Lecture Note 7 Commissions on Revenue Allocation in Nigeria PDF

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Commissions on Revenue Allocation in Nigeria To address the tension that has so often been associated with revenue allocation in Nigeria, several commissions have been put in place to help resolve and /or minimize the tension. The following are some of the commissions 1. The Phillipson Commission on Revenue Allocation (1946) Before 1946, Nigeria operated a unitary system of government and so there was no need for a revenue sharing scheme. The introduction of the 1946 Richard's constitution which gave room for regionalism necessitated allocation of revenue to the newly created regions. To this end, the Phillipson Commission was appointed to provide an acceptable revenue allocation formula that could transfer finances to the regions to match their newly assigned responsibilities. Phillipson based his revenue allocation formula on three factors  principles of derivation,  even progress and  population. Emphasis however was on the principle of derivation which generated a lot of controversies because the implies that all or some part of the revenue generated from the region/state should go to that region/state. 2. The Hicks-Phillipson Commission (1951) The controversies generated by the Phillipson's commission the new constitution (The Macpherson Constitution) led to the setting up of the Hicks-Phillipson Commission on revenue allocation. The Commission was charged with the task of developing a revenue sharing formula that would achieve a "progressively more equitable division of revenue" over a five-year period. The Commission recommended the strategy of independent revenues by the regions, unlike the previous practice where all revenue was collected and disbursed by the central government. Based on this revenue allocation formula, allocations from centrally collected revenue were to be disbursed on the principles of a. b. c. d.

derivation, need, population and national interest.

This formula also generated a lot of controversies as the variables or factors such as population and national interest were said to defy any clear meaning. The Western Regional Government at that time which was relatively richer than the other regions due to the production of cocoa, pressed for a new revenue allocation scheme which would give a higher percentage to the derivation principle. This pressure partly led to the setting up of the Chicks Commission in 1953.

3. The Chicks Commission (1953) As usual, the Chicks Commission was set up following the 1953 constitutional conference which led to the Lyttelton Constitution of 1954. This constitution gave full autonomy to the regions and formally established a federal structure for the country. Among the terms of reference for the Commission, was to ensure that: Total revenue available to Nigeria was shared in such a way that the principle of derivation was followed to the fullest degree. Chicks followed his terms of reference religiously and as a follow-up, the central marketing board was broken up into regional resource boards in 1954 with their resources divided on the basis of derivation. He also extended his allocation scheme to cover not only import and excise duties but also export duties, mining rents and royalties The Commission's formula lasted for about five years during which controversies erupted over the use of the derivation principle. This was because the other regions endowed with fewer natural resources protested against the use of the principle and agitated for the use of equality of regions, need and national interest. 4. The Raisman Commission (1958) The constitutional conference of 1957-1958 provided the opportunity for a review of the Chick's revenue allocation sharing formula, following its bitter criticism from some of the regions. The Commission was charged with the responsibility to come up with a more viable formula for revenue allocation. At the end of its sittings, the Commission achieved the following in terms of revenue allocation: 1. Personal income tax was made a regional tax while the centre had to coordinate the laws through the income tax Management Act. 2. A Distributable Pool Account (DPA) was created to facilitate the sharing of some federally collected revenue among the regions. Raisman Revenue Allocation scheme employed two major principles of a. b.

derivation and need. Based on this, the North had 40 percent, West 31 percent, East 24 percent and Southern Cameroons 5 percent of centrally collected revenue respectively.

5. Binns Commission (1964) This Commission was set up to review the allocation of mining rents and royalties and the distribution of funds from the DPA among the four regions, following the creation of the MidWest from the old Western region. The Commission rejected the controversial principle of derivation and recommended the -

principle of financial comparability - a sort of hybrid between need and even development.

Allocation was therefore determined by the cash position of each region, its tax efforts and the standard of services provided.

On the allocation formula, from the DPA, Binns recommended the following percentages for the regions: North 24 percent, East 30 percent, West 20 percent and Mid-West 8 percent. These recommendations were to become effective on April 1, 1966, but the military intervention on January 15, 1966 rendered them ineffective. This sudden change in the political atmosphere and the creation of 12 new states from the four old regions in 1967, deepened the crisis of how to share the fund in the DPA. The formula applied in sharing the DPA funds after the military takeover was: 1. the states in the former Western and Eastern regions got their share based on the principle of population. 2. the Northern states were however allocated funds on the principle of equality. 6. Dinna Interim Revenue Allocation Committee (1968) In 1968, the Supreme Military Council appointed the Dinna Interim Revenue Allocation Committee to look into the existing system of revenue allocation. The Committee was to suggest the necessary changes and indicate sources of revenue for both the state and federal governments. The Committee recommended: a. the renaming of the DPA to State Joint Account (SJA), b. the establishment of Special Grants Account (SG A) and c. the setting up of a permanent planning and fiscal commission to administer SGA. On allocation to states, the Committee rejected the principle of derivation and applied -

the principles of basic need, minimum national standards and balanced developments.

Disbursement from the SGA was on the principle of tax effort, balanced development and national interest. The report was rejected by the military government because it was said to have exceeded its power and in many respects, ignored its terms of reference. 7. The Military and Revenue Allocation: The military era shifted the bulk of FCR to the federal government. The decree employed two principles in the main to allocate revenue, namely, a. the principle of population, 50 percent and b. the principle of equality of states, 50 percent. On export revenue, the states got only 60 percent instead of the 100 percent previously received. The remaining 40 percent was retained by the federal government. The military also put in place a decree that gave the federal government had 100 percent right of off-shore rents and royalties. Another decree transferred a substantial portion of revenue going to the states to the DPA. The provisions of this decree made it mandatory that 80 percent of all on-shore mining rents should be

transferred to the DPA, leaving a meagre 20 percent for the states to be shared on the basis of the principle of derivation. The decree, however, left intact the old principles of revenue allocation based on population and equality of states. 8. Aboyade Technical Committee on Revenue Allocation (1977) The Obasanjo regime appointed this committee as a part of transition to civil rule programme with the hope that if the Committee's report was accepted, it would be included in the constitutional proposals. The Commission recommended that all Federally Collected Revenue (FCR) without any distinction be paid into the federation account. The proceeds were to be divided among the federal, state and local governments in the ratio of 60 percent, 30 percent and 10 percent, respectively. A special grants account to assist mineral-producing areas was also recommended. To this SGA, the federal government was to pay in 3 percent of its share of revenue. The Commission based its sharing formula on five principles outlined as: a. b. c. d. e.

equality of access of development opportunities; national minimum standards for national integration; absorptive capacity (ability to learn and apply new knowledge); independent revenue and minimum tax effort; and fiscal efficiency.

The Commission's report was rejected by the Constituent Assembly in 1978 on the grounds that they were too technical to implement. However, the Commission's idea that all the federally collected revalue be paid into a common pool to be shared among the different tiers of government was accepted. In 1979 the "Federal Account" was created. The national assembly was also charged with the responsibility of determining how revenue should be shared among the various units of government. 9. Okigbo Commission 1980 When the military handed over political power to civilians in 1979, one of the vexing issues that the new administration had to grapple with was to provide a new and acceptable revenue sharing scheme for the country. A presidential commission headed by Dr. Pius Okigbo on revenue allocation. The commission was charged with the responsibility of examining the existing formula for revalue allocation with due regards to the principles of derivation, population, equality of states, even development, equitable distribution and national interest. Based on its terms of reference, the commission made the following recommendations: 53 percent of FCR was to be retained by the federal government, 30 percent was to be allocated to the state, 10 percent was to go to the local government.

7 percent was kept as special funds Several other amendments have been pursued as indicated in the table below all in the name of arriving at the best formula for allocating revenue in Nigeria. ITEM

Date

FederalGovt%StateGovt.% LocalGovt.%SpecialFunds%

Total%

Aboyade Commission

1977

57.00

30.00

10.00

3.00

100.00

Okigbo Commission

1980

53.00

30.00

10.00

7.00

100.00

Revenue Allocation Act 1981

55.00

30.50

10.00

4.50

100.00

Pre-April 2002

48.50

24.00

20.00

7.50

100.00

August 2001

41.23

31.00

16.00

11.70

100.00

Pre-Supreme Court Legal Decrees/Law Pre-Supreme Court RFMAC Proposal

Current

Supreme Court Ruling April 2002 Post-Supreme Court Executive Order # 1 Post-Supreme Court Executive Order # 2 Post-Supreme Court RMFAC Proposal

allocationRuledUnconstitutional

May 2002

56.00

24.00

20.00

0.00

100.00

July 2002

54.68

24.72

20.60

0.00

100.00

January 2003

46.63

33.00

20.37

0.00

100.00

National Priority Services Funds*:Ecology - 1.50Mineral

Submitted to Latest RMFAC Proposal PresidentSeptember 47.19

31.10

15.21

20, 2004

Devt.- 1.75Agric Devt. 1.75Reserve Fund - 1.50-----------

100.00

------Total - 6.50{joint Fed/State/LGmanagement}

Submitted to Presidential Proposal

NASSJanuary 25, 2005

Ditto+ Horizontal formulas**+ 47.19

31.10

15.21

State DerivationFunds Boards to 100.00 manage 13% derivation***

* Revenue Mobilization, Allocation and Fiscal Commission (RMFAC)...