The states are dying

There is a hardly a day that goes by now, that we don’t read in the media of billions of naira being stolen by an agency in the central government. The whole thing is sickening. The rate at which money is being stolen in the central government has become like a curse. It is as if there is a competition among top government officials on the amount of how much you could steal. The main reason is that there is too much money in the centre and there is lack of coordination. Someone even suggested that we don’t have any leader in the centre. In an ideal situation it should not be tolerated. I think the time is ripe now to ask how come the central government has so much money while the states and the local governments are on financial ventilator. The last time we examined the formula for revenue allocation was in 1980. And the report was never implemented till today. The military came in 1984 and bungled everything. The present revenue allocation formula favours the centre because it was produced by the military. And as we are aware the military prefers a central command structure.

In spite of the extravagant life style of governors judging by the number of the expensive Lexus and Toyota CVR cars in their convoys, the states are dying for lack of funds. Notwithstanding the Local Government Reform Committee set-up on June 17, 2003 and headed by Etsu Nupe, Alhaji Umaru Sanda Ndayako as the Chairman with Alhaji Liman Chiroma(North East), Barrister John Ochoga(North Central), Professor Godwin Odenigwe(South East), Mr. Augustine Udoh-Ekong(South South), Professor Akin Mabogunje(South West), Senator Tunde Ogbeha(Senate), Hon. Austin Okpara(House of Representatives), Mrs Abieyuwa Garba(representing Women), Mr. Venatius Ikem(Youth) and Alhaji I.B. Sali as the Secretary of the committee, the Local Government system today in Nigeria is more or less dead.

Yet the centre keeps on spending money like drunk sailors. The rural areas have been abandoned and neglected. The other day the Vice President, Yemi Osinbajo, GCON, cried out that the cost of governance has become too expensive. To me that is understatement. The cost of running government in Nigeria is killing Nigeria. And a docile society like ours tolerate it. It looks as if we have surrendered. We should ask ourselves why the central government has become so mighty. The major reason is the issue of revenue allocation.

In 1980, President Usman Aliyu Shehu Shagari, GCFR, attempted to address the issue of revenue allocation. On November 21, 1979, he set up the Presidential Commission on revenue allocation.

The Commission was headed by Chief Pius Okigbo. Other members of the commission were Uman Bello, Garrick B. Leton, Ahmed Talib, Balarabe Ismaila, Adedotun O. Phillips and W. Okeife Uzoaga. Mr Ambrose Feese of the New Nigeria Development Company Limited in Kaduna was the Secretary. Messrs C.C. Chukwurah, I.O. Dada, F.D.O. Enwefah, A.O. Gaber and Tunji Olutola from the Federal Public Service and Mrs M.N. David –Osuagwu from the Public Service of Anambra State formed part of the secretariat of the commission. The Commission toured the then nineteen states of the federation and later submitted his reports to President Shehu Shagari on June 30, 1980. One hundred and thirteen individuals submitted memoranda to the commission while forty-eight associations, institutions and professional bodies equally submitted memoranda to the commission. Among those who submitted memoranda were Chief Simeon Adebo, Governor Aper Aku of Benue state, Professor Sam Aluko, Mr. Akin Fadahunsi, Chief D.E. Okumagba, Senator Kunle Oyero, Dr. Ibrahim Tahir, Dr. A.B. Yusuf, Mr. R.O. Nwabueze, Mr. Fola Omidiji, Dr. E.J. Nwosu, Mr. Bisi Morafa, Dr. Dele Olowu, Chief N.A. Frank Opigo, Chief E.E. Jacob Duke, Chief A.A. Ani, Chief E.K. Clark, Mr. B. Briggs, Chief S.O. Asabia, Mr. Victor Salami, Mr. M. Prest, etc. All the nineteen states then submitted their memoranda to the commission.

But let us look at the various revenue commissions that we have had till date.

“In political as well as fiscal terms, Nigeria operated a unitary form of government between 1914 and 1946. There was therefore no need for any system of revenue sharing. The impending constitutional change to be introduced in 1946 by the Richards Constitution created the need to formulate proposals to enable the newly created Regions, North, West, and East, to carry their new responsibilities. The new Constitution gave to the Regions some measure not autonomy but of administrative authority and responsibility, but left the supreme fiscal powers squarely with the Central Government. It was therefore necessary to make available to the Regions revenues to enable them to undertake their new functions. The Phillipson Commission was to formulate the administrative and financial procedures to be adopted under the Constitution.

The Commission divided Regional revenues into two classes: “declared” and “non declared” revenues. “Declared” revenues were those locally collected by the Regional authorities: direct taxes (personal income), licences, fees, income from property, mining rents, etc. These formed the core of what were later restyled independent revenues. “Non declared” revenues were those collected by the Central Government. Since Nigeria operated a unitary Government, it was the Central Government that determined what portion of the “non declared” revenues was to be shared each year among the Regions. In the event, during the four years of the Phillipson scheme (1948-1952), the proportion of centrally collected revenues shared among the Regions remained under one fifth.

For the share of the Regions out of the non-declared revenues, Phillipson considered three principles: derivation, even progress and population. Since population could be used as a proxy for need and even progress, and the statistical basis for using this principle did not exist in 1946, Phillipson applied only the principle of derivation. His argument that in using it he aimed at inculcating “financial responsibility” into the Regions, was mere rhetoric: all the taxes that entered into the argument were outside the legal and administrative jurisdiction of the Regions. But Phillipson also attempted to ensure that the shares of the Regions reflected the need to maintain existing levels of Regional expenditures as well as provide for “reasonable and unavoidable expansion.” Officials were blamed subsequently for making assumption on the entitlement of the Region on the basis of derivation, since the statistics of regional consumption of certain commodities were grossly deficient. Second, controversy, developed as to who was being developed at the expense of the other: the relative contribution of the Regions to the total revenues (declared and non-declared) and the relative receipts from the Centre diverged widely. The application of the principle of even progress with population as the proxy would have redressed the balance by giving the North more the 36 per cent it got against the West with 26 per cent, or the East with 38 per cent. The dissatisfaction with the Phillipson scheme and changes envisaged by the 1951 MacPherson Constitution which introduced a quasi-federal structure of government led to the appointment in 1950 of Professor John Hicks (1904-1989), a British Economist and Sir Sydney Phillipson (1892-1966), a British Knight and finance administrator to develop a scheme that “over a trend of five years” would achieve a “progressively, more equitable division of revenue.” By recommending that the Regions should have the power to raise, regulate and appropriate to themselves certain items of revenue, Hicks and Phillipson laid the foundation for the principle of independent revenues whose seeds were already in Phillipson’s category of “declared” revenues. Since, however, these revenues could not meet the needs of the Regions, some centrally-collected revenues would have to be shared between them. Accordingly, the Commission proposed the principles of derivation, need, and national interest. It gave 50 per cent of the import and excise duty on tobacco and 100 per cent of the duty on motor fuel back to the Regions on the basis of derivation established by reference to the relative consumption in the Region. It gave capitation grants to the Regions on the basis of need established by reference to population. But since at the time when the Commission was doing its work, the last census was in 1931 and the next census was two-three years away (1953), the population factor was determined by reference to the male adult tax payers in each Region. Indeed, the 1953 population was, in many places, grossed up from the nominal tax rolls. The Commission gave special grants to the Regions on the basis of national interest: 100 per cent of the cost of the Regional police force; 50 per cent of the cost of Native Authority police force; and 100 per cent of the grants given for education by the Regional Government to the voluntary agencies and local authorities. The Commission’s Report had one outstanding feature. A single factor was used for strict and direct revenue allocation a two-factor formula, of need and national interest was used for grants. This took care of principles that could not readily, for statistical and other reasons, be accommodated in the formula for direct allocation. The attempt to look beyond allocation of revenues to cover merely recurrent expenditures was ahead of its time for the then Nigerian Government. The Commission’s recommendation on a uniform tax system and on the need for a Loans Commission for the administration of loans to the Regions and the Centre were rejected by the Government. Agitation soon built up from the West to push the principle of derivation to the limit by applying it to all items of federally collected revenues. The North pressed for the deepening of the application of the principle of need while the East pressed for the extension of the principle of national interest.

The air was thick with bitter controversy between the Regions. Opportunities for a review of the Hicks-Phillipson proposals came with the Constitutional Conference in 1953. The (1954) Lyttleton Constitution gave full-self-government to the Regions while the Centre had to wait until 1957 to attain self-government, and until 1960 to achieve independence. Sir Louis Chick was appointed to ensure among others, that the total revenue available in Nigeria was allocated in such a way that the principle of derivation was followed to “the fullest degree” compatible with the needs of the Central and the Regions. Chick followed this injunction strictly. He expanded the allocation scheme to cover not only import and excise duties but export duties, mining rents and royalties, personal income taxes.

The logic of Chick’s recommendation led directly to the breaking up of the Central Marketing Board into Regional Boards in 1954. Their reserves were shared on the same principle of derivation. The west got about 50 million pounds sterling, the North about 70 million pounds and the East about 30 million pounds. In substance, following the Chick Report, 50 per cent of general import, excise and export duties, 100 per cent cent of import duties on motor spirit, of personal income tax, mining rents and royalties went to the Region of origin. His system operated for five years 1954-59.

Bitter criticism of the scheme developed of problems of measurement of consumption of imports (except for motor spirit and tobacco) and instability in export duty receipts. The Constitutional Conference of 1957-58 provided opportunity for a review of the Chick scheme.
The appointment of Sir Jeremy Raisman, civil servant and Professor Ronald Tress (1915-2006), a British Economist, envisaged the impending independence of Nigeria which was to follow in 1960.Their terms of reference were, among others : To examine the present division of powers to levy taxation in the Federation of Nigeria and the present system of allocation of revenue derived in the light of :(i) experience of the System to date; (ii) the allocation of functions between the governments in the Federation; (iii) the desirability of securing that the proportion of the income of regional governments should be within the exclusive power of those governments to levy, and collect, taking into account consideration of national and inter-regional policy.

The Raisman Commission was to review the tax jurisdictions as well as the allocation of revenues from these taxes, but such that the Regions had the maximum possible proportion of their income within their exclusive competence. This prescription for maximum independent revenues for the regions could not be fully realised. As the Commission reported, “the scope for the enlargement of regional jurisdiction or taxation …. seems disappointingly small” This conclusion is as valid today as it was in 1958. Personal Income tax was, however, made a Regional tax with the Centre being given the power to harmonise the tax laws (not the rates) through an income Tax Management Act.

Raisman created the Distributable Pool Account to facilitate the sharing of some federally collected revenues among the Regions. Each major revenue head was divided into a portion to be paid to the Regions on the basis of derivation, a portion to the Federal Government and a portion to be paid into the distributable pool for sharing among all the Regions on a set of principles. Payments were made on the basis of derivation on the following items : 30 per cent of import duties (other than on tobacco and motor fuel), 50 per cent of mining rents and royalties. Raisman’s argument was that “the government in whose Region oil royalties originate should clearly have a significant share in it.” The payments into the Distributable Pool Account were made from 30 per cent of mining rents and royalties and 30 per cent of all import duties except those on wine, beer, spirits, motor spirit and diesel oil and tobacco.

For the allocation to the Regions out of the total revenue there were clearly two principles; derivation and need. But need was reflected by population, by requirements for continuity in government services, for minimum responsibilities of government (in later to be restyled equality of States), and for balanced development. The weights attached to these principles were not displayed. The result of their calculations was that the North got 40 per cent the West 31 per cent the East 24 per cent and the Southern Camerouns then still a part of Nigeria, 5 per cent.

The Raisman formula remained in force until 1965 by which time oil revenue was beginning to show signs of becoming a dominant factor in the structure of the federally collected revenues. Increases in the import duties and the growth of manufacturing industries which yielded higher excise revenues all helped to enlarge the revenues of the Regions. Raisman had recommended that subsequent reviews should relate only to the mining rents and royalties and the allocation from the Distributable Pool Account. By 1963, the Republican Constitution had been introduced necessitating another review of the existing scheme.

The Binns Commission was appointed under Section 164 of the 1963 Republican Constitution. Its terms of reference were, among others, to review and make recommendations with respect to the allocation of mining rents and royalties and the distribution of funds in the Distributable Pool Account among the regions”. Binns, therefore, focused on the distributable pool account. He increased it to 35 per cent of revenues from import duties, mining rents and royalties and shared the account in the proportion of North 42 per cent, East 30 per cent, West 20 per cent, and Midwest 8 per cent.

He applied the principle of “financial comparability”, for the first time; it was somewhat of a hybrid between need and even development. It is determined by the cash position of each Region, its tax effort and the standard of service it provides. The Commission’s work and sittings were conducted in secret leaving an air of mystery around the recommendations.

Within a year of the Binns Report, the military intervention in Government in 1966 changed the political environment. In 1967, twelve States were created out of the former four Regions; the immediate problem was, therefore, how to share the Distributable Pool Account among the twelve States. The problem was solved very simply by dividing the share of the former Northern Region (42 per cent) among the six new States created out of it on the basis of equality and those of the West and the East among the States newly created out of them, on the basis of population. In a sense, the two principles of population and equality of States entered partially in the allocation of revenues and became firmly and fully adopted in 1970.

The Decree of 1967 was to provide an immediate and temporary solution to an immediate and pressing problem. Accordingly, the Dina Committee was appointed in 1968 with the following terms of reference: In the light of the creation of twelve states charged at present with the function formerly exercised by the Regional Governments to: look into and suggest any change in the existing system of revenue allocation as a whole. This includes all forms of revenue going to each Government besides and including the Distributable Pool; suggest new revenue sources both for the Federal and the State Governments.

The recommendation were far reaching in style and substance. The Committee renamed the Distributable Pool Account into “States Joint Account” ; established a Special Grants Account, recommended a permanent Planning and Fiscal Commission to administer the Special Grants Account and to undertake a continuous study and review of revenue allocation problems and schemes, and reduced the weight given to derivation, etc. For the shares to the States, the principles considered were: basic needs, minimum national standards, balanced development and derivation. Royalties from on-shore mining, were paid out to the States of origin, 10 per cent, the Federal Government, 15 per cent, the States Joint Account, 70 per cent, and the Special Grants Account, 5 per cent.

Rents from on-shore operations were to continue to be paid in full to the States of origin. The Special Grants Account would be disbursed to States on their application to the Commission. The principles to be applied from disbursement were tax effort, balanced development and national interest. The Report was reject by the Military Government. It was not even published. Its range went beyond the mood of the military rulers of the time. For example, it recommended, as Hicks and Phillipson had done in 1951, that there should be a uniform tax regulation for the country and that the pricing of Marketing Board produce should be harmonized; it also recommended that the Federal Government should finance all higher education. Some of these have, subsequently, been adopted piece-meal, for example, pricing policy of Marketing Boards, uniform income tax regulation, and financing of universities.

The last but not least is the Professor Ojetunji Aboyade (1931-1994) from Awe in Oyo state, technical committee on revenue allocation of 1977. The Constitution Drafting Committee had been appointed in 1975 to prepare a draft Constitution as part of the political programme of the Federal Military Government. Accordingly, the Technical Committee on Revenue Allocation was appointed in 1977 to review the existing revenue allocation scheme; its proposals were to be submitted to the Constituent Assembly and, if adopted, to be made a part of its constitutional proposals.

The Committee’s approach to the problem of revenue allocation extended to problems of development. It recommended that all federally-collected revenues, without distinction, be paid into the Federation Account. The proceeds of this Account are to be shared among the Federal Government, the States and, for the first time, local government councils in the order of 60 per cent, 30 per cent and 10 per cent respectively. This recommendation brought the States and local government councils into the most lucrative revenue sources: petroleum profit taxes and companies income tax. It created a Special Grants Account (3per cent from the Federal Government’s share)— and muck like Dina’s — to be administered by the Federal Military Government for the benefit of mineral producing areas and in need of rehabilitation from emergencies and disasters, etc. The principles for sharing among the States were built into a five-factor formula: equality of access to development opportunities, national minimum standards, absorptive capacity, independent revenue and tax effort, and fiscal efficiency. The formula was to be applied to increments, in the Account beyond the level of the previous year. The scheme was accepted but modified by the Federal Military Government.”

The governor’s forum should as a matter of urgency press for a new revenue allocation formula. It is not too late for the states and the local government to be saved. The death of the local and the states governments will affect governance in this country.

Teniola, a former director at the presidency, wrote from Lagos