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FEDERALISM AND REVENUE ALLOCATION IN NIGERIA: A CRITICAL EVALUATION OF THE DERIVATION PRINCIPLE

CHAPTER ONE

1.1 Introduction

Federation implies the existence of more than one level of government in one country each with different expenditure responsibilities and taxing powers. Nigeria is a federation consisting of states and federal capital territory, federal government, 36 states and 774 local governments. Among the different levels of government, fiscal arrangement ought to be worked out properly to ensure fiscal balance in the context of macro economic development and stability. 

Federal systems by their nature are complex administrative designs because they involve multiple levels of government.  The Nigerian federal system is thus beset by a lot of complex challenges. One of such challenges is the seemingly implacable and intractable Niger Delta crisis arising from lopsidedness in revenue allocation and sharing in the country (Omotoso, 2010). 

The fiscal arrangement among the different tiers of government in a federal structure contends (Osisioma and Chukwuemeka, 2007) is often referred to as fiscal federalism; in other types of political structure it is known as inter-tier or intergovernmental fiscal relations.  The capacity of the federal, provincial and territorial governments to assume their responsibilities hinges on the balance between decentralization of revenues and decentralization of government spending.  This decentralization refers to the portion of total revenue collected and expenditures allocated to both state and local governments.  The degree of decentralization argues Okoro (2006) is the extent of independent decision making by the various arms of the government in the provision of social and economic services. It connotes the degree of autonomy of state and local governments in carrying out various economic tasks.

Prior to the discovery of oil in Nigeria, other sectors of the economy thrived. Agriculture, for instance, was a major source of revenue for the Western Region. The Eastern Region that was less endowed devised other sources of revenue. All this has however changed since the discovery of oil in the country. This has led to the demise of the other productive sectors of the economy. In fact, Nigerians are poorer today than they were in the pre-oil boom days. This is mainly because of the methodology of sharing the oil revenue. The struggle for the control of the oil wealth has led to an unfortunate shift from a revenue-oriented principle to an expenditure-oriented principle of revenue allocation (CyberEssays, 2010).  According to Edevbie (2000), the unity of our country has always been fragile. A potent threat to our unity and democracy is injustice. Every part of the Nigerian nation feels the pinch of the unjust union. Almost everyone feels marginalised or at least claims to be marginalised but curiously, no one takes responsibility for the marginalisation.

The growth and development of any economic system, be it capitalist, socialist or a mixed economy depends significantly on the ways resources are being allocated or revenue distributed among the constituent units. Resources allocation or revenue allocation has been the cardinal goal of any such economy even in the capitalist economy where resources are allocated through the market mechanism, it should be efficiently and systematically allocated to achieve optimal profits or benefit.

The issue of revenue allocation depends largely on the political background and system being operated by a country. However, Nigeria offers a good example of federation by devolution, and one where sharing has been a strong but contentions instrument of addressing regional economic disparities and fiscal imbalances. It went through a costly and traumatic civil war partly because of perceived spatial injustice, but federalism has survived all the political streams as the best system of conducting regional development in the context of a coherent national development process. Hitherto, Nigeria has followed the practice of ad hoc review of its revenue sharing arrangement and has hitherto not established a constitutional or permanent commission system. Since the end of the Second World War, it has appointed eight such review bodies, reflecting more or less different turns in the country’s contemporary political history.

Up to the end of the Second World War, the country was run administratively since 1914 by the colonial power as a unitary system. The impending establishment of three components regions was the background to the setting up of the first revenue allocation study group – the Phillipson-Adebo Commission of 1946. The constitutional movement towards still greater regional autonomy in the early 1950s was also paralleled by the Hicks-Phillipson commission of 1951. A new realignment of constitutional functions, between the centre and the region, brought into being in 1953, the Chick Commission. By the mid-1950s, internal self-government had come to the regions even though, the nation as a whole was still under the British Colonial rule, and the Raisman Commission of 1958 was in recognition of the new fiscal problems posed with the granting of independence in 1960 and the experience of working a fully-fledged federal constitution. The Binns Commission was appointed in 1964 to reflect the lessons of accumulated fiscal experience. Then came the take-over by the military in 1966 and the splitting up of the four regions into 12 states in 1967 as the civil war approached. The Dina Committee of 1968 was set up to address that problem at least on an interim basis.

In spite of its recommendation, the military nevertheless proceeded on their own rule-of-thumb for virtually the rest of the rule. But, as the 12 states had meanwhile been further subdivided into 19 states (with a new federal capital also carved out), and as the take-over by the civilian was approaching under a fresh constitution, the Aboyade Technical Committee was empanelled in 1977. The incoming civilian government however, had its own ideas of how to go about correcting regional disparities and therefore established the Okigbo Commission in 1979.

There have been twists and turns at every point about which allocation principles were dominant, tried, suggested, accepted or rejected. These principles find their parallel in the dominant political attitudes of the day in the fortunes of party alliances and in the variations of different revenue sources with the changing fiscal land scale. And politicians of different ideological perspectives and party colours could be expected to support and extol precisely the particular allocation principles that were most likely to benefit their respective constituencies on any given period, even if the same politician had to somersault intellectually and completely reverse themselves in a subsequent period. Leaving aside the more colourful allocation principles (such as geographical peculiarities and surface areas) which were variously suggested by different pressure groups, the following represent the basic criteria for revenue sharing that has been tried at one time or the other in the series of fiscal review commissions in Nigeria: derivation, even development, independent revenue, need, national interest, continuity of government, minimum responsibility, relative population size, financial comparability, equality of access to development opportunities, national minimum standards for national integration, different degrees of fiscal efficiency. New indicators continue to be indigenously devised, but not surprisingly the issues are still not yet (and probably cannot be) permanently resolved.

Long, complex and often confusing as the list of principles may be, they are still substantially meant to address only one aspect of the regional development problem; namely the distribution of any given sum to be allocated among the various member states or regions, the problem of establishing among different levels of government within the federal system was always another matter, approached differently by the different review commissions in Nigeria. So was the problem of local government financing. And so was the perennial issue of administering grants from one level of government to a subordinate level. But by and large, with the notable exception of personal income taxation, the distribution of tax powers among the different levels of government has been generally stable in the Nigeria fiscal system.

This research work centers mainly on the critical evaluation and determination of the derivation principle cum the fiscal federalism in Nigeria to determine basically how the derivation principle has undermined the fiscal federalism in Nigeria.  This research work also delves into the relationship between fiscal federalism and national economic growth as well as discussing the equitability of the current revenue allocation in Nigeria.

1.2            Statement of the Problem

            The Nigeria federalism is beset with structural imbalance. But true federalism implies that the constituent or federating units should pursue their own developmental programmes at their own pace, utilizing resources within their territory and under their control. But Nigeria’s federating units continue to be on the increase resulting in greater pressure being put on available resources. Such pressure makes it impossible for any unit to get fully satisfied with regard to its shares. Paradoxically, revenue allocation in Nigeria has witnessed a plethora of reviews as evidenced by various committees and commissions instituted in that regard (Okeke, 2004).  Yet no reliable formula has been evolved to meet the citizen’s yearnings and aspirations. Such experienced deficiencies have triggered off many actions among the lower tiers of government who continually complain of fiscal imbalance. Danjuma (1994) writes: “The existence of a federal system with its accompanying political units necessitates a revenue sharing arrangement to enable each unit to carry out its constitutionally assigned responsibilities.  In federalism the logic underlying the allocation of tax power (revenue sources) does not always tally with the logic underlying the assignment of constitutional responsibilities, there is always a gap between the expenditure obligations and the revenue to these levels of governance. Revenue allocation has been evolved as a mechanism for dealing with this imbalance or gap between expenditure obligations and revenue resources. For such allocation to be effective and efficient, it has to have clearly stated objectives, formula, principle and criteria.

The practice of federalism without recourse to true fiscal federalism amounts to sheer hypocrisy. The fact that the basic issues in Nigeria’s fiscal federalism are still hazy has equally encumbered her progressive move towards a true nation state. During the pre independence period, a number of commissions were set up to look into the problems of Nigeria’s fiscal federalism. These include: Philipson Commission (1946), Hicks-Philipson Commission (1950), Lenis-chick Commission (1954), and Raisman – Tress Commission (1958).  However, notwithstanding the fact that each, tried to resolve the controversy surrounding true fiscal federalism in Nigeria, the issue persisted. This culminated in the series of other post-independence commissions that were equally set up to provide the needed panacea on fiscal federalism arrangement for the country. These included: Binns Commission (1964), Interim Revenue Allocation Review Committee (1969), Okigbo Commission (1979), Danjuma Commission (1988) etc. Given the scenario, when the country reverted to the democratic rule in 1999, the 1989 constitution was made operational with several attempts to address the plethora of problems associated with the country’s fiscal federalism. However, during this period, there existed quite a lot of controversies surrounding the nation’s fiscal practice that led to some states in the Niger Delta region taking the Federal Government to court (Olugbemi 2000).

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