Nigeria's broken revenue formula: Sharing the spoils or stifling progress?

Nigeria’s revenue allocation formula, which dictates the statutory sharing of revenues from the Federation Account among the three tiers of government, is a glaring example of injustice and inequity enshrined in law. This system fails to promote fiscal efficiency or enable effective fiscal coordination. States and local governments are forced to operate with limited resources, often disregarding fiscal or monetary stability. This approach does nothing to ensure the even development of the federating units.

The Federal Government, unduly favoured by the current formula, takes a disproportionate share of the revenues. Out of every naira in the Federation Account, the Federal Government claims 48.5 kobo, while the states and local governments receive 24 kobo and 20 kobo, respectively. An additional 7.5K is allocated to four special accounts’ managed by the federal government. This means the federal government effectively controls 56 percent of all revenues, a figure that starkly illustrates the imbalance of power and resources.

This centralization of resources and power allows the Federal Government to behave as if it owns the Federation Account, often treating states and local governments as mere supplicants. Instances of unilateral decisions affecting revenue distribution, such as the creation of the Excess Crude Account by Olusegun Obasanjo, exemplify this overreach.

State governors also wield excessive control over local government funds, emboldened by constitutional provisions that mandate a state joint local government account. This has led to mismanagement and misuse of funds meant for local development.

“This centralization of resources and power allows the Federal Government to behave as if it owns the Federation Account, often treating states and local governments as mere supplicants.”

The principles underlying the revenue-sharing formula are fraught with controversy. The 1999 Constitution stipulates that population, equality of states, internal revenue generation, landmass, terrain, and population density should guide the formula. Additionally, the principle of derivation, ensuring at least 13 percent of revenue from natural resources goes to the producing states, has been particularly contentious. Oil-producing states argue that royalties should accrue directly to host communities, reflecting international practices. On the other hand, states that don’t produce oil see this as an unfair advantage, which compounds regional differences.

Moreover, special accounts managed by the federal government and certain revenue-sharing principles are susceptible to corruption. These include the ecology and natural resource development accounts and principles related to social development and internal revenue efforts.

To address these challenges, a comprehensive review of the revenue-sharing formula is imperative. The primary goal should be to expand the fiscal capacity of state and local governments. These entities currently face enormous developmental challenges with insufficient resources. Achieving social development goals, such as reducing poverty and improving health and education, requires significant financial support.

Another objective is to streamline the federal government, making it more efficient in delivering services. The Federal Government’s excessive control over resources and responsibilities has led to bloated recurrent expenditures and inefficiencies. Transferring many of these responsibilities to state and local governments, such as education, health, housing, and agriculture, would foster better service delivery and policy outcomes.

Furthermore, promoting balanced development across the federation is crucial. The current system creates disparities, leaving poorer regions behind. Ensuring equitable resource flows can provide opportunities for all federating units, regardless of their inherent wealth or lack thereof.