Imperative of a new revenue sharing system

The Revenue Mobilization Allocation and Fiscal Commission (RMAFC) carry a huge burden of responsibility to ensure that the distribution of the consolidated revenue fund is fair and justiciable to various state of the Nigerian public. The agency should also be applauded for quick response to the yearnings of Nigerians for an immediate review of the current Revenue Allocation Formula among the three tiers of government in Nigeria.

The advent of the 1999 constitution reintroduced the Joint Account System and based on the same document, the Revenue allocation (Federal Account) Act 2004 was enacted.

Presently, 52.68% of allocation from the Federation Account goes to the Federal Government (broken down into Federal Government – 46.18%, Development of Natural Resources – 3.0%, General Ecology – 2.0%, Development of the Federal Capital Territory (FCT) – 1.0% and Stabilization Fund – 0.5%).

The 36 States of the federation have a combined share of 26.72% while the 774 Local Government Areas (LGAs) in the country take 20.6%. Furthermore, oil and solid minerals producing states in the South-South region, share 13% of all related revenue in accordance with the principle of derivation.

Under the current Act (Section 2 subsection 3), the landmass of a state or local government shall be the Proportional Areal Size (PAS) of each state or local government relative to the total areal size of Nigeria. Another allocation is the Terrain is based on PAS of the three identified major terrain types present in the State or LGA respectively. These include Wetlands/Water bodies, Plains and Highlands. A third major index of allocation is what is called Social Development Factors (SDFs); these are Education, Health and Water.

Education for instance is measured based on Public-Funded Primary School Enrolment (60%) and the remaining 40% based on Public-Funded Secondary/Commercial School Enrolment. The primary school enrolment allocation is made solely on direct proportion while that of Secondary/Commercial is made equally (50% each) in Direct proportion and Inverse proportion. For Healthcare, it shall be measured based on the number of State/Local Government hospital beds. 50% each of the Allocation shall be made in Direct and Inverse Proportion to the number of the State hospital beds. The third element, Water, shall be represented by Mean Annual Rainfall in the State Headquarters and the State Territorial Spread.

Fifty percent (50%) each of the allocation shall be made in direct proportion to the State’s territorial spread and inverse proportion to the Mean Annual Rainfall in each State headquarters, using the most current live year figures, the same year for all the States. Section 162 (5) of the Constitution provides inter-alia.

“The amount standing to the credit of Local Government Councils in the Federal Account shall also be allocated to the State for the benefit of their Local Government Councils on such terms and in such manner, as may be prescribed by the National Assembly”. Also, section 162(6) provides that – “Each state shall maintain a specific account to be called “State and Local Government Join Allocation Account” into which shall be paid all allocations to the Local Government Councils of the State from the Federation Account and from the Government of the State”. These sections of the constitution proscribed direct allocation to the councils and put it under the supervision of every State Government.

Despite these extant provisions, there is a loud case for change in the revenue sharing and allocation formula. The challenges plaguing the current revenue allocation structure are traceable to the provisions of the Constitution under the Exclusive Legislative List. It is important I note that a federal structure envisages power-sharing between a central government and the subnational governments of the constituent units such that the latter would exercise control over their own affairs and then contribute parts of their sovereignty to the central government as may be provided under a written constitution.

Financial resources are then allocated to different tiers of government in accordance with their specific requirements. It then becomes a challenge where the federation exists almost as a unitary state and the governments of the sub-national governments are agents of the central government; depending on it for survival, rather than as semi-autonomous federating units. Being a large nation with diverse population and ethnic groups, there is no doubt that Nigeria ought to embrace a federal model that focuses on decentralization of governance to the states.

This is because it is significantly easier and more cost-effective for state and local governments to provide primary governance over their regions than for primary governance to flow from the centre. It also ensures that citizens can demand accountability from a government that is closer to them than the central government. Also, embracing a true federal structure will provide an incentive for federating states to be competitive and self-sustaining which will, in turn, set the country on a path to sustainable growth and development.

The current Revenue Allocation Formula has been in use since 1992, but within that period, Nigeria has witnessed significant socio-economic, a demographical transformation which is not limited to the following – in Increased population densities, rural-urban migration, insecurity, religious and inter-ethnic tensions, poverty, increased agitation for autonomy and restructuring, ballooning unemployment and under-employment leading to youth restiveness since our return to democratic rule in 1999 – and its attendant consequences. Others include inadequate investments in infrastructure such as roads, power, water and human capital development.

Notwithstanding the overwhelming evidence of these socio-economic and socio-demographic challenges in the country since 1992, the revenue allocation formula has not been changed. Rather the current formula has encouraged a ‘bloated’ Federal Government with significant wastages, leakages, red-tapes and bottlenecks processes, cost inefficiencies and mismanagement of scarce national resources – thereby resulting in complete distraction from core responsibilities of national concerns.

In addition to some of the challenges listed above, the States have increasingly had to bear significant additional responsibilities in managing the fallouts of these issues in order to maintain peace, security and invest in social welfare programmes as well as invest in infrastructural development.

Furthermore, the country has witnessed significant devaluation of the Naira, cost-push inflation, low productivity, economic policy inconsistency, delays in market deregulation, inadequate diversification of the economy leading to increased dependence on oil revenues. The other debilitating issue is low economic growth consequent upon a series of economic recessions, which has further impoverished our people.

In view of the above, it is our position that addressing the issues of the current revenue allocation structure would ultimately require revising the items on the Exclusive Legislative List of the Constitution with a view to decongesting the same to provide a basis for the federating states to exercise self-determination. There is therefore the need to increase the percentage due to the state governments under an agreed revenue allocation formula and also amend the provisions of the constitution to devolve more powers to state governments in the long term.

To be continued tomorrow

Okubadejo is the honourable commissioner for Finance & Chief Economic Adviser, Ogun State Government.