REVENUE ALLOCATION IN NIGERIA. What is revenue allocation?
Revenue allocation refers to the sharing of the nation’s wealth between the component parts of the nation, that is, between the federal, state and local governments.
revenue allocation in Nigeria and its various panel since independence
Revenue allocation is grouped into two major parts.
These are:
Vertical revenue allocation: This involves the sharing of the revenue accruing to the federal account among the three tiers of government – federal, state and local governments.
Horizontal revenue allocation: This refers to the sharing of revenue accruing to the federation accounts among the units within a given level of government.
It involves certain principles based on some factors to be applied in revenue allocation. These principles include population size, land mass, derivation, ecological problems, etc.
REVENUE ALLOCATION IN NIGERIA. What is revenue allocation? Revenue allocation refers to the sharing of the nation’s wealth between the component parts of the nation,
that is, between the federal, state and local governments. revenue allocation in Nigeria and their various panel since independence
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It also involves the formula which refers to the system of relative weight assigned to various principles, e.g.
federal government – 40%, state -20%, local government -15%, mineral producing area -10%, ecological problems -5%, special fund -5%, others -7%. , These are just tentative figures.
The revenue allocation formula used in 1992 by the government from the federation account includes:
Federal government’s share = 8.5%
State government’s share = 24%
Local government’s share = 20%
Ecological problems = 2%
Mineral production areas = 3%
Special fund = 7.5%
Others = 2.5%
It should be noted that there is no fixed revenue allocation. It changes from time to time.
The Revenue Mobilization Allocation and Fiscal Commission (RMAFC) is always at work trying to work out a proposal for a new revenue-sharing formula.
For example, the oil-producing states are currently getting 13% oil derivation from the federation account.
As of July 2005 during the Political Reform Conference, the oil-producing states agitated for 25% of the federation account and if this is approved by the National Assembly, the entire formula will be changed. The government offered them only 17%.
revenue allocation in Nigeria and their various panel since independence
Nigeria has one federal government, 36 state governments (excluding the Federal Capital Territory, Abuja, which is run like a state on its own right) and over 760 local governments.
Revenue allocation problems in the country seem to worsen as the number of governments competing for centrally-collected revenue in the country increases.
The problems actually began in 1914 when the northern and southern protectorates of Nigeria were amalgamated
Before then, the South was fiscally self-reliant from duties on spirits, while the North received imperial grants annually.
The fiscal union became necessary for two main reasons. First, both protectorates had fiscal years beginning at different times of the year. Secondly, trade between them was not free.
The amalgamation immediately introduced a problem by transferring customs duties to the central government, thereby causing a lot of suffering to the southern provinces that relied almost completely on such duties for their revenue.
However, the problem was not a | serious one. To ensure a balance in the aggregate budget of the Central, Northern and Southern governments, all expenditures were met from a general revenue fund into which all revenue was collected.
Between the 1926/27 and 1948/49 fiscal years, the estimate of revenue and expenditure by all the governments was fully unified.
More serious revenue allocation problems arose in 1939 when the South was divided into the Eastern and Western Provinces.
The North and West felt irked that the East contributed the least to the central pool but claimed the most from it.
In 1949, separate budgets were again introduced for the four governments, causing further problems. A revenue allocation commission had to be appointed to resolve the situation.
The commission recommended that allocation to each region should be based on that region’s contribution to the central pool, but that backward areas be given special attention.
This did not help the situation, as the East and West felt that both factors unduly favoured the North.
Meanwhile, customs duties were distributed according to contribution to the central pool. Dissatisfied with all this, the East introduced a personal income tax in 1955/56 to boost its revenue.
1963, the Mid-West was created as the fourth region of Nigeria and a twelve-state structure came into effect in 1967.
In 1976, the number of states was increased to nineteen and, in 1987, to twenty-one, to thirty in 1991 and to thirty-six in 1995. These further divisions only complicated the revenue allocation even more.
Revenue allocation commissions and panels in Nigeria.
A number of ad hoc revenue allocation commissions and panels were set up to look into the problems arising from revenue allocation in Nigeria. We shall now briefly examine these commissions:
- The Phillipson Commission
- Hicks-Phillipson Commission
- Chick Commission
- Raisman Commission
- BinnsCommission
- Dina Committee
- Aboyade Committee
- Okigbo Commission
The Phillipson Commission (1946)
This was the first of the fiscal commissions in Nigeria. It divided regional revenue into declared and non-declared revenue.
Declared revenue was raised and kept by the regions. Non-declared revenue, solely determined by the central government, was from the central pool.
Although the non-declared revenue of a region was to depend on the three factors of population, even progress and derivation, only derivation was actually used, due to lack of statistics.
On the basis of this derivation principle, the distribution of total non-declared revenues was found to be as follows: East 38%, North 36%, and West 26%.
Hicks-Phillipson Commission (1951)
The Phillipson formula of 1946 was found inadequate when the Macpherson Constitution of 1951 was introduced. The Hicks-Phillipson Commission was therefore appointed.
The commission proposed a revenue allocation formula based on need, derivation, and national interest.
This soon broke down because the West favoured the derivation principle, the North the principle of need, while the East preferred the national interest principle.
No two of the regions ever agreed on which principles to be applied.
Chick Commission (1953)
This commission recommended the splitting of the central marketing board into regional marketing boards, which was done in 1954.
Its report also led to the allocation of 50% of customs and excise duties, 100% of import duties on motor spirits and 100% of personal income tax, mining rents and royalties, to their regions of origin.
Raisman Commission (1958)
The most important recommendation of this commission was the creation of a Distributable Pool Account for sharing among all the regions on a given set of principles.
Payment into this account was from 30% of mining rents and royalties and 30% of all import duties except those on tobacco, wine, beer, spirits, motor spirits and diesel oil.
Allocation from federal revenue to the regions, under this commission’s recommendations, was based on need and derivation.
Binns Commission (1964)
The major achievement of this commission was to raise the Distributable Pool Account to 35% of revenue from mining rents and royalties, and 35% of import duties.
Secondly, the commission shared the account in the ration North 42%, East 30%, West 20%, and Mid-West 8%, The military came to power in 1966 and suspended the recommendations of this committee. Decree No. 15 of 1967 was concerned, however; with revenue allocation.
Dina Committee (1968)
This committee recommended the change of the Distributive Pool Account into the States joint account, established a Grants Account, and reduced the importance of the derivation principle.
The Federal Military Government rejected all the recommendations of this committee. Up to 1977, three main decrees were used to allocate revenue.
Aboyade Committee (1977)
This committee recommended a Federation Account into which all centrally collected revenue would be paid. It was to be distributed among the Federal, State and Local governments in the ration 60:30:10.
The committee also created a special Grants Account for mineral producing states and areas struck by natural disasters and emergencies.
proposals were submitted to the Constituent Assembly which rejected them outright, after a series of politically biased debates.
Okigbo Commission (1979)
This commission recommended that the Federation Account be shared between the Federal, State and Local governments in the ratio 53:30:10 and that 7% of the total revenue be set aside for special funds.
It also recommended the creation of a States Joint Account.
These recommendations were amended or rejected by the Federal Cabinet, the House of Representatives and the Senate in turn.
In the end, however, the Senate’s formula of 58,5% Federal Government, 31.5% to the State Government and 10% to the Local Government was adopted. This was the formula used until the military returned to power on 31 December, 1983.
Thus we see that revenue allocation problems in Nigeria have not been easy to solve. Indeed, a number of them still remain unsolved.
Revenue allocation practice in Nigeria
In practice, Nigeria has seen a number of administrations, who have adopted various formulae to allocate the centrally-collected revenue among its various governments.
During the first republic, when there were the Northern, Eastern, Western and Mid-Western regions, the centrally-controlled revenue was distributed to the regions respectively in the ratio 42:30:20:8.
These figures were arrived at on the basis of the factors of population, financial need, contribution to revenue, and balanced development.
This formula was still maintained immediately after the creation of a twelve-state federation in 1967, the allocation to a region simply being shared out among the states carved out of it.
The Gowon administration soon got dissatisfied with this arrangement and appointed the Dina Committee of 1968, whose recommendations were rejected.
In 1970, a decree (No. 13) was promulgated which took retrospective effect from April 1969.
This decree altered the revenue allocation formula by toning down the all-powerful derivation principle and introducing measures of fiscal equalization among the states.
On 29 July, 1975, Gowon was overthrown and Brigadier (Later General) Murtala Mohammed came to power. The Murtala government rejected the formula in use under Gowon and introduced a new one.
The Murtala formula reserved 75% of all centrally- controlled revenue for the Federal government, while the twelve states were to share 22%. The remaining 3% was shared by the country’s local governments.
On 13 February 1976 General Murtala Mohammed was assassinated in an abortive coup d’état and the mantle of government fell on Lt. General Olusegun Obasanjo.
In 1977, the Obasanjo government, pursuing its programme of transition to civil rule in the country, again appointed a technical revenue allocation committee headed by Ojetunji Aboyade, a distinguished Nigerian professor of Economics.
The report of the committee was submitted to the then Constituent Assembly, where it suffered extreme politicization and, finally, outright rejection.
On 1 October 1979, Obasanjo handed over the reins of government to Alhaji Shehu Shagari, who became the first Executive President of Nigeria.
It was to the Shagari administration that the Okigbo Revenue Allocation Committee of 1979 submitted its report in 1980.
The formula prescribed by the committee was altered by the executive arm of government before it was presented to National Assembly. At the National Assembly, the House of Representatives amended it further.
Later, the Senate rejected the formula recommended by the House of Representatives and recommended its own, which became very controversial.
In the end, a joint committee of the House of Representatives and Senate approved the Senate formula by 12 to 11 votes.
The Senate formula, which was therefore in use all through the Shagari era reserved 58.5% of centrally-collected revenue for the Federal government, 31.5% for the states and 10% for the local governments.
On 31 December 1983, the military intervened again. This time, the new government was led by Major-General Muhammad Buhari.
As was to be expected, the Buhari government threw out the Shagari formula and introduced its own, under which the allocations to the Federal governments were to be 55% 32.5% and 10% respectively.
2.5% of all centrally-controlled revenue was reserved for ecological problems and mineral-producing areas.
The Buhari era ended on 27 August 1985 and Major General Ibrahim Badamosi Babangida emerged as the new head of state. Under him, the Buhari formula of revenue allocation was retained.
However, the Political Bureau, appointed in 1986 and headed by Dr S.J Cookey, submitted its report to the Babangida government in 1987.
It recommended a new revenue allocation formula under which the Federal, State and Local governments would share the centrally-collected revenue in the ratio of 40:40:20.
This recommendation was not rejected.
It is in fact possible that it will become operational in the near future.
Obstacles to effective revenue allocation in Nigeria
Two major obstacles confront effective revenue allocation in Nigeria. These factors are:
- The politicization of the problem and
- Lack of statistical information
Politicization
We have seen that many ad hoc commissions on revenue allocation have come and gone in Nigeria since 1946. They often made useful and workable recommendations.
Yet, these were either totally rejected or grudgingly accepted. The main reason for this is the undue attention given to political considerations.
Each section of the country wants the largest share of the ‘national cake’ and will take every conceivable measure to bring this about.
This explains why during the debates on the Okigbo Committee recommendations in the National Assembly, for instance,
legislators from the northern states argued vehemently that land mass should be used as a revenue allocation factor while their counterparts from the southern states especially the eastern states, insisted on the derivation principle.
Worse still, two governors from the eastern states were soon in a heated argument over which of their states ranked higher in mineral production.
Such is the obstacle to the politicization of successful revenue allocation in the country.
Lack of statistics
This is another problem on account of which revenue allocations in Nigeria continue to suffer.
Every now and again population, primary school enrollment, number of children of primary age, etc, are used or recommended as factors to be considered in allocating revenue to a state.
Such revenue allocation can hardly be effective when the population figures are not even known. The last accepted census in the country took place in 963, some 47 years ago.
The next national census took place in October 1991. The census should provide reliable statistical details for problem-free revenue allocation in the coming years.
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