• Tuesday, July 23, 2024
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BusinessDay

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.

Read also: FX gains contribute N4.23tn to FAAC revenue in one year – Report

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.

Read also: Nigeria’s Revenue Sharing Formula Needs A Facelift

To reflect these objectives, the revised revenue-sharing formula should include key provisions. Firstly, charges for the derivation principle and a Stabilisation and Investment Fund should be applied to the main pool before distribution. The derivation principle should be enhanced to at least 25 percent of the main pool. The Stabilisation and Investment Fund is essential for protecting budgets against revenue volatility and funding critical infrastructure development.

Secondly, the vertical sharing formula should be adjusted to allocate 37 percent of revenue to the Federal Government, 35 percent to states, 22 percent to local governments, 1 percent to the Federal Capital Territory, and 5 percent to a new Fund for Human Capital Development. This fund would support federal institutions such as universities and teaching hospitals, recognising their national importance.

For horizontal distribution, only three principles should apply: equality of states, population, and terrain/landmass. This simplifies the formula and removes outdated and contentious criteria. Additionally, local governments should receive their statutory shares directly, ending the problematic state-local government joint account.

To ensure the independence of the Federation Account Allocation Committee (FAAC) and the neutrality of the Federal Government in revenue sharing, the Revenue and Fiscal Commission should oversee FAAC. Separate accountant generals should manage FAAC and federal government accounts.

While these changes aim to create a fairer and more efficient system, they are not a silver bullet. To unlock Nigeria’s full potential, a multi-pronged approach is necessary.

States and local governments must prioritise economic growth initiatives that create a diversified and sustainable revenue base. Responsible spending that prioritises long-term investments in infrastructure, education, and healthcare is critical.

Furthermore, strengthening internal revenue mobilisation efforts at the state and local government levels is crucial. This could involve implementing innovative tax systems, improving tax collection efficiency, and closing loopholes.

Building capacity for new responsibilities, through training and knowledge transfer, will also be essential for effective service delivery.

By combining a reformed revenue allocation formula with a commitment to economic growth, responsible spending, and capacity building, Nigeria can lay the foundation for a brighter future.

This collaborative effort, driven by transparency and accountability at all levels, can finally deliver the development and prosperity Nigerians deserve.

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