revenue sharing in the nigerian federation

Revenue Sharing in the Nigerian FederationAuthor(s): Lawrence A. RupleySource: The Journal of Modern African Studies, Vol. 19, No. 2 (Jun., 1981), pp. 257-277Published by: Cambridge University PressStable URL: http://www.jstor.org/stable/160637 .

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The Journal of Modern African Studies, 19, 2 (1981), pp. 257-277

Revenue Sharing in the Nigerian Federation

by LAWRENCE A. RUPLEY*

CHANGES in the nature of federal financial relations were among the most striking features of the nearly I 4 years of military rule in Nigeria. At the time of the January 1966 coup there was a great imbalance in the size of the four Regions, with a consequential built-in tendency for

political instability. At the resumption of civilian rule in October I979, there were 19 States of relatively balanced size, with an important role for the Federal Government as a mediator between them as well as an initiator of change.

Since there are three levels of authority in a federation, the allocation of functions is more complex than in a unitary system with central and local governments only, especially as it is necessary to ensure that each has sufficient revenue in order to carry out its essential work. The decentralisation of activities under a federal system is important because the local and state governments may be best able to detect community preferences for various public goods. However, a number of functions must be performed by a national government - for example, the conduct of foreign affairs, a meaningful policy of economic stabilisation, effective income redistribution, the provision of essential facilities and services for all the country's residents, or public goods where there are

significant geographic spill-overs of benefits. Thus, a federal government must be assured of adequate financial resources, just as are the states and the localities.

Appropriate decentralisation of expenditure activities does not, however, necessitate the fragmentation of the overall tax structure. This need occur only if it is thought necessary for each level of authority to have jurisdiction over autonomous sources of revenue. However, a federal government may be more efficient in tax collection than the various subordinate units, and some system of revenue-sharing may therefore be preferable to a separation of revenue sources.

Revenue sharing has been the dominant method used to deal with the financial needs of the States of Nigeria, although some separation of sources has been made, such as jurisdiction over personal income tax

* Senior Lecturer in Economics, University of Nairobi.

257



and produce sales tax.1 However, the amounts of revenue available to the States through sources under theirjurisdiction have been inadequate, and revenue sharing has been employed on a very large scale for at least a quarter of a century. Thus, statutory grants from the Federal Government amount to 56 per cent or more of the revenue of all the

Regions throughout the entire period from I953 to I965, and more

typically were in excess of 60 per cent.2 Following the revisions in the

revenue-sharing system introduced in 1975, federal grants averaged 81

per cent of the total recurrent revenue of the States for the fiscal year I975-6.

Revenue sharing in Nigeria has been accomplished largely by statutory allocations, namely those that the Federal Government are

required to make by law. These have typically been unconditional, since the grantor does not specify the use to be made of the funds, and the

recipient is not required to match them. In Nigeria the system of unconditional statutory grants has been embodied in constitutional

provisions rather than in ordinary legislation, an indication of the

political sensitivity of these arrangements. Although such an approach has made it difficult to modify that system in response to fluctuations in the economy and the fiscal condition of the various governments, it has provided a degree of predictability and insulation for the States from sudden and capricious changes in the size of their grants from the Federal Government.

Some unconditional grants have been made from revenue from

particular taxes, and are then allocated to States on the basis of their

geographic derivation - for example, import duty on motor fuel. Other

grants have come from revenue channelled into the Distributable Pool Account (D.P.A.), and they are then shared without reference to origin. It must first be decided how much revenue is to go into the D.P.A. and then how this is to be divided among the State Governments. Hence the need to achieve a fiscal balance not only vertically between the federal and state levels, but also horizontally so that the D.P.A. is shared

equitably among the various State Governments. Until the mid-g6o0s when the revenue from petroleum increased sharply, federal finance in

Nigeria was predominantly perceived as a question of horizontal fiscal

balance, with great attention being paid to derivation-based revenues and the shareout of the D.P.A. among the Regional/State Governments.

1 Even so the Federal Government introduced uniform personal income tax rates and abolished

produce sales taxes on export crops throughout the country in I974. 2 0. Teriba, 'Nigerian Revenue Allocation Experience, I952-65: a study in inter-governmental

fiscal and financial relations', in Nigerian Journal of Economic and Social Studies (Ibadan), November

I966, p. 375.

258 LAWRENCE A. RUPLEY



REVENUE SHARING IN THE NIGERIAN FEDERATION 259

Many persons identified more strongly with their own localities than with the Federal Government, and were pleased to have as many funds as possible to spend in their Region/State. However, with a given amount of revenue, the more that is allocated for the States, the less there is left to finance national activities and responsibilities. Thus, the more important is the principle of derivation, the smaller will be the revenues that can be retained by the Federal Government and made available for sharing via the Distributable Pool Account.

Virtually exclusive use of unconditional grants generally prevailed until around I975. Since that time, some use of conditional grants has been made by the Federal Government. These have been discretionary, albeit shown in the Federal Budget either as 'Non-Statutory Appro- priation of Revenue', or included in the expenditure of a particular Ministry, as were the early grants for Universal Primary Education

(U.P.E.). In neither case have they included any explicit matching feature. One consequence of the mixed mode of budget presentation is that it is often difficult to trace the total amount granted by the Federal Government to the States and the local governments. This is of

particular importance because the degree of dependence upon dis-

cretionary grants has increased dramatically in recent years, and its

implications for inter-governmental relations should be consciously considered. For example, special central grants to the State Governments towards the cost of U.P.E. amounted to N647 million in I979-80, namely 6-8 per cent of total federal expenditure.1

FEDERAL FINANCE PRIOR TO 1975

From 1946 to 1952 there was some separation of revenue sources between the Federal and Regional Governments, as well as shared funds in the form of discretionary block grants on the basis of derivation. But the Regional Governments had only limited fiscal powers. A movement towards truly federal financial arrangements took place during the

period I952-4. The Regional Governments were given independent tax

jurisdictions, and statutory rather than discretionary shares of central revenue, while the revenue-sharing criteria were expanded to include the principles of need and national interest, as well as derivation. From

I954 to I959, the principle of derivation was elevated to the virtual exclusion of all others. Consequently, the Federal Government was deprived of large amounts of revenue, and the imbalances between the Regional Governments were heightened. An attempt was made in 1959

1 Nigeria, Federal Government Budget Estimates.



LAWRENCE A. RUPLEY

Table i

Revenue Sharing by Tax Source, I959-691

i April 1959-31 March 1966 i April I966-31 March 1969

o100% of import duties on tobacco and motor Ioo % of import duties on tobacco and motor fuel to the Region where consumed fuel to the Region where consumed oo00% of import duties on alcoholic beverages Ioo00% of import duties on alcoholic beverages to the Federal Government to the Federal Government

6o0 % of all other import duties to the Federal 65 % of all other import duties to the Federal Government Government

30 % of all other import duties to the D.P.A. 35 % of all other import duties to the D.P.A.

00 % of excise duties on tobacco to the Region I00oo % of excise duties on tobacco and motor where consumed fuel to the Region where consumed

100oo% of all other excise duties to the Federal ioo% of all other excise duties to the Federal Government Government

100 o % of export duties to the Region where 100 % of export duties to the Region where produced produced

500% of mining rents and royalties to the 50% of mining rents and royalties to the Region where extracted Region where extracted

30 % of mining rents and royalties to the 35 % of mining rents and royalties to the D.P.A. D.P.A.

20 % of mining rents and royalties to the 15 % of mining rents and royalties to the Federal Government Federal Government

to reduce the importance of the principle of derivation, and the Distributable Pool Account was introduced for the first time. Only after that was the Federal Government's financial power strengthened, and its revenue position became more buoyant.2 Major changes in the

system did not occur again until I966. The period from I952 to 1959 provided a concrete example of the

fact that heavy reliance on the principle of derivation has serious

negative implications for the fiscal viability of the central government in a federation. The 20 years beginning in 1946 also demonstrated

clearly that each Regional Government adhered to various principles of revenue sharing according to whichever was most beneficial to itself.

1 Source: A. 0. Phillips, 'Nigeria's Federal Financial Experience', in The Journal of Modern African Studies (Cambridge), 9, 3 October 1971, p. 394- updated by one year since the sharing arrangements remained unchanged to 31 March I969. During both periods shown, the principles of revenue allocation that received primary emphasis were derivation, fiscal autonomy, and unified national policy.

2 This paragraph is largely drawn from Adebayo Adedeji, Nigerian Federal Finance (London, 1969), pp. 252-3. For a detailed discussion of the fiscal changes and review commissions from I952 to I965, see Teriba, loc. cit. pp. 361-82.

260



REVENUE SHARING IN THE NIGERIAN FEDERATION 26I

The Governments of Northern and Western Nigeria greatly favoured the principle ofderivation from I946 to around I960, because groundnuts and cocoa were the dominant sources of export revenue. However, after

petroleum revenue began to escalate from 1958 onwards, it became clear that there was little prospect of oil being found in these Regions. So the two Governments then reversed their arguments with respect to the desirability of the principle of derivation. When it became apparent that they wished to change the 'rules of the game', Eastern Nigeria moved towards secession. Such history is vital to an understanding of the events leading to civil war in I967.

Military coups occurred in Nigeria during January and July 1966, the revenue allocation arrangements having been revised the previous year, but eventually made effective from I April I966.1 The major changes were to increase the allocations made to the State Governments at the expense of federally-retained revenue - see Table I. The division of the D.P.A. was also revised modestly, with the proportion going to Eastern Nigeria decreased, and that of Western and Mid-Western

Nigeria increased somewhat - see Table 2.

It was announced in May 1967 that I2 States were immediately to be created to replace the four Regions.2 This change was important in order to redress the inequalities in area and population of the Regions - Northern Nigeria was larger than the East, West, and Mid-West combined - since these imbalances had severely strained inter-regional relations. The 12 States did not begin to function with separate budgets until the fiscal year commencing I April 1968, when the Distributable Pool Account was divided as shown in Table 2, although the disposition of the various tax sources remained unchanged. In all cases the previous regional share of revenue was divided among the new States created from within that Region. However, for reasons unexplained, the Northern Nigeria share was divided equally among the six new States in the Region, while reference was apparently made to population in the other Regions.3 That anomaly was corrected in April I 969, as is also shown in Table 2.

The new revenue-sharing system was intended to be only an interim

arrangement, pending the appointment of the Revenue Allocation

1 Initially, the changes were expected to occur on i April 1965 under the Allocation of Revenue (Constitutional Amendment) Act No. 18 of 1965, but that was then changed to I April I 966 under the Allocation of Revenue (Commencement) Decree No. 67 of 1966 - Official Gazette (Lagos), 52, 95, 8 December 1965, and 53, I Io, 6 December I966.

2 Nigeria, The Constitution (Financial Provisions) Decree No. 15 of i967, in Official Gazette, 27 May I967-

3 S. Egite Oyovbaire, 'The Politics of Revenue Allocation', in Keith Panter-Brick (ed.), Soldiers and Oil: the political transformation of Nigeria (London, 1978), pp. 227-8.



LAWRENCE A. RUPLEY

Table 2

Division of Distributable Pool Account Revenue, I959-751

percentages

Region/State i April I959-- i April 1966--- i April 1968- I April 1969- Government 31 March I 966f 31 March 1968 31 March I969 31 March 1975b

JNorth (40/95) 42-1 420 - -

Benue-Plateau 70' 7.8 Kano 7-0 9'3 Kwara 7?0 6.3 North Central 7'0 7'8 North Eastern 7-0 II53

North Western 7-0 9-3

East (3 I /95) 326 30-o0 - -

East Central I7'5 io06

Rivers 5'? 5'6 South Eastern 7-5 7*4

Weste (18/95) I9 0 20 0 -

Lagos 2-0 5-5 Western I8-o 12 7

Mid-West0 (6/95) 6-3 8-o - -

Mid-Western 8-o 6-4

a The fractional presentation of shares occurs because the Southern Cameroon Trust Territory received 5 per cent of the D.P.A. when the formula was devised in 1959. In I960 the Territory left Nigeria and joined the Republic of Cameroun. Since agreement could not be reached as to the division of that 5 per cent, the original percentage became the numerator and 95 the denominator.

b From i April 1969, 50 per cent of the D.P.A. was divided in equal parts for each State, while the other 50 per cent was divided on the basis of relative population.

c The Mid-West Region was created in I963.

Review [Dina] Committee inJuly 1968. However, the Report submitted to the Federal Government in late January 1969 was never published, and the Government's views are not known since no White Paper was issued.2 The Committee was thought by many to have exceeded its terms of reference by examining the larger question of federalism in

Nigeria, rather than merely that of revenue sharing, and because its criticisms of the derivation principle were not yet widely supported by the States. In order to more nearly match the revenue and expenditure of each level of authority, the Committee recommended that the

1 Sources: Phillips, loc.cit. pp. 389-408; Nigeria, Decree Nos. 15 of I967 and 13 of 1970; and

Oyovbaire, loc. cit. p. 229. 2

Oyovbaire, pp. 228 and 238-9.

262




Table 3 Revenue Sharing by Tax Source, I April I969-3I March 19751

00oo% of import duties on tobacco to the State where consumed I00% of import duties on motor fuel to the State where consumed, but all of the 9 5 % increase in import duty on motor fuel and the I6-7% increase on kerosene as of i April 1969 to the Distributable Pool Account

I00% of import duties on alcoholic beverages to the Federal Government 65 % of all other import duties to the Federal Government 35 % of all other import duties to the D.P.A.

50 % of excise duties on tobacco and motor fuel to the D.P.A. 50 % of excise duties on tobacco and motor fuel to the Federal Government 00oo % of all other excise duties to the Federal Governmenta 00oo % of reconstruction surcharge to the Federal Government - levied from 19 October I967 until I April I974

00oo% of export duties on produce, hides, and skins to the State where produced, but three-fifths of the 50 % increase in produce duty as of I April 1969 to the State of production and two-fifths to the D.P.A. (The export duty on produce was abolished as of I April I973.)

45 % of on-shore mining rents and royalties to the State where extractedb 50 % of on-shore mining rents and royalties to the D.P.A.b 5 % of on-shore mining rents and royalties to the Federal Government, 00oo of off-shore mining rents and royalties to the Federal Governmentb

00oo% of company profits tax (including super-tax) to the Federal Government oo% of petroleum profits tax to the Federal Government

a The Federal Budget Estimates show that 67 per cent of these duties in I969-70, 64 per cent in 1970- I, and 50 per cent during 1971-5 were paid into the D. P.A. for division among the States. There appears to be no Decree that provided for such statutory payments.

b The on-shore/off-shore distinction was begun on i April I971.

Federal Government should (I) assume responsibility for some items on the Concurrent Legislative List, such as higher education, public safety and order, and scientific and industrial research; (2) make conditional

grants for health and road transport, introduce uniform rates of income tax, reform the marketing board system, and distinguish between off-shore and on-shore oil revenues; and (3) establish a permanent Revenue Allocation Commission.2 Although the Dina Committee

Report was rejected by the State Commissioners of Finance in April 1969, many of the changes suggested therein were subsequently adopted.3

The revenue-sharing arrangements were amended in 1970, retroactive to I April I969. As may be seen from Table 3, there were some changes in the disposition of various tax revenues. In addition, the D.P.A.

1 Sources: Federal Official Gazettes and Budget Estimates, I969-75. 2 Oyovbaire, pp. 240-1. 3 Ibid. p. 242.




formula was amended, whereby in future half of the Pool was to be divided in equal parts to each State, while the other half was then allocated on the basis of their relative population1 - see Table 2. This new formula quite closely resembled that suggested by the Dina

Committee, and continued with no major revisions until 31 March

I975. However, during the first half of this decade a number of other

important changes occurred in the financial arrangements of the Federation.

As from i April I 97 I, the ownership of Nigeria's continental shelf was vested in the Federal Government which thereafter received all off-shore oil revenue.2 This change removed the possibility that the major and

fastest-growing source of petroleum revenue might be allocated to States on the basis of the derivation principle; however, there was scarcely any public discussion of the implications in Nigeria at the time. In April I973, the Federal Government limited the maximum state-imposed produce sales tax rate to 0o per cent, and then abolished this a year later as part of its major revision of the marketing-board system and

export-crop taxation.3 The Federal Government imposed uniform rates of personal income tax throughout Nigeria as of I April I974.4 Thereafter, the progressive-rate personal income tax was still levied under thejurisdiction of the State Governments, but they no longer had the power to alter the structure of tax rates or deductions allowed.5 In

April I975, the cattle tax (jangali) was abolished by the Federal Government.6 Several of these changes were directly in accordance with the recommendations of the Dina Committee.

An important feature of the foregoing changes in federal financial relations during the early I970s was that they were announced and imposed by the Federal Military Government without resort to special commissions of inquiry or constitutional convention. Although the legislative modifications were accomplished by Decree, it must be remembered that the Supreme Military Council contained the Governors from all the States, so that the changes were perhaps not

1 Nigeria, Constitution (Distributable Pool Account) Decree No. I3 of 1970, in Official Gazette, 57, I2, 12 March I970.

2 Nigeria, Off-Shore Oil Revenues Decree No. 9 of 1971, in ibid. 58, 15, 31 March I97I. 3 Budget Speeches for 1973-4 and I974-5. The Federal Government assumed control of

marketing board pricing policy and abolished export duties on such produce in I973; the changes culminated in the establishment of seven national Commodity Boards in 1977.

4 Nigeria, Income Tax Management (Uniform Taxation Provisions, Etc.) Decree No. 7 of I975, in Official Gazette, 62, 9, 24 February I975.

5 For further discussion, see L. A. Rupley, 'Personal Income-Based Taxation in the Northern States of Nigeria and the Effect of Uniform Income Taxation', in Bulletin for International Fiscal Documentation (Amsterdam), 32, August-September 1978, pp. 40I-I0.

6 Budget Speech, 1975-6.




Table 4 Revenue Sharing by Tax Source, I April I975-31 March 19791

0oo0% of import duties on tobacco to the Distributable Pool Accounta ioo% of import duties on motor fuel to the D.P.A. 10oo 0% of import duties on alcoholic beverages to the Federal Government 65 % of all other import duties to the Federal Government 35 % of all other import duties to the D.P.A.

500% of excise duties on any item to the D.P.A. 50 % of excise duties on any item to the Federal Government

oo0% of export duties on produce, hides, and skins to the D.P.A.

20 % of on-shore mining rents and royalties to the State where extracted 80 % of on-shore mining rents and royalties to the D.P.A. o100% of off-shore mining rents and royalties to the D.P.A.

ioo% of company profits tax to the Federal Government 100oo% of petroleum profits tax to the Federal Government

a Half the D.P.A. was divided equally among the States, and the other half according to the relative population of each.

as 'unilateral' as they at first appeared. The political and financial implications of petroleum production also changed very rapidly throughout the years I970-5, SO that a number of the Dina Committee recommendations now found more favour with the State Governments than they had when first made in April I969.2 The States were given discretionary grants to recompense them for the immediate loss of revenue that resulted from the federal termination of the produce sales tax (as well as export duties on produce), and the introduction of uniform personal income taxation. Even beyond such discretionary grants, however, it is clear that the States agreed to the loss of autonomy over some of their revenue sources because of their expectation of very much enlarged grants through revised revenue-sharing arrangements as a result of the phenomenal growth in petroleum revenue, particularly after early 1974. Those expectations were realised in the following fiscal year.

PETROLEUM AND THE REVENUE-SHARING CHANGES OF 1975

A revised revenue-sharing system came into effect on i April 1975 - see Table 4. The major new features were a further reduction

1 Source: Nigeria, Constitution (Financial Provisions, Etc.), Decree No. 6 of 1975, in Official Gazette, 62, 7, 13 February 1975. 2 Oyovbaire, loc. cit. pp. 242-5.



LAWRENCE A. RUPLEY

in the importance of the principle of derivation, a large increase in the amount of statutory revenue to be granted to the State Governments, and a provision that the revenue-sharing arrangements should be

routinely re-examined at regular intervals corresponding to development plan periods. The de-emphasis of the principle of derivation is indicated

by a number of changes. All revenue from import duties on motor fuel and tobacco was to go to the D.P.A., instead of primarily to the State where consumption occurred. All export-duty revenue from produce, hides, and skins was to go to the D.P.A., instead of to the State where

they were produced. Henceforth, 80 per cent of on-shore mining rents and royalties was to go to the D.P.A. in contrast to the previous 50 per cent; the share to the State of derivation was decreased from 45 per cent to 20 per cent.1 In addition, all mining rents and royalties from off-shore

production were to be paid into the D.P.A. rather than to be entirely retained by the Federal Government, as previously.

The I975 changes when coupled with the exceptional growth in federal petroleum revenue, following the O.P.E.C. actions of late I973 and early I974, resulted in an enormous increase in statutory grants to the State Governments. From the I973-4 level of N323 8 million they grew to N833-7 million by I974-5 and to NI,4I4-9 million in I976-7.2 Over that four-year span, therefore, the amount of statutory revenue increased by more than four times, and indeed reached N2,534 million in the I979-80 budget estimates. Such grants were far and away the dominant source of revenue for the State Governments, constituting from 69 to 77 per cent of their aggregate recurrent revenue from 1970 to 1975, and more than 80 per cent following the revision of the revenue-allocation system in 1975 - see Table 5.

THE TECHNICAL COMMITTEE REPORT OF I9783

In April 1978, the major features of the Report of the Technical

[Aboyade] Committee on Revenue Allocation were adopted, to be first used in I979-80. The Government White Paper provided that 60 per cent of virtually all federally-collected revenue should be retained by the Federal Government,4 30 per cent should be paid to the State

1 The definitive reference is Decree No. 6 of 1975, cited above. In addition, the changes are

discussed in L. A. Rupley, 'The Next Revenue Re-Allocation', in West Africa (London), 6January

I975, p. IO, and 'Revenue Allocation in Nigeria', in ibid. 16 June 1975, p. 68i. 2 Nigeria, Official Gazette, various dates. 3 Portions of this section are drawn from L. A. Rupley, 'Why Nigerian Spending has Grown

and Grown', in West Africa, 4 June I979, pp. 977-80. 4 Nigeria, Government Views on the Report of the Technical Committee on Revenue Allocation (Lagos,

I978)-

266




Table 5

Statutory Grant Revenue Received by State Governments, I968-761

N milliona

Total Statutory Total State Government Percentage Grants (i) Recurrent Revenue (2) (I) (2)

1968-9 92-6 I46-3 63-3 1969-70 I62-6 234'4 69'4 1970-1 266-7 356-5 74-8

I971-2 322-I 4I6 7 77'3 1972-3 321-5 466-4 689 1973-4 383-0 53I'9 72-0

I974-5 625 8 836 6 74'8 1975-6 1,482 4 1,830'5 8I>0

a The average exchange rate for the Naira during I975 was U.S. $1.63 and ?0.73, while during the first half of 1980 it was U.S. $i.80 and ?0.79-

Governments, and I o per cent to local governments.2 The provision that total revenue be shared was a significant change from the previous system, inasmuch as the very large amounts of revenue from the

petroleum profits tax and company profits tax had until then been retained entirely by the Federal Government. The greater the diversity in revenue sources to be shared, the less the risk that the recipients will be susceptible to fluctuations in the yield from particular taxes. Another

important change was that, for the first time, federally-collected revenue was to be statutorily shared with local governments as well as the States.3 Each State Government would received its share of the

federally-collected States Joint Account (corresponding to the former

D.P.A.) as an unconditional grant. Each State Government would also receive the same proportion of the federally-collected Local Government Fund which was, in turn, to be allocated to the local governments within its jurisdiction. In addition, each State Government was to assign 10

per cent of its own total revenue (statutory receipts plus internal

independent revenue) to the local governments within its jurisdiction.4

1 Sources: various State Government Budget Estimates. In order to compare the amounts of statutory grants with the total recurrent revenue, the data are taken from the Budget Estimates of the State Governments. Actual revenue figures are shown wherever possible, but all data for 1974-5 and 1975-6 are approved estimates. The amounts in this Table may, therefore, not exactly match the aggregate of the statutory grants as shown in the Federal Government Budget Estimates.

2 The personal income tax revenue from the armed forces, foreign service officers, and the new Federal Territory was not to be shared.

3 Following the local government reforms of I 976, there were 299 local governments throughout

Nigeria. R. 0. F. Ola and C. A. Olowu, 'Recent Administrative Developments in Nigeria: January I975-April 1977', in Quarterly Journal of Administration (Ife),July 1977, p. 306.

4 Nigeria, Government Views on the Report of the Technical Committee on Revenue Allocation, pp. 6-7.



LAWRENCE A. RUPLEY

Table 6

Federal Government Recurrent Revenue and Revenue Sharing with State and Local Governments, i976-8o1

N million

I978-9 1979-80 I980 I976-7 1977-8 Approved Approved Annual Actual Actual Estimates Estimates Basis"

Total federally-collected recurrent revenue 7,057 2 8,o68 2 6,815-2 8,805-0 I5,773'5

Less statutory allocations: to State Governments I,414'9 I,795'9 i,637'I 2,234-0 3,387'2 to Local Governments - - 300-0 369.7

Total federally-retained revenue 5,642-3 6,272-3 5,178-1 6,27I 0 12,016-6

Non-statutory grants to Local Governmentsb I00 0 250-0 50-0 - -

a Fiscal I 980 is I April through 3 I December 1980. Annual basis I 980 is the nine-month amount multiplied by I'333 so as to be comparable to other years.

b Amounts for all years are budget estimates rather than actual amounts.

The 1978 system provided that revenue should be shared among the State Governments on the basis of (i) equality of access to development opportunities, (2) national minimum standards for national integration, (3) absorptive capacity, (4) independent revenue and minimum tax

effort, and (5) fiscal efficiency. Such provisions decreased still further the importance of the principle of derivation in revenue sharing in

Nigeria. The Aboyade Committee Report recommended that the five criteria for revenue sharing be weighted as follows:

equality of access 0o25 national minimum standards 0'22

absorptive capacity 0'20

independent revenue o-i8 fiscal efficiency o 015

Although the Federal Government did not adopt these proportions immediately, it accepted the recommendation that the weighting for

'equality of access' and 'national minimum standards' should be

1 Sources: various Official Gazettes, Federal Budget Estimates, Budget Speeches, and the President's I980 Budget submission to the National Assembly.

268




recomputed whenever a national development plan was prepared or revised, and that the weighting for the other three criteria should be revised annually.1

The major features concerning the collection and sharing of federal revenue are shown in Table 6. The Government White Paper on the

Aboyade Committee Report provided that for 1979-80 the 60/30/10 per cent division of revenue would not be applied to all federally-collected revenue, ---but only to the increment in the total as compared to I978-9. Even so, the I979-80 estimated statutory allocation to the States of

N2,234 million was some N600oo million (37 per cent) greater than that for the previous year. The 1979-80 estimated allocation ofN300 million to local governments was the first to be provided as a statutory grant, and was twice the non-statutory grant budgeted in the previous year. Had the new formula been fully applied for I979-80, N5,283 million rather than N6,27I million would have been retained by the Federal Government (16 per cent less); the total statutory grants to the States would have been N2,642 million rather than N2,234 million; while the local governments would have been granted N88I million rather than

N300 million. It was sensible to ease into the transition to such a new system in order to avoid sudden dislocations in the finances of the Federal Government, and to enable more orderly expenditure planning to occur at state and local levels.

There were severe criticisms of the Aboyade Committee Report in the Constituent Assembly in mid-1978. Although they did not cause the military regime to alter its decision to adopt the substance of the Committee's system, it does help explain subsequent objections after the resumption of civilian government in late I979. The displeasure in the Constituent Assembly was partially the result of (I) the tone of the presentation of the Report,2 (2) the complexity of the sharing criteria and their reliance on development-plan targets as the primary basis for the allocation calculations, and (3) the omission of explicit use of population and equal shares to each State in the formula.3 Perhaps most

I Ibid. pp. 7-8. 2 The Committee's Report was presented by Dr 0. Omoruyi, a member of the Constituent

Assembly who was not regarded as politically neutral because of his previous stands on debated issues, and who unwisely questioned the autonomy and competence of the Assembly to produce an alternative revenue-sharing system. The timing of the presentation worked against the Aboyade Committee Report because it was considered just after the hard debates on the creation of more States, the Sharia controversy, and the formula for the Presidential election. 0. Oyediran and 0. Olagunju, 'The Military and the Politics of Revenue Allocation', in Oyediran (ed.), Jigerian Government and Politics under Military Rule, ig66-79 (London, I979), p. 209.

3 Oyediran and Olagunju, loc. cit. pp. 206-209. For example, in the previous revenue-sharing system, half of the D.P.A. had been divided on the basis of population, and half had been granted in equal shares to each State.



important was the fact that the Military Government's attempt to

de-politicise the sharing of revenue, as reflected in the reliance on economic criteria in the Technical Committee Report, was at odds with the Constituent Assembly's perception that this was primarily a

political issue. It is pertinent to note that the major features of the Technical

Committee Report do not necessarily do away withper capita imbalances in the amounts of statutory grants to different States. So long as there are criteria in addition to population that are taken into account in any sharing formula, variations in the statutory revenue per capita in different jurisdictions are virtually certain to occur. However, the absence of 'population' or 'need' as distinct categories does not mean that these are ignored. The two revenue-sharing criteria of 'equality of access to development opportunities' and 'national minimum standards for national integration' certainly attempt to respond to a

government's 'need' for revenue in both an absolute and a relative sense. In addition, such criteria surely have operational meaning only when some reference is made to the size of the population within such a government's jurisdiction. Furthermore, the absorptive capacity of the States or local governments to expend revenue wisely depends in

part upon the size of the population on whose behalf the expenditure is made.

The revenue-sharing system introduced in April 1979 relied relatively little on geographic derivation. In that respect it is the most recent step in a series begun in 1959 that have progressively lessened the importance of that principle. Oil revenues have been important to that progression in at least two ways. First, the question as to whether they were to be allocated primarily on the basis of derivation was an important contributing factor to the onset of the civil war.1 The preservation of the Federation also made it difficult for any State to argue that financial

self-sufficiency - based on derivation - constituted a justification for

secession, or that such revenues belonged only to that State while others were severely handicapped by their absence. Second, the growth in oil revenues up to 1975 produced phenomenal increases in the funds available for the Rivers and Mid-Western (now Bendel) States because of the derivation-based portion of the allocation formula, and also

strengthened the budget position of the Federal Government.2 The 1 Just after secession, Eastern Nigeria demanded that the oil companies pay ?20 million in oil

royalties to it rather than to the Federal Government. However, the British Government, as the

majority shareholder in Shell-BP, vetoed a decision to comply with that demand. S. R. Pearson, Petroleum and the Nigerian Economy (Stanford, 1970), p. 139.

2 Oyovbaire, loc. cit. p. 244.





disproportionately large shares received by the Rivers and Mid-Western States were the envy of all other States, and therefore became politically indefensible. Although it had been thought inappropriate for petroleum tax revenue to accrue merely to the town or district or province in which the pumping activity occurred, it also came to be accepted that such revenue belonged to all Nigeria's citizens, rather than only those resident in the State where the oil wells were located. Extreme buoyancy in its revenue also gave the Federal Government increased strength and influence, such as the ability to make compensating grants following its abolition of export duties and produce-sales tax. The result was increased federal influence with respect to revenue-sharing policy, and a large majority of State Governments that wanted to diminish the role of derivation in revenue sharing.

THE OKIGBO COMMISSION REPORT OF I980

Very soon after the resumption of civilian rule in October 1979, a Presidential Commission on Revenue Allocation was appointed, under the chairmanship of Dr Pius Okigbo,1 to explore ways of ensuring that each tier of government would have adequate funds to carry out its constitutional obligations. It was also to consider revenue-sharing criteria - such as derivation, population, national interest, even devel-

opment, equitable distribution, and equality of States - and to take into account the attitude of the Constituent Assembly and the representations of the Federal, State, and local Governments.2 The Commission toured

Nigeria to receive testimony, and submitted its Report on 30 June 1980 which was published at the end of August I980 with the Government's White Paper.

The Okigbo Commission recommended that 53 per cent of the total

federally-collected revenue be retained by the Federal Government, 30 per cent be granted to State Governments, and 10 per cent to local

governments. In addition, 7 per cent should go to a Special Fund to provide compensation for oil spillage or other damage caused by the

presence of oil wells in a State. Between the States the Commission recommended that 40 per cent of revenue should be shared on the basis of population, 40 per cent on the basis of minimum responsibility (equality), 15 per cent based on primary-school enrolment, and 5 per cent based on the amount of internal revenue collected by the State.:3 Simultaneously, the Commission recommended the transfer of respon-

1 The other members of the Commission were M. Ahmed Talib, W. Uzuaga, Balarabe Ismaila, A. 0. Phillips, Usman Bello, and G. B. Leton.

2 West Africa, 7 July 1980, pp. I22 I-3. 3 Ibid. I September I980, p. I64I.



LAWRENCE A. RUPLEY

Table 7 A Comparison of the Effects of Recent Revenue-Sharing Systems1

System Adopted System Adopted Revenue Alloca- after Aboyade T. Okigbo Commission in White Paper tion Act, signed

Committee Report Recommendations on Okigbo Report February I981

N million % N million % N million % N million %

Total federally- collected revenue [annual basis 1980] I5,773'5 I00'0 15,773-5 100'0 I5,773 5 I00'0 15,773 5 I00'0

Statutory grants: State Governments 3,387'2 21'5 4,732'I 30-0 4,732'I 30-0 4,968-7 31 5 Local Governments 369'7 2'3 I,577'4 I0'0 I,261I9 8'o i,577'4 10'0

Special Fund - - 1,104- 70' 1,104-1 7-0

Federally-retained revenue I2,0I6-6 76-2 8,360o0 53'0 8,675-4 55-0 9,227'5 58.5a

a This figure includes the 2-5 per cent earmarked originally for the Special Fund by the Okigbo Commission and the White Paper for the initial development of the Federal Capital Territory, as well as an extra I per cent to deal with ecological problems.

sibility for housing, agriculture, and Universal Primary Education from the Federal to the State Governments.

The Government White Paper specified that the Federal Government should retain 55 per cent of total revenue, the States 30 per cent, and the local governments 8 per cent.2 Table 7 demonstrates the implications of the recommendations by the Commission, as well as the allocations announced in the White Paper: the grants to be received by the States are to go up bv 40 per cent over the I980 budget estimates, the local

governments are to get an increase of 24I per cent, while the retained share by the Federal Government is to be decreased by 28 per cent.

The Okigbo Commission has continued the earlier-mentioned trend to diminish reliance on the principle of derivation in Nigerian revenue

sharing. However, the oil-producing States reacted with an explicit call for increased reliance on the principle of derivation. Following a joint meeting after the Commission Report was available to them, but before the Federal Government had issued its White Paper, the Governors of

Bendel, Cross River, and Rivers States stated that 50 per cent of

federally-collected revenue should be paid to the States, while the entire

Special Fund should be paid to the oil-producing States.3

1 Sources: Table 6, and West Africa, I and 8 September 1980, and 9 February 198 I; calculations

by the author. 2 West Africa, 8 September 1980, p. 1735. 3 Ibid. i September 1980, pp. I641-2. In addition to the three States already mentioned, oil

production occurs in Imo and Ondo States.

272




The Revenue Allocation Bill sent to the National Assembly in November I980 maintained the 55 per cent federal share, but this was reduced during the following month to 50 per cent and to 46-5 per cent in January I981. Meanwhile the Senate had approved a formula

whereby the Federal Government is to receive 58*5 per cent (including 2-5 per cent for the development of the Federal Capital Territory and I per cent to deal with ecological problems), the States 31'5 per cent, and local governments 10 per cent - see Table 7. The Senate version was adopted on 29 January and signed into law by President Shagari on 3 February i98i.1 This also provided that 5 per cent should be deducted from the 31-5 per cent allocated to the State Governments to benefit the mineral-producing States on the basis of derivation, and that the allocations to the local governments should be disbursed

directly by the Federal Government.

THE RECENT GROWTH OF NON-STATUTORY GRANTS

Since I968 the recurrent budget heading of 'Non-Statutory Appro- priation of Revenue' has included most of the discretionary unconditional grants to State Governments. Here are to be found their shares of export duties on animals, birds and reptiles, as well as their subsidies for the federal abolition or control of revenue sources, such as export duties on produce, produce-sales tax, and the uniform personal income tax. However, beginning in 1977, the recurrent conditional grants to the States for Universal Primary Education were also included in this

heading.2 Some recurrent grants to the States were also to be found in Federal Ministry of Health expenditures. Federal grants to local

governments were referred to in the Budget Speeches for I976-7 and

1977-8 - although one is hard pressed to find them in the actual

budgets3- were included in Non-Statutory Appropriations the follow-

ing fiscal year, and became statutory grants at the beginning of 1979-80. At various times since 1968 the capital budget of the Federal

Government has included grants to State Governments for a variety of

1 Amma Ogan, 'What Happened at the Assembly', in ibid. 9 February I981, pp. 261-2. The 12 non-N.P.N. Governors immediately challenged the President's interpretation of the constitution on the point of whether the Revenue Allocation Bill had been truly passed into law, bearing in mind the differences between the two Houses. See 'What the Governors Said', in ibid. 23 February 1981.

2 In the previous year such grants had been included as part of expenditure by the Ministry of Education, as were the 1974-7 grants in support of the tremendous expansion of Grade II Teacher-Training Colleges in preparation for the beginning of U.P.E.

3 They may have been included in Supplementary Budget Estimates, but still should have shown up in a later year's budget when actual expenditure of that prior year is normally shown.



projects: agriculture, education, health, industries, sewers and drainage. water supply, and urban roads. Also included therein have been grants to enable each State to establish loan schemes for the local governments within its jurisdiction, and to cover the costs of establishing new state administrations in I976. While the Federal Government's I975 'Udoji' wage and salary increases for civil servants were apparently incorporated in the I974-5 supplementary recurrent budget of the Ministry of

Finance,' the I975-6 Federal Ministry of Health capital expenditure included a grant of N6-6 million to State Governments to allow

payment of 'Udoji' arrears for the hospital staff of voluntary agencies. This indicates that some grants are definitely not 'recurrent' in the sense that they can be expected to routinely occur; however, it is not obvious that the placement of such non-recurrent grants in the capital budget, along with various sorts of construction projects, always contributes to an informative presentation of expenditure.

Some discretionary federal grants were erroneously shown as statu-

tory. An examination of the Federal Budget Estimates shows that 67 per cent of the excise duty revenue from items other than motor fuel, tobacco, and the reconstruction surcharge, was granted to the State Governments in I969-70 and 64 per cent in I970-I. Throughout the

I971-5 period the Federal Government paid 50 per cent of such other excise duties into the D.P.A. for subsequent grants to the States. In these cases there does not appear to be any Decree to authorise such payments as statutory grants. The Federal Government certainly has the power to use such revenue for discretionary grants to the States, but the budget document should then show them as non-statutory grants. 2

As should now be obvious, a considerable amount of detective work is necessary in order to ascertain the total amount of discretionary grants made by the Nigerian Federal Government to the States and local

governments. Whereas non-statutory grants once constituted a virtually insignificant portion of the federal budget, the total discretionary grants to the States and local governments for 1977-8 of NI,028-9 million amounted to more than one-third of all statutory and non-statutory grants (N2,835-2 million)3 - and that occurred despite the enormous

statutory payments made since I975. The large size of recent discre-

tionary grants strengthens the argument that they should be consoli- dated under a single heading, rather than scattered throughout the

budget. 1 The Ministry total (N I 3 I 8 million) amounted to nearly I 4 per cent of total federal recurrent

expenditure in that year, as compared with a typical amount of I or 2 per cent. 2 Some general excise revenues paid to the States during I964-6 were shown as Non-Statutory

Appropriations. 3 Various Federal Budget Estimates.





CONCLUSION

As we assess revenue sharing in Nigeria in light of the experience of the I4 years of military administration, it is useful to be reminded that the desirability of any particular system of federal finance is finally a

political judgement. Although any separation of sources or revenue

sharing is unlikely to be regarded as optimal by all citizens in all the units of a federation, it must be 'acceptable enough' in order for this

system of government to survive. This realisation was of particular immediacy upon the return to civilian rule in 1979, although the

previous military regimes were frequently characterised by a sensitivity to the diversity of opinions within Nigeria that is perhaps surprising to those who equate governance by soldiers with an intolerance for differences. It is significant, for instance, that the Military Government

sought approval in principle of its major decisions with respect to the

1978 Report of the Technical Committee on Revenue Allocation from the Constituent Assembly as it debated the new constitution.

By the mid-g97os the Nigerian Federation had placed great reliance on unconditional revenue sharing rather than on a separation of revenue sources. Much of the responsibility for expenditure remains at the level of the States, but the major sources of finance are centrally- collected by the Federal Government. The inclusion of the revenue-

sharing provisions in the Nigerian constitution has often been criticised because of the inflexibility that thereby results. However, such an

approach does provide a strong reassurance to the State Governments that the terms on which they receive grant revenue cannot be changed suddenly and capriciously at the discretion of the Federal Government. Such a system perhaps provides the States of Nigeria with a degree of

'sovereignty' that is usually associated with jurisdiction over separate revenue sources, rather than with a system of revenue sharing in which the States do not levy most of the taxes from which they derive much of their revenue.

The fact that revenue from virtually all federally-collected sources since I979 is shared does provide potential protection against fluctuations in the revenue derived from any one or two taxes. Such diversity should stabilise total revenue yield for the States and local governments, as well as for the Federal Government. However, heavy reliance on

petroleum - 75 per cent in the 1979-80 budget - is a matter of serious concern inasmuch as the States and the local governments will also find themselves adversely affected by downward fluctuations in the quantity and price of oil exports. The call for increased diversification in revenue




sources in General Olusegun Obasanjo's 1979-80 Budget Speech is therefore all the more important, and should be vigorously pursued by the States as well as the Federal Government. A reassurance against sudden changes in the terms of revenue sharing, and the provision of

regular review of these arrangements,1 could free the State Governments to make greater use of those revenue sources under their jurisdiction, rather than merely engaging in full-time lobbying for greater federal

grants. The two most recent revenue-allocation reports have both included measures to encourage State Governments to make greater local tax efforts. If we consider the expenditure commitments already in existence, and the large discretionary grants budgeted in the three

years I977-80, such state-controlled revenue sources will certainly need to be pursued, even if petroleum revenue does not decline in the near future.2

As suggested earlier, heavy reliance on the principle of derivation has been an important cause of imbalances between the State Governments in Nigeria, and a revenue-weak Federal Government cannot intervene to prevent economic or political instability. The decreased reliance on the principle of derivation, particularly since I970, is therefore a desirable development in Nigerian federal finance. Expenditure by the Federal Government is as legitimate and important to the citizens of each State and locality as is that of the States and local governments. Care should be taken to avoid a situation, such as that described for the period I954 to 1959, where the Federal Government might find itself unable to respond to needs throughout the country, through its

expenditure programmes or discretionary grants, because of its own weak revenue position.

The new civilian Governments in Nigeria have inherited a system of federal finance that is considerably different than what was in existence during the first post-independence civilian period. The current framework should be more conducive to cordial relations among the

States, and between the States and the Federal Government, than was that of the I960-7 period. However, deliberate efforts must be made

by all Governments and legislators to recognise that other States are

equally as important as one's own, and that the Federal Government's revenue needs are as pressing as are those of the States and the local authorities. To see beyond narrow sectional interests to the necessity for

1 The establishment of a permanent review panel was recommended by the Dina, Aboyade, and Okigbo Commissions.

2 General Olusegun Obasanjo announced in the 1978-9 Budget Speech that State Governments were to introduce purchase tax in respect of professional fees, charges, etcetera, and hotel and

catering services during I978-9.




a nation that is more than merely a grouping of 19 States is a formidable

challenge indeed. It will necessitate deliberate statesmanship on the part of elected representatives to perceive that they have an obligation to serve the entire Nigerian nation, as well as the constituencies that elected them.

MOA



revenue sharing in the nigerian federation

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