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Nigeria; A Flawed Fiscal Federalism in Urgent Need of a Fix

April 22, 2019

“Statistics are like a bikini what they reveal is suggestive but what they conceal is vital” – Aaron Levenstein.
 
Fiscal Federalism or Fiscal Decentralization is a state of affairs where federal governments have decentralized revenue-raising powers to sub national governments (SNG) such as regional, state and local governments, enabling them fund local services. Taxation and expenditure in this instance is allocated between all tiers of government while the nature of transfers between them is also determined.
 
In theory, Nigeria operates a fiscal federalism yet almost all the states and local governments in the country are nonviable without the support of the federal government. Readily available statistics suggest that states in Nigeria have a productivity / revenue generation problem.
Just take a look at our states today. In 2017, 14 of the 36 state governments could only internally muster 5 to 9% of the funds collected from the Federal Government.
 
Those states include Bauchi (total internal revenue of N4.3Bn against N85Bn from the FAAC); Yobe (N3.59Bn compared to N67Bn from FAAC); Borno (N4.9Bn against N92Bn from FAAC), Kebbi (N4.39Bn against N76Bn from FAAC); Katsina (N6Bn compared to N103Bn from FAAC); Niger (N6.5Bn against N87Bn FAAC); Jigawa (N6.6Bn compared N85Bn FAAC); Imo (N6.8Bn against N85Bn FAAC); Akwa Ibom (N15Bn against N197Bn FAAC); Ekiti (N4.9Bn against N59Bn FAAC); Osun N6.4Bn compared to N76Bn FAAC), Adamawa (N6.2Bn against N72.9Bn FAAC); Taraba (N5.7Bn against N66Bn FAAC), and Ebonyi (N5.1Bn against N57.8Bn FAAC).
 
Depending on the size of their recurrent expenditure bill, without the feeding tube and life support machine from the centre, these states will have to radically reduce their expenditure, salaries, wages and pensions bill or become insolvent.
 
States like Lagos and Ogun fared much better, generating more IGR than their allocation from FAAC (N333Bn against N201Bn for Lagos and N74.83 Bn against N69Bn for Ogun), while the likes of Rivers (N89Bn IGR compared to N178Bn FAAC), Edo (N25Bn IGR vs N75Bn FAAC), Kwara (N19Bn IGR against N61Bn FAAC), Enugu (N22Bn IGR against N69Bn FAAC), Kano (N42Bn IGR vs N143Bn FAAC) and Delta (N51Bn IGR vs N175Bn FAAC) also did relatively well.
 
This present parasitic relationship between most of the states and the centre is largely so because the Federal government has in the past, tinkered with the country’s fiscal federalism to favour itself rather than the regions, states or local governments.
 
Between 1948 and 1988 the following fiscal commissions remodeled the revenue sharing formula amongst Nigeria’s three tiers of government; Philipson (1948), Hicks (1952), Chick (1954), Raisman (1959), Binns (1964), Dina (1968), Aboyade (1977), Okigbo (1979), and Danjuma (1988). Prior to 1959, the regional governments retained 100% rights to royalties and rents from mining, a situation which changed as soon as crude oil was discovered in commercial quantity in the country. Thus the Raisman Commission of 1959 adjusted the revenue sharing formula to 50% for the mineral regions (what we know today as derivation), 20% Federal and 30% for the Distributable Pool Account (DPA). By 1966, this had been jettisoned as controlling Nigeria’s oil resources became the primary purpose of the successive military juntas and politicians at the centre.
In fact, the Petroleum Decree 1969 vested “the entire ownership and control of all petroleum in, under or upon any lands, in the State”. The military juntas also introduced Land Use decrees that essentially revoked Nigerians’ natural rights to their own lands and vested ownership in the State as well.
 
By 1970, derivation had been reduced to 45%. In 1975, it was further reduced to 25%. In 1981, the Shagari administration took it down to 5%, the General Buhari administration further reduced it to 1.5%, while the 1999 Constitution, brought it up to its present 13%.
 
Also of note is that Sales Tax was replaced with Value Added Tax (VAT) in 1994. Prior to its replacement, regions and the successor states had 100% right to it however with the 1994 amendment, VAT was not only collected by the Federal Government but the Federal Government retained 35% right to the collected revenue.
 
So, over the years and across almost each amendment to our fiscal federalism structure, the federal government has increased its stranglehold on revenue and tax collection. Each successive structure, rather than spur economic growth and development, has increasingly discouraged productivity and education, stifled competition amongst the states and local governments, asphyxiated innovation across board, and rewarded population size, land mass and mediocrity.
In theory, it is expected that federal countries are to be more decentralized than unitary states however as observed in Nigeria and other developing federal countries, this is hardly ever the case. Though often citing poor data, inadequate infrastructure, weak systems, administration and capacity, a lot of the reluctance to decentralize is usually based on political, or sectional interests. Dominant players at the centre are very reluctant to relinquish power / revenue generation and expenditure control to local players as this, they believe, whittles down their relevance. This is even more pronounced in a country with major socioeconomic imbalances such as Nigeria. Those from states that struggle to generate revenue are afraid that they will be unable to survive without fiscal centralization. Notably, countries who are facing secession, nationalist movements, war or the threat of war tend to be more centralized for obvious reasons.
 
The truth however is that fiscal federalism / decentralization spurs competition, leads to innovation, efficiency and better accountability amongst sub-national governments. Fiscal decentralization also leads to a significant improvement in the caliber and pedigree of aspirants to office in local and state governments and reduces the focus on the centre.
In the same vein, it engenders Fiscal Puritanism; i.e., fiscal abstinence (little or no waste of money) as available funds are applied to imperative projects, and fiscal rectitude as the need to increase revenue collections leads to efficiency in tax collection.
 
Anecdotal observations indicate that the more Nigeria moved away from fiscal federalism to (what is in practice) fiscal centralization, the less the sub national governments have seen the need to drive productivity, competition and innovation. What has happened over time is that competition has now been reduced to how much oil revenue a state can get from the centre while productivity (for most states) is the State Commissioner of Finance travelling to Abuja, cap-in-hand, to collect allocation from FAAC.
 
We can see the lack of incentives for competition in the disparity in literacy levels across the country; 94.24% in Abia and 19.16% in Zamfara. 89.03% in Cross River and 7.2% in Yobe. 78.8% in Akwa Ibom and 10.36% in Katsina. 90.57% in Osun and 19.26% in Bauchi. 96.3% in Lagos and 15.01% in Sokoto.
 
It can also be seen in the percentage of children of primary school age that are out of school; Lagos has 4.3%, while Bauchi has 60.7%. 6.6% in Abia and 58.1% in Gombe. Anambra has 6.6% and Jigawa has 44.7%. Ondo has 8.2% and Adamawa has 41.8%. Edo has 8.6% and Katsina has 34.8%.
 
The more you dig into the data, the more you realize that Professor Aaron Levenstein’s ‘bikini’ conceals stunted and retrogressive growth, a country choking on its version of fiscal federalism. A country that has turned what should have been a population / size advantage of 198 million people into a liability. With a birth rate of 5.5 children per woman, the population growth trajectory now borders on a crisis as it is projected to hit 550 million by 2070 with no commensurate plan for employment, infrastructure, utilities, hospitality, transportation, food, clothing, housing, medi-care, education, electricity, water, education and a myriad of other products and services available in civilized societies.
 
Developed countries deploy fiscal federalism to ensure an alignment between public expenditure to the different needs of the local and state governments within the federating units. This way, management is brought home, and is very local. Accountability is also significantly enhanced as residents / constituents close to the points of service delivery can hold their immediate local and state elected officials who live in their midst answerable.
 
Local and State governments are also likely to be more efficient, responsible and accountable if they have to generate the revenue they spend. Development and services will be specific to the needs of the locals and expenditure adjusted to what is affordable.
 
As we head into another Presidential election year, there are three candid questions we need to put to ourselves;
 
1. Why did the advent and commercial quantity discovery of crude oil trigger Nigeria’s movement from full fiscal federalism to what is largely fiscal centralism?
 
2. How have the regions / states / local governments fared in terms of economic growth and development since this consolidation of revenue generation and expenditure in the centre?
 
3. Between true fiscal federalism and fiscal centralization, which model best encourages development, economic growth and internal competition across board?
 
These are questions we need to answer if the intention is to move from a perpetually ‘developing country’ status, exploit the limit of our potential and transit to a developed country.

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