Simplifying Our Revenue Allocation Formula Once and For All

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. However, in the face of aggressive counter-claims of the states, 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, but in particular over the 2002 Budget, in which the Federal Government now stands to statutorily lose to the state and local governments as much as N400 billion.

Let us quickly look at the figures: Nigeria’s approved 2002 budget 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 which would be due to crude oil earnings (at 1.788 million barrels a day, $18 /barrel at budget exchange rate of N112/$) . For our purposes here, I 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.

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

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? This is what the budget looks like:

Total Under Federal Control N1.11 (for its use and for distribution as it sees fit)

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

If you inspect the two Before- and After-Supreme Court ruling budgets above, the shift of fiscal control from the federal government to the state and local governments is quite significant, and requires the federal government to fundamentally restructure its responsibilities since it could lose up to N400 billion from under its control. So there is panic, understandable panic by the Federal government of president Obasanjo and Na’Abba/ Anyim who now wonder how they will no fund their travels, their salaries and allowances, that Abuja stadium, all in this election year, etc. For example, one report had the president saying:

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

Another report state that the President had set up a 5-man panel, and the National Assembly a 20-man panel to study the Supreme Court ruling.

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…….

Yet a third report stated that the president was suspending the application of the revenue allocation formula – including that “gentleman’s agreement magic figure” of 13% of “natural resources”- pending action by the Revenue Mobilization Allocation and Fiscal Commission . This is because 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. “A minimum of 13%” is not a specification, rather it is discretionary, so neither the States or 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.

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. For example, in January 1993, in a paper titled “Revenue Sharing and the Political Economy of Nigerian Federalism”, General TY Danjuma, present Federal Minister of Defence, former Chief 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)::

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.

CBN Annual Report Year Ended 31^st 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.

CBN Annual Report Year Ended 31^st 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 FAT, 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 the1996 CBN report. Nigeria’s proliferation of unproductive, money-sinking 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 taking, that readily drops to $0.25 per day.

In short, we are an oil-rich country. However, based on our needs, we are not a rich country.

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 we will 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 (=Xy). Next suppose that by law it has been determined to allocate 100z% from the derivation pool to the worthy P states. 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.

The following formulas are readily confirmed:

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

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Simplifying Our Revenue Allocation Formula Once and For All

Table 2: Table of Calculated Ratios for Revenue Allocation Formulas

3. THE MATHEMATICS OF A MONOCULTURAL REVENUE ALLOCATION