OIL RENT MANAGEMENT AND FISCAL FEDERALISM: THE NIGERIAN EXPERIENCE

By

Akomaye V. Agba, Ph.D*

Avagba2000@yahoo.co.uk

And

Ben Obi, Ph.D*

benonyi@yahoo.com

Abstract

The paper addresses the vexed issue of oil rent management within the context of the country’s fiscal arrangements. After reviewing the conceptual and theoretical issues germane to the subject, the paper analyzes the data on the federation account and the relationships between the centre and the sub-national governments. Using the indices of expenditure decentralization, revenue decentralization and financial autonomy ratios, the paper comes to the conclusion that: (i) the expenditure power is concentrated in the federal government, (ii) the revenue decentralization ratios are 73.4 per cent for the federal, 20.1 per cent for the states and 6.53 per cent for the local governments and, (iii) there is non-correspondence problem in the country’s fiscal relations. The paper finally suggests that conscious effort should be made to allocate more revenues to the sub-national governments; the oil producing communities should be allocated higher proportion of the oil revenue to calm the tension in the area. Moreover, the trend in the federal systems is towards decentralization. Keywords: Fiscal Federalism, Decentralization, and Fiscal Correspondence. Introduction

The entity called Nigeria has existed as a Federation since its creation by the

erstwhile British colonial overlords in 1914. In that year the Northern and Southern

Protectorates were amalgamated to create a single entity. The country moved on to self- * Drs Agba and Obi are lecturers in Economics Department, University of Abuja, Abuja. Nigeria.

rule and later independence in 1960. Evidence exists that the federating units neither

negotiated their existence, nor the form of federation practiced. However, at

independence, the country operated a fiscal system, with the main criteria of revenue

sharing including, among others, derivation, even development, equality of access and

minimum standard of responsibility of government. At a time when agricultural produce

constituted the main sources of foreign exchange, the regions were entitled to 50% of the

revenues raised in accordance the derivation principle.

In subsequent years, a series of events were to alter all these earlier arrangements.

Specifically, the discovery of crude oil and its commercial exploitation in the Niger Delta

changed many things. These changes were more in the area of revenue sharing. Oil

revenues, which some commentators referred to as `rents’ have transformed government

revenue and expenditure. It has also taken the country from oil boom, characterized by

high revenues and a small absorptive capacity to that of an expanded capacity for money

but little money – oil doom. The reference to oil rents can be explained with reference to

an earlier designation of the oil sector as an enclave (Okigbo, 1983). This is because the

economy contributes very little to the industry but merely collects `rents’ on the use of

the land by multinational oil firms. Moreover, these use manpower and technology that

are alien to the economy.

The management of the oil rents have generated great controversy and schisms, in

some cases between regions (oil bearing and others or rulers and others, etc.). This has

left in its wake malfeasance in the form of corruption, bad governance, and lack of

accountability, among others. The adoption of various strategies and policies to manage

the oil revenues have not led to much progress in the polity. Since the inception of civil

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rule in 1999, the freedom of expression has apparently given fillip to agitations for more

equitable sharing of the oil revenues that culminated on the oil control suits that were

controversially settled by the Supreme Court in 2000.

The thesis of this paper is that the management of oil rent has been largely

inequitable as the fiscal arrangements have twisted the sharing formula in favour of the

power elites, mostly the ethnic groups that have monopolized power at the center. This

inequitable system has bred mistrust and heated the polity. In the process, the activities

have bordered on rent-seeking without much attention to the effects on national

integration and productive efforts on the part of the constituent parts of the country. The

paper is divided into four parts. Apart from the introduction, Section II contains the

conceptual and theoretical framework. This is followed by an analysis of the fiscal

arrangements in the Third Section. Finally, Section IV takes up the Summary and

suggestions for policy reforms in the fiscal arrangements.

II Conceptual and Theoretical Framework

2.1 Conceptual Issues

This paper analyses oil rent management and fiscal federalism. Accordingly, this

section focuses on a clarification of the relevant concepts. One of these concepts is that of

`rent’. In the classical formulation, rent is a payment for the use of land. In a market

system where private ownership of land, as it is for other property is the rule, those who

own land, are rewarded for their participation in the production process. Specifically, the

reward is for hiring out their land. Closely related to rent is that recognition that it can be

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`economic’, a reference to the payment over and above what is required to induce a factor

to offer itself for usage (Agba, 2005).

As earlier indicated, the oil industry in the country exists on the fringes. The point

often cited is that it is (i) dominated by multinational corporations (MNCs) (ii) they use

foreign technology (iii) their operations are largely conducted by foreigners drawn from

their parent countries while the indigenous manpower is in the periphery; (iv) the

currencies of transactions are the US dollar, Pound Sterling; the Euro and (v) the

Corporations are so powerful and rich that their annual turnovers compare with the GNP

of many countries and this makes them capable of threatening sovereign governments

(Agba, 1991). As a result of the foregoing, the local content added to oil production is

negligible. Currently, government’s participation is in the form of Joint-Venture in order

to regulate the industry (Akpan, 2004).

Furthermore, government intervention also takes the form of taxation which

differs from that in other activities, while the tax is on income of the MNCs, it also takes

into cognizance, “the ownership rights to the mineral which is social in many countries”

(Akpan, 2004:20). Akpan further adds that the rents tax is a levy on the resource rents

over and above the levies that are specified by the income taxes. The issues of inter-

generational equity are taken care of as the levy is to ensure equity between the

generations and this is equally extended to the various regions in the country (Akpan,

2004).

Scholars in the area have also identified the importance of the fiscal objectives of

government which include the maximization of government’s revenue from depletable

resource and the preservation of appropriate incentives for the exploitation and

4

development of oil resources. The best approach, it is argued, is to optimize between the

two scenarios (Stauffer and Gault, 1981). In addition, the collection and management of

these oil rents are said to be characterized by various forms of distortions.

2.2 Theoretical Framework

The analytical framework that embraces fiscal federalism, presupposes the

existence of and its adoption by a country. This stems from the laudable objectives,

which are efficiency, equity, and fiscal balance. It requires that the resources of a country

be allocated equitably through the distribution of functions and tax powers and authority

(Ndebio, 2004; Sharp and Olson, 1978). Federalism entails among others the devolution

and decentralization of functional taxation powers and the capacity of the various levels

of government to discharge the same efficiently. This form of government or political

arrangements differs from a unitary system like practiced in the UK. There are various

forms of references to federalism such as political, administrative; which are not directly

the preoccupation of this paper and are not pursued further.

An important aspect of fiscal federalism is the division of taxation powers

between the tiers of government. Ndebio (2004) presents the case for Nigeria. He notes

that these are expected a priori to be fair, just and equitable. The division of jurisdiction

is between the Federal, States and Local governments. Thus, it is necessary that this is

codified either in the organic law of the country such as the constitution, or any other

relevant law. In addition, this has to be tied into the fiscal policy of the nation to

guarantee stabilization and coordination.

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Other elements of fiscal federalism are that the principles of revenue sharing out

to be predetermined and well known to the stakeholders generally. These guidelines

condition inter-governmental fiscal relations. Agiobenebo (1999) has clearly identified

these as: diversity, minimum provision of essential services; fiscal equalization;

efficiency; centralized redistribution and derivation. Where emphasis is laid depends on

the complex issues of competition and political economy. Before leaving this aspect, it is

necessary to add the factor of inter-governmental transfers and grants. These grants could

either be matching or selective and non-matching, in nature. The necessity is to relate the

grants to what has been known in Nigeria as “internal revenue generation efforts”; and

also to take cognizance of sudden occurrences at the sub-national levels, necessitating

grants from the national or central government (Shah, 1991: Ndebio, 2004).

Within a fiscally federated state, a citizen can be subjected to the influence of

fiscal operations of different levels of government. Such a development is what

economists tag “economics of the ruled-level” (Gbayesola and Uga, 1999; Buchanan

1965). However, Wheare (1953) aptly argued that each level of government should have

adequate resources to perform its functions without appealing to the other level of

government for financial assistance. He emphasized this view when he said that:

“If state authorities, for example, find that the services allotted them are too expensive for them to perform, and hence) the call upon the federal authority for grants and subsidies to assist them, they are no longer coordinate with the federal government but subordinate to it. Financial subordination (marks) an end of federalism in fact, no matter how carefully the legal forms may be preserved. It follows therefore that both state and federal authorities in a federation must be given the power in the constitution each to have access to and to control, its own sufficient financial resources. (Wheare, 1953).

6

In Nigeria, since 1946, the country accepted the principles of federalism and its

concurrent concept of fiscal federalism. As at today, there are three distinct levels of

government in the country. These are the Federal Government at the center in Abuja, the

36 state governments as at 2006 and the 774 Local Government units including the Six

Area Councils within the Federal Capital Territory, Abuja. Each of these levels of the

government has its sphere of influence and functional competence. For instance, as per

the 1999 Constitution of the Federal Republic of Nigeria, the Federal Government has

exclusive constitutional responsibility for some functional subjects under the `Exclusive

Legislative List’ (Second Schedule of the 1999 Constitution, Part I Section 4), while both

the Federal and State Governments have control over the `Concurrent Legislative List` of

functional subjects as per Part II, Section 4 of the Second Schedule of the 1999

Constitution. The Fourth Schedule of the same Constitution Section 7, outlined the

functions that should be performed solely by the Local Government Council or in

conjunction with the State Government.

Also, the 1999 Constitution has also outlined the procedure for disbursing the

Distributable Pool Account to the three levels of government as per Section 162,

Subsection 1 & 2. Such outlined procedure is theoretically expected to provide adequate

financial resources for the different tiers of government to meet their constitutionally

assigned functions and responsibilities. Unfortunately though, irrespective of this

constitutional delineation of responsibilities and functions among the three tiers of

government, the dynamics of federalism have unconsciously or consciously subordinated

the apparent lower tiers of government to the Centre. This is commonly referred to as the

non-correspondence problem (Herber, 1979) which usually arises from the fiscal

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imbalance occasioned by the divergence/incongruence between constitutional functions

and responsibilities and fiscal resources. In practical terms, non-correspondence usually

leads to the inability of some levels of government to adequately fulfill their

constitutional functions and responsibilities. Where and when this occurs, the citizenry is

always disillusioned and cynical of the structural arrangement called federalism.

Scot (Quoted by Olowononi, 1998) and Banner (1961) hold opposing views to the above position. Scot, for example argue that a short-run misallocation of scarce resources is not dysfunctional to a federal political system in the long-run. Banner gave added credence:- “Policies which seem paradoxical or even self defeating

in terms of promotion of economic development in the sense of raising living standards may come to be readily explicably by reference to alternative aims which take precedence over the promotion of economic development and which may require measures incompatible with it.” (Banner, 1961).

Irrespective of these competing arguments, most levels of government in federal systems

are increasingly finding it difficult to meet their constitutional functions and

responsibilities in the face of their limited fiscal resources. Consequently, devising an

appropriate fiscal arrangement that would balance functions and responsibilities with the

given financial arrangement has been a perpetual problem in contemporary federal

systems including Nigeria. In Nigeria, the task of articulating an appropriate fiscal

relationship among the different tiers of government is delegated to the Revenue

Mobilization Allocation and Fiscal Commission. However, it is on record that since

1999, the RMAFC has not been able to articulate and pass into a Bill a Revenue Sharing

Formula.

Irrespective of the contrary, no economy the world over is let loose from

governmental intervention. Intervention is necessitated for five basic reasons. These are

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to enhance broad macroeconomic objectives for full employment, maintenance of price

stability, promotion of economic growth and development; maintenance of external

balance or balance of payments equilibrium and promotion of equitable distribution of

income and wealth apart from the conventional role of the government in maintaining

law and order (Bello-Imam, 1999:250).

Unfortunately, in Nigeria federalism ceased in practical terms as from January

1966. Except for a civilian interregnum of four years (1979-1983), Nigeria was ruled by

the military dictators between 1966 and May 1999. For all practical purposes, military

governments tend to be unitary, regardless of whether the country is constitutionally a

federation. Military governments in Nigeria have not been exceptions. Besides, even

when a civilian government succeeds a military government, some of the practices and

styles (if not structures) of a military administration continue under the civilian

government. Additionally, the centripetal forces that characterize military regimes are

significantly reinforced if the structure of revenue generation is such that the bulk of

revenue is collected by the national government, as has been the case in Nigeria since the

early 1970s owing largely to oil resources (Phillips, 1991 a & b). Any realistic discussion

of fiscal federalism in Nigeria cannot but take cognizance of these foregoing

observations.

What is Decentralisation?

Decentralization involves the transfer of administrative powers and authority to

local bodies in the fashion of local self-government. Enemuo (1996) gave credence to this

when he said that:-

“decentralization involves the transfer of authority and resources from the central government and its

9

agencies to field organizations, or those agencies, subordinate units of government, semi-autonomous public organizations, area-wide or regional development authorities; functional authorities, autonomous local governments or non-governmental organizations” (Enemuo, 1996).

Decentralization has four basic elements. These are devolution, deconcentration,

delegation and privatization cum deregulation (Asmeron, et al., 1995). The first

devolution involves farming out of certain levels of power and authority to levels/tiers of

government which carries with it some measure of autonomy. Enemuo (1996) amplified

this view when he said that devolution involves the transfer of power to sub-national

units of government, which are autonomous, distinct from the central government and

under only indirect supervisory control of the center. In addition, the units usually have

responsibility for specific functions over defined areas while the leadership is usually

popularly elected by the people. According to Rondinelli et al (1989). “deconcentration”

obtains when some amount of administrative responsibility is transmitted to lower levels

within the central government. It is, according to him, “the shifting of workload from

central government ministry headquarters to staff located outside of the national capital

`i.e. at the periphery’.

Deconcentration also translates into a mere geographic setting of local offices at

the periphery without any measure of autonomy. This form of decentralization could also

take the form of field administration which entails the transfer of decision-making

discretion to plan, make routine decisions and adjust the implementation of central

directives, to field staff. There is a sense in which de-facto governments can degenerate

into local administration as they operate as agents of the central government at the

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periphery thus making them de-concentrated units. For example, Nigerian local

governments under the protracted Military rule in the country were instances of `dejure’

devolutionary units but `defacto’ de-concentrated agencies of the Central government at

the periphery.

Delegation, according to Rondinelli (1989), implies the transfer of authority to

plan and implement decisions over specific activities to organizations such as

corporations which are placed under indirect control of central agencies. This is what

Asmerom, Borgman and Hoppe (1995) described as “the assignment of tasks by central

government organizations to semi-autonomous or parastatal organizations”. The fourth

element of decentralization, privatization and deregulation, according to Asmerom,

Borgman and Hoppe (1995), refers to the transfer of functions from government to non-

governmental organizations and to the private sector in general. To Van de Walle

(Quoted by Bello-Imam, 1998) and Boun and Michalet (Quoted by Bello-Imam, 1998)

privatization is a sharp contraction of the Public Enterprises and more dominance in the

private sector particularly in economic activities.

Of these four elements of decentralization, it is only devolution that is identified

with real transfer of political and administrative powers from the central government to

the people at the sub-national levels. Indeed, from the point of view of building a

democratic society, devolution is the only method which permits maximum participation

by the people at the grassroots.

III OIL REVENUE AND FISCAL DECENTRALIZATION IN NIGERIA.

Nigerian economy has been described as a monolithic economy because of its

dependence on only one sector, the oil sector. The oil price shock of 19703 transformed

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the agrarian economy of Nigeria to an oil economy. Oil revenue constitutes over 70 per

cent on average of total revenue generated in Nigeria between 1970 and 2004. Despite

the huge revenue generated from oil, poverty, low GDP per capita, high unemployment

rate, etc. pervade the economy. It should be noted that Nigeria is the sixth largest oil

producer and yet she is classified as a Third World country. The concomitant of this is

what scholars termed “resource curse” thesis.

Table 1 below shows the contributions of oil revenue to total revenue and to the

federation account.

Table 1: Percentage Contributions of Oil revenue in Total Revenue and the Federation

Account.

1970 - 1979 1980 - 1989 1990 - 1999 2000 - 2004

Oil revenue

as % of total

revenue

64.19 71.28 77.16 77.30

Oil revenue

as a % of

federation

account

67.57 78.08 160.23 110.52

Source: Authors’ Computation

Oil revenue has grown in importance and size. With correlation index of 0.95, oil revenue

is highly correlated with the amount of money accruing to the federation account. The

Federation Account is the account from which the three tiers of government usually share

the content in certain proportions, based on the revenue allocation formula. The

expenditure and revenue opportunities available to each tier show the degree of fiscal

decentralization in the country.

The degree of fiscal decentralization can be assessed on the basis of three basic criteria:

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(i)The importance of local expenditure in relation to the general government

expenditures, (ii) the importance of local revenues relative to the general government

revenues, and (iii) Local governments’ financial autonomy. Thus, the indicators used to

study the degree of fiscal decentralization according to UNDP (1993) and Lijeron (1996)

are:

The expenditure decentralization ratio, defined as the percentage of total

government expenditure spent by lower-tiers of government;

The revenue decentralization ratio, which assesses the significance of local

taxation. It is defined as the percentage of sub-national government revenue in

total government revenue; and

The financial autonomy ratio, which gives an indication of sub-national

government funding. It is the percentage of locally raised revenue in total sub-

national government expenditure.

EXPENDITURE DECENTRALIZATION IN NIGERIA

Table 2 below presents evidence of expenditure decentralization in Nigeria between 1993

and 2004 for which data were available for all three tiers of government. Expenditure

power could be said to be concentrated with the Federal arm of government, averaging

about 65.40 per cent within the period of analysis. The average expenditure

decentralization at the State level was as low as 25.8 per cent, and lower still at the Local

Government level with an average of 8.8 per cent. It should be noted that the period of

analysis comprises two polarized regimes both in orientation and ideas. If we divide the

period between periods of military and civilian regimes, it would be clear that

13

expenditure decentralization was more between 2000 and 2004 which corresponds to the

present democratic experiment. This period expenditure decentralization ratio averages:

52. 65 per cent for the Federal arm, 35.12 per cent for the States and 12.33 per cent for

the Local Governments. This can be contrasted with the era of military, that is, between

1993 and 1999. The average expenditure decentralization ratio for this period was 73.41

per cent for the Federal arm, 20.06 for the State and 6.53 for the Local Government.

Table 2: Nigeria: Expenditure Decentralization Ratio (1993-2004) %

Year Federal State Local Govt.

1993 75.02 17.33 7.64

1994 68.24 23.72 8.04

1995 71.26 22.31 6.43

1996 75.97 18.92 5.11

1997 77.74 16.83 5.44

1998 72.24 21.23 6.53

1999 80.58 14.27 5.14

2000 57.72 29.61 12.67

2001 56.99 33.42 9.59

2002 53.23 37.88 8.88

2003 48.86 36.72 14.42

2004 46.46 37.95 15.59

Average 65.40 25.80 8.8

Source: Authors’ computation based on CBN Statistical Bulletin (2004).

When we relate the figures to what obtains in the developed economies, we found out

that Nigeria performed woefully especially during the military era. The average

expenditure decentralization at the local level in the industrial countries is about 41.78

per cent and even about 13.64 per cent for the developing nations as a whole (Lijeron,

14

1996). This implies that Nigeria’s expenditure decentralization ratio is not only far below

the industrial countries’ average, but also below the developing nations’ average.

REVENUE DECENTRALIZATION IN NIGERIA.

Table 3: Nigeria: Revenue Decentralization Ratio (1993-2004) %

Year Federal State Local Govt.

1993 96.61 2.87 0.52

1994 94.33 5.11 0.56

1995 96.01 3.55 0.44

1996 96.00 3.59 0.41

1997 95.12 4.46 0.41

1998 93.44 5.89 0.67

1999 96.07 3.45 0.47

2000 97.70 1.94 0.37

2001 97.15 2.59 0.26

2002 94.54 4.89 0.57

2003 94.88 4.38 0.74

2004 96.14 3.31 0.55

Average 95.67 3.83 0.50

Source: Authors’ computation based on CBN Statistical Bulletin (2004).

Table 3 presents evidence of revenue decentralization in Nigeria between 1993 and 2004.

The scenario here is more appalling than the expenditure decentralization profile.

Revenue decentralization ratio within the period of analysis averaged 95.62 per cent for

the Federal Government, 3.83 and 0.50 per cent for the States and the Local Governments

respectively. Hence revenue is concentrated with the Federal arm. When we compare the

Nigerian situation with what obtains in the industrialized world, Nigeria is obviously

lagging behind the industrialized countries. Lijeron (1996) indicated that revenue

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decentralization in the industrialized countries averaged about 14.99 per cent at the local

(sub-national) government level while, the developing countries’ average is about 6.90

per cent. A cursory observation of Table 3 shows that the level of revenue concentration

did not markedly change between the military era (1993-1999) and the present civilian

regime (2000-2004).

One can easily see from Tables 2 and 3 that the degree of decentralization of expenditure

is higher than that of revenue and even much higher during the present democratic

dispensation. The implication of this phenomenon is that the sub-national governments

are usually dependent on the Federal allocation to meet their expenditure needs. This

apparent imbalance between the sources of revenue and functional obligations in the

states and local governments poses the problem of non-correspondence or vertical fiscal

imbalance (Herber, 1979).

The vertical fiscal imbalance revealed a conscientious attempt by the federal arm to

maintain a large portion of national revenue which major source is oil revenue to the

detriment of sub-national governments. For instance out of N 3,901.4 billion federally

collected revenue in 2004, N 2,638.3 billion accrued to the Federation Account

representing about 67.6 per cent. Again, out of the amount that accrues to the federation

account only N 2,438.9 billion was distributed among the three tiers of government and

the derivation fund. Table 4 below shows the sharing of the Distributed Pool Account

among the constituent units and the derivation fund, from 1998 – 2004 of which there

was reasonable data for all the component units.

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Table 4: Shares of Revenue by Tiers of Government from the Federation Account.

Years Federal State Local Derivation Fund

1998 48.42 22.35 18.62 0.58

1999 49.02 24.23 20.20 0.76

2000 47.76 23.64 19.69 4.96

2001 40.88 30.14 18.90 6.04

2002 50.74 23.56 19.72 5.27

2003 50.36 23.05 19.05 7.53

2004 47.07 23.87 18.40 10.66

Average 47.55 24.40 19.23 5.11

Source: Authors’ computation based on CBN Statistical Bulletin (2004) and CBN Annual Report and Statement of Account (Various Years). Table 4 reveals that there was no strict adherence to any revenue formula for instance the

present democratic dispensation allocates 13 per cent of the federation account to

derivation fund but the amount accrue to that fund has always been less than halve of

what is supposed to accrue to the fund. It should be noted that the derivation fund has

always been managed by the Federal Government; hence the Federal Government has on

average not less than 52.66 per cent of the federation account in its management.

FINANCIAL AUTONOMY OF NIGERIA’S SUBNATIONAL GOVERNMENTS

Table 5 shows evidence of the financial autonomy of the various tiers of government in

Nigeria between 1993 and 2004. The Table reveals that the Federal Government had far

more than its expenditure requirements. This can be correlated with reckless spending,

official corruption and lack of transparency in government financial dealings. While the

17

Federal government financial autonomy ratio averaged 170.95 per cent within the period

of analysis, the states and local governments’ figures are 17.12 and 6.60 per cent,

respectively. Again, as Lijeron (1996) has shown, financial autonomy in the sun-national

governments of the industrialized countries averaged about 80.26 per cent and 67.94 per

cent for the developing countries. Thus, comparatively, there is little or no financial

autonomy for sub-national governments in Nigeria.

Table 5: Nigeria: Financial Autonomy Ratio (1993-2004) % Year Federal State Local Govt.

1993 100.80 12.96 5.32

1994 125.49 19.55 6.36

1995 184.91 21.82 9.40

1996 154.26 23.18 9.76

1997 136.10 29.53 8.37

1998 95.17 20.40 7.56

1999 100.16 20.32 7.75

2000 271.89 10.51 4.65

2001 219.20 9.95 3.51

2002 170.08 12.37 6.14

2003 210.04 12.89 5.58

2004 283.26 11.93 4.85

Average 170.95 17.12 6.60

Source: Authors’ computation based on CBN Statistical Bulletin (2004.

The above analysis shows that subnational governments in Nigeria have a restricted

capacity to rely on their own resources because they have limited tax possibilities

(revenue sources). Oil revenue accounts for about 70 per cent of federally collected; and

oil by law is owned by the federal government, it then means that greater revenue sources

are concentrated with the federal government. It has been said that federal government

18

has lucrative revenue sources which include petroleum profit tax, mining rents and

royalties, import and excise duties, company income tax, and value added tax (VAT).

Hence, the sub-national governments are left with less lucrative sources of revenue. This

phenomenon has forced the sub-national government to depend on transfers from the

federation account to meet their expenditure requirements, thus making the sub-national

government unduly loyal and easy to manipulate by the federal government. There is a

continuous whittling down of sub-national powers engendered by imbalanced fiscal

federalism in Nigeria.

The blotted federal purse poses an inherent danger as witnessed over the years. The

lucrative revenue sources at the disposal of the federal government have the proclivity of

making any government regime to stay longer in power. This is evidenced in Nigeria by

the number of years the military had ruled the country and also the number of years each

military ruler spent before being over-thrown through coup d’etat. For instance the

Gowon regime spent about nine years before being over thrown in 1975. Also General

Babaginda spent about seven to eight years before he was forced to step aside in 1993.

Further more; President Sani Abacha held power from 1993 to 1998. He planned to

transmute from a military head of state into a civilian president when he died. It should

be noted that he had already secured the presidential nomination of the then five

prominent political parties to contest as the president. We may not have heard the end in

this proclivity to prolong tenures, the Civilian governments notwithstanding. This was

witnessed in the recent attempt at the constitutional review in 2006.

The issue on corruption is also linked to oil revenue, for instance the 1992 oil wind fall

has not been accounted for even when the Okigbo panel indicted former head of state,

19

president Babaginda. The Abacha loot is apt in this discussion as so many dollars and

pounds were looted by late president Sani Abacha.

The ominous danger to the inequitable fiscal federalism in Nigeria is the awakening of

voices of the oil producing states, backed by the militant youths in seeking for a fair share

of the resource in their land of which they have suffered and are still suffering untold

externalities arising from exploration and exploitation in the Niger Delta region. The

recently concluded National Political Conference gave the people of the South-South

geopolitical zone the opportunity to ask for 50 per cent derivation as was the practice

before the rise to prominence of oil in Nigeria. The lack of understanding and the

rejection of even a 25 per cent derivation resulted in a walk out staged by the delegates

from the South-South geopolitical zone. Consequently, there have been series of

kidnapping of expatriates working with the oil companies in the Niger Delta region, a

demonstration and also a struggle for a fair share of the oil rent.

IV SUMMARY AND CONCLUSION

This section summarizes the main findings from the analysis and makes some

recommendations for an adjustment to a better fiscal federalism in Nigeria. From the

analysis in section III as well as the theoretical review, we can make the following

deductions.

Nigeria fiscal federalism dates back to the pre-independence era, principally

1946; although the details of the type of federal structure and system remain

unresolved.

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There are in theory a three-tier system of governance in the country which

comprises the federal government, the state government, and the local

government. However, the power is concentrated at the federal level with the sub-

national government vulnerably dependent on the federal level.

Expenditure power is concentrated at the federal arm, where this concentration

averages about 65.45 per cent as against 25.8 per cent and 8.8 per cent for the

states and local governments, respectively.

Similarly, the extent of decentralization of expenditure ratio is 73.4 per cent for

the federal, 20.06 per cent for the states and 6.53 per cent for the local

governments. These figures are for the period 1993 to 2004.

The country experiences the problem of non-correspondence or vertical

imbalance which appears to have heightened the level of agitation for greater

share of the oil revenue at the sub-national levels.

The management of the oil rent is fraught with anomalies and distortions. This has

bred such anti-social attitudes such as corruption, bad governance and a

propensity to prolong tenure as witnessed by almost all the military heads of

states and recently the civilian government led by president Obasanjo.

SUGGESTED POLICY ACTIONS.

On the basis of the foregoing, we suggest as follows:

Conscious efforts should be made to allocate revenues away from the federal

government towards the sub-national governments.

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The oil producing communities should be allocated a higher percentage of the

revenue on the basis of derivation principle.

There is need to engage the oil producing communities in dialogue so as to

ease the tension that is building up leading to riots, kidnappings of oil workers

and a heightened general level of insecurity.

The trend in the federal systems is towards decentralization of power and

resources. The federal government should consider and adopt that line,

especially as there are attempts to review the 1999 constitution.

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Banner, P.T. (1961). Indian Economic Policy and Development. London, Macmillan Press. Bello-Imam, I.B. (1999). Fiscal Federalism in Nigeria” in Komolafe, O. et al (Eds.) Fiscal Policy Planning and Management in Nigeria . (Ibadan: NCEMA). Ch. 10 Bello-Imam I.B. and Agba, A.V. (2004). “Fiscal Federalism, the National Question and Resources Control: Practice and Prospect” in I.B. Bello-Imam and M.I. Obadan (Eds.), Democratic Governance & Development Management in Nigeria’s Fourth Republic, (Ibadan: NCEMA and CLGDS) Buchanan, J.M. (1965). “An Economic Theory of Clubs”, Economica, Vol. 32 (125) 882-902. Enemuo, F.C. (1996). “Decentralization, Governance and Local Government in Africa: Impediments and Prospectics” Paper at the Conference on Governance Issues in Africa – Arusha, Tanzania, April 12 – 16. Gbayesola, O. and Uga, E.O. (1999). “Sources and Structure of Government Revenue” in Komolafe., O. et al (Eds.) Fiscal Planning and Management in Nigeria. (Ibadan: NCEMA). Herber, B. P (1979). Modern Public Finance. Homewood: Richard D. Irwin, Inc.

Lijeron, J.H.E (1996). Decentralization, Local Governments and Markets: A Comparative Study of Recent Trends in selected countries cited in J.C. Anyanwu (1999) “ Fiscal Relations among the various Tiers of Government in Nigeria”. In the proceedings of Nigerian economic Society annual Conference, 1999. Ndebio, J.E.U (2004) .“The Elements and Practice of Fiscal Federalism on Nigeria”, in Taiwo, I.O and Fajingbesi, A.A. (Eds.) Fiscal Federalism and Democratic Governance in Nigeria .Ibadan: NCEMA and ACBF. Okigbo, P.N.C. (1983). Planning the Nigerian Economy for Less Dependence on Oil . Ibadan: NISER. Olowononi, G.D. (1998). “Revenue Allocation and Economics of Federalism” in Amuwo K. et al (Eds.) Federalism and Political Restructuring in Nigeria. Ibadan: Spectrum and IFRA.

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Phillips, A. (1991a). “Managing Fiscal Federalism: Revenue Allocation Issues” The Journal of Federalism Vol. 21(4) Rondinelli, D.A. et al (1989). “Analysis of Decentralization Policies in Developing Countries: A Political Economy Framework”. Development and Chang. Vol. 20(1) Pruhdhomme, R. (1989). “Issues in Decentralization” Paper Presented at the Workshop on Strengthening Local Government in Sub-Saharan Africa organized by the World Bank in Bologna, Italy. Shah, A. (1991). “The New Fiscal Federalism in Brazil”, World Bank Discussion Paper. 123, (Washington DC: The World Bank). Stauffer, R & Gault, J. (1981). “Effects of Petroleum Tax Design upon Exploration and Development”. Paper at the Economics and Evaluation Symposium of the Society of Petroleum Engineers at Texas, Feb., 25 – 7. UNDP (1993). Human development Report, 1993. London: Oxford University Press.

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