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Tuesday, January 25, 2005

The Latest Revenue Allocation Formula in Nigeria – A Quick Inspection

MIDWEEK ESSAY: January 26, 2005
________________________________________________________

Introduction

Ever since the Aboyade Commission was empanelled by then military ruler General Olusegun Obasanjo in 1977, the Revenue Allocation Formula for Nigeria has been going through a number of contortions under various federal governments (See Table 1 below).

In its latest incarnation, a first iteration of which was submitted according to Law by the RMFAC (Revenue Mobilisation, Allocation and Fiscal Commission) and which has now been sent to the National Assembly by now civilian ruler President Obasanjo, we have that the Federal:State:Local:Joint government shares are in the percentages 47.19: 31.10: 15.21 : 6.50, where the last figure is a National Priorities Services Fund (comprised of four different funds) to be jointly administered by all tiers of government.

One wonders why the percentages were not simply simplified to 47:31:15:7, with all the four services funds being set at 1.75% each, instead of all this 0.19, 0.10, 0.21 additions, etc.. That would have made life simpler for everyone.

In addition to the above, new horizontal formulas are being proposed to determine how the 31.10% (to the states), the 15.21% (to the local governments) and the 13% derivation (to state, local government and community entities) are to be shared. – See Tables 2 and 3 [Note that the derivation percentage remains fixed at 13%, despite agitations to make it 50%.]

It is these latter horizontal formulas that are of primary concern to us in this brief essay.


Horizontal Formulas to States

If you look at Table 2, about 80% of the horizontal distribution (79.14% to be exact) will be based on three indices: equality, population and internal revenue generation (IRG) effort. Although one would have hoped that the IRG be given some more prominence (say boosted up to 12.5% at the expense of land mass and terrain,) one can live with this distribution as given.


Horizontal Formulas to LGs

In order to stem the proclivity for creation of more Local Governments, President Obasanjo has now proposed a zeroing-out of the Equality component in allocating revenue to this tier, and instead distributed the 45.23% Equality component EQUALLY among the other nine components – thereby adding 5% to all the other components, except for population, to which he added on the balance of 0.23%.

This development is either due to a MAJOR arithmetic laziness, or else a deliberate and MAJOR policy shift in priorities for the Local Government funding. It would be the former if the government merely found it convenient to add the 5% across the board. However, making this uniform across-the-board adjustment would mean that items like Population Density would receive a proportion five times what it originally would have received (that is when equality was added in), rural roads/waterways and potable water four times, Education and Health would receive roughly two-and-a-half times, land mass and terrain two times, IGR one-and-a-half times, while population would receive just a 20% increase.

One way of revising these percentages would have been to simply scale them according to their ratios when the equality component is eliminated. This would have led to the Column labeled (Col. 3) in Table 2.

However, I believe that this opportunity should have been more imaginatively taken advantage in order to re-prioritize what local government should be all about, first by emphasizing its role in rural road development, education, health and water provision, as well as in encouraging it to increase its internal generation revenue stream.

Hence in Table 2, we have suggested a new set of percentages which should be considered.

This boosts rural roads seven-and-a-half times, potable water seven times, education, health and population density three-and-a-half times, internal generation two-and-a-half times, while keeping population, land mass and terrain at roughly the same level as the state indices.

Whatever be the case, if some local governments are not careful, they will lose money big time due to the removal of a whopping 45.23% due to equality without a compensating gain as the allocation shifts to other items.

One hopes that their financial managers are putting hands to calculators.


Horizontal Formulas for Distributing the 13% Derivation

This is set out in Table 3 – a 60: 30: 10 distribution between state : LG : community. However, since equality of local governments have been eschewed in Table 2, it should also be removed in the horizontal distribution of this 13% derivation among the local governments across the states. IT would not be unreasonable instead to see the 30% for local governments shared on the basis of 50% quantum production, 30% population and 20% self-help projects.


The Sovereign National Conference and These Revenue Distributions

According to the 1999 Constitution, once these new revenue allocation formulae are agreed by the National Assembly and assented to by the President to become law, they must stay in place for at least 5 years. Yet one would hope that a Sovereign National Conference / Dialogue which we must have either this year or within the next five years will properly address the relationship between the duties of the various tiers of government, so that a more rational resource-control-based revenue allocation can be adopted.

Let us pray.


Bibliography

1.http://www.nigerianmuse.com/nigeriawatch/allocations/?u=Running_news_revenue_allocation_formula.htm
Running News on Revenue Allocation Formula of Nigeria

2. http://www.ngex.com/personalities/voices/sm010601baluko.htm
The Unfederal Nature of Nigeria’s Fiscal Federalism
Mobolaji Aluko; January 7, 2000

3. http://www.ngex.com/personalities/voices/mwc020801baluko.htm
MidWeek Essay: On the Federal Government Suit Over Resource Control
Mobolaji Aluko; February 8, 2001

4. http://www.ngex.com/personalities/voices/se031701baluko.htm
SATURDAY ESSAY: The Littoral States and Onshore/Offshore Resource Control in Nigeria
Mobolaji E. Aluko; March 17, 2001

5. http://www.dawodu.com/aluko10.htm
MID-WEEK ESSAY: Simplifying Our Revenue Allocation Formula Once and For All
Mobolaji E. Aluko,; April 17, 2002

6. http://www.dawodu.com/aluko16.htm
MONDAY QUARTERBACKING: Revenue Allocation and the Nigerian State: Of Derivation, Dichotomy and Debt Issues
Mobolaji E. Aluko, May 20, 2002

7. http://www.dawodu.com/aluko85.htm
The 9% Fight Between Federal and State Governments Over Revenue Allocation
Mobolaji E. Aluko, March 4, 2004


Table 1: Brief Historical Outline of Revenue Allocation Formulas in Nigeria

ITEM

Date

Federal

Govt

%

State

Govt.

%

Local

Govt.

%

Special

Funds

%

Total

%

Aboyade Commission

1977

57.00

30.00

10.00

3.00

100.00

Okigbo Commission

1980

53.00

30.00

10.00

7.00

100.00

Revenue Allocation Act

1981

55.00

30.50

10.00

4.50

100.00

Pre-Supreme Court - Legal Decrees/Law

Pre-April 2002

48.50

24.00

20.00

7.50

100.00

Pre-Supreme Court - RFMAC Proposal

August 2001

41.23

31.00

16.00

11.70

100.00

Supreme Court Ruling

April 2002

Current allocation

Ruled

Unconstitutional

Post-Supreme Court - Executive Order # 1

May 2002

56.00

24.00

20.00

0.00

100.00

Post-Supreme Court - Executive Order # 2

July 2002

54.68

24.72

20.60

0.00

100.00

Post-Supreme Court - RMFAC Proposal

January 2003

46.63

33.00

20.37

0.00

100.00

Latest RMFAC Proposal

Submitted to President

September 20, 2004

47.19

31.10

15.21

National Priority Services Funds*:

Ecology - 1.50

Mineral Devt.- 1.75

Agric Devt. - 1.75

Reserve Fund - 1.50

-----------------

Total - 6.50

{joint Fed/State/LG

management}

100.00

Presidential Proposal

Submitted to NASS

January 25, 2005

47.19

31.10

15.21

Ditto

+ Horizontal formulas**

+ State Derivation

Funds Boards to manage 13% derivation***

100.00

*General Ecological Fund (1.50 per cent); Solid Minerals Development Fund (1.75 per cent); National Agricultural Development Fund (1.75 per cent) and National Reserve Fund (1.50 per cent).

TABLE 2: New Horizonal Formulas for Distributing Revenue

S/N

ITEM

To States

(Col. 1)

To LGs

(Col. 2)

Could have

Been for LGs

(Col. 3)

Should have been for LGs

(Col. 4)

1

Equality

45.23

0.00

0.00

0.00

2

Population

25.60

30.83

46.74

25.00

3

Population

Density

1.45

6.45

2.64

5.00

4

Internal Revenue

Generation Effort

8.31

13.31

15.17

20.00

5

Land Mass

5.35

10.35

9.77

5.00

6

Terrain

5.35

10.35

9.77

5.00

7

Rural Roads &

Inland Waterways

1.21

6.21

2.21

10.00

8

Potable Water

1.50

6.50

2.74

10.00

9

Education

3.00

8.00

5.48

10.00

10

Health

3.00

8.00

5.48

10.00

Total

100.00

100.00

100.00

100.00

% From FG

31.10

15.21

15.21

15.21

Note: [(Col. 2) = (Col. 1) + 5] except for Equality ( = 0) and

Population [ = (Col. 1) +5.23 ]

Note: Except for Equality:

(Col. 3) = (Col. 1) * [ 1 + 45.23/(100-45.23) ] = 100 * (Col. 1)/54.77

since 45.23% should have been re-distributed in proportion to original ratios (minus equality)

***Table 3: Sharing of 13% Derivation Fund (to be managed by States Derivation Fund Boards)

Item

13% Derivation:

Basis of Sharing

percentage shared

Among entities

To States

60.00

Relative to Quantum of Production

To Local Governments

30.00

50% quantum; 20% equality

20% population; 10% self-help projects

To Community

10.00

To be specified according to relevant

Assembly (House or National)

Total

100.00


_______________________________________________________________________

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