on land mass, population, derivation principle, volume of contribution and the whims and caprices of the power-that-be in arriving at an equitable, just and fair formula?

An Enugu-based legal practitioner, Honurable John Nwobido, flays the existing sharing formula, saying it “is skewed in favour of the Federal Government to the detriment of states and local government areas.”

“The current formula of 52.68 per cent, 26.72 per cent and 20.06 per cent to the federal, states and local governments is clearly disproportionate and does not take into cognizance, the ever-increasing needs of the states,” he said.

The one-time chairman of Inter Party Advisory Council (IPAC) in the state noted that “the latest moves by RMAFC to review the sharing formal is commendable and I advocate increase allocations to states and local governments in ratio of 50 per cent to states, 30 percent to Federal Government and 20 per cent to local government areas. It would enable the states to deliver qualitative governance.

—Additional report by JUDE OSSAI.