Since 1954 when Nigeria became a federation, revenue allocation formula has always been a knotty issue, causing some resentments and frictions in the wheel of the nation.
Recently, the Niger State Governor and Chairman of Northern Governors’ Forum, Dr. Babangida Aliyu, stirred the hornet’s nest, when he attributed the underdevelopment of the North to the paltry allocations the states in the region receive from the federation account. He called for the scrapping of the 13 per cent derivation given to oil-producing states in the South, so that the states in the North will get more for development.
Governor Aliyu was echoing what the Central Bank of Nigeria (CBN), Mallam Lamido Sanusi, had said in an interview with Financial Times of London. The CBN governor said that the low financial allocation to the northern states was the major reason for the underdevelopment and activities of such groups as Boko Haram. Indeed, since Sanusi flew the kite and followed by Aliyu’s outburst, the arguments have polarised the nation along North and South divides, especially coming at a time when the agitation for restructuring and convocation of a national conference has reached fever pitch.
Genesis
When Sir Arthur Richards (Lord Milverton) divided Nigeria into three regions, in 1954 and Nigeria became a federation, a commission headed by Sir Louis Chick was set up the same year to work out revenue sharing formula. The commission recommended that the total revenue available to Nigeria be allocated in such a way that the principle of derivation be followed to the fullest degree, for the purpose of meeting the reasonable needs of the centre and each of the regions, among others. The 1954 federal constitution embodied most of the recommendations of the commission, especially the derivation formula.
Chick’s formula was in operation from 1954 to 1958, when another commission headed by Jeremy Raisman was set up to replace it. The Raisman Report played down considerably the principle of derivation and instead placed great emphasis on population, which is regarded as an approximate index of fiscal need. It also emphasised the basic responsibilities of the regional governments as well as the need for an even development of the country as a whole. This recommendation was taken and thus the whole revenue allocation formula was reversed. This was the situation until independence.
The next fiscal review commission was appointed in 1964 and was headed by Binn. The report of the commission was not published until 1965. When it came out, it still emphasised on the use of the principle of fiscal need.
In May 1966, the military government under Major General Johnson Thomas Aguiyi-Ironsi abolished the federal system of government and formed a unitary system of government, with the centre taking lion’s share of the resources from the states. After the counter-coup of July 1966, General Yakubu Gowon promulgated a decree abolishing the unification decree of Ironsi and restored Nigeria to federal system of government.
However, the Nigeria did not go back to the old four regions that controlled their resources. The military legislated for the whole country. This was the situation until the May 27, 1967, when the military Decree No. 15, empowered the government to carve out 12 states out of the existing four regions.
Owing to the prevailing situation in 1967 during the creation of 12 states, what obtained was to subdivide federal transfers to each former four regions among the states in a particular region. This arrangement met with stiff opposition and criticisms because of its arbitrariness. This initial creation of states and subsequent ones saw the centre getting stronger while the regions, as replaced by states, are getting weaker.
Against the background of revenue sharing being an agitated issue, the Federal Military Government appointed, in July 1968, an interim allocation committee headed by Chief I. O. Dina, who submitted its report in February, 1969. The committee recommended that in distributing resources the fiscal needs of the states should be the determining factor. This is mainly on the side of distributing oil revenues.
It recommended that only 10 per cent, as against 50 per cent, should go to the mining states, while the remaining 90 per cent should go to the other states through the Federal Government. The government never implemented this recommendation of the commission. Rather, during the period, between 1969 and 1974, the government relied on an interim allocation arrangement.
In 1975, the Federal Military Government promulgated the Revenue Allocation Decree to reverse the situation. This was a departure from the principle of derivation. The non-oil producing states benefited more from this arrangement.
During the Second Republic, President Shehu Shagari, in 1980, set up a commission headed by Dr. Pius Okigbo. It was the first in presidential system of government in Nigeria. The commission significantly raised the revenue of some states at the expense of others and, therefore, it negated the idea of balanced development in the country.
The Supreme Court of Nigeria invalidated the Okigbo commission’s recommendations. However, the revenue Act that was passed by the National Assembly in 1981 was based on the commission’s report. According to the Act, the Federal Government was to receive 55 per cent of the allocation. State governments were to collectively get 30.5 per cent and local governments, 10 per cent. The remaining 4.5 per cent was for special funds. With this, the derivation principle was discarded in revenue allocation scheme.
The military government that took over from Shagari continued in arbitrary sharing of revenue. However, attempt to address the ecological problems caused by oil exploration in the Niger Delta received a boost, when, in 1992, the military government of Ibrahim Babangida established Oil Mineral Producing and Development Commission (OMPADEC).
During the build-up to the return of civilian government, because of the restiveness in the Niger Delta region, there was apparent concern about the declining security situation in the region arising from increased agitation from the oil-producing communities and its consequent threat to the economy.
This made the 1995 Constitutional Conference to recommend that in sharing the revenue, 13 per cent should be set aside as derivation revenue to assist the development of oil-producing communities. The intention was very clear: to financially empower the oil-producing states of the Niger Delta to tackle the monumental neglect and degradation of the area.
The now contentious 13 per cent derivation principle was enshrined in the 1999 Constitution. The affected states started getting the 13 per cent from April 2000, 10 months after the implementation of the 1999 Constitution on May 29.
It was not yet Uhuru for Niger Delta as the region had to contend with another issue: onshore/offshore dichotomy in oil revenue. They considered this a betrayal.
In 1978, the then military government of General Olusegun Obasanjo passed a decree, known as the Exclusive Economic Zone Act. The thrust of this decree or act is in Section 2(1), which states: “Without prejudice to the Territorial Waters Act, the Petroleum Act or the Sea Fisheries Act, sovereign and exclusive rights, with respect to the exploration and exploitation of the natural resources of the sea bed, subsoil and superjacent waters of the Exclusive Zone rest in the Federal Republic of Nigeria and such rights shall be exercisable by the Federal Government or by such minister or agency as the government may, from time to time, designate in that behalf, either generally or in any special case.”
The Federal Government interpreted this provision to mean that revenue derivable from offshore production of oil cannot be credited to the states to which that offshore geographically belongs, using the Offshore Revenue (Registration of Grants) Act, 1971 Cap. 366 LFN. 1990 as guide. On the basis of this interpretation, the Federal Government split oil revenue into 60 per cent: 40 per cent as on-shore/off-shore revenue and proceeded to base payment of the minimum 13 per cent derivation revenue from the 60 per cent. In effect, the Federal Government paid 7.8 per cent of oil revenue as derivation rather than the minimum of 13 per cent enshrined in the Constitution.
This issue of offshore/onshore was finally resolved by the Supreme Court that gave the offshore resources to the contiguous states and this is why some states, particularly, Akwa Ibom, River, Delta and Bayelsa go home with jumbo allocations.
If the report of the 2005 Constituents Assembly set up by former President Olusegun Obasanjo saw the light of the day, the cry by the northern interest groups would have been louder because the oil-producing states demanded 50 per cent as against current 13 per cent. The Constituent Assembly resolved to give to them 25 per cent. This was not, however, implemented.
The constitution headache
It is only a review of the constitution that can alter the present revenue formula, as it concerned derivation. It is going to be a Herculean task for the North to have its way.
The Niger Delta is still not satisfied with the present 13 per cent and like Oliver Twist, are asking for more, while other states in the South are calling for a return to the arrangement when the regions, paid in 40 or 50 per cent of their resources to the centre. They want they states to now take over the resources and pay the Federal Government 40 or 50 per cent of it.
When this scrapping or alteration of the 13 per cent derivation principle appears on the amendment list of the National Assembly, tribal and ethnic chauvinism would override national interest among the legislatures, as they would be divided along ethnic lines. Those from the North would push the amendment, in their favour, while those from the South would resist it.
At the state Houses of Assemblies, the 17 southern states would likely vote against any amendment in this direction, thereby stalling such proposal. The states in the South may also demand a review of sharing of revenue from Value Added Tax (VAT) as over 60 per cent of the industries that generate VAT are in the South.
Another issue that is associated with revenue sharing is the local governments. At present, the North has more local government areas than the South. This means that the North gets more funds accruing to local governments than the South.
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