Revenue formula: Ending a cycle of injustice

WALE AKINSELURE writes on unending agitations for new revenue sharing formula cum fiscal federalism, bearing in mind the ongoing consultations with governors and other key stakeholders by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) chairman, Elias Mbam and his federal commissioners towards arriving at new revenue formula.

Over the years, there has been loud agitation for a review of the nation’s revenue allocation formula. The outcry has been wrapped in reverberating calls for fiscal federalism, restructuring and review of the 1999 Constitution. Governors, especially, have led the charge for increased revenue from the Federation Account to states, lamenting that the current structure negates the cardinal principles of federalism, as centre and states ought to exist in a coordinate arrangement. They also contend that the skewed system foists a lot of responsibilities upon states without corresponding funding. For instance, at point of implementing the current N30, 000 national minimum wage, governors threatened to back out of the agreement unless the Federal Government reviewed the existing revenue allocation formula. The existing unjust formula, according to observers, has become the go-to-excuse for governors for poor socioeconomic amenities like health care, educational facilities, infrastructure, inability to regularly pay salaries and failure to ensure adequate security of lives and property. Others contend that the structure has become a basis for state’s penchant for taking loans or grants, sale of bond and push for depletion of the Excess Crude Revenue Account.

But, the last time the formula was reviewed was in 1992, contrary to the provisions of the 1999 Constitution for a five-year exercise.  Sadly, the one in operation now came through an executive order invoked in 2002 by the then President Olusegun Obasanjo. Under it, as modified, the Federal Government takes 52.68 percent of federal allocation; states receive 26.72 percent while local Governments get 20.60 percent, with 13 percent derivation revenue going to the oil-producing states.

According to experts, the review is also necessary because the political structure of the country has since changed with the creation of six additional states in 1996, which brought the number of states to 36 with a corresponding increase of local governments from 589 to 774. Therefore, since the last review done 29 years ago, various stakeholders have offered propositions on what they consider as an acceptable formula in tandem with fiscal federalism, coupled with contemporary realities. This advocacy notwithstanding, various attempts at review have not been followed through to the letter. This time, the authorities are promising a paradigm shift. The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC), the agency with the statutory power to carry out such assignment, has stepped up efforts towards the goal, with the chairman of the commission, Engineer Elias Mbam setting a December 2021 date to come up with a new formula that will be deemed fair, just and equitable.

Part 1, paragraph 32 of the Third Schedule of the 1999 Constitution empowers the RMAFC to “review, from time to time the revenue allocation formulae and principles in operation to ensure conformity with changing realities, provided that any revenue formula which had been accepted by an Act of the National Assembly shall remain in force for a period of not less than five years from the date of commencement of the Act.” In line with this mandate, the commission has been moving from state to state to engage with various stakeholders with a view to collating memoranda, inputs before arriving a formula to be presented to President Muhammadu Buhari. Speaking on the ongoing review, the RMAFC boss pointed out that the current review focuses only on the vertical allocation, which covers allocation to the federal, states and local governments and does not imply reduction in the costs of governance. He explained that the review is simply to look at the responsibilities of each tier of government and what percentage of the federation revenue would be appropriate for the type of responsibility that each tier of government has. “Because of what we have learnt from the past, we have decided that we will first handle the vertical revenue allocation formula, which is revenue sharing between Federal, States and Local governments, not sharing among states or local governments, which would come as the second phase of this review. This is going to be less controversial, and we will achieve our goals.”

An unending journey

Formal Revenue Allocation started in Nigeria in 1946, when the regional governments were granted internal autonomy by the Richards Constitution which also shared responsibilities between the Regions and the Federal Government. Since 1946 when the first seed of federalism was sown in the country, all major constitutional changes and/or changes in administration have been associated with attempts to modify or change the revenue sharing rights of the different tiers of government. Prior to the establishment of RMAFC as a permanent body to handle issues of revenue allocation and fiscal matters on continuous basis, various commissions and committees were set up by different regimes at the federal level to handle these issues on temporary basis. As further constitutional changes were taking place, a number of ad-hoc fiscal commissions were subsequently appointed to recommend acceptable formulae in conformity with the changes at that time. There was the Philipson Commission (1946), which recommended three principles: derivation, even progress and population. The Northern Region was allotted 46 percent; Western Region, 30 percent and  Eastern Region, 24 percent. The Hicks commission of 1951 introduced some general principles, namely Independent Revenue, Derivation, Need and National Interest. Then Chicks Commission of 1953 which applied mainly the principle of Derivation, while recommending 50 percent of Revenue from certain items to the Federal Government; the remaining 50 percent was to be allocated to the Regions. The Raisman Commission Report of 1958 brought about the creation of a Distributable Pool Account into which should be paid 30 percent revenue from mining rents and royalties, imports other than duties on tobacco, motor spirits (including diesel oil), beer, wine and potable spirits. What went to the Distributable Pool Account was shared among the Regions using the general principles of continuity of government service, minimum responsibilities, population and balanced development as follows: Northern Region, 40 percent; Western Region, 24 percent; Eastern Region, 31 percent; Southern Region, 5 percent.

The Binns Commission Report of 1964 recommended a decrease of the percentage share of the Central Government. Revenue ¡n the Distributable Pool Account was to be allocated among the regions on the principle of “financial comparability ‘using the following formula: Northern Region, 42 percent; Eastern Region, 30 percent; Western Region, 20 percent; Mid-Western Region, 8 percent. The Dina Interim Revenue Allocation Review Committee Report of 1968 recommended that the Distributable Pool Account should be renamed State Joint Account and that there should be established a Special Grants Account; and a Permanent Planning and Fiscal Commission to administer the Special Grant Account, and also to study and review the Revenue Allocation Formula. The Dina Committee’s Report was rejected on the grounds that its range went beyond the mood of the Military Government of that time. Then came the Aboyade Technical Committee Report of 1977 which recommended formula for vertical allocation thus: Federal Government, 57 percent; state government, 30 percent; local government, 10 percent; Special Grants Account, 3 percent. The Aboyade report was rejected because it was considered too technical. In 1980, the Okigbo Commission recommended vertical revenue allocation thus: Federal Government, 53 percent; state Government, 30 percent; Local Government, 10percent; Special Funds, 7 percent. Suffice it to say that there have been also been various military decrees and memos (revisions), particularly 1970, 1971, 1992 and 2004. It is worthy of note that all the Commissions/Committees listed were Ad-hoc in nature as they were dissolved on completion of their respective assignments except for the RMAFC established by Decree No. 49 of 1989 and later amended by Decree 98 of 1993 (now RMAFC Act CAP R7 LFN 2004) under Section 153(1) of the 1999 Constitution of the Federal Republic of Nigeria (as amended), as a body created to handle revenue allocation and fiscal matters on a continuous basis.

Contentions overtime and the governors’ push

The politics of revenue allocation has been contentious overtime. In 2006, when a special committee headed by House Leader, Abdul Ningi undertook public hearings across the six geopolitical zones, there were heated debates. At the inauguration was the then Chairman of RMAFC, Engineer Hamman Tukur and the then Minister of Federal Capital Territory (FCT), Mallam Nasir el-Rufai, who was there to present the Federal government’s perspectives on the proposal, there were already some levels of misconception arising from arguments at the inauguration. For instance while the Chairman of RMAFC restated the need for Special Funds to address the need of the constituent units under the custody of Federal Government for joint administration by stakeholders, el-Rufai said it is needless the argument for the creation of ‘parallel bodies on fiscal issue.’

One of the most contentious issues that the 2014 National Conference grappled with was fiscal federalism: the assignment of revenue collection/taxing and spending powers between and among the federal and state governments. This includes include the revenue allocation formula and the so-called “resource control” question.

Meanwhile, central in the several propositions on review of the current formula have been the need to increase in the percentages allocated to states and local governments. The much-talked about 2014 Confab report recommended a ratio of 42.5 percent to the centre; 35 percent (states)  and 22.5 percent allocation to local governments.

The governors have been irresolute in their calls for more revenue to be allocated to states and local governments. A committee of the Nigeria Governors Forum (NGF) set up in 2011, headed by the then governor of Lagos State, Mr Babatunde Fashola, recommended that the Federal Government should now get 35 per cent; states should get 42 per cent and local government should get 23 per cent. Till now, governors still favour a review where states get between 35 and 50 percent. Upon the visit of the various RMAFC federal commissioners, during the ongoing interactions, governors have demanded an increase in allocation to states and local governments for them to live up to their responsibilities. They argue that these two tiers of government are closest to the people. On his part, Governor Babagana Zulum of Borno State and Nyesom Wike of Rivers insisted on a formula that will make more money available to states for development. Gombe State governor, InuwaYahaya demanded an upward review of statutory allocations to states and local governments in the country to enable them meet the ever-increasing challenges of social, economic, human and infrastructural developments. He regretted that the state does not receive revenue from its large gas reserve, and VAT from international oil companies (IOCs) operating in the state. Governor Ifeanyi Okowa of Delta argued that the current arrangement where the centre gets the lion share of the country’s revenues would not bring about the development states yearn for. The Oyo State government, through its Commissioner of Finance, Mr Akinola Ojo disclosed the state’s proposal for the new formula as federal government, 35 percent; the state government 35 percent; local government, 30 percent while 10 percent derivative revenue should go to the oil producing states.

He noted that the state’s proposal will help address infrastructural gap across the country and attend to the demands of Nigerians for better life.

Advocating a review of the current federal structure, Governor Rotimi Akeredolu of Ondo state, said, “The National Assembly must, as part of its patriotic assignment, repeal many laws establishing many agencies whose functions overlap or appear to compete with those of the states of the Federation. Our legislators must stop appropriating funds for the sustenance of moribund agencies of the Federal Government. There are too many of them. They should reduce, considerably, the number of items on the Exclusive List and increase those on the Residual List for proper devolution of powers.”

Speaking recently on the imperativeness of fiscal federalism, Governor Seyi Makinde demanded that federating units be given power to control natural resources and power to control their state security architecture.

Still a long journey!

As the RMAFC continues the process of coming up with a new revenue formula, there are those who wonder whether there is indeed enough justification for increased revenue to the states. There are those who question the extent to which the states have optimized the resources they have got so far. Speaking during one of the sensitizations across the country, Oyo Federal Commissioner, RMFAC, Mr Bimbo Kolade stressed that the state and local government must provide justification for their calls for increased allocation. Ideally, under a federation, each tier of government (federal, provincial/state, and district/local) should have assigned taxing powers to raise enough revenue to conduct its operations – administration and provision of public services – and no government should rely on another government for a significant portion of its revenue. However, the problem with Nigeria’s federalism is that most states governments and local governments rely heavily on revenue allocated from the federation account, with only a few state governments doing enough to improve their Internally Generated Revenue (IGR) to reduce reliance on the federal government. Indeed, there have been calls on government to review its day to day government expenditure (recurrent and capital) so as to reduce the cost of governance. Governments at all levels have been charged on the need to scale down on unnecessary expenditure and to monitor expenses on developmental projects that would impact positively on the lives of the citizenry.

In Nigeria, the cost of governance over the years has been very high and alarming and therefore unsustainable as recurrent expenditure continues to significantly exceed capital expenditure. This problem has continued to generate public concern and national discourse because of the negative implication on investment, industrial expansion, infrastructural development and growth of the real sectors of the economy. Amid the agitations for revenue formula review, the journey towards a new revenue allocation formula is still quite a long one. Moreover, the ongoing sensitization and interaction with various stakeholders across the country by RMAFC is one of about five stages towards the evolution of a new revenue sharing formula. After the ongoing interactions, data and resources will be collected from states for RMAFC to collate before coming up with a formula that will be submitted to the President. Upon the President receiving the formula from RMAFC, he will then transmit it to the National Assembly which will hold its own round of debates, stages of reading which may include public hearings, before it becomes an Act of Parliament.

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