Ike, D. N.

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NJDS VOL 1 NO.2 QCI'OBER, 1981Nigerian JOUDlal OfDevelopment StadieISSN: 0189 - 26lAARTICLESTowards a Meaniqful EducationaaJ Refonn in Developing Countries- E. J. Nwosu, (( C NWQochaQrban PIaJudDa' Nlaeda: The Governmental Context-HanyA. Gnm 22Housing the Urban Masses in Nigeria- EnioJa O. AdeniyiA Theory of Inefficiency in its Socio-[)yJwnk: Setting·- Pita N. O. Efta/or-' 3749Trent:s in Urban P1aIming in Nigeria: The case of Jos aty- H. 1. AjaegbuGrowth of Insurance in Nigeria: Indicators and Problems- ObiMordiThe Political Economy of Small Enterprise Development- E. J. Nwosu6173,Towards An Optimal Formula for Revenue Allocation in Nigeria- Don Nnaemeka Ike .Book Reviews Cllike NwaochaObi MordiLG4110113Pub1i3hed by The &anomieaevelopm~t/nstir-~teI Univenity ofNigerill, Enugu Ozmpu.t, EntIgu,M~104 NIGERIAN JOURNAL OF DEVELOPMENT SruDlESVOL. I NO.2 OCTOBER 1981TOWARDS AN OPTIMAL FORMULA FOR REVENUE ALWCATION IN NIGERIA-byDON NNAEMEKA IKE··10 INTRODUCTIONFrom the history of revenue allocation in Nigeria, it is evident that an objective formula with in·temal consistency has long eluded the state agents entrusted with problem of searching for acceptablesolution. As the term implies, it is a continuous problem within the confmes of fiscal federalism. Insituations of this nature, negotiations and political considerations loom large in the determination ofthe final outcome., But these consideration should not overlook the underlying economic and demo-graphic factors on which an optimal solution must be based. In Nigeria we have settled for ad hocsolutions depending on the prevailing concentration of political power. The experience is that thosewith repository of power would want to direct and allocation formula in their own favour. Con·sequently terms like evea development, derivation, equality of state, population, national interest, aremanipulated to suit each area's economic interest.e essential features of fiscal federalism require that:-(a) Functions be allocated between the central and state Governments, with the necessity for eachGovernment to be endowed with enough fiScal powers to be able to carry its functions.(b) Both Central and State Governments should have fiscal autonomy which implies freedom todisburse funds.(c) All Governments should have adequate and elastic resources to meet their needs and respon-sibilities.(d) Economy and efficiency should be maximised in the process of revenue collection and dis·bursement. 1bis is flouted by the Nigerian decentralised systems.e) The Federal authority has supervening powers of revenue re-distribution. Thus resources couldbe transferred from one State to the other for purposes of achieving economic stability andeven development.An efficient formula between the centre and the states should satisfy these broad principles. TheFederal and State Governments have political autonomy with exclusive and concurrent powers. Thusthe states should also be endowed with adequate fIScal capacity to match with their responsibilities.regardless of the gap between fiscal need and available resources.A State may generate substantially more revenue than the others. If the- state is allowed to retainand disbUISe the entire revenue it would defeat a larger national goal of even national developmentand this is potentially disintegrative. Hence the need for additional powers of the federal authority foa more even distribution of the National resource endowment to make for inter-regional equity andalanced development..nu.s paper was written in l'J81 immediately after the Joint Finance Committee of the National Assembly passe,the Re7enue Allocation Bill that was later succe·ssfully challenged in the law court.**Dr. Ike is the-Head, Department of Finance and InsuIance, Institute of Management and Technology, bn~uINigeria.IKE: OPTIMAL FORMUL FOR REVENUE ALLOCATION 105Nigeria was un as a unitary Government until 1946 with the coming f the Richards Constit tion.As a Unitary Government there was no need for revenue allocatiOll., since the central authority hadonly provincial administrators to cater for. In 1946 with the Richards Constitutio and the threeregional set·ups, the need arose to allocate revenue to the J{egions. Phillipson Cklmmission wasappointed to study and make recommendations on the implemen ation of the new system.Philhpson identified what he called "declared revenue", which Was regional revenue collectible anddisbursable within the regions. These revenue sources included duect taxes, receipts from licenses,mining rents, fees of court~ and offices as well as receipts of rent from Government property andearnings from departmentsOn the allocation of non-declared revenue to the states, Phillipson considered two criteria, deriva-tion and the need tor even development. He adopted derivation because he believed that regions shouldbe encouraged to learn financial responsibilit and restraint. They have to learn to sper-r'I nly whatthey can contribute to the national revenue.This was the principle of derivation which would allocate to each region a share of non-declaredrevenue proportionate to its contribution of such r venuesNon·declared gran ts were to be paid to the regions as follows:-North 46 per centWest 30 per centEast 4 per centThe principle was not only detrimental to national integration and even developmen but wasfound unworkable. It created problems for the East and bitter wranglings in its pplicatiofl. Thus thisprinciple was rejetted in 1950. The Hicks·Phillipson commission discarded derivation and emphasiseda weighted population measure for the non·declared revenue which accounted for 94% of the totalrevenue.The importance of Hicks.Phillipson commission was that it rejected derivation as the primaryprmciple of revenue allocation and introduced other cri e ia namely: independent revenue, need andnational interest aU designed to make for effectiv fIScal federalism. This however still causeo 015-affection among the regions and is said to be contributo y 0 the constitutional crisis of 1953.Other Revenue panels were Chick Commission of 1953, R.lismen Commission of 1958, BinnsCommission of 1-964, Dina Commission of 1968 Aboyade Technical Committee of 1977, and thepresent Okigbo Commission of 1979. Chick Commission emphasised derivation, Raismen Commissionde-emphasised this principle. Under R.lismen, a newly styled distributable poo account was establisheThe Binns equation'was not substantially different from Raismen's except for a new Wlquantiflableprinciple of fmancial comparability in distribution of the Distributpble Pool ACCOQot. The DinaCommission advocated a Special Grants Account to be operat'ed by a fiscal and plalmrng Commission,but this was rejected by the Federal do~mmentK The analysesot the rious recommendations areas shown by Phillips (1975), Teriba (1966), and Nwosu ( 980).The Aboyade Technical Committee went ahead to separate revenue jUrisdiction of state andFederal Go'f'tlrnments and to identify a State's Joint Account to e shared amongst the States andFederal Go'f'tlmment a.ccording to the following principles:Equali y of access to developmentopportunities, National minimum standard for national integration, Absorptive- capacity, Independentrevenue and minimum tax effort. and Fiscal efficiency. The National Constituent Assembly of 1978106 NIGERIAN JOURNAL OF DEVELOPMENT STIJDIESrejected the criteria used on the basis of its dubious statistical foundations and measurement problems.The criteria were not amenable to objective quantification, and depending on assumptions madecouJd lead to entirely different results. Subsequently the Federal Government rejected the formulaand set up the Okigbo Review Panel in 1979.2. PRINCIPLES TO BE CONSIDEREDAn optimal revenue allocation formula should answer to the broad objectives of inter·regionalquity and balanced national development. It must not look askance at the essential features of fiscalfederalism as itemised above which involved autonomy, adequacy, cen trality, efficiency, and redis-tributional capacity of the federal authority.The recurring principles: running through the above-analysis and in the other referenced articles arethe following:-I. Derivation.2. Population.3. Even National Development4. Need5. Absorptive capacity6. Fiscal Efficiency7. National Interest8. Equality of States. Total School Enrolment.Derivation recognises the need to retajn incomes in States thta produce such incomes. II is arguedthat in order to inculcate financial responsibility, and fiscal prudence in revenue management, statesshould learn to spend only what they contribute to the national purse. limier this system thus,poorly endowed states would remain poor and well endowed ones would grow richer, all in the samecountry. This would negate the need for even national development, aml tllis would be potentiallydisruptive in the context of national economic integration.But the apologists of derivation could have a case. They have pointed to the deleterious effect ofmineral exploitation on environment, destroying ecological zones for agriculture and life. Such des-truction goes beyond the act ual monetary compensation paid out to the real land owners. Additio·nally there is need to transform areas of mineral potential to industrial zones as agriculture is inhibi-ted by exploitation creating quasi-technological unemployment. Areas of oil and mineral potentialwould consequently require more revenue for the transformation that may be required to ensureequilibrium in the relevant micro-economy.Thus, although a de-emphasis of derivation is recommended, it should not be completely scrappedpeciall/in dealing with oil royalties and rent.Population could be used as a relevant index for need with the assumption of eq ual per-caput mini·mum need; population would approximate the economic needs of each State. Since maximization ofpeoples welfare is a relevant state objective. population and; or percapita income must be seen as animportant co-State variable.Phillipson in 1945 considered population as the best available measure of human needs and verysimple to understand. Phillipson, however did not pursue the implication of this conclusion and thusON 107left ou population from his formula. Since the Hicks-Phillipson review of 1950, population has beenrecognised as an im rtant variable, until the A oyade review w 'ch sought for ohje tive criteri hatcould not be manipulated by public officials.The problem ith population i the Nigerian situation is the inaccuracy of the existing populationdata. It is argued by some that any emphasis on population woul lea to large scale popula ion in·tlation by States who would ant t use this r ess to incr ase their allocati n. It is necessar tostate that reve ue allocation is not the nly incentive for sta es to seek to inflate their population.The desire for enhanced political rep esentation in the c nt e an inter·r giona s uggles orhegemony are other strong inducem nts for rigging the population count As a result, we should notthrow a ay the b by with the bathwater. Thus e forts should be made t hand over to the presentan future generations of Nigerians accurate population data. This would g rant a fai ,si pie anequitable distribution of revenue with population as an important variable. 1 would add arentheticaUythat in advanced capitalist countries, U.S.A. for instance, population is the most important criterionfor revenue distri ution accounting for about 90% of the shared evnue.Even national development is not a quantifiable criterion. One of the broad objectives of revenua ocation is the achievement of even national development, since states have widely differing resourceendowment Hence the adde responSibility of the superior Federal auth rity to reo istr"b te reosources from the rich to t e poor states. h ,the use of criterion other than derivation is aimed atachieving even and balanceu national development.Need is amorphou and nebulous. Needs are limitless whil resources t satisfy them ar con·strained by the fact of scarcit (N osu, 1980). Consequently in the context of a state s ructure, needcannot be totally quantified or specifieu except by reference to population. Population should stiper-sede :my further reference to need in an ppropriate revenue calculus.Absorptive capacity, iiscalefficiency and nationalmtere t arc not easily quantifiable. Proxies couldbe used to approximate the intluence of these variable, but these proxies cannot be made 0 jectiveand acceptable to all states as they are likely to have dIfferential effects. There is evidence that allStates have very hIgh ab orptive capacity and as such this criterion should be ruled irrplevant in thepresent 'igerian situation. States with high fiscal effiCiency should be able to collect and disburseefficiently revenue sources within their exclusive Jurisdiction. National interest i not objective and hashjgh political undertones; if incorporated into our revenue framework, it is likely to follow the Kdis~tribution of political power and as such would be a source of polItical disputations. A Special Grant'sccount, of negligible fiscal magnitude, could be created within the discretionary powers of theNation\ Chief Executive on the advise of a Fiscal and/or Plannmg Commission for use to attend tonational emergencies, disasters and ecological depredation. The author dId recomm nd tllis .1977 memorandum (Ike 1977) to the Aboyade Technical Committee.Equahty of state~ is a straIght forward democratl pnnciple. Although in actuality states are notequal as they have differing size, popUlation and esource endo m nt; but SInce states have the sameauministratlve framework (namely Governors and state's executives, houses of legislature, civil serviceand judicial systems) of largely equal size, the states are likely to incur sinuJar administrative I.:osts.Thus the equality prrnciple with respect to states could have more than fictional and political implica-tions (Nwosu, 1980). The principle should be accorded a place in an appropriate revenue distributioncalculus as a result of its consequential economic possibilities. The weight given to this principle should108 NIGERIAN JOURNAL OF DEVELOPMENT STUDIESbe kept as small as possible to reduce the demand for mushroom states which has gripped the nation.Education has been accepted to have great inter-regional externalities. A State investing lughly ineducation would benefit the nation with enlightened and educated work force available for the largereconomy. Consequently to encourage states to invest in education from primary to University level,total school enrolment should be used for revenue allocation. Furthermore, as Anderson et. al., (I 963)pointed out, 40% of pnmary enrolment is a threshold for economic development. As a result, an in·ducement to States to emphasise school enrolment through a revenue framework could also lead thestates lIIto achieving far~ernational objectives.Additionally, total schOOl enrolment could be used as an index of human absorptive capacity, withstates having high school enrolment being able to absorb further investment 1fl other sectors of theireconomy in response to the economic force of factor complementarity.3. AN OYl1MAL REVENUE FORMULA30%55%5%10%.30.55.5.10The States and local governments should have certain Jurisdictions exclusive to them in order tocreate some measure of f!.Seal autonomy for these States. Thus the main source of state generatedrevenue should be personal income tax. Other sources of state revenue should be sales or purchasetaxes, football pools and other betting taxes, 'capital gains tax, stanlp duties, motor vehicle taxes andlicence fees. Local Governments should have jurisdiction for property tax, market and trading licences,motor parks dues, and land registration fees.All federally collected- revenue which should include import duties excise duties, export duties,mining rents and"'royalties. petroleum profit tax, companies income. tax should be consolidated intoone account to be shared by the Federal, State and Local Governments. The Federal Governmentshould retain personal income taxes from external affairs officers and the Federal Capital territory.The others should be shared 50% to the Federal Government, 40% to the state Governments jointly,8% to the Local Governments Jointly and 2% special Grants Account, within the discretIonary juriS-diction of the nation's Chief Executive to be disbursed on the advice of a Fiscal or Planning Com-mission, especially for use to attend to national emergencies, disasters and ecological depradations.The States account should be shared according to the following principles: population, derivation,equality of states and total school emolment. Fifty five percent should be shared accordmg to popu·lation, 5 per cent according to derivation, 10 per cent according to equality of states and 30%according to the raw figures of total enrolment. Thus the criteria and their associated weights are asfoUows:-I. Population2. Derivation3. Equality of States4. Total Schoolenrolment. Total 1.0 100%There may not be much that is scientific about the above pattern of distribution, but it reflects theauthor's qualitative ordering of the relative weights of the principles as elucidated in the aboveIKE: 0 TlMAL FORMULA FOR REVEN E ALLoCATIO 109analysis. The formula woul do for now and .or the future, and it reflects th synthesis 0 thepriorised (antecedent facts four hec.kered fiscal evolution.CONCL USJONS:The Okigbo Commission recommen ed a formu a not substantially different from the ab veformula, except in the relat"ve weights assigned. This Olagbo recommendation went through theFederal Executiv Council and the National Assembly. The Federal Government White Paper onOkigbo's recommendations renected the C mmittee's rdering and the ielative weights with minormodifications, but in the National Assembly new criteria were introduced that deviat d from thoptimality characteristics analysed above. For instanc Ian mass was injected into the revenue alloca-tion ~cujus which to the author is a retrograde step in our historical fiscal evolution. Reven shouldbe meant for people and not for land. Land itse i!> an asset, and a state with abundant land massalready has greater resource endowment. To give more money to sates with mor land are istantamount to "Carrying coal to Newcastle" .in future the rational principles of population and school enrolment should be give enhancedstatus if we are interested in economic development under conditions of political s ability. Forinstance, in the U.S.A., revenue is dist 'b ted only on the basis of population. In the 200 years ofU.S. history, there ha been no demand for division ()f states into unviable units for th purpose ofdenvin enhance fisca capacity from the common pool. It is an advantage for state to be large. Ifstates remain large, Nigeria as a nation is more likely to ben fit from economies of scale in the costsof administration and other technological indivisibilities in capital investments. Thus a formula in theline advocated would not only conduce to politica stability but also accelerate economic growth anddevelopment.REFERENCESAnderson, A.c, and Bowman, M.J. (1963), EdUCQtion and ECOfWmic a~lo1gmentK Chicago: AIdine PublishingCompany, 347.L. Ike, D.N. (len7) "An Optimal Formula For evenue Distn'butio .. Mimeo.Nwosu, £.1. (1980), "Revenue Allocation in Nigeria" in J Onoh (ed.), Foundations ofNfgerilm FfllilnciolIn[ralirructu e. Croom Helm, London: 176-193.4. Phillips, A.O. (1975) "Revenue Allocation in Nigeria 1970-1980", Nigerion Journal 1Economic and SociolStudies 17 (2): 1-27.Tenba, 0., (1966) "Nigerian Revenue Allocation Experience 1952-1'65; A study in Inter-Gov ·mmentlllFiscal and Financial Relations", NIgerian JOlUnal 01Economic and Socilll Studies 8(3 p 361-382.

TOWARDS AN OPTIMAL FORMULA FOR REVENUE ALLOCATION IN NIGERIA

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TOWARDS AN OPTIMAL FORMULA FOR REVENUE ALLOCATION IN NIGERIA

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