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The case for Fiscal Federalism: Part 1

The case for Fiscal Federalism: Part 1

The Government of Niger State recently announced that it had banned the sale of alcohol in the state including parts of Niger that borders on Abuja, popularly known as Suleja, and Nigerians reacted swiftly with criticisms in response to the decision, with a consensus being “Niger State Government should be excluded from sharing in Value Added Tax that is earned from the sale of Alcohol.’’

This is not the first time that a state in Northern Nigeria has been in the news for banning the sale of alcohol, and even going as far as confiscating and destroying alcohol. As a matter of fact, this was the foundation on which the Rivers State Government sued the Federal Government, and convinced Lagos and Oyo States to join as joint parties in the suit against the FIRS seeking for a determination at the court of higher mention (the appeals court) following a decision at a State High Court in Rivers State, on the principle of letting state governments collect its own VAT and Personal Income Tax. This opinion of mine will be structured into two parts. This first part will introduce the background to this topic with two outstanding analyses on the issues of Fiscal Federalism.

Nigerians keep wondering why the budget per head, outside of the large size of government and ensuing profligacy, doesn’t seem to matter much in terms of its per capita weight, and also given the fact that the population is growing at 3% per annum. The answer is that the principles on which the federation is structured is wrong and requires a fundamental change. Let’s focus on these issues:

Nigeria’s legislative framework encompasses sixty-eight items across its exclusive, concurrent, and residual lists, demanding immediate amendments to delineate government control. Notably, “Schedule 39” addresses minerals and mines, encompassing Oil fields, Geological Surveys, and Natural Gas. The 2009 Niger Delta resource control agitation prompted the establishment of the Ministry of Niger Delta, reinforcing the Niger Delta Development Commission (NDDC), and creating the Office of the Special Adviser to the President on Amnesty. However, these initiatives have fallen short of expectations, particularly concerning their achievements relative to allocated resources.

In response to disparities in benefits among regions, the Federal Government established the North East Development Commission. Meanwhile, the South East and South West are advocating for similar commissions with federal allocations. Considering the well-structured Oil & Gas industry and the 2021 Petroleum Industry Act’s impact on regulatory functions, PMS price deregulation, and increased midstream investments, there’s a growing call for legislative amendments. Proposals include separating Oil & Gas from Solid Minerals mining, granting states control over their mineral assets (including prospecting, exploration, and beneficiation), and implementing mining taxes and royalties payable to the central government.

Furthermore, there is a suggestion to allocate 30% of profits from production sharing, profit sharing, and risk-sharing in NNPC’s contracts for Joint Ventures and independent production in Oil & Associated Gas to a Frontier Basin Exploration Fund. This fund aims to ensure that states beyond major oil producers benefit from the 13% derivation from Oil & Associated Gas. The question arises whether it is time for the government to enact such amendments for a more effective and equitable resource governance structure.

The second opinion is that the current principles of revenue allocation, overseen by the Revenue Mobilization and Fiscal Allocation Commission (RMFAC) through the Federal Account Allocation Committee (FAAC), rely on flawed metrics. Land mass, population, equity of states, derivation, and Internally Generated Revenue (IGR) shape the allocation framework. A more strategic approach suggests eliminating land mass, population size, and equity of states as criteria. For instance, Lagos State, with a smaller land mass of 3,527 square kilometres, accommodates 20 million people, boasting a 76:24% IGR to FAAC ratio, equivalent to 26 other Nigerian states combined.

The equity of states assumption disregards variations, as exemplified by Lagos, a major hub for sea cargo traffic, giving it a disproportionate advantage due to centralised ports. Granting states control over Personal Income Tax (PIT) and Value Added Tax (VAT) may result in uneven revenues. However, introducing a 5% stabilisation buffer fund could support less prosperous states, promoting survival and development through private-public partnerships without overburdening existing businesses.

The only equitable criteria for revenue allocation in Nigeria should consider derivation from royalties, taxes, profits from minerals, mine resources, and IGR. The imbalance arises from the government retaining 55% of generated revenue, centralising power in Abuja. Annual States Viability Index reveals only six Nigerian states as financially viable, highlighting the need for a more just and sustainable revenue distribution framework.

In conclusion, Nigeria’s Fiscal Federalism urgently requires reevaluation. Recent alcohol sale bans in Niger State and historical Northern region bans highlight the need for nuanced revenue allocation. Part one delves into legislative challenges, proposing amendments for effective resource governance. The second part stresses flawed allocation principles, advocating a strategic shift towards royalties, taxes, and IGR. As regional disparities persist, legislative amendments and specialised funds are crucial. A comprehensive overhaul is imperative for a just and sustainable revenue distribution, fostering economic development and equitable growth across states

Kelvin Ayebaefie Emmanuel is an Economist and a Board Member at Obsidian Archenar Nigeria.

Watch out for the second and concluding part of this article.