University of Nigeria Virtual Library

Serial No ISBN 978 – 8087 – 36 - 1

Author 1 ONAH, F. E.

Author 2

Author 3

Title Fiscal in Nigeria

Keywords

Description Fiscal Federalism in Nigeria

Category Social Sciences

Publisher Great Ap Express Publishers Ltd

Publication Date 2006

Signature

Fiscal Federalism in Nigeria

edited by F. E. Onah

GREAT AI' EXPRESS PUBLISHERS LTD NSUKKA - NIGERIA First Published 2006 by GREAT AP EXPRESS PUBLISHERS LTD 3 Obollo Road, Nsukka Tel. 08054094419,08034276377,08043180775

O F.E. Onah

ISBN 978-8087-36-1

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Mnde in Nigeria Table of Contents

Notrs on Contributors iv lntrod~~cfion, I) - xii II

1. Fcdcralism in Nigeria today. - Ken Ifesinnchi 1-28

2. Base of fiscal federalism in Brazil, India, Switzerland and the

United States of America. - 0. E. Obinna 29-62

3. Revenue allocation system in Nigeria, 1946 - 2000. - F. E Onnh 63-94

4.Fiscal federalism and economic, industrial and social developrncnt of Nigeria. - Ben E. Aigbolclmn 95-130

5. Problems and challenges of fiscal federalism in Nigeria. - Roseline C. Onnh 131-148 .

6. T11c problems and prospects of fiscal federalism and nation- building in Nigeria,- Job C. Anynnzuu 149-174

7.The challenges of internally generated revenue of state in Nigeria. -R I Chima & K I< Ogtlji~iba 175-196

8. Politicisation of revenue allo~ationin Nigeria. - Roseline C. Onnh 197-208

9. Resource-expenditure gap in local finances. - F. E. Onnh G. C. I. Olcoli 209-222 v

10. Revenue allocation and resource control in Nigeria. - F. E. Onnh G. E. R. Ukzuticzc 223-242 'v Notes on Contributors

Ben E. Aigbokhan - Professor of Economics, Ambrose Alli University, Ekpoma, Edo State, Nigeria. Chijiolte I. Okoli - Research Fellow, Health Policy Research Unit, Department of Pharmacology and Therapeutics, College of Medicine, University of Nigeria, Enugu Campus. Ezebuilo R. Ukwueze - Lecturer, Department of Economics, University of Nigeria, Nsukka, Nigeria. Felix E. Onah - Professor of Economics, Department of Economics, University of Nigeria, Nsukka, Nigeria. John C. Anyanwu - Professor of Economics and Chief Economist, African Development Bank (ADB) Tunisia. Ken Ifesinachi - Senior Lecturer, Department of Political Science, University of Nigeria, Nsukka, Nigeria. Kanayo I<. Ogujiuba - Deputy Chief of Party, United States Agency for International Development (USAID),Nigeria Reforms Project. O.E. Obinna - Professor of Economics, formerly with Department of Economics, University of Nigeria, Nsukka, but now with the Department of Economics, Ebonyi State University, Abakaliki, Ebonyi State, Nigeria. Roseline C. Onah - Senior Lecturer, Department of Public Administration and Local Government, University of Nigeria, Nsukka, Nigeria. Reginald I. Chima - Formerly Senior Lecturer, Department of Economics, University of Nigeria, Nsukka, Nigeria but now the Monitoring Evaluation Specialist, United Nations Fund for Population Activity (UNFPA), Harare, Zimbabwe. Introduction

F.E. Onah

Concept and processes of federalism 111 political philosophy federalism is defined as "the theory or advocacy of federal political orders where final authority is divided between sub-units and he centre"'. Sovereignty is constitutionally divided between at least two territorial levcls so that units at each level have final authority and can act independently of the others in some areas. As a consequence, citizens have political obligations to at least two authorities. However, allocation of authority between the centre and the sub-units may vary from country to country. The above political order is contrasted with that of a . While involve territorial divisions of authority typicallv entrenched in the constitution which neither a sub-unit nor the centre can unilaterally alter, decentralized authority in unitary states can bc revoked by central legislative authority at will. A variant of federal orders is . In contrast confedera tions have weaker centres than federations. Typically, in a confederation sub-units may legally exist. The centre only exercises authority delegated to it by sub-units; it is subject to sub-unit veto on many issues. Its decisions only bind sub-units but not citizens directly. It lacks an independent fiscal or electoral base. To cap it all, sub-units do not cede authority permanently to the centre. Often, are based on agreements for specific tasks and the common government may be excised by delegates of sub-unit governemnts2. Having thus distinguished between a federal system and a unitary state on the one hand, and between a and a confederation on the other, we now focus attention on the federal system. In literature, two processes of federalism are identified. One process involves the coming together of independent states to cede or pool "sovereign powers in certain domains for the sake of goods otl~erwiseunattainable, such as security or economic prosperity"3. Such federations are referred to as "coming together" federations and are typically arranged to constrain the centre and prevent majorities from overriding sub-units. Examples of such federations include the present U.S., Switzerland and Australia4. The second process is evolution from a unitary set-up. "Holding together" federations develop from unitary states as ' response to alleviate threats of by territorially clustcrcd minorities. In such arrangements particular domains of sovereignty are granted to sub-units while maintaining broad range of actions for the central government and majorities. Such areas of concession include languages and cultural rights in an asymmetric federatien. Federations in this category include India, Belgium, Canada and Spain5. A question that may naturally follow from the foregoing discussion is: What are the reasons for federalism? Answers to this question may be grouped jnto two sets, one set relating to the advantages of a federal order over and above that of completely independent sovereign states or secession, and the other concerning the preference of a federal order to that of decentralized unitary states. It is, however, necessary to point out that many of the reasons offered in literature in defence of a federal political order appear to be in favour of without requiringconstitutional entrenchment of split authority.

Reasons for a federal system rather than separate states or secession. States can join together in a federation to jointly become powerful enough to deter or ward off external aggression F.E. Onnh vii

and/or to prevent aggression or wars among themselves. In this sense; federations may foster peace by preventing wars and fears of war6. Federations can promote economic prosperity by removing barriers to trade among the federating units and through economies of scale. These strategies can be achieved by trade agreements among the units and by constituting themselves into a sufficiently large market capable of reaping economies of scale7. Federal arrangements may protect individuals and minorities' human rights by constraining state au thorities and entrusting the centre with the authority to intervene in sub-units. Federal arrangements can facilitate agreement, coordination and control over "spill-over" effects and externalities by transferring some powers to a common body. For example, where agreement would have been difficult to achieve between independent states, a federation may facilitate mutual use, control and coordination of the water resources of a river that transverses the federating units. Federal arrangements may improve the political influence of formerly sovereign governments of the federating units/states. This is achieved through better coordination and greater exercise of political power in relationships among the sub-units, especially the small ones that are now enabled to influence decisions rather than being mere policytakers. Federal political orders "may promote cooperation, justice, or other values among or within sub-units as well as among or within their constituent units, for instance, by monitoring, legislating, enforcing or funding agreements, human rights, immunity from interference, or de~elopment'"~.

Reason for preferring federal orders to a unitary state In this section we consider arguments put forward in favour of a federal structure as opposed to a unitary form of been recognized as fundamental that even military governments attached importance to the continuation of a federal system of government in the country. It is also important to observe that the Nigerian federalism is one of competing decisions to hold together sub-units that began as a decentralized unitary state. It is therefore another example of "holding together" federalism. The federation began as a unitary colonial state in 1946 but disaggregated into three regions in 1954 and into for rcgions in 1963. In 1967 the regions were abrogated and 12 states created in their place. The number of states increased to 19 in 1976, to 21 in 1987, and ultimately to 36 in 1996 with a federal capital territory which has almost acquired the status of a state. In addition, the number of local governments which have functioned as a third tier of government has grown from 299 in 1970 to 774 by 1996. The country has witnessed what for convenience may be termed "civilian federalism" and "military federalism," corresponding to civilian and military governments respectively. Civilian federalism which, in the real sense of the concept, conforms to true federalism, has entailed governance based on the constitutional sharing of power between the central, state and local governments. It is marked by party politics which determines the "nature of thc federation, the configuration of powers, and the prevalence of the rule of law".I2

The Coverage Tlic focus of this collection is on fiscal federalism (intergovernmental fiscal relations), a concept which was first introduced in Nigeria in 1946 following the adoption of the Richards constitution". The study is concerned with the allocation of ;tax jurisdiction and expenditure responsibilities among the central and sub-unitst governments in a federation. The book therefore contains contributions from experts in different but relevant fields of public finance. Chapter one disc~~ssesthe general concept of federalism and x-rays its current state in the country, tracing its development from the colonial period. Even though it addresses a theme of which fiscal federalism is just a sub-set, the rationale for its inclusion is to provide the general environment within which the focus is situated. Chapter two treats the subject-matter from the perspective of older and more advanced federations. It is intended to provide the knowledge within which the Nigerian experience may be appreciated. Specifically, it discusses federalism as it is practiced in the U.S., India, Brazil and Switzerland. Chapter three traces the system of fiscal arrangements in Nigeria from the colonial times, discussing thc evolution of tax jurisdiction and revenue allocation from the time Nigeria was a unitary state wi t11 some decentralization, to the current stage. Chapter four examines the problems and challenges of fiscal federalism in the country, looking at the f~mctional responsibilities and taxing powers of the three tiers of government. It identifies vertical and horizontal financial imbalance among the levels of government, their consequences and solt~tions. Chapters five and six deal with the implications of fiscal federalism for economic and social development in Nigeria. The former discusses such issues as the rationale for fiscal assignment to different levels of government, vertical fiscal imbalance, and its ramifications for il~dustrialdevelopment and economic growth. It contains a lot of statistical information w11icl1 not only serves for illustrative purposes but also as a data-base for further research. The latter focuses on the problems and prospects of fiscal federalism for na tion building. Specifically, it analyses different forms of fiscal decentralization and their relativity. It is also a rich source of statistics. Chapter seven has internally generated revenues of state governmentsas its focus. It argues that the dependence of state and local governments on statutory allocations form the centre erodes their fiscal autonoiny and weakens their capacity to perform devolved responsibilities. It concludes by asserting F.E. Oiznh xi that while devolved responsibilities are bottom heavy, the fiscal capacities are top heavy. Chapter eight examines the issue of politicization of revenue allocation in the country. Specifically, it seeks to: determine the extent to which effective revenue allocation in the country has been marked by political in flucnce. establish the possible consequences of politicization on fiscal federalism. proffer suggestions on how to reduce political influence.

C1icipter nine considers tlie adequacy of local government revcnucs for the execution of assigned responsibilities. It obscrvcs that not only are the revenues grossly inadequate but also that they are expended mainly on recurrent items, thus ma king execu tion of capi tal development projects extremely difficult. Finally, chapter ten takes a look at the diincnsions of resource control. It blames the agitations of the inhabitants of mineral -producing areas on inadequate compensation for tlie exploitation of their resources and for ecological degradation of their environments. In conclusion, it must be owned that these chapters do not exliciustall the thorny issues associated with fiscal jurisdiction and revenue allocation in a federal system. Even those aspects discussed may have fallen short in their depth of analysis. However, the issues of intergovernmental fiscal relationships is much like a recurring decimal; it is very dyiiamic and gc?ins currency and momentum in response to changing political environments. It is therefore hoped that the contents of this work will be found useful to the enquiring mind. References 1.Andreas Follesdal (2003), S tandford Encyclopedia of Pllilosophy, (http.www.andreas. follesdal@filosoft. uio. no). p. 1. 2.!1?id, p. 2. 3.Stepan A. (1999), "Federalism and Democracy: Beyond the U.S. Model", ]oirr~~lof DCIIIOCY~~C~, 10: 19 - 34. 4. Andreds ~ollesdal:op cit, p 2. 5. Ibid, p. 2. 6. Ibid p. 5. 7.Is,http:/ /www. countrystudies.us/ Nigeria/77.htm l3.Ola Vincent (2002). Fiscnl Fcdcrnlism, good for Nipuia, http:/ /www.nigerdcI tacongress.com. Federalism in Nigeria today

Ken Ifesinachi

Introduction Tlie Nigerian statc is a historical plienomciion. Tlie state form of society is simultaneously a product, an instrument, and a spccific manifestation of class struggle in the historical development of human societies. The state form of society perceived as the autonomization of class domination can be distinguished in terms of its specificity in relation to a given mode of production. We can therefore distinguish the communal, slave holding, feudal and capitalist societies as specific historical manifestations of the state. Nigeria is a product of capitalisrli. The intensive growth of capital in Europe led to the emergence of monopolies. The cmcrgcnce of monopolies lcd to a dccrcasc in production in their bid to corncr the inarkct for profit maximization. In the long run, the decline in production led to n fall in t11c rate of profit. The ubiquitous pervasive tendency for profit maximization inherent in capitalism led to ,the extension of capital to other territories. This pl~enomenonis called impei.inlism. Imperialism involves the political, economic and social control and exploitation of weaker nations by stronger ones in order to preserve the necessary coriditions for capital accumulation. The emergence of the Nigerian state can therefore be located in the period of the cxtensivc growth of capital tl~rough the process of impcrialisni. The period of direct political, economic and social control of the country by the British is referred to as the colonial era. This period can be dated from 1860 to 1960. Thus, the Nigerian state appears to have emerged out of a century of colonial do~nination,distortions '2nd exploitation. The Nigerian state th'it cmcrgcd in 1960 was imm~rs~din clews conflict instcad of rising above it. Thc coloi~ialcra in the country was marked by tho rule of c-onipniessuch '1s the Royal Niger Company, which acted as tlw st'!tc, and from this tradition, the colonial state dcvclopcd as a tool of capital. This implied that under coloniaiism stn te power was used for primitive capital accumu1ation. At indepcndcnce, the emergent ruling class WAS more in tcrested in reproducing the neo-colonial character of the sta tc and the condi tions for their doinina tion, and continued thc usc of state power for primitive capital accumulation. This implied that thc post-colonial state of Nigeria is interven tionist and involved in class conflict. What follows is a bitter struggle to control state power as a source of primitive capital acc~~mulation.The definition and ~har~ictcrof Nigerian fcdcralism can be better appreciated in the context of class conflict in Nigcria. The nature and character of the class conflict in the post- colonial state of Nigeria is a rcflcction of the mode of articulation of capitalism 011 disparate pre-capitalist modes of production. The implication is that the capitalist state was hoisted simultaneously on the communal states of southern Nigeria and the feudal states of northern Nigeria. The separa tist colonial policies and ideology accentuated the contradiction in this development. This resulted in the emergence of a highly fractious ruling class in post-colonial Nigeria, divided along ethno-regional lines. The fractions which roughly correspond to the pa tterns of domina~~ccbefore colonialism, were fossilized by the patterns of socio-econchnic activities under colonialism. The effect of a11 thesc is the emergence of a Nigerian state with limited potentials for mediating the grim socio-economic Ken Ifesinnchi 3 conflict between the different ethno-regional factions of the ruling class in Nigeria. The consequence of this contradiction is the conflict and tension that characterize the relationship among different cthno-regional groups in the country. The problem of Nigerian federalism can be located in this context. In an attempt to grapple with the problem, federalism has bccn canvassed for both in political action and political analysis. Federalism is a structure of government wl~icli is assumed to havc the potentials of providing for the separate identity of different ethno-regional groups while preserving their unity in a central federal government. Tn the same vein, the ethno-rcgional character of socio-economic competition in Nigeria is perceived as a peculiar attribute which portrays Nigerian federalism. Thus, the e thno-regioiial pattern of socio-ecoi~orniccompe ti tioii in Nigeria is said to have a federal character. This idea of Nigeria's federal character has been translated into a principle of p~lblicadministration and public policy in the country. I11 1995 the government in order to apply the federal character principle in the management of ctlino-regional conflicts and tensions in Nigeria established the Federal Character Commission. However, it is argued in this study that the thrust of Nigerian fedcralisn~devolves around the capacity of the ruling class to evolve a consensus political leadership. Nigerian federalism is thus perceived as an expression of the class conflict among the fractions of the leadership in the post- colonial state of Nigeria. This study is an attempt to review and clarify the structure and operation of Nigerian federalism with a view to explicating its fundamental strictures, challenges and prospects of transforma tion.

Development of federalism in Nigeria The Nigerian state is a ' historical phenomenon. British imperialistic incursion in to Nigeria began with the ai111exa tion of Lagos in 1861. Through the activities of the Royal Niger Company, which was granted its charter in 1886, the British consolidated thcir hold on the western, eastern and northern parts of the country by 1898.The Royal Niger Company Charter mandated it to establish and maintain law and order, impose taxes, levy duties, ensure justice and guarantee free trade in the area.' Initially, tlie British maintained three separate administrations for Lagos, Southern Nigeria and Northern Nigeria. This three-pronged partnership forged with the British s~rbscqucntly influenced the course of constitutional development in Nigeria. In an effort to unify the administration of tlic three areas, Joseph Chamberlain, Secretary of Sta te for the , sct up the committee i11 1898.~Thc committee rccommended for the political development of tlic country in order to save costs and to facilitate administrative cxpediencv. It also rccommended the unification of the thrcv Nigerian administrations. In 1906, the Lagos administration was ~ncrgcdwith that of southern Nigeria. Southcrn and Northern Nigeria were amalgamated in 1914 to ensure fiscal propriety in administration3, and to protect the two British territories from German arnbitioii. Prior to amalgamation and until 1946 the North and South diverged radically in administration. The North operated a hierarcliical emirate system. It has to bc observed that the operation of the policy of indirect rule by the local aristocracy bascd on the emirate hierarchy tended to coincide with British aristocratic tradition. This atavism can be said to account for the fa~ourabl~disposjtion of the British colonial officials towards tlic cmirnte system. 111 the So~itlithere were great varieties in tlic system of indirect rule arising from the different forms of trndi tional administration tlia t tlie British met on arrival. Lagos was administercd as a crown with legislative and executive councils. Othcr Yoruba kingdoms operated a loose form of indirect ;tdministration based on paramount chiefs. In the arcas of thc Niger Delta, the heads of small city-states functioned as agents of thc British government in a brand of indirect rule called the "House Rule System". In Igboland the "court rule system" was practised. Another differing fea turc of the South is that it Iiad a vociferous bunch of intellectuals who cdited and published newsuapcrs that reacted strongly against the colonial ;~dministr~~tio~~. Thc point bcing made is that in spite of amalgamation, Northern and Southern Nigeria maintained separate administrations. 111 this WCI~thc two administrations developed a growing schism in trCidition,character and orien ta tion. The British offici,ils of thcb diffcrcnt administrations handed over thcir prcjuciiccs to their subjccts in the course of time. When t lugh Cli ttol-d beca~ncChvernor of Nigeria at the end of World Weir 1, hc. tricd to reverse the tide of by uniting the two cidi~iinistr;rtioi~sbut was disallowed by Lord Milner who had bcconic Scbcretary of State for the Colonies. Lord Milner n~aint~~incclthat he was not prcp'ired to "put the whole country under a single pooh-ball with only superior clerks to help 11irn."~The British colonial office later appointed Sir Richmond l'almer Lt Governor of Northern Nigeria. Palmer was known to have worked assiduously towards maintaining a separate idcnti ty for the North. His scheme of budgetary independence in any case was perceived as a policy of secession rather than that of dec~ntralization.~~e was also known to have advocated in the late 1920s a federal solution to the unification of Nigeria." Sir Theodore Adams as Chief Commissioner also championed Palmer's rejected scheme of emirate independence. He was noted to have said in 1941 that the emirs considered the northern provinces as a separate country and that enforced cooperation with the south would lead to a demand for a "pa ki~tan."~Governor Richards later divided Nigeria into three regions in 1946 to represent the three major ethnic divisions: Yoruba, lgbo and Hausa/Fulani, thus making the task of unification an arduous one. Richards' perception of Nigerian unity is evident in his statement in 1948. According to him, ...It is only the accident of British which has made Nigeria one country. It is still .far from being one country or one nation socially or even eccmoinically ... sc~ciallyand politically there are deep differences between the major tribal groups. They do not speak the same language and they have highly divergent customs and ways of life and they represent different stages of cult~re.~

This statement underscores the separatist thrust of the colonial ideology. Nnoli has noted that tribalism occupied an important place in the racist ideology of colonialism. It was represented as a primitive and barbarous mystique peculiar to the Africans, and as products of socialization into thiscolonialist world view, Africans have internalized this discriminatory classification of their countrymen." In his study of Ivory Coast, Aristide Zolberg observes that both Africans and Europeans widely believed that certain ethnic groups were more progressive, intelligent, or generally more worthy of respect than others."'Thus, the level and rate of colonial socio-economic attainment became a basis for the myth of ethnic superiority. Also in an attempt to preserve the Islamic purity of the north as an essential ingredient for the policy of 'divide and rule' as well as to insulate the north from southern radicalism, the British colonial administration excluded Christian missionaries from the north. They also limited the introduction of Western education in the region. Thus, the relative isolation of the North from Western influences that were transforming the South left the north backward, fearful and resentful, and the south scornful of the North." The indirect rule system also left its mark on the North and made feudalism an impalpable fossil incapable of growth or new orientation. The above developments were further buttressed by the former Nigerian national anthem with the wording" ... though tribe and tongue may differ, in brotherhood we stand.. .. " This equally indicated the British propaganda of cultural separatism. The objective conditions of the colonial economy also helped to reinforce ethnic and regional differences in the country. The import-export structure of the international economic relations Ken Ifcsinnchi 7 of colonialism hampered the economic integration of the various parts of the colony. The various parts of the colonial economy were rather integrated with the metropolis than with each other. The economy lacked coherence and balance and was therefore fragmented scctorally and regionally.'2 Thus, the colonial economy was organized around regional enclaves isolatcd from each other; consequently thcl emergent dominant class werv tragmen ted aiong ethno-rc-gion;l1 lines. 'The pa ttcrn of socio-economic competition consequently tended to sharpen the ~iw~irc~nessof ethno-regional differentiation. This, in turn, reiiitorccd class antagonisms and ethno-regional conflicts and tension Icading to the emergence of strong pan-ethnic and regional political parties in Nigeria's first and second republics. The point is that the British failed to build a unified Nigeria. To date, the struggle to establish a progressive and stable Nigerian nation continues as a hangover of unkind and disprogram~ned British paternalism.'' Nigerian leaders therefore have, through colonial policies and ideology, swallowed the pill of separatism. Thus, in 1947, Balewa declared that: Since the amalgamation of Southern and Northern Provinces in 1914, Nigeria has existed as one country only on paper ... it is still far from being united.14

Also, in 1948, while Southern leaders were making protestations of unity, Balewa, as a member of the legislative council, was noted to have said: I am sorry to say that the presence of unity is artificial and it ends outside this chamber ...The Southern tribes who are now pouring into the North in ever- increasing n~imbers... do not mix with the northern people.in social matters, and we in the north look upon them as invaders.I5

The well-known statement of Chief Obafemi Awolowo has the same implication: Nigeria is not a nation: it is a mere geograpliicai expression. There arc no 'Nigerians' in the same sense as there arc 'English' or 'Welsh' or French'; the word Nigerja is merely a distinctive appellation to distinguish those who live within the boundaries of Nigcrici from those who do not.'"

Sjrnilarly, Alimadu Bello wrote that the north, even as far back as I9 14, would have preferred to take her 'own wayf.'' Thus, the adoption of federalism by Nigerian leaders in 1954 is widely seen as a means of managing and resolving the complicated and poten tially explosive e thno-regional diversity or what has come to be perceived as the national question. The national question is the "fears" that the various ethno-regional groups had of one another. Therefore, power-sharing among the ethno-regional groups which federalism promised was perceived to be a means of ensuring ethno-regional autonomy in a united Nigeria.

Structures and challenges of Nigerian federalism The political, economic and social challenges of leadership and Nigeria's federal democracy at the dawn of the 21" century are arduous, complex, ovcrlapping and even shifting. From the debris of a previous political order past legacies tend to colour political development. Past legacies of personal authoritarian rule with its distinct traces of patrimonialism have been the most prominent feature of post-independence governance in ~frica."Among these are rent-seeking behaviour among the members of the elite, an authoritarian state, ethnic and religious conflicts and a brand of political struggles in which hegemonic exchanges, pacts or compromises among the elite tend to be opportunistic and lack the foundation on which consistent policy can c-lc,~olvc~.'~ Accord i ngl!., Nigeria's cliequered political history throws up the following problems: 1 C = There have been procedural problems of protocol arising from confusing the operation of parliamentary and presidential democracy. How to attain the symmetry of checks and balances between the executive and legislature without precipitating crises. The persistence of pervasive military and authoritarian dispositions, which prefers government by orders rather than by consultation, persuasion and dialogue. Pervasive disruption of government programmes and lack of continuity and the secming inability of the leadership to evolve a stable tradition of alternating political choice. = How to work the presidential democracy so as to respond positively to the centrifugal and centripetal pulls of ethnic, religious, social and idiosyncratic ylur a 1'ism in Nigeria's federalism in order to douse social tension and foster national integration.

In order to illuminate the pertinent issues involved in the foregoing, we begin with the structural imperative of federa 1'~sm and try to locate Nigerian federalism in this context.

The structure of Nigerian Federalism 11.1 conceptualizing federalism, K. C. Wheare, its foremost contemporary exponent, draws his classic formulation from the structure and processes of the government of the United States of America as the ideal model of federal government, and avers: by the federal principle, I mean the method of dividing power so that general and rcgional govcrnmcnts are each within a sphere coordinate and inticpendcnt,

Accordingly, the federal principle specifies Constitutional division of powers among levels or tiers of governments. The operation of a written constitution showing this division . Coordinate supremacy of the two levels of government with regard to their respective functions The existence of a bicameral legislature An independcnt judiciary and supreme court Constitutional provision for human rights Independent electoral systems for both levels of governmen t Existcwcc of multi- party democracy, among others

TIic Amvrican tlicorctica I modcl of I<. C. Whearc was adopted for Nigeria, ,iltliougli the acLiptatioii of American federal domocratic principlw is yet at crossroads, du~to discrepancies in tlic in tcrnal con trciilictions of the country's political economy. Nigeria presently blazes a trail in the operation-of a three-tiered structure of federalism of federal, state and local governments, albeit with a preponderant and overbearing federal govcrnmcnt. The indication is that the operation of the principle of separation of powers between the tiers of governments as well as that of the three arms - the executive, Icgislature and judiciary - is that, it is observed inore in its breach. The indication also is that the ideal features of classical federalism following Ikejiani-Clark2' have not significan~ly i rnpacrcd on Nigerian federalism. These include: the desire of conccrncd communities to be under a single indepcndent government for some purpose; the desire of the federating units to retain regional autonomy in some matters at least; and the imperative that the federating units must be reasonably proportional in size in order to ensure a fair distrib.ution of political power, in coy ing with sectional diversities of geography, heterogeneity of social culture, nationality,. language and re~igion.'~

Thc Nigerian nation has moved progressively from a 12-state structure in 1967 to 36 states, a federal capital territory in Abuja and 774 local government areas. The structure indicates northern predominance in the control of 19 states, the federal capital territory at Abuja and the headship of the federal government. This imbalance in the structure of the Nigerian federation has had telling consequences for the operation of Nigerian federalism. We proceed to examine some of the attendant strictures of Nigerian federalism incidental to its structural dynamics.

Federalism and the demand for restructuring in Nigeria The state refers to a society or community with its distinct system of production and distribution rela tions as recognized under a prevalent international law. The stability of the state form of society is a function of the management of political, economic and socio-cultural competition and conflict on the basis of popular rather than private coopera tion, negotiation, bargaining, restraint, compromise, equity and justice. This in heres from the popular notion that "the democratic idea" is about "the challenges often posed by citizens' demands for greater control and participation even in countries generally regarded as highly democratic." 23 Democracy is thus more than a putative or abstract construct. It finds copious, robust and equitable expression in the politics of cultural pluralism. However, the character of the Nigerian state depicts a neo- patrimonial federal permutation in which leaders evolve a patronage system cutting across ethno-regional cleavages and social diversity via primitive capital accumulation. The federal structure is perceived as a device for the elite to take advantage of state largesse. 2%imilarly, Amuwo conceives the Nigerian polity as a hierarchy of patrons and clients cutting across horizontal regional, ethnic and religious cleavages.25 This view is quite congruent with Richard Joseph's prebendal or rent-driven paradigm.2" No less a political gladiator in Nigerian politics as Ghali Umar Na' Abba, former speaker of the Federal House of Representatives, has alluded to this clientelist stranglehold, I\ li~l(.acknowledging the imperatives of justice in Nigerian I~YIOI,,I l15m./\ccordinglv hc. argues tliat: r ti(*p~oplc who have been rulmg Nigeria, the j~olr~~c.,ilelite. from both North and South

Ii,i\ (t never p~vtcwdedto be ruling or acting In Ihc~intcrc>st of the masses who create the wealth ot the, n'i t~on.-''

This fact NaJAbbCisttitcls, 15 c~locpcntly demonstrated by the dcsp~r~ition,dirt poi ci~icidccciy tliat are prevalent in all sclclions ol tlie country. '\ It is thl5 \c.cwciriohit lid5 cmgcvdorcd constant agitation for. j~~slicib,~o~isi~lt~itio~i, opi\ning of tlx~political space, re- ncbgotiat~onol tlic Nigcbri'in pact 'ind rc>sti-i~cturing.In this regCirci yoli t~c~ilrcstri~cti~ring is inspired by separatist and irrcdcntist aspirations ag'iinst pCrccived structural defects, institutional dcforniities, injustice, functional inequities, vexatious tr'insi tion processes and controversial constitutional rcvic\ws and I-cfornis in Nigerian federalism. However, restructi~ring through coiisti tution ma king and political engineering, as Amuwo2' notes, hardly democratizes inter- class political competition; it only addresses intra-elite political contestation and, not infrequently, rather unfairly and unsatisfactorily.

Northern domination and the bogey of power-sharing Northern domination of the political leadership of the country has been seen as not only providential but also divinely inspired. A scion of the conservative Northern political oligarchy, Maitama Sule, once drew attention to this providential and divinely inspired logic in this way: The Northcrncrs are endowed ... with leadership qualitics.The Yorilba man knows I~o\;ito earn a living and has diplomatic qualitics. The Igbo is gifted in commerce, trade .... God so c'rcatcd us individually for 3 purpose. Others are created as kings, servants . . . we all need each other. If there arc no followers, a Iting will not exist."'

Osifo-Whiskey's articlc, "The trouble with the North", expounds on this theme in this way: Under the able scheming of the caliphnl North, power alternates between its civilian and military minions in in ilnaba.lsIiedly rabid power play that reduces tlic entire south to a glorified second-class people."

In thc saruc Ijght, Chicf Anthony Enahoro notes that some think of no tional unity as a scenario"' in which they provide thc still-actors, while other parts of the country provide the bit actors and extrasT2 The real or unimagined fears of northern domination and hcgcniony has created the bogey of power-sharing as the solution to northern and other forms of ethno-regional domination. Power-sharing in the structure of a polity tends to accentuate the oligarchic predilection of revisionist de~noci-atictheory and practice. It is largely a holding operation with an inherent tendency to maintain the socio- economic strrtzls quo, and government immobility with the consequent growth of cynicism towards the political process." The notion of power-sharing in Nigerian federalism, as Adigun Agbaje argues, has the potentials of doing more harm than good to the polity by further complicating the search for good governance, national integration and democracy." The crass failure of power-sharing to facilitate and support democratic governance in Nigeria makes it redundant as a principle of political leadership. Power-sharing is at best a rationalizing creed engendering illusory consciousness and the bogey of power dispersal in the face of continued power concentration. If creates a feeling of symmetry even as the formation and perpetuation oi asymmetrical power relations between people and institutions continue to grow and fossili~e.~~ 14 Federalism in Nigeria today

Power-sharing thus becomes an ideology, following John B. ~hompson,""mobilizing everyday meaning in its service and construction, communicating and circulating symbols supportive of production, sustenance and reproduction of relations of domination. Structural realities in Nigerian-type federations are indicated by: over-valuing and poli ticiza tion of social life over-concentration of power in the ruling oligarchy over-centralization of power in the federal government the absence of Arend Lijplmrts'" segmental autonomy.

An extreme tradition of personal patrimonial rule disdainful of plural democratic brcaks on the abuse of power make power-sharing in Nigeria to be no more than a deceptive bogey. Closely related to the notion of power-sharing is the concept of rotational presidency, perceived as an arrowhead for ensuring real access and balancing in institutional representation, especially the presidency in Nigeria. Undemocratic as it is, the idea of rotational presidency has been construed as a major, if not the last, pragmatic plank to ensure unity and stability in Nigeria. The idea was nurtured by deep-seated ethno-regional schisms and the hegemonic disposition of the Northern oligarchy in Nigeria's geopolitical equation - a thesis scandalously buttressed by the events of the annulment of the June 12,1993 presidential election. The principle of rotational presidency is presently being played out as a convention but its returns are really worrisome. All the fears of Nigeria's tumultuous past are still alive in the polity. The clear indication is that since colonialism, the Nigerian nation has remained an authoritarian project driven on the wheels of primitive capital accumulation. The bogey of an enduriqg nascent democracy is quickly receding into a 'lootocmy' of unprecedented buccaneering proportion, unmindful of the plight of its citizens. Another corollary of power-sharing, which has remained a vexed issue in Nigeria, is the revenue allocation profile, Ken lfesinachi 15 indicating trends in the management of 'fiscal federalism' or its more impressionable synonym, 'resource control'. The principles applied in the past varied from permutations of derivation, need, equality of states, population, internal revenue effort, even social development, to landmass and ecological problems among others." The dialectics of primi tive capital accumulation accentuated by the matrix of Nigeria's cultural pluralism made revenue allocation neither equitable nor efficient. It is unassailable that the octopoidal, rapacious and oligarchic tendencies in the operation of Nigerian fcdcralism undermine any meaningful democratization of the Nigerian state to pursue people-oriented policies. Revenue allocation in Nigeria has thus remained a project of the ruling oligarchy devoid of the promise of democratic evaluation.

Federal character and political engineering in Nigeria Nigerian leaders tend to see institutional arrangements and the process of social engineering as the solution to e thno-regional conflict and tension in the country. The establishment of the Federal Character Commission to apply the federal character principle to the distribution of national resources can be seen in this light. Our concern here is to investigate the relationship between the process of political engineering and social problems as part of the strictures of Nigerian federalism. Here, we are concerned with investigating the interconnections between public administration, public policy and e thno- regional conflicts and tension in Nigeria. We proceed to examine these interconnections in details Public administration has to do with the mobilization and utilization of the material and human resources of society for national devel~~rnent.~%dministrationis therefore inevitable in any situation where there is a defined objective concerning human welfare requiring the co-operation of two or more persons for its attainment. Administration generally takes place in the context of a planned systim of cooperative effort in which individuals have assigned functions. As an instrument of human welfare, administration is concerned with planning, coordination, supervision and coi~trol.~~Itinvolves coordinate behaviour for bhe attainment of organizational objectives. The administrator's position within an organization is therefore strategic and pivotal. Indeed, so significant is administration that we can accept the view of writers that, if our civilization breaks down, it will be mainly a breakdown of admini~tration.~' Public administration is also part of the political process. It is the machinery through which government executes its policies. This underscores the intricate relationship between politics and public administration in society. In this regard, Carl Frederick remarks that the idea of a dichotomy between politics and administration is a 'misleading distinction' which had become 'a fetish', a stereotype in the minds of theorists and practitioners alike."2Public policy, on the other hand, refers to decisions of a long-term perspective that guides government. Public policy manifests empirically in the consistent behavioural action of government in public affairs. There is therefore a direct relationship between politics, public administration and public policy. Public administration and public policy usually reflect the nature and character of the political struggles in society. It is in this context that the establishment of the Federal Character Commission can be understood. The Nigerian government established the Federal Character Commission in 1995 to apply its policy of federal character to public administration in the country. We note that the federal character principle has to do with ethno-regional relations in Nigerian federalism. What is therefore pertinent is to appraise the extent to which a bureaucratic organization can grapple with problems of political development. With regard to Nigerian public administration, it has been observed that part of the reason for its ineffectiveness arises from its excessive bureaucratic politics. Officials devote proportionately more time than is reasonable to the serious business of promotion and moving ahead within the system in which very little emphasis is placed on merit and performance. In this struggle for personal advantage, the ethnic factor often intrudes and is cleverly manipulated. The Nigerian bureaucrat, jihad when a Muslim / Mu\lln~tlcket for the. emthroncmcnt of presidential dc~mocrCic.\111 'I1sc.1I,) ~v,isabortcd in 1993. At the time, it wcisthe. \ oicc. of t)ro-dcm~ocr,icymovements that raised hell to tlic h~ghIic~,~\~(m\, \vhc~c~~\ the voices of sharia were no\~\~lie~roto he. ~~~~~~~d I lit. ~LItfoca ting and acrimonious politici/a tion of the. \liar~~il\sue by highly-placed national figures in the. co~111tn tcd\ to blur and confuke the appreciation of the real issue\. Intlcbcd thv doniino effect of thc hidden and unexpressed rc>\c.ntnicwt\ of the. contested terrain of cthnicity and religion cast\ do~~bton hopes for optimism for sustainable fedcral democracy in N~gc>ria.

Conclusion l hcv-c. 15 no doubt that the persistent ethnic, communal and rc.li~iouscrises in Nigeria pose formidable but surmountable c)l~st;l~.lc~sto Nigeria's nascent federal democracy. The saliency ot &nicity and religion in Nigerian politics is to be located in the. historical development of the Nigerian state, specifically the occurrence of these phenomena can be perceived as a hangover of the paternalistic divide and rule policy of the colonizer as well as a retreat of the alienated natives from the hostility, brutality and deprivation of the colonial order. It has been argued that the dominance of politico-ideological structures in ' their communal form is genealogically inscribed in the structures of the Nigerian state.4hThis development is traced to the his tory of the internationalization of capital. The Nigerian state emerged as a product of the extension of capital from Europe to other lands in the 1860s. The motive of monopoly capital was centred on the ever-ubiquitous tendency of capitalists for profit maximization. In the process, monopoly capitalism tended to de-emphasize the transformation of precapitalist social relations, institutions and symbols as part of the superstructural edifice of the racist ideology of divide and rule. The consequence is the persistence of a medley of disparate pre-capitalist social relations and institutions side by side with the capitalist social relations and institutions, and this has become part of the ideological ensemble of the post-colonial state of Nigeria. The implication of this scenario is that the orientation of Nigerians tends to vary in terms of their attitude to the inherited post-colonial state and the surviving structures of traditional society. With respect to the rules and institutions of the post- colonial state, Nigerians exhibit an overriding feeling of alienation, not being sure whether they have a stake, commitment, obligation, or sense of belonging. In this connection it has been argued that Nigerians relate to two different publics. One is the primordial community to which they relate with integrity and moral uprightness; the other is the colonially contrived modern state institutions to which they relate with a feeling of alienati~n.~~Through the passage of time, Nigerians have unfortunately come to envision their life chances through this dual prism. This unfortunate and pervading mental fixity runs through the length and breadth of the country. It is pertinent to note that the persistence of the dual orientation of Nigerians is an indication of the failure of the Nigerian state to generate and regulate social relationships through ideological persuasion, welfarist policies and effective governance. The strength of a state is measured not by the unbridled wielding of coercive power but by its ability to make the citizens accept its laws as the standard to which they conform. The moral authority of enforcing the rules of society depends on the legitimacy, credibility, and responsiveness of the political institution in enforcing laws for the ultimate good of the citizens. The tendency of Nigerians to subscribe to the ideology of their pre-capitalist traditional institutions stems from the abysmal failure of the modern institutions to make a meaningful impact on their lives. It has been argued that the daily maintenance of law and order for most Nigerians is still essentially by pre-colonial or modified pre-colonial procedures and institutions. The police are rarely regarded as friends. It is also argued that where the modern hospitals are not feared and appreciated, they are avoided because their immense costs are beyond the reach of Ken lfesinachi 23 most Nigerians. Similarly, the education system has been seen to train people for a lifestyle that is unavailable and unaffordable to most ~i~erians."It is this bleak scenario and the dual prism through which Nigerians perceive their life chances that create mobiliza tional gaps which unconscionable plutocrats and 'lootocrats', ethnic and religious entrepreneurs, cash in, as a means of securing predatory access to state power and patronage. The attempt to popularize political power led some Northern state governors to make political capital of the sharia. The tortuous travails of the democratic ferment are necessarily linked to the suffocating and acrimonious politicization of the fissiparous proclivities of Nigeria's socio-cultural and idiosyncratic pluralisn~.Thus, one of the major challenges of political leadership and democratic federalism is to solve the problem of dual authority through a unified, objective and independent set of rules and institutions capable of regulating and mediating the political, economic and social lives of Nigerians with equity and fairness, irrespective of religious or ethnic identity. In order therefore to douse social tension and foster the proper federal democratic temperament, sentiments, conventions, institutions, tendencies and values the following measures are imperative: What is required is the building of a uniform set of operational rules and making the traditional institutions and values more functionally relevant to the present industrial era, rather than romanticizing their past simplicities or succumbing to or taking refuge in the nebulous indeterminacy of their mysticism, superstition, and/or making political capital of their fissiparous proclivities. Ensuring concrete enforcement of human rights by providing sustainable income, adequate health services, adequate housing, and free or affordable compulsory education to all citizens of Nigeria. Ensuring popular representation through a fair electoral dispensation that guarantees and evolves a stable tradition 24 Federalism in Nigeeria today

of alternating political choice through local participation, consultation and dialogue in national political life. Putting in place very functional tripartite harmonious structures and facilities of democratic governance throughout the nation. Quick revamping and resuscitation of agriculture, essential services, public utilities and other decaying infrastructure. Putting in place a very vigorous and comprehensive indigenous Nigerian art and science need-based education and industrialization towards a concerted and unflinching policy of self-reliant development. Evolving a Nigerian people's constitution through popular representation that provides for only one central parliament and regional governments for Northeast, Northwest, North central, Southeast, Southwest, South-south of ~igerialed by a Vice President for each region to occupy the presidency every five years on the basis of rotation beginning from the zones that are yet at a disadvantage in occupying the presidency and thereafter in alphabetical rotation. The central parliament will comprise three representatives for each of the present states and one for the Federal Capital Territory, Abuja. The regional parliaments will comprise one representative from each local government area in the regions. Thus, states will be abolished and a federal structure of regional and local governments will be put in place. Each vice-president will score at least 25% of the votes in at least four Regions as well as the highest number of votes in an election to be elected to the office. The term of office of each Vice-president will be five years. The Federal Executive Council will comprise the president, the six regional vice-presidents, and thirteen ministers, two of whom will be from each region, and the Minister of the Federal Capital Territory. Revenue allocation will be based on 50% derivation to each region.

The immediate implementation of the above measures, it is Base of fiscal federalism in Brazil, India, Switzerland and the United States of America

0. E. Obinna

Introduction A distinction which is sometimes made between a federalism and a federation is that in a federation of independent states, as opposed to a federalism, the central governmental unit possesses no independent fiscal authority. It has no power to levy taxes directory on the income or wealth of individuals citizens. Rather, revenues are collected from individuals by the independent states which, then, make contributions in support of the organization. The North Atlantic Treaty Organization (NATO) and the Economic Community of West African States (ECOWAS) can be cited as ready examples. In the literature, however, federation and federalism are used so interchangeable that it now seems pedantic to make this distinction. The contributions of economics to the theory and practice of fiscal federalism have been smaller than those of political science in the sense that economist have been less critical in this area than political scientists. The latter have seriously examined the discrepancies that emerge between federal government policies and the .politics of state and local governments and underscored the consequences of unit autonomy. Poli tjcal science, thus, invcstigates the role of interest groups in a federal framework and assesses the relative administrati~~e responsiveness of federal, state and local agencies. Economics, on the other hand, has not sufficiently analysed the macro- aspects of federal states. It rather accepts the existence of a federal structure, extols its virtues as democracy by decentralization and then proceeds to show, as an ex-post justification, that conventional cconomic objectives can be achieved in a federal system. There js no gaii~sayingthc fact that the problems of a federalism arc. intractably political but some are obviously cconomic. For ins tancc, the optimum size of local government units is a matter of considerable economic interest. Therefore, there is always some compromise between political and economic objectives; the economist should not merely adapt hjs own model to a federal structure he uncritically adopts. However, econonics has addressed itself to some of the problems of fiscal federalism by discerning principles in terms of economies of scale and the consequences of local spillovers of costs and benefits. Since the scale and the spillovers effects are rather an elusive aggregation of measurements, economic analysis has confined itself to assumptions and propositions. It thus examines the bases of fiscal federalism under the traditional neo-Keynesian objectives, namely, stabilization, income distribution, resource allocation and economic efficiency.

Background to fiscal federalism Definition Federalism is the government of a federal community characterized by a territorially diversified pattern that calls for two levels of government: one dealing with the central and the other with the local diverse. In a federal community the equilibrium of power is continually shifting; therefore, federalism is a dynamic piocess rather than a static design. It plays a primary role in providing an opportunity for small en ti ties to organize themselves into larger unities as illustrated bv the Union of Switzcrlnnd and that of the United States of America. A federalizing process is also important in solving the problems of over-centralization of governmental powers as the examples of India aid Brazil show. It follows that federal governments often evolve out of confederations as in the United States of America or out of partitioning as in India. The specific aims of a federalism may differ in time and place but there is always the common objective of defence against dangers to which all the federating 11ni ts may be exy osed . Federalism, then, is a permanent union of communities so distinct that they might as well have been sovereign states. But they are so linked by common interests that they have surrendered absolute sovereignty to the union. Thus, an essential quality of federalism lies in the conferment of sovereignty which the federating or federalizing units surrender to the union.

Bases There are two basic modes of creating federalism. The first is by drawing together existing sovereign states, evoking loyalty and affection from their citizens, into a permanent union for the protection of their common interest. For example, the drawing together of Swiss cantons into a league and the coming together of former British colonies in North America into a confederation were the bases of federalism in Switzerland and the United States of America respectively . Second, federalism may also be established by partitioning former into convenient administrative units to avoid overcentralization of governmental powers. The partitioning may be with respect to historical evolution, race mixture, economic diversity or other regional differences. Examples of this second mode are found in the partitioning of the former Tnd ian and Brazilian empires into separate administrative units, thereby creating a federalism in each of the two countries. 32 Base offiscnlf~deralismin Brnzil, India, Switzerlnnd nnd the USA

Purpose The factors that bring separate or partitioned units together into a federal bond are, from the records of history, mostly defence and economics. The defence factor not only inspires the creation of federations but also determines their characteristics and ensures there permanence. Common defence cannot be organized unless all major decisions concerning the armed forces and about foreign policy are entrusted to the federal government. The people of the USA, for example, had need for a common action to enable them to win their war of independence from Britain and also to prevent reconquest. A similar need confronted the people of Canada and it was the threat of German imperial ambition that warned the Australian colonies to seek their common defence. Defence was also the cement of the Swiss confederation. In India and Brazil, there was little or no fear of imperial reconquest but external aggression from elsewhere and internal anarchy were possible dangers. Such possibilities prevail over the many differences among the peoples of India and Brazil and produced a federalism in each of them. Like defence, economic interests can be ensured when a single authority legislates about currency and banking and when the whole country becomes an area within which the movement of labour and goods can be free. As economic life becomes more complex, so it becomes convenient to entrust to the federal government subjects like bankruptcy, patents, insurance and monopolies. And as the process continues, each federating unit becomes more dependent on the whole for its prosperity. No one unit or group of units can withdraw from the union without imperilling the standard of living and the quality of life of the rest.

Principles Generally speaking, the'creation of federalism is based on the following five principles: O.E. Obinna 33

1 Written constitution Often, the component units of a federation are so politically conscious at the time they federate that they need to have some universally acceptable statements about the rights of the federation itself and those of the federating units. Therefore, a primary requirement in a federal arrangement is a written constitution as separate from the rest of the Law. Without this safeguard, the rights of the units may be trampled upon and a majority group may use its superior voting power to impose a unitary form of govcrument.

2 Amendment procedure In a federation, the constitution is the only guarantee of rights to the whole body of citizens and the protector of separate units. Therefore, it is likely to be most earnestly studied and frequently invoked. Since the drafting of a constitution entails reconciling the positions of units with different or even conflicting interests, interpreting and altering the constitution play a major role in the politics of federalism. These also must follow a constitutionally defined procedure.

3 Supreme Court Courts do not make or alter laws but simply declare them. Thus a Supreme Court is to immediate arbiter in matters of interpreting the constitution. However, if the people do not like the interpretation of the court they are the final arbiters. It is common knowledge that in Switzerland the influence of the court is at a minimum because the practice of consulting the people by referendum is well-established. Where the people can pronounce speedily and easily the court becomes less important.

4 A second chamber In a federation, a Second Legislative Chamber is extremely useful. Its purpose is to guard against changes which would seduce the rights of units in favkr of the union. It does so by making the passage of ill-considered legislation difficult. 34 Hnsc offiscalfecleralis~i~it1 Brazil, l~dia,Swifzerlnnd nrd tlre USA

Usually, the units contain people of all classes, occupations and opinions, so a Federal Second Chamber is not associated intimately with any interest group. Because of its concern with the rights of a11 units, it is constituted so as to give smaller units ;I greater voice than the size of the population alone would justify.

5 Separation of powers A federal country must provide for a distribution of powers bctwccn the fcdcration and the units. It must decide, for instance, how the powers of making and enforcing laws are divided between the federation and the units. In all usual cases, the federation must control defence, the police, foreign affairs and essential economic matters. The units, on the other hand, handle their own local government, marriages, divorce and births while education, health and the like are subject to current legislative power.

Origins of federalism in four countries Brazil Brazil adopted a federal structure as an import from the north and it contrasted sharply with the centralization of government which prevailed under the former colonial and imperial regimes. There, the institutions of federalism conform to the basic characteristics of Brazilian society. Regional differences are profound due to the size of the country, historical evolution, race mixture and economic diversities. These factors and feelings are expressed in literature and arts, in politics and the idioms of daily speech. The country is, therefore naturally fitted to a federal arrangement: But it has not been easy to operate the related institutions because the various regions of the country are dissimilar in resource endowment and economic development. The Union is composed of 21 states, five federal territories and a federal district coniaining the capital which enjoys the position of a state. When the constitution of 1946 was drafted, elaborate care was taken to avoid undue centralization yet modernization has progressed most unevenly in the country. Glaring contrasts exist between the advantages states in the south and those in the west and the north-east as well as between thc state capital and the smaller rural towns. The challenge posed to the constitution is to ensure that, as the nation p rogresses, benefits are more uniformly spread.

India The Union of India was a protest move against repressive powers of British rule in the years of growing agitation for self- government. It came into being by partitioning the formcr Indian along the lines of religion, language, ethnic affinity and other differences having regard for administra tivc conveniences. Being eager to proclaim the rights and liberties of the individual, the designers of new India were aware, first, that the country was riven by social, economic, religious and caste differences. Second, the new India contained both the former provinces of British India accustomed to representative government and the Indian states which had been ruled, often undemocratically, by princes subject only to the paramount sovereignty of the British Crown. Third, factors of disunion made India unfit for self-government at an earlier date. The new rulers then, were determined not to permit destructive elements to destroy the state. Observers record that they were determined to apply the same principles to the former British provinces and to the of princes and to declare the duty of the state to mitigate or remove the causes of disunity.' Thus, the Indian constitution was influenced by particular abuses against which the makers of the constitution were, at the time, anxious to protest. These ideas find expression in component parts of the Union, the fundamental rights of citizens and principles which are direct state policy. The composition of the Union is classified under "A" comprising the former provinces of British India, "B" comprising the adjacent territories previously ruled by Princes and "C" comprising special areas like Delhi, the seat of the 36 IZasc offiscal fcclcralisrn in Brazil, India, Szuitzerland and the USA

Union and some islands in the Indian ocean known as the Union Territories. '

Switzerland The crc>ationof the Swiss Union was based on geography and history rather than race and language. The country is situated in central Europe, bounded on the north by Germany, east by Austria, south by Italy and west by France. It forms an oval- shped mass consisting of numerous small districts which differ M.'~c-c~\'in Ianp~age, religion and customs yet bound together in ;I political alliance originally entered into for the purpose of common defcnce. The Union history is largcly that of drawing together of bits of each of the surrounding imperial kingdoms of Germany, Italy and Burgundy for defence purposes. Starting with a defensive alliance between three Forest cantons, the confederation was enlarged by the admission of other districts and towns, all leagued with the original three members. Little by little the league won its independence from the bordering empires. Accordingly, rulers of the Holy Roman Empire, with possessio~7snorth and south of the Alps, found it prudent to respect the wishes of a people who occupied a region so vital for communication and so difficult to conquer. Having thus gained freedom, the federating unit banded together to defend it with such a resolution that neighbouring towns and districts were drawn in and the alliance became capable of resisting attacks from German, Austrian, Italian and French princes. The league became permanent for the purpose of self-defence against all who should attack or attempt to do SO. Thus, Swiss history is a study in federalism made up of 22 cantons, three of which are divided into half-cantons. A half canton, however has the same rights of self-determination but only half of the voting powers in federal matters. The country is a federation resolved not to endanger its unity either by unfair treatment of any racial, linguistic or religious O.E. Obinno 37 communities which make up its population or by permitting a Sonderb~rndthat is, secession. A unique character of the Swiss federation is that each canton can frame its own constitution provided it is republican, not repugnant to the federal constitution and capable of being amended by direct majority vote of the citizens. The federal constitution has concerns for economic and social stability, the rights of individuals and small groups, respect for national defence and has a certain anti-clerical flavour. The constitution is federal and republic and the confederation is a nation, the patriotism of whose citizens is universally acknowledged.

United States of America The federal system in the USA is based on popular sovereignty and the constitution is the supreme law of the land. Events leading of federalism began in 1776 when 13 former British colonies on the Atlantic coast of North America formally renounced their allegiance to Britain in a Unilateral Declaration of Independence. This was to protest against arbitrary rule by a government they could not take part in choosing. They saw policies of the British government as restricting the individual's right to trade, to acquire property of enjoy life and liberty as he deemed fit. The former colonies made good their claim during the ensuing war and, for some period, were linked in a loose confederacy which was unable to adequately provide the central government with powers to ensure the survival of the new nation. They soon found out that independence could not be preserved without equipping a central government with rights to some powers over individuals and the states which formed the nation. They had to frame a constitution setting out a balance of power between the central government, the state government and-the individual in order to contain a threat of reconquest and guard against internal tyranny and anarchy. The constitution's leading difference from the confederation is that it gives the national government power over individuals and grants residual powers to the states. It is an important ------instr~imentfor granting the national government its supremacy over the states. The federal courts are the principal agents in securing this essential power. Thus, the most important provision of the constitution is the granting of jurisdiction to federal courts in cases involving the interpretation of the constitution and of laws or treaties made under it. This has madc the constitution the supreme law of the land.

Features of fiscal federalism The concept There are several alternative conceptions of fiscal federalism but one set of assumptions has proved to be highly fruitful. As a result, it has served as a basis for economic analysis. It is the conception by Tiebout who definesfiscal federalisnz simply as a decentralization of the fiscal structure purely from the point of view of economic efficiency.' Decentralization, as implied by Okigbo, is the existence in one country of more than one level of government, each with different expenditure responsibility and taxing powers.%nder fiscal federalism, any one individual is subject to the influence of the fiscal operations of different layers of government.

Separate taxing powers The degree of the extent of the distribution of expenditure responsibilities and taxing powers may differ widely in different federations but in each country political, geographic and cultural factors, for example, have influenced the nature of the distribution. In Brazil, a very high percentage of revenue is derived from indirect taxes, which fall heavily on consumers with modest mcans. But some attempt is being madc to correct this situation by increasing the yield from graduated income tax. More may be expected from this source in the future as industrialization fosters the grdwth of urbanized areas and an increase in the ~lrbanmiddle class. So far this emerging class has been too hard hit by price inflation td feel able to make long-range plans. O.E. Obinrla 39

Geographical allocation poses a problem to equities of taxation and this is further complicated by inequalities in the economy. A large share of the national revenue is collected in the state of Sao Paulo and the city of Rio de Janeiro, so the burdens of taxation are not really fairly distributed. The richer individuals as well as the richer regions tend to be more favoured. Thus, the Union is required to transfer fixed percentages of the yields of designated taxes on a proportional basis to state and local treasuries. Likewise, the states are obliged to distribute a certain share of their revenues to the local units. The constitution, however, recognizes a national interest in two regional problems which transcend the resources of the states directly concerned, namely the economic development of the Amazon basin and the periodic droughts in the northeast of the country. On the whole, the country is so large and the states so disparate that the constitutional authority of the Union cannot fail to be predominant, especially at the time of rapid industrial expansion and the accompanying monetary inflation. In India, the powers of taxation are possessed by three authorities: the central government, the state government and the local government. The central government collects revenues from import duties generally and particular export duties also. It imposes excise duties on the manufacture of kerosene, matches, motor spirits, sugar, tobacco, tyres, opium, cloth, coffee and tea as well as on the production of silver and steel ingots. It collects personal income tax and net railway receipts. The state governments, on the other hand, collect sales tax on general goods, the sale of motor spirits and the consumption of electricity, while the local governments collect water rates and levy terminal taxes on certain goods entering their jurisdictions. They also collect land and irrigation revenues, forest income and stamp duties. In addition to these separate revenues, the local governments earn a specified share of the income which the other layers of government raise within their boundaries. This is to enable them to undertake expenditure 40 Bcnse of fisccnl federalisrr ill Brazil, India, Switzerland and the USA responsibilities on their administrative business, public works, education, health, justice, police and jail. For special works of improvement such as irrigation schemes and city development, the local government may be authorized to borrow through the central government. In Switzerland, the economically active population is en~ployedas follows: Manufacturing 46.6% Agriculture 16.5% Commerce and banking 11.8% Public administration 7.6% Transport and communication 4.5% The hotel industry 4.2% Other domestic services 8.8% Total 100.0%

These proportions clearly show that Switzerland is preponderantly an industrial country depvnding for its prosperity on the export of machinery, apparatus and instruments. The country does not have many useful mineral resources except salt. Being entirely landlocked and having little access to overseas markets, the Swiss are committed to hard work, inventiveness and perseverance. Practically, however, all raw materials are imported and hydraulic power is an important source of energy in the country. The economy is affected by the smallness of the home market, the protectionist policies of foreign customers and the heavy land transport charges. As a result, manufacturers do not indulge in excessive mass production; rather they thrive by producing, in a reduced volume, expensive wares which have very high value. The main revenue sources of the central government are import duties, export duties, excise duties, personal income tax, company income tax and capital gain tax. The state governments collect revenues from sales tax, purchases tax, estate tax, stamp duty and capital transfer tax while local O.E. Obinno 41 governments impose property tax, water rates, motor park dues, entertainment tax, fees and licences. The principal expenditures of the federal government are under the heads of defence, foreign affairs, police, post office, railway, social insurance, administration and vocational training. The states are responsible for compulsory and free elementary education, secondary education, urban water, housing and agriculture while the local governments provide playground, road maintenance, sanitation, rural health and refuse disposal. In the USA revenues mostly accrue to the federal government from general taxes, personal income tax, corporate income tax, alcoholic beverages, tobacco products, public utilities, death and gift duties and insurance trust. State governments mostly generate revenues from general sales and gross receipts, motor fuel, motor vehicle and operators licences, employee retirement and unemployment compensation. On the other hand, local governments mostly impose property tax, utility and liquor stores tax. he fcduhl government mostly undertakes expenditure responsibilitics on national defence, international relations, health, natural resources, air transportation, water transport and terminals, social insurance administration, interest on general debt, insurance trust and employee retirement. The state governments mostly undertake expenditure responsibilities on highway construction, unemployment compensation and public welfare while local governments mostly undertake expenditure responsibilities on education, maintenance of police, housing, urban renewal utility and liquor stores.

Grants-in-aid Grants-in-aid are a major device for the continued viability of a federal system. The application of a spatial conception of the benefit theory of taxation requires that the geographical areas of benefit be circumscribed and that the residents of these areas support the public expenditures that benefit their areas. 42 Hose offiscd fed~'rdis~iziiz Brazil, Indin, S7uitz~rIai~dOIZ~ tlw USA

Therefore, grants-in-aid from the federal government to state and local governments contribute to efficient allocation of resources provided that (a) the grants are to finance national benefits derived from a programme which extends to the entire nation; (b) there is no serious leakage from the circular flow. In theory, grants-in-aid are extended to the point where the last unit of expenditures brings an equivalent marginal social benefit to the nation. But in the real world of fiscal fcderalism, grant programmes are not necessarily formulated, adoptcd or implemented with such efficiency objectives in view. Rather they are adopted as a matter of fiscal and programme concerns with substantial overlap between the two. Nonetheless, authorities in public finance see the granting of financial aid as the most important relationship between a central government and its affiliate government units. Grants from tlic central government relieve the lower units of a certain I ir~~i~it.i;llburden and in return secure their cooperation with the

( ~YItr'll go\/cmmen t on national issues. Large urban areas also tcntl to look up to the central government for the solution of somc problems which the local government units are incapable of handling. Federal grants-in-aid are then made on the grounds that the central government has more resources and that the transfer of some of them to the lower units is necessary for the successful operations of the federal system. An implicit assumption, of course, is that the expenditure responsibilities of the federating ~mitsarc. bcyond the limit which their own resources can bear. At the macro-level, the introduction of an equalizing factor would ensure that if the aggregate level of state or local government revenues from own sources fell below a predcterrnined average for all states or local government areas the deficiencies would be made up with federal grants-in-aid. A factor which tends to equalize inter-state or inter-local government revenues also tends to equalize in ter-s ta te-or inter- local government average personal income. This tendency is a welcome improvement in the formula for the allocation of federally-collected resources to other layers of government. O.E. Obima 43

Equalization on the basis of average per capita income accepts that deficiencies in the living standard among people ought to diminish. Federal grants-in aid on the basis of a predetermined average level of revenue for all state or local governments in less effective in transferring real income from the upper to lower-income families. Rather, they could give undue benefits to prosperous families in poor states or local government areas at the expense of poorer families in prosperous states and local government areas. It is not the area but the people in it who pay tax and receive benefits from government spending. To frame policies in terms of areas rather than people is to resort to a crude weapon for achieving the goal of nation discrimination among people. In spite of arguments in favour, however, the use of federal grants-in-aid as an equalization factor on the basis of average per capita income is still a goal to achieve rather than one already achieved. In the USA, efforts towards this achievement show that in the sixteen states with lowest average income per capita, the federal grants-in-aid are 32% above the national average. In the seventeen middle-income states the federal grants-in-aid are 14% above thc national average while in the sixteen states with the highest average income per capita federal grants-in-aid are 19% below the national average. For health services the grant average in the lowcst income states is 70% above the national average and 35% below the national average in the highest-income states. For education the grant average is 11% above the natjonal average in the lowest-income states and 14% below national average in the highest-income states. For welfare services, the grant average is 34% above the national average in the lowest-income states and 12% below in the highest-income states. For highway construction; the grant average is 13% above the national average in the lowest-income states and 24% below national average in the highest-income states. For all "other grants" the average is average is 62% above national average in the lowcst- 44 Base offiscal fc.deralism in Brazil, India, Szuitzerland and the USA - income states and 24% below average in the highest-income states."

Borrowing Domestic borrowing could be a good thing for a state with attractive invcstible assets; it could, for instance, provide a . means of breaking a vicious circle caused by capital deficiency in the private sector through a principle of "rolling-over". This principle considers that small saving of the private sector are not enough to finance a certain scale of industries but rather than subsidize such industries for an unduly long time, a state authority could use its internal borrowing operations to establish a number of them and then sell them over to private owners who gradually and steadily pay-off the cost. The advantage of the principle of "rolling-over" obviously lies in the provision of capital to the private sector and the starting of industries with considerable risk to small savers. If the industries are of the large-scale type which could not be privately owned, the general public will be encouraged to buy shares if the success of the industries is already evident, thus making it possible to channel small savings into productive investment. When related to foreign capital, the principle of "rolling- over" could be a means of transferring capital from the foreign sector to the private sector of the domestic economy with a minimum of problems. Thus, it follows that through this principle, capital deficiency in the private sector could be minimized with public borrowing and could be more smoothly managed. As a rule, however, such domestic borrowing must be undertaken only for the benefit of revenue-yielding investments whereby the profits can be used to cover interests and amortization charges on the loaned capital. This means that current expenditures must be financed from taxation. In countri& where budgetary reforms have taken place, particular importance is attached to the practice of borrowing for productive investment. For instance, the Swedish concept of "financial soundness" of government transactions is measured O.E. Olri,lllll 45 by the change in national assets resulting from such transactions. Whcrc reveniw-~lieldinginvestments are financed by borrowing, they induce in increase in national assets, but if prowcds from borrowed capital are used for maintaining osisting assets there c"in be no such increase in total assets. In so fcir'1s n st'] t~'iii~y Lx)rrow to finance capital im provement with ;I limited life, the dcbt so incurred must be retired over the period of improvement or the burden will rest future gcnerations of ta~p~iyerswho may no longer enjoy the benefits of the particular improv~w~~mt. A state or local govcrnnicnt, which fails to retire debts, may reach a stage later where it cannot borrow any longer if the total ainount of debt reaches a level beyond the capacity of the go~~rninentto meet interest payments at tolerable tax rates. A point may also be reached where actual default may occur. But a statc. government with less responsibility for attaining cconomic stability than the national government may not have a problem of such magnitude. Sometimes a state must vote on every increase inindebtedness which requires an increase in the tax rate for the purpose of debt servicing." An old technique of debt redemption is through a system of sinking fund which requires the government to make payments into it during the life of each issue. Before the issue is ma ture, the accuxnula ted sum plus the original payment will be sufficient to pay it off in full. But it has been observed that this system sometimes leads to laxity since a sinking fund can be tapped for other purposes or-payment into it may not be made regularly. As an alternative the serial system has been used with much success because the maturity dates of serial bonds are spread over a period of years and a certain amount falls due each year. The issue is then redeemed without recourse to sinking fund methods in much the same way as the method of "rolling-over." Normally, there are four limitations to the extent state and local governments can undertake borrowing. First, there are usually some constitutional restrictions on the borrowing powers of the lower units of government to a certain ratio of 46 Bnse ojfiscnlfcdernlisnz in Bmzil, Indin, Switzcrlnnd nncl tlic LISA -- - their tangible assets. Thus, even if the restrictions were proved unwise, the statutory provisions caimot be changed without amending the constitution. A state or local government finding itself in a difficult financial position can sidestep such limitations by deliberately raising its authorized ratio to the full market value of the tangible assets. Or neighbouring state or local governments can form public corporations with authority to operate on non-profit basis and to act on behalf of the various units concerned. Such public corporations can undertake to build schools, expand utility enterprises and provide athletic facilities, all financed with debt secured on a long-term lease. The second limitation is in connection with the powers of state and local governments to repudiate debts if they so wish, since they possess some residual sovereign powers. This condition makes it difficult for state or local governments to attract sufficient private investment or borrow as cheaply as they may have need for. Therefore, they are not always able to cover a large proportion of their total expenditures by borrowing. This is the crux of state budgetary problems in the USA and elsewhere. It may also be the case that poorer local government units may be obliged to pay relatively high rates of interest whereby the debt burden assumed by all the units bears an inverse relationship to the tax efforts they make. The third limitation is that, often, local governing bodies are composed of lay citizens who are not professionally qualified staff knowledgeable enough in the functional relationships of the financial markets. Lay citizens, of course, are unversed in the technicalities of complex money markets and, often, they lack the specialized skill required in the maiiagement of borrowing operations with a view to the most favourable credit terms. Thus, they lack the know-how of debt management and are unable to promote investor understanding of the quality of local obligations through informative ;eporting. These deficiencies sum up to the inaccessibility of money markets generally experienced by small borrowers. O.E. Obir~nn 47

Fiscal federalism and macroeconomic management Economic stabilization Stfll1iliz(7tionmeans the maintenance of the purchasing powers of a co~mtry'scurrency through stable levels of prices and incomes with supporting monetary and fiscal policies which require periodic budgetary deficits or surpluses with corresponding borrowing and debt management. The national government has responsibility for and control over the central bank which is the monetary authority of the country. It also acts as the fiscal agent of the national government and the custodian of reserve accounts of the commercial bank through which it regulates their ability to create new money with their lending operations. It is the central bank which authorizes the issues of notes and coins which form a large proportion of the domestic currency. The central bank controls the treasury, manipulates the external sector and determines the foreign exchange rates. These stabilization factors are, by their very nature, easier managed by the national government. State and local governments have very little responsibility for achieving economic stabilization because their economies are open with substantial inter-unit mobility of capital and labour. Any efforts to use fiscal instruments to raise the levels of employment and income within their boundaries will have modest effects. Although the local employment level might rise, its effects on the resident population may be offset by the immigration of labour from neighbouring states. Likewise, local expenditures might be increased but their multiplier effects within the locality will be small because a considerable portion of the increases in spending will spill over to other states. Cornparable obstacles will face state fiscal policies intended to counter an inflationary situation. Thus, increases in state taxes without corresponding benefits will place the state's economy as a competitive disadvantage. At the same time, reductions in expenditures, with tax rates unchanged, will have similar consequences. In each situation, reductions in aggregate demand will not be sufficient to affect local price levels where there are integra tcd interstate markets for both goods and factors. In con temporary federal systems, states and local governments do not have powers to create money and, as Obinna points out, they req~iirethe approval of the federal government to ncgotia te for ex ternal den ts7Consequently, the requirement for a balanced budget, often enforced constiti~tionally, conforms with the realities of an open economy wherc policy parameters are largely exogenous. It follows that in federal systems stabilization is a national objective to be achieved by the federal government. State and local governments mcrely adapt their fiscal positions to the policies that are determined exogenously in much tl~csame way as business firms and households adapt their budgetary decisions to the fiscal and monetary actions of the federal governmen t. As regards cconomic growth, state and local governments may pursue policies that arc intended to attract cconomic activities to their jurisdictions by offering tax inducements or capital facilities whose costs may be borne by the general taxpayer. If thc total value of cconomic activity is nationally determined at fully employment levels, then state or local government subsidiza tion to attract economic activity may have uncomfortable consequences where the gains of state A are the losses of state B. Unfortunately too, the subsidies to incoming business firms are paid at the expense of non-benefiting taxpayers within the jurisdiction. It seems, then, that a more sensible thing to is to pay subsidies to existing firms to induce them to remain in areas wherc there are adequate supplies of labour and basic in frastructure. Again, because people aie mobile, those educated in one area migrate to other areas and the benefits embodied in the form of human capital get transferred to these other jurisdictions.'Given that the spatial patterns differ for various types of public services,, strict application of the benefit principle as the basis for the assignment of functionswould call for different but overlapping jurisdictions for each service. A O.E. Obinna 40 person residing in any one location would then be a member of various "service clubs" yielding an excessively large number of units eacli of which coincides with the group benefiting from tlie particular activitv. This would be intolerable from an administrative point of view. The reference to subordinate units of government as service clubs assumes that eacli unit would carry out and finance, from taxes paid within its borders, its appropriate allocation functions without reference to thc fiscal activities of others. But in the real world of federalism, fiscal transactions demand cooperating adjustments among the various layers of government concerned. It should be noted also that existing jurisdictions arc3 historically given and not created with fiscal rationality in mind. Ra ther, such non-economic factors as geography, history, language and religion have played leading roles in influelicing the dccision to create states of local government areas. Thus, state and local government boundaries seldom fit neatly into economic benefit limits and this creates the problems of spillover of benefits and costs from one jurisdiction to another. This problem is suc11 that a state or local government will be unwilling to financc, from its own resources, expenditures ~hosebenefits accrue to non-residents. Rather, if tlie residents of lower ini its of governmcnt behave rationally they will underta ke only those expenditure activi ties whose benefi ts accrue exclusively to themselves. In Brazil, expenditures on tlie development of tlie An~azon basin are undertaken by the national governinelit partly because the state directly concerned cannot af ford the high costs involved and partly because the benefits accruing from the project spill over into other states.

Income distribution There are three partially separable economic issues which are associated with distributional policies in a federal system. The first is that of income distribution among all citizens; the second is horizontal equity among individual taxpayers and the third is that of equalization of the fiscal position of the state or local ~lnitsof a federation. In the first instancc, if the federating state or local govcrnmcnts had ultimate control over income distribution there would be unfortunate barriers to the optimal local of population and economic activity. High-income individuals and some business firms would migrate from high-tax states to avoid tax burdens. However, taxation is not the only distributional techniques; distribution also comes by way of decisions to spend more or less on programmes that benefit specific income groups. Expenditures on education, for instance, will have different distributional consequences from those on police or fire protection. These considerations are relevant at all levels of government but they have wider consequences at national levels. Horizontal fiscal equity among individuals is not a problem in a unitary system of government where the central fisc treats all individuals alike with respect to their taxes and benefits regardless of where they live. It does arise in a federal system and Buchanan suggests that in establishing the criteria for horizontal equity it is necessary to compare the fiscal position of individuals across local lines.' Alternatively, a locality could be assumed as sufficiently homogeneous with respect to taste, costs and income so that horizontal equity criteria can be established for localities in relation to each other. Buchanan's criterion is that all citizens should receive equal treatment with respect to taxes and benefits from government services, regardless of the state in which they live. Unless this is done, the citizens of low-income states will be subjected to excessive fiscal pressure as such states attempt to tax more highly in order to provide adequate levels of governmental services. Of course, an underling assumption is that within a. state the benefits of government goods and services are uniformly distributed among the populace and that individual preferences and'othcr characteristics are such that inside a state all persons values equally the services provided by the level of states or local expenditures. O.E. Obinnn 5 1

On this assumption, the remedy is to equalize the fiscal residuals of individuals, that is, the net difference between tax burden and expenditure benefits. The fiscal positions of individuals are identical within an average fiscal position of the state as a whole. The fiscal residuals can be equalized if they can be measured approximately by varying the federal government rate of personal income tax among the states. Or, the fcdera 1 governmen t could require redistributive payments among the states to equalize fiscal capacity. Such payments would approximate an equalization of residuals and would be more feasible than tax rate discrimination. Burkhcad and Miner described Buchanan's proposal and conceptually interesting but of not much practical importance. Aside from its constitutional infirmity, it is by no mean clear that the provision of spatial horizontal fiscal equity among individuals is of much importance to countervail other fiscal objectives. Federal government tax rates that discriminated geographically would destroy any authority the states possessed over their vertical money income distribution.%cott believes that the equalization of fiscal residuals would not guarantee that all individuals would end up at an optimum on their indifference curves between public and private goods. The true test of fiscal equity among individuals lies in the achievement of geographical indifferences with respect to tax- benefit combinations. This condition is not assured by the equalization of the residuals since individuals may prefer to live in a high-tax high-benefit jurisdictions."' Finally, equity among states alters the position of the individual with respect to the combined federal-states fisc. The assumption in this approach is that states are reasonably homogeneous, internally, with respect to taste and preferences. Equalization, then, is redefined in relation to established statewide fiscal jurisdictions. Musgrave sees three possibilities in this coi~nection;first, the equalization of actual outlays and performance by the states; second, the equalization of differentials in need and capacity and, third, the equalization of state fiscal ten tial. I' An implicit assumption in these 52 iiclsc of fiscnlfidernlislr~in Rrazil, India, S7oitzerlarzd nt~dthe USA ------possihilitic~s is thcit there are no inter-sta te fiscal relations; tlic~rolorc~,there are spillovers of benefits and tax burdens. I ~~rtlior,(~lil;lli~atioii grciiits are limited only to transfers among state's so tlicit the‘ federal budget is in balance, implying then that \~l~atevcrone state gains by way of subsidies, others will lose in transfers. Eq~~llizationof o~itlaysor pcrforniance levels requires contin~~o~istransfers from c~Lwvc-avcragerevenue-need states to h\1o\v-,i\(brci~~l rov(~~iii~~-ii~cd ones, until all sta tes achie\~c c\cli~i\~ilo~lcc~.Any oxpii~\ion ot rcvcnucs by ;I particular state CIt hor r~bciIICV~ tlio SLI~SIC~Yrecci\/~d or-increases its required transfcr pLiymc~iitsSO that only a portion of the increase remains with the taxing jurisdiction. Such an arrangement would be seriously disincentive in tcv-ms of a state's own tax revenues, with the possibility that the state might move towards a zero level of taxation. Eq~~alizationof differentials in need and tax capacity removes this disincentive by the climination of a state's own tax rate in the formula for subsidization, but introduces the inequalities that follow from the receipt of subsidies by states that do not make comparable tax efforts. Equalization of fiscal potentials is more attractive. In one variant of this approach, subsidies are based on the state's own tax efforts and tax base in relation to the average tax base and rate. The outcome of such a scheme is complex, but in general it provides the greatest subsidy to states whose tax base is lower than the average and, thus, whose tax rate is above average. Another variant to equalize fiscal potential is to provide a subsidy to achieve average performance per unit of money of self-financed outlay. Capacity and need may be combined in such a fashion that subsidies adjust revenues so that any state can provideaverage performance levels per unit of money of self-finance outlay at average tax rates on own tax base. The strength of the. fiscal potential approach is that it minimizes the free ride problem inherent in capacity equalization. At the same time, since the subsidies depend on a state's own tax rate, the equalization of fiscal potentials reintroduces substitution efforts. Both incentives and disincentives accord with the base, rates and need of individual states in relation to the average of all states. Effects do not all tend in one direction but promote the equalization of efforts and performance which, after all, is the objective sought. If agreement can be reached on the equalization objectives, specific formulas for its accomplisl~mentcan be developed but the implantation of the scheme is another matter. An assumption that simplifies the description of alternative concepts of equalization cannot be accepted any longer. For instance, when a state is treated as an entity, attention must be directed to cost and benefit spillovers. Expenditures in one state may give rise to substantial out-of the-state benefits at wherc those educated in states A migrate to serve in state B or, on the side, where state A may be in a position to shift a portion of its tax burdens to the residents of state B through property and income taxes imposed on business firms that export goods across states lines. These may raise A's fiscal capacity at the cxpensr~of B's. It may bc possible to provide some rough estimates of benefit spillovers and exported taxes that could be sufficiently accurate for the implementation of an equalization scheme. But the practical difficulties are overwhelming for any equalization scheme that requires a computation of the taxable capacity of a state. In measuring the taxable capacity, attempts have been madc to index the rela tive position of the states by some readily available indication of economic activity such as personal income. In these attempts, tax efforts are treated simply as a ratio of state and local tax collections to state personal income and the states are ranked by this index. Another way is to formulate a representative or model state-local tax system based on the average practices of sta tes or some set of standard provisions for tax bases and rates. This imodcl is then applied states by state to estimate the resulting yields, which are then converted to an index designating the taxable capacity of the state. Again, tax efforts are ratio of actual 54 R~SPof fiscnl fcdcmlisnr iiz Rrmil, Indin, Smitzerlnnd nnd the USA sta te- local tax collections to the estimated yicld from tl~cmodel tax system. Unfortunately, however, neither the ratio of tax collections to state personal income nor the model tax yields is good enough for a satisfactory measure of taxable capacity. The level of personal income would need to be modified by the distribution of that income within a state and perhaps by its composition with respect to labour and property income. The measures used extinguisl-t important differences among the urbanized areas in a state. Both measures of personal income and model tax system overlook the circumstances that affect taxable capacity within a state. Some states have additional taxable capacity because tlwir residents have, on the average, a propensity to gamble or to buy lottery tickets. Other states may have additional taxable capacity because, traditioi~ally,certain types of cconomic activities are subject to heavy state-local tax burden, eg extractive industries. Besides, it is by no means clear tl-rat taxable capacity can be isolated from the preferences of the community with respect to public versus priva te goods. Political circumstances are also relevant. At any time in any state, taxable capacity is influenced by constitutional restrictions, by the political programme of the governor and his willingne~sor otherwise to seek higher tax rates, by the attitude of the legislators and their constituents, by the political parties and by the attitudes of the taxpaying public. In sum, equalization schemes that depend on operational measures of taxable capacity among states are subject to severe limitations. Such ineasures would probably be somewhat meaningful at intersta te levels.

Resource allocation The foregoing discussions emphasize that a federal system complicates the 'achievement of traditional goals of the public sector. The utilization of fiscal and monetary policies for the purpose of stabilization is weakened in a federal system in contrast with a unitary system. Distributional objectives are even more difficult to attain in a system of multilevel finance. Comprehensive horizontal equity among individual taxpayers is unattainable because of the different net fiscal benefits available to taxpayers in different governmental units. Even when states are treated as homogeneous units there are still great complicc?tionsin an attempt to equalize service levels or fiscal capacity among them. Thus, the cconomic rationale for a fedcral system must reside in the allocations element. The case rests on the belief that preferences and costs of public goods will differ less among citizens in specific geographic areas than among the national population as a whole. Therefore, a fedcral system will bc more efficient in optimizing preference patterns than will a unitary system where geographic differences in attitudes between public and private goods would presumably be obliterated. Thc general rule for allocations is that, for Pareto optimality to obtain, taxes must be collected on a benefit basis in accord with individual marginal valuations of public goods. And that must be determined as a point where the sum of the marginal valuations is equal to marginal cost. In a federal system with semi-autonomous states the benefit principle cannot be linked to specific individual valuations but must be linked with state benefits. This may afford as approxima tion to individual Pareto optimality if gains, costs, benefits, preferences md incomes are reasonably homogenous. The homogeneity assumption is necessary to the very concepts of state/local costs and benefits. There is no economic virtue attached to the proposition that each government must collect the revenue that it spends. To justify this proposition on political grounds would require the invocation of some mystical virtue attached to self-reliance. It is quite possible for the federal government to collect taxes in the state and cs.tablis11 a pattern of subventions with the state government responsible for the determination of expenditure levels and mix. If the income abilities of the states were equal and the distribution of population among them were also equal there 56 13ase offiscalfederalisnz in Brazil, Iirdia, Szuitzerkand and the LISA would be little difficulty in sharing out distributable funds equally. Because differences occur in major respects, they ought to be taken into account, and the suitability of other methods of allocation should bc explored. Consider a method of resource allocation based on principles of derivation, equity and population. The weighting is such that one half of distributable funds is shared and basis of derivation, one quarter on the basis of state equity and the remaining one quarter on the basis of population adjustment. Derivation is considered as a traditional principle, equity as a means of straightening other relevant factors and population as the ultimate beneficiary. At a high level of aggregation such as in an economic region it seems expedient to use population as a broad indicative factor in an allocation formula. But such a formula is incapable of taking into account the differences in such regional aspects as previous allocations and existing capital stock. The cost information conveyed by these elements and the direction of their effects on allocation remain uncertain although their inclusion appears to be an improvement in the allocation formula. Two complementary alternatives that may be considered are: allocation on the basis of population alone and allocation on the basis of average income. The possibility of merging both into one also exists. If "population" were used as a broad indicator of need, distributable funds would be divided by the population and each state would determine its share by multiplying the quotient by the number of persons residing in the state. But this would not take into consideration the sharp differences in individual earnings that may be there, and the purpose of income redistribution would be defeated. Thus, from the point of view of income distribution, the use of an index of average income may be introduced. The criterion of "average income" recognizes that differences in personal earnings sum up to differences in income capabilities of the states. It seeks to correct this by attempting to equalize interstate revenue with the use of centrally collected funds.For effective equaliza tion of intersta te O.E. Obinnn 57 revenues however, average personal income would be required at both national and state levels together with the average share of centrally collected revenue that would accrue to each state. In a high-income state, average personal income would be higher than the national average; total allocation to such a state would be smaller than the average for all the states. In a middle-income state average personal income would be equal to the national average and total allocation to such a state would be equal to the average for a11 the states. But in a low- income state where avcragc personal income be lower than the national average, total allocation would be higher than the average for all the states. However, such averages would not reveal differences in the population content of the states, so it wo~rldbe necessary to merge both criteria into one, whereby "population" would remain a broad indicator of need, while /I average income" be introduced to neutralize the adverse effect of income inequalities on low-income states. As an illustration let A, B and C stand for three states in a federation where population is distributed among them at the rate of 50,20 and 30 respectively. Further, let 300 represent an indcx of average income for the three-state nation, and let 110, 90 and 90 'igain represent the indices of average income in states A, B and C, respectively. Assume for the sake of simplicity, that the equivalent of 10 percent of the aggregate income of thc three-state nation were available for redistribution among the states. In order to combine the principles of popula tion and average income a single allocation formula, the following explanation would hold:12

Dntn for the flzroc- stat^ mtion National average income - 100 Total population - 100 Aggregate l'lational income = 10,000 Income for distribution . - 1,000 58 Base of. .fiscal federalism in Brazil, India, Switzerlnnd nnd the LISA

Data for. tlzr thrw states: Income Population x capacity = Total income A 50 x 110 - 5,500 - States B 20 x 90 - 1,800 C 30 x 90 - 2,700 Aggregate state income - 10,000

Redistribiition calcril~tions A 3 x x 1,000 - 450 +(45'%) 100 110 States B 20 x 100 x 1,000 - 220 +(220/0) 100 90 C 3 xux 1,000 - 330 +(33%) 100 90 Total - 1,000 + = approxima tcly

Income redistribution formula Srarc population Nnrionnl Average Income x x Distributable funds National Pop~iln~ion Stale Avcragc Income

Economic efficiency There is an "opportunity cost of federating" which is seldom discussed. Tt is that GNP is smaller in a federal than in a unitary system because any degrce of authority over economic or fiscal policy interposes some barriers to factor and product mobility. 'Tlwse barriers will rcducc, to some extent, the volume of total economic activity because, in many instances, a federal system will fail to achieve appropriate economies of scale. In every federal system the boundaries of major governmental subdivisions may not be immutable but they do change slowly. With technological improvement in transportation and communication systems, it is possible that, over time, the scale for the provision of many state and local area services could be increased with co~~sequentreductions in the average unit cost. O.E. OOinm 59 It can be contended that the observable failure to recognize governmental boundaries precludes securing whatever economies of scale that may emerge. Further, it can be argued that the size of the local government unit required to secure consensus is likely to be smaller than the size required for economies of scale. Two other dimensions in the selection of appropriate size are the minimization of political externalities such as the need for bargaining across jurisdictional lines and the maximization of social redistributive goals. Both of these dimensions indicate largcr units than those required to secure the maximization of a home-rule type of consensus. These considerations on the production side point towards a lower GNP in CI federal than a unitary system but there may be some offsets. It is often argued that a centralized administration produces serious diseconomies of scale. A federal system, on the other hand, may provide a wider opportunity for techi~ologicalinnovations because the states act

CIS 'I Iabora tories of experiment." Some states may develop model programmes in specific areas that can be emulated by others with a saving in installation costs. Thus, there may be production-side efficiencies to offset p roduc tion-side inefficiencies that characterize a federal system and there may be consumer efficiencies if there is an appropriate clustering of individuals with some common tastes and preferences, provided that there is sufficient mobility to permit the clus tcring. It is possible that measured GNP would be smaller under a federal than a unitary system but state and local decisions reflecting a commonality of tastes and preferences would attain cl higher level of real income. It is also possible that a federal system may have an easier task in equalizing income among localities than a unitary system. Unfortunately, however, economists have net some up with studies on the relative costs and gains of federal and unitary systems, although some believe that such a study would be 'most difficult to undertake. Moreover, the isstles are usually formulated in terms of a static (,() Rnsz offiscnl fedrmlisin iiz Brazil, lndia, Szuitzerland and tlw USA

pppppppppppppppp-- model;-thus it does not seem clear whether and federal or a unitary system is more responsive to changes in taste and technology. If it is acccpted that the GNP is likely to be lower under a federal system, then, that is where the cost of federalism has already been paid. Therefore, allocational efficiency must be attained within the limits of this lowered CNP. This efficiency can be approached, as with distributional concerns, by seeking to optimize thc position of individuals and their preferences or by seel

Conclusion A coi~clusionthat can be drawn is that in Brazil and Jndia federalism was created by partitioning former empires ruled by princcs and foreign powers into convenient administrative units to prcvcnt undue centralization of governmental powers. In Swi tzeriand and the USA, on the other hand, a federalism was created by drawing together former sovereign states, evoking loyalty and affection from their citizens, into a permanent Union. 111 each example, a federalism was created initially for the purpose of common defence of the federating units against external aggression or internal anarchy. The resulting safety was then accompanied with economic efficiency through the mechanisms of stabilization, income redistribution and resource a 11oca tion. Notes 1. M. Stewart (1960), Modcrn forms of Govei.rinlcnt. London: George Allen & Unwin Ltd.) p. 6'1. 2. Encyclopncdin Rrifnirrricn (1964), Volrrme 12. (London: William Bcnton Publishers, p. 190. 3. C.M. Tiebout (1961), "An Economic theory of fiscal Dcccntralization," Plddic Firmrccs: Nccds, Sorlvci~snnd Utilizatiori. (I'riiicetoii: Princeton University Press), p. 79. 4. 1'. N. C. Okigbo (1965), Nigeuiniz Prrblic Finarm. (London: 1,ongnian Publishers, p. 3. 5. S. Schultz and S E Harris (1959), An~ericnlr P~lblicFi17ai1ce. (Prenticc Hall Inc.,) p. 487. 6.W. F. StoIper (1973),Economic Gro7of/lnrrd Polificnl instability ill Nipria (Michigan: University of Michigan), p. 28. 7. 0. E. Obinna (.1989), Elcrircirfs of Fiscnl Frderalisrll (Ibadan: NCEMA) p. 19. 8. J. M. Buclianan, (1960), "Federalism and fiscal equity" in Fiscnl tlrcory crrd politicnl economy. (Chapel Hill: University of North Carolina Press) pp. 170 - 189. 9. J. Burkhead and J Miner (1971),Prlblic Expenditure. (New York: Aldine, Atherton) pp. 252 - 292. 10. A. Scott, (1964), "The economic goals of federal finance" in Public Fii~anccNo.3, p. 24. '11. I<. A. Musgrave, (1961), "Approaches to a fiscal theory of political federalism'' in Plrblicfirlnnce: Ni~ds,Solrrces nnd trtilizntion. (Princeton: Princeton University Press), pp. 96 -122. Note, allocation on the basis of population alone would give state A an undue advantage over states B and C and on the C would each have an undue advantages over state A. Revenue allocation system in Nigeria, 1946 - 2000

Introduction The term system refers, among other connotations, to an ordered set of ideas or procedures according to which something is done.' In the context of revenue allocation, it implies the set of ideas or criteria for allocating tax jurisdiction and public revenue among different tiers of government. Thus, our objective in this chapter is to examine the principles that have guided the allocation of tax powers and public revenue among different levels of government in Nigeria between 1946 and 2000. We will also discuss changes that have taken place in the system' over the years, but the analysis of the actual pattern of allocation that has resulted from these changes falls outside our assignment. It may be necessary to acknowledge the fact that other authors have written on the subject of revenue allocation in Nigeria either exclusively or as part of a wider topic. For instance, P.N.C. Okigbo has looked at the evolution of fiscal structure and relationship in Nigeria.2 O.Teriba%as analysed revenue allocatidn in the country over the period 1952-1965. A. Adedeji has analysed the development, problems and prospects of Nigerian Federal Finance up to 1969. Aluko has emphasized the political content of revenue allocation, particularly in Nigeria4 and A. 0.Pl~illips~ has examined revenue allocation in the country for 1970-80. Our write-up is intended to bring together the views of the eight fiscal commissions and three decrees whose recommendations have formed the basis for sharing tax powers and revenue up to 2000 in the country. Put differently, this chapter brings together the ideas expressed by these writers, takes a look at what had gone before the systems they have expressed and finally examines the changes that have taken place since then.

The pre-federal system One is tempted to agree with the Okigbo Commissjon that since "in political as well as fiscal terms, Nigeria operated a unitary form of government between 1914 and 1946, there was no need for any system of revenue sharing."" We however differ in respect of this view. Even though there were only two tiers of government during the period, there existed some form of revenue sharing between them as shown below. Prior to 1947 the fiscal relationship in Nigeria involved only two levels of government: the central government and local authorities, otherwise known as native authorities. The power to raise tax (direct taxes and customs duties) was vested in the central government. All tax receipts were paid into central government treasury and a grant was made back to the native authorities. The grant was of the order of 50 per cent of tax receipts. The native authorities were given complete freedom of disbursement of their own share. In addition to their share of the general tax, other sources of revenue for the native authorities included cattle tax, court fines and fees, market dues, slaughter fees meant to cover the cost of supervision and administration,'forest fees and dues (the former going to the government and the latter to the native authorities as royalties), death duties, school fees, and ferry licences. F.E. Onnh 65

This pattern of fiscal relationship remained in force until 1913 when the native authorities were allowed to retain 50 per cent of general tax revenue and then pay over the balance of 50 per cent to the government treasury. This system whereby the native authorities retained a portion of tax before surrendering the remainder to the central government raised the question of the proper jurisdiction over the direct tax levied in the North. Between 1926 and 1929 the Conference of Residents, on the onc side, and the central government, on the other, hotly debated whether this tax was levied by the central government and out of the proceeds a portion was allowed the native authorities or a tax levied by the native authorities out of which the government took a share. It was the view of the conference that the latter situation was the case. However, the Secretary of State refused to amend the law and thus the right over taxation was retained for the central government. In 1929, Sir Graeme Thomson submitted to the Secretary of State a request that 'fully organized' native authorities be allowed to retain up to 75 per cent of the proceeds of direct taxes to enable them carry out their tasks effectively. This was the first time the principle of derivation was implicitly introduced into the revenue allocation formula in Nigeria, since the more organized native authorities were likely to raise more direct tax revenues. However, between 1933 and 1934 the share of native authorities that were classified as fully organized was reduced from 75 per cent to 60 per cent. Similarly, in 1935, Sir John Maybin, then administering the government of Nigeria, permitted the shares of direct tax going to the Bussa and Kaiama native authorities to be raised from 50 per cent to 60 per cent on the grounds that their areas were too poor. Again, the concession introduced, for the first time, the principle of need or even development into the revenue - sharing formula in the country. Between 1935 and 1939, the principle of derivation was de- emphasized in favour of the principle of even development. The governor, Sir Bernard Bourdillon, criticized the principle of allocation based on the degree of organization on the grounds that it made for uneven development. He was of the view that the needs of the poorer native authorities should qualify for better consideration on the basis of even progress to enable them catch up with the rest of the country subject to the condition that:

the proposed expenditure for which an increase in the proportion of allocation was being sought must be related to what might be considered truly native authority. the native authority in question must meet a satisfactory level of performance in its tax collection duties. Nigeria as a whole must be able to bear the expenditure.

The Phillipson Commission, 1945-51 Sir Arthur Richards who later became Lord Milvertoq succeeded Sir Bernard Bourdillon as governor of Nigeria in 1943. Between that year and 1945 the officials of the colonial government studied and discussed an equitable formula for allocating revenue between the central government and local authorities and between the central government and regional assemblies then being contemplated. The proposed introduction of regions would make it necessary to fashion fiscal relationships between the three tiers of government. Moreover, the relationship between the central and regional authorities had to be properly and strictly defined. Sir Sydney Phillipson was commissioned to make a comprehensive study and recommend administrative and financial procedures to be adopted under the new constitution for Nigeria. He became the Financial Secretary in 1945 and almost immediately set out to address these problems. His report was published in 1946 and his recommendations were accepted by the government and built into the constitution known as the Richards Constitution which came into force in 1947, establishing regional assemblies in the Eastern and Western Regions and the Northern Regional Council in the North. The new Constitution gave to the regions some measure F.E. Onah 67 not of autonomy but of authority and responsibility, but left the supreme fiscal powers squarely with the central government. The Commission divided regional revenues into two classes: "declared" and "non-declared" revenues."Declared" revenues were

essentially local in character for ease of assessment and collection; regionally identifiable; those with no implications for national policy.

The revenue so declared included central government's share of direct taxes (personal income taxes), licences, fees, income from property and mining rents. These formed the core of what later came to be known as independent revenues. "Non-declared" revenues were those collected by the central government mainly form customs and excise duties. From these revenues block allocations were made to the regions. The central government determined what portion of the "non-declared" revenues was to be shared each year among them. For the share of the Regions out of these revenues, Phillipson considered three principles: derivation, even progress and population. However, since the statistical basis for using population as a proxy for need and even progress did not exist in 1946, he applied only the principle of derivation. He defended the sole use of this principle on the grounds that it inculcated financial responsibility in the regions. The Okigbo Commission criticized this argument as rhetoric, pointing out that all the taxes that entered into the argument were outside the legal and administrative jurisdiction of the region^.^ Of the 'non-declared" revenues, 50 per cent was retained by the central government while the remaining 50 per cent was shared among the regions on the basis of derivation. This principle implied fhat each region would receive from the centrally - collected revenue the same proportion as it had contributed to it. In order to determine the proportion of a region's contribution to the centrally-collected revenue, the distribution of consumption of dutiable goods was used. Computation was based on the returns made by the Department of Customs and Excise and by major importing firms in respect of tobacco (excluding cigarettes), cotton piece goods, spirits, salt, and motor spirit (petrol). The proportions of consumption obtained in respect of cotton and salt were applied to the revenues obtained from duties on all commodities other than the five mentioned above. Officials were subsequently blamed for making assumptions on the entitlement of the regions on the basis of derivation, since the statistics of regional consumption of certain commodities were grossly deficient. Secondly, controversy developed as to who was being developed at the expense of the other; the relative contributions of the regions to the total revenues (declared and non-declared) and as the relative receipts from the centre diverged widely.' In particular, the North argued that allocation should be made on the basis of need with population as the proxy. This would have redressed the imbalance by giving it more from the non-declared revenues than the 36.65 per cent it got against the West with 27.16 per cent, or the East with 36.17per ceneover the years 1948-51. The rejection by the southern regions of the suggestion by the North led to the setting up of an independent Commission by the colonial administration to reconsider the issue of revenue allocation in the country.

The Hicks-Phillipson Commission, 1951-53 The dissatisfaction with the Phillipson scheme and the changes envisaged by the 1951 Macpherson Constitution, which introduced a quasi-federal structure of government, led to the appointment in 1950 of Professor John Hicks and Sir Sydney Phillipson to work out a scheme that 'over a trend of five years' would achiev-e a 'progressively more equitable division of r~venue."~'The report of the Commission was published in 1951 in what came to be known a6 the "Report of the Commission on Revenue Allocation". F.E. Onah 69

It recommended that regional governments should have the power to raise, regulate and appropriate to themselves certain items of revenue hitherto nominally declared regional. These included a portion of the general tax (personal tax), cattle tax, motor and drivers' licences, liquor licenccs, rents from governinent property (on mining, land and other property income) and other licenccs. Motor spirit originally taxed only through customs duties could now be taxed by regional governments in the form of sales taxes. Also placed under rcgional jurisdiction were entertainment taxes and stamp dutics. Thus, there emerged for the first time in Nigeria federal finance, the principle of "independent revenue". According to tlw Commission, this principle was in tl~cinterest of regional autonomy and proper financial responsibility." However, since these revenues could not meet the needs of the regions, the Commission also recommended that some centrally-collected revenues be shared between them. For the purpose of sharing the revenue so allocated to the regions, Hicks-Phillipson proposed three principles. These were the principles of derivation, needs and national interest. The Commission criticized the unlimited adoption of the principle of derivation as amounting to an over-emphasis of the principle of self-independence, a situation more appropriate to a loose confederation of almost independent states than to a federal constitution as envisaged for Nigeria. It justified the inclusion of other criteria (needs and national interest) on the grounds of practical difficulties of determining the region of origin of important revenue receipts. For allocation on the basis of derivation, the Commission recommended that 50 per cent of the proceeds of tobacco duty be shared among regions in proportion to tobacco consumption. In accordance with the principle of needs, it recommended that

CI capitation grant, thc size of which should be determined from tjrne to time by' the Federal Council of Ministers, should be givcn to each region in respect of each male taxpayer in its population. In respect of the principle of 1x1tional interest: education and police grants were to be made to the regions by the central government in the following proportions: 100 per cent of the cost of regional police force; 50 per cent of the cost of native authority police force; and 100 per cent of the cost of regional government's educational grants to voluntary agencies and local authorities. With one major exception and one minor modification, the Commission's recommendations were accepted by the government and given constitutional sanction in tlie Nigeria (Revenue Allocation) Order in Couiicil of 1951. The major exception was the rejection of the recommendation that a regional tax should replace the existing centrally-collected import duty on motor spirit. The rejection was on the grounds of practical difficulties and the cost of collecting such a tax. Rathcr than granting regional autonomy in this respect, the government rulcd that the gross proceeds of customs duty on motor spirit be assigned to the regions and distributed among them in proportion to their relative consumption. The minor modification was with respect to the police grants, which wcrc never fully paid. Thus, following the Commission's recommendations, tlie system of revenue allocation over the period, 1951-54, could be summarized as follows:

Revenues collected and retained at the centre These were revenues from import duties other than duties 011 imports of tobacco and motor spirit; export duties; excise duty on beer brewed in Nigeria; iiicome tax assessed under the Income Tax Ordinance (including companies income tax"); mining royalties; ljcence fees and fees for services centrally rendered; court fees; stamp duties, interest on loans; earnings of central government departments; and other revenues accruing from central services and undertakings; 50 per cent of the import and excise duties on tobacco. F.E. Onnh 7 1

Revenues allocated to the regions These included 100 per cent of the gross proceeds of import duty on motor spirit; 50 per cent of the gross proceeds of import and excise duties on tobacco.

Independent revenues of the regions Sourccs of revenue collected and retained by regions included direct tax; produce sales tax; licence fees; service fees; interest on loans and surplus funds; revenue from regionalized departments; regional government undertakings and other miscellaneous items. The net effect of the Hick- Phillipson formulation was an intensification of regional frictions. The West argued against the reduced role of the principle of derivation; the North criticized the inadequate emphasis on the principle of needs; and the East thought that national interest should have been the dominant principle.'2 Thus, each region favoured a particular principle for reasons exactly opposite to those for which the other region or regions were opposed to it. As a consequence, the quest for a more acceptable principle of revenue sharing continued.

The Chick Commission, 1953 Following the Nigerian Constitutional Conference held in London in July and August 1953, Sir Louis Chick was appointed Fiscal Commissioner to inquire into and report on the financial effects of the newly constitutional arrangements. The 1954 Lyttleton Constitution gave full self-government to the regions while the centre had to wait until 1957 to attain self- government, and until 1960 to achieve independence. Sir Chick was required to + assess the effect on the public expenditure of Nigeria as a whole of the reallocation of functions between the centre and the regions, after taking account of any transfer of physical assets and liabilities; + inquire how the resources available, or to be made, available to the regions and the centre, could best be collected and distributed, having regard to regional and central autonomy and ensuring that the principle of derivation was followed to the fullest degree compatible with meeting the needs of the regions and the centre; + assess what redistribution of uncommitted governmen tal reserves should be made between the centre and the regions; + assess if Southern Cameroon could pay its way without financial assistance from other parts of Nigeria, if it became a separate rcgion, and to examine how the salary and other expenses of the Commissioncr for Cameroons should be met; + consider what arrangements could most suitably be made between the centre and the regions as regards governmental borrowing; + submit recommendations on the above subjects.

Of intcrcst in Chick's assignment was thc fact that, for the first time, the ne~dfor providing an adequate measure of fiscal autonomv was explicitly a-ticulated in the ternis of rcfcrcncc of ;I f~w~lConiniission. It is also ~iot~wortliythat Chick WCIS not e~npowcredhy his tcrtns of re~fcscncc.to tampcl- with thosc rcvc~riucsthat hc~dilll~c~dy bccn declcired independcnt revenues of the regions. He could only make recommendations with regard to those revenues collected by the centre and assigned wholly or in part to the regions. Finally, it is necessary to point out that the terms of reference required him to ensure that the total revenues available to the regions were allocated in such a way that the principle of derivation was followed to the fullest degree. Indeed, according to the final decision of the 1953 Constitutional Confercncc, the principles of needs and national interest were 110 longer to play any further part in revenue allocation in the country. Although Chick was not unaware of the practical ditficultics involved in the9application of the principle of derivcItion to the whole range of revenues classified as central, his recommendations necessarily followed closely on the lincs F.E. Onah 73 contained in his terms of references.'%part from the retention of the existing independent regional revenucs, he recommended that the principle of derivation be applied to a11 the centrally raised revenues allocated to the regions. The only exception was his proposal that the federal government should be empowered to make discretionary grants to any regional government engulfed in serious financial difficulties through c'luses beyond its control. Wi tli minor modification, his recommendations were accepted by the government and adopted as the basis of revenue allocation between 1954 and 1959. The elements of his proposal could be summarized as follows.14

4 Federal government revenue lievenues centrally collected and retained by the federal government includcd 50 per cent of thc net proceeds of a11 export duties; 25 pcr cent of import dutics on tobacco; 50 per ccnt of all excise dutics; 50 per ccnt of tlic i~tproceeds of import dutic.:; otlior tlian those 01; motor spirit and tobacco; and I00 pcr cent of all the proceeds of compmy tax.

4 Revenues transferred to the regions according to derivation kveiiucs collected by the federal government but assigned wholly or in part to regional governments according to regional consumption or origin of products or commodities included; 50 per ccnt of the import duty on tobacco; 50 per cent of a11 cxcisc dutics; 100 per ccnt of the import duty on motor spirit; 50 per cent of dl1 cxport dutics; 100 per cent of pcrsoiial inco~nctax levied and collcctcd by the federal government; 100 per ccnt of the proceeds of mining royalties and rents; and fees for small craft iicenccs. .

+ Revenue transferred to the regions in fixed proportions Rcvcnues transferred from the centre to the regions and sharcd out in fixed proportions of 40 per cent to the West, 30 per cent to the North, 29 per cent to the East and 1 per cent to Southern Cameroons included 50 per cent of the proceeds of import duties other than those on motor spirit and tobacco.

+ Independent regional revenues These included direct tax; produce sales tax; licence and service fees; interest on loans and earnings on surplus funds invested; and revenue from regjonal departments and undertakings. The adoption of the principle of derivation as the sole basis for sharing the revenue allocated to the regions widened the financial disparity between the regions. It increased the advantage already enjoyed by the Western Region. It not only received the largest share of the proceeds of import, export and excise duties but increased its share of the total allocation from about 39 per cent under the 1952-54 regime to more than 41 per cent followingSir Louis Chick's recommendations (Tables 1and 2). On the othcr hand, the share of the East declined from 29 per cent to 24 per cent during the period. Even though the North maintained the same share, it has been shown that the rcgion suffered a considcrable loss of revenue through errors of 'defectivederivation y ercentages. ''Expectedly, demonstrations of dissatisfaction with the system of revenue sharing mounted, necessitating the need for another fiscal Commission.

Table 1: Percentage distribution of centrally collected revenue among regions, 1952-54 Source 1 Northern ( Western 1 Eastern Region Region Region Tobacco and petrol duties 24.2 50.8 25.0 Capitation grant 59.8 18.3 Education grant 15.2 41.5 Police grant 31.8 37.1 Transferred servicc grant - 100.0 Total 1 32.6 1 38.6 Source: Calculated from 0 Teriba, op, cif;Table 1, p. 365. F.E. Onnh 75

Table 2: . Percentages of allocation received by region by type of tax or grant, Type of receipt Northern Western Eastern Sou tliern Region Region Ilegion Cameroon Import duty on lobacco 16.7 46.7 36.6 Import duty on molor spirit 22.6 54.0 23.3 Import duties 011 others 30.3 40.4 29.3 Export duties 32.0 51.2 16.8 Excise dulies on tobacco I32.6 55.4 12.0 Exciscl dutics on beer 23.7 59.2 17.1 Income tax 47.9 26.0 26.1 Mining rent and royalties 89.7 0.3 10.0 Licences from small craft 0.0 63.5 36.5 Special grants from reserve fund 29.1 24.7 Tola 1 - ril 32.5 : 1 ;::; 1.9 Soor~o:Calculatccl from 0Tc. IXI, O/I. cit; ble 2; p. 369. The Raisman Commission, 1958 The Raisman Commission was appointed in 1957 as a result of the dissatisfaction with the system developed on the basis of Sir 1,ouis Chick Report. The Commission was asked to examine, and make recommendations on the current division of tax jurisdiction between the federal and regional governments and on the system of revenue allocation between the regions in the light of the allocation of functions approved at the 1957 Constitutional Conference. Specifically, it was required to cnsure a high degree of fiscal autonomy for the regions, subject only to the limitations imposed, on the one hand, by administrative practicality and convenience and, on the o tlwr, by the requirements of national and interregional policy; take into account, in its recommendations on the allocation from centrally-raised revenues, the relative financial positions of regional govcrnlnen ts in relation to their actual and potential expenditures. F.E. Onalz 77

Federal government revenue Revenues collected and retained by the federal government were as follows: import duties on beer, wine and liquor; 70 per cent of all other import duties except those on motor spirit, diescl oil and tobacco; excise duty on beer; 70 per cent of excise taxes; Lagos personal income tax; and 20 per cent of mining rents and royalties.

Allocations to regions according to derivation These included all export duties; import duties on motor spirit, diesel oil and tobacco; excise duties on tobacco; 50 per cent of mining rents and royalties.

Allocation to the distributable pool l

Independent revenue The sources of revenue collected and retained by regional governments included the personal income tax of Africans and non-Africans; taxes on partnerships, clubs, trusts and other unincorporated associations; licence fees and service fees; interest on loans and surplus funds invested; revenue from regional departments and undertakings; sales tax on produce other than tobacco, motor spirit, hides and skins.

The Binns Commission, 1964 In his recommendations, Raisman had suggested a constitutional provision for periodic reviews of revenue allocation in respect of two items - mining rents and royalties - and the Di~t~ibutablePool Account. One such revenue Commission was the Binns Commission set up in 1964 under section 164 of the 1963 Republican Constitution. The terms of reference required the Commission to review and make 78 r\evcm{e flllocfltiolz system in Nigeria, 1946 - 2000 -- recoinmenda tions in respect of the allocation of mining rents and rovalties and the distribution of funds in the Distributable Pool Account among the regions. Binns did not recommend any radical departure from the status quo. Nevertheless, he introduced a new principle (and this was accepted) of "financial comparability" in sharing the funds in the Distributable Pool Account. He increased the Distributable Pool Account from 30 to 35 per cent of revenues from import duties (other than those on beer, winc, liquor, noto or spirit and tobacco) and from mining rents and royalties. He proposed sharing the account among the regions in the proportions of 42 per cent to the North, 30 per cent to the East, 20 per cent to the West and 8 per cent to the Midwest. The proportions were worked out on the basis of his new principle of 'financial comparability' which was somewhat a hybrid between need and even development. The principle was based on the cash position of cach region, its tax effort and the standard of service it provided.

The Dina Interim Committee, 1968 Within a year of the Binns Report, the military took over the government of Nigeria. This changed the political environment of the country. In 1967 twelve states were created out of the former four regions. This therefore created an immediate problem of how to share the Distributable Pool Account among the twelve states. What the military did was to divide the share (42 per cent) of the former Northern Region among the new six states created out of it on the basis of equality. The share of the Western and Eastern Regions were shared among the new states created out of them on the basis of population. The Midwest's share remained unchanged at 8 per cent. In 1968, however, a Committee under the chairmanship of Dina was set yp to work out an interim revenue allocation formula. Its terms of reference were to + look into and suggest any change in the existing system of revenue allocation as a whole; F.E. Onoh 79

+ suggest new revenue sources both for the federal and state governments.

In its ~wommendations,the Committee suggested the setting up of a Special Grants Account to be operated by a permanent planning and fiscal Commission. The account was to have 5 per cent of royalties from on-shore oil operations, 10 per cent from offshore operations, 10 per cent from excise duty, and 5 per cent from export duty. Funds from the account would be disbursed to the states on application to the Commission, the principles for disbursement being tax effort, balanced development and national interest. The Committee recommended the renaming of the Distributable Pool Account into "States Joint Account". Into this account he proposed that 70 per cent of the remaining royalties from on-shore mining should be paid; 10 per cent should be paid out to the state of origin, and 15 per cent to the federal government. Rents from on-shore operations were to continue to be paid in full to the states of origin. For sharing the "States Joint Account", the Committee reduced the weight given to derivation. The principles it considered were: basic needs, minimum national standards, balanced development and derivation. The Report was rejected by the military government. It was not even published.

The decrees and the system, 1970 -77 Apparently, indecision over Dina's recommendations and the cessation of the civil war were the background to Decree No.13 of 1970. As a result of this Decree, the bulk of federally collected revenues was shifted to the federal government as follows: Whereas under the existing formula 100 per cent qf export duties went to states of origin, the Decree resulted in only 60 per cent going to them and the remaining 40 per cent to the federal government. Similarly, whereas 100 per cent of the import duty on motor spirit was formerly allocated to states on the basis of consumption, 50 per cent was now to be paid to them while the federal government retained tlie remaining 50 pcr cent. Again, 50 per cent of mining rents and royalties was formerly paid to the states of origin but now the percentage was reduced to 45. The Distributable Pool Account was credited with 50 per cent of it (mining rents and royalties) while the federal government retained the remaining 5 per cent. Finally, 50 per cent of excise duties was to be paid into the Distributable Pool Account, whilc the federal govcrnmcnt retained the remaining 50 per cent. The Distributable Pool Account came to bc distributed 50 per cent on the basis of equality of states and 50 per cent in proportion to the population of states. It has been observed that whether the states were satisfied or not with tlie net effect of shifting substantially more revenues to the federal government at the expense of the states was not readily made known in view of the command structure of the Military ~overnmcnt.'"

Decree No. 9 of '1971 had a similar effect on the revenue of the military government. By 1970 it was clear offshore crude oil production would soon be of equal significance as on-shore production as a source of oil revenue. Accordingly, in 1971 the fcdcral government decreed that it alone had the right to offshore rents and royalties. Decree No. 6 of 1975 was another important legislation of the military administration, which introduced significant cl~angesto the system of revenue allocation in the country. The changcs so introduced were as follows: + As against the former 45,per cent of mining rents and royalties which was pajd to the states of origin under Decree No. 13 of 1970,20 per cent was now to be paid to them. The F.E. Onah 81

balance of 80 per cent was credited to the Distributable Pool Account. The 35 per cent of import duties, other than those on motor spirit, diesel oil, tobacco, wine, potable spirits/liquor and beer, previously recommended by the Binns Commission and accepted by the government was retained for payment into the Distributable Pool Account. The balance of 65 per cent was to be retained by the federal government. Import duties on motor spirit and tobacco were to be paid 100 per cent into tlic Distributable Pool Account. As against the former situation in which the states were allocated all excise duties on tobacco and 70 per cent of excise duties on soap and mineral waters (Raisman Report), 50 pcr cent of all excise duties was now to be paid into the Distributable Pool Account, while the remaining 50 per cent was to be retained by thc federal government. 100 per cent of export duties on produce, hides and skins was now to be credited to the Distributable Pool Account. The distribution of the Distributable Pool Account was still based on 50 per cent population and 50 per cent equality of states.

Pinally, Decree No.7 of 1975 standardized personal income tax throughout the country. By this Act thc states' power to vary tax rates was takcn away; they could now only rely on efficient assessment and collection for increased revenue. This was one of tlic suggestions made by the Dina Committee whose recommendations were entirely rejected by the military govcrnmen t.

The Aboyade Technical Committee, 1977 The Teclinical Committee on Revenue Allocation undcr the c1iai1-manshipof Professor Aboyadc was set up in June 1977. Its recomliicndations were to be submitted to the Constituent Assembly aiid, if adopted, to be made part of its constitutional proposals. The terms of reference were to + examine the current revenue allocation formula with a view 82 l

to determining its adequacy in the light of population, equality of status among states, derivation, geographical peculiarities, even development, national interest, and representation from the federal and state governments, as well as from other interested parties; + recommend new proposals as necessary for the allocation of revenue between the federal, state and local governments, and also among the state and local governments; + make whatever recommendations considered necessary for the effective collection and distribution of federal and state revenues. l7

The Committee recommended, among other things, that all federally collected revenues (except personal income tax from the Armed Forces, External Affairs Officers, and the new Federal Capital Territory) be paid into the Federation Account. The proceeds of the account were to be shared between the federal government, the states, and for the first time, local government councils in the proportions of 57/30 and 10 per cent respectively. The remaining 3 per cent was to be paid into a Special Grants Account to be administered by the Federal Military Government for the interest of polluted oil-producing areas, and areas in need of rehabilitation from national emergencies, disasters and general ecological degradation. Each state was requjred to make an additional allocation of 10 per cent of its total revenue (statutory receipts plus internally- generated revenue) to the local governments within it. For sharing from the States Joint Account the Committee recommended the adoption of five criteria: + Equality of access to development opportunities. + National minimum standards for national integration. + Absorptive capacity. + Independent revenue and minimum tax effort. + Fiscal efficiency.

The formula based on these criteria was to be applied to increments in the Account beyond the level of the previous F.E. Onnh 83 year. Moreover, the same criteria were to guide the sharing of the Local Government Fund among local governments in each state.

This scheme was accepted but modified by the Federal Military Government as follows: Recommended 1 A c c e p t e d Weight i Equality of access to % dcvelopmen t oyportunitics ii National minimum standards for national integration iii Absorptive capacity i\7 Independent revenuc and tax effort v Fiscal efficiencv 1 0.15 1 0.13

Of these five factors (i) and (ii) rested on equity considerations whilc the rest rested on efficiency considerations. Moreover, the criteria were open to numerous problcins which included lack of consensus on the choice of ~inderlyingfactors, defective mcasures of the indices, and the selection of weights to be att

Table 3: Revenue jurisdiction and distribution in Nigeria in the )70s Source of Lcpl Basis Administration Right to Iicvenue Rcven~~e% Import Dulies: Feder

on TV and Radio Stamp Duties Federa tion States States 100 Gift Tax Fcdera tion States States 100 Estate Duties Fcdera tion States States 100 Sales or States States States 100 Purchase Tax Football Pools Sta tes States States 100 and Other Belting T~IX~S Motor Vehicle Statcs States States 100 TclX and Drivers Liccncc Fees Entertainment Statcs States States 100 Tax LandStates States States/ Local Registration & Govt. 100 Survey Fees Proputy Tax Sta tcs Local Govt. Local Govt. 100 Markets & States/Loc Local Govt. Local Govt. Trading a1 Govt. 100 Licence Fees Motor Park States/ Local Govt./ Local Dues Local Govt. States Govt./States Land G ro~ii~d States Local Govt. Local Govt. I

The Okigbo Presidential Commission, 1980 In November- 1979 the Okigbo Commission was appointed in the light of the deliberations in the Constituent Assembly already alluded to in connection with the Aboyade Committee's recommendations.

The terms bf reference given to the Commission were to: 8 + examine the present formula for revenue allocation, having regard to such factors as national interest, derivation, 86 Iicven~fcnllocntion sllstein in N;,qerin, 1946 - 2000

population, even development, equitable distribution, and cquali ty of sta tes. + recommend, in the light of the findings, new proposals considered necessary for revenue allocation between the federal, state and local governments. + makc whatever recommendations considered necessary for effective collection and distribution of federal and state revenues and offer broad guidelines on the distribution of revenue among local governments within states. + make any other recommendations on any related issues as may bc found necessary.

In keeping with section 149 (1) of the 1979 Constitution, the Commission agreed to thc creation of the Federation Account into which all federally collected revenues, except the proceeds of taxcs on the personal income of the personnel of the Armed Forces, the Nigeria Police Force, Externa 1 Affairs Officers, and rcsidcnts of the Fcdcml Capital Territory, should be paid. It however recommended that the C~nstitutionbe amended to the effect that receipts accruing from the repayment of loans and scilcs of capital assets should not be regarded as revenue and therefore should not form part of the Federation Acco~~nt.~' Other rccommcnda tions were that + the federal government should maintain jurisdiction over taxes, with the exception of those declared independent revenue sources for state and local governments. + the Federation Account be shared among the three levels of government as follows: federal government 53%, state government 30%, local government 1O0/0 and Special Fund 7%. 4 the S~ecialFund should be amlied as follows: Percenta~ Injtial Development of the Federal Cayi tal Tcrri tory 2.5 Special I'roblems of Mineral-Producing Areas Other Continuing Ecological IJroblems lievenue Equalization Fund Total + Usc be made of a four-factor formula for the allocation of revenuc from the Federation Account among state governments with the following weights:

Percentage i Minimum Responsibilities of Government 40.0 .. 11 Population 40.0 iii Social Development Factor (Primary School 15.0 Enrolment) iv Internal Revenue Effort 05.0 Total 100.0

+ Thc 15% allocation in respect of primary school enrolment should be made up of 11.25% for direct enrolment and 3.75% for inverse enrolment. + allocation from the Federation Account to local governments should be on the same basis as that on which state governments share their own portion of the Federation Account. + each state government should contribute 5% of its total revenue to the State Local Government Joint Account. + in establishing the body to administer the State Local Government Joint Account each state government should ensure that the local government councils are strongly represented .

The recommendations of the Commission were accepted and adopted with minor amendments by the National Assembly and signed into law in 1982. The Federation Account was to be distribt~tedamong the three levels of government as follows:

- ~cdcral-government 55% Sta tc Governments 35% Local Government Councils 10%

8 The 35% share of state governments was applied as follows: Equality of States Ecological Problems Derivation Principle Total

The 3.5% allocation on the basis of derivation was sub-divided into 2.0% to directly accrue to states concerned in proportion to thc value of iniilcrals extracted from the territory of the states and 1.5%into a fund for the development of mineral-producing areas of the country. This fund was to be managed in accordance with such directions as may be issued from time to time by the president, having regard to the value of minerals extracted from and around the particular areas. The formulae for allocating the proportions of the Federation Account standing to the credit of states and local government councils were left as recommended by the Commission. The remaining modification was that in addition to the allocation from the Federation Account to local governmcn t councils, each state government should contribu tc to the State Joint Local Government Account 10% of its total revenue for each quarter rather than the 5% recommei-tded by the corn mission.22

The System since 1982 The system of revenue jurisdiction approved by the National Assembly in 1982 has remained unchanged up to 2000. What has been altered a number of times is the forimula for distributing the Federation Account. For instance, in 1985 the Military Administration amended the allocation formula with the principal objective of relating the allocation on the basis of derivation to the total value of minerals extracted rather than to the total revenue in the Federation Acco~ui-tt. This was in reference to thea2.0% of the Federal Account previously paid directly to the mineral-producing states and the 1.5% of the Federation Account n~locatedto the development of rnineral- producing areas. F.E. Onnh 89

The amending decree provided that the shares of the federal government, local government councils and the fund for the ameiioration of ecological problems in the Federation Account should remain unchanged at 55, 10 and 1.0 per cent rcspectivcly. The share of state governments was however put at 32.5% while 1.5% was reserved for the development of mineral-producing areas. In allocating the 32.5% share of state governments, 30.5% was to be distributed on the basis of existing criteria while 2.0% was allocated directly to the mineral-producing states on the principle of derivation. What is important in the amendment is that the 2.0%0for derivation and the 1.5% for the development of mineral-producing areas should henceforth be related to the value of minerals extracted rather than the whole value of the Federal Account. lieali~ingthat the amendment would result in excess funds in the Federal Account, the decree provided that any such excess funds should be allocated in accordance with the amended revenue allocation form~~la.~' I11 1989 an important institutional change was made. The military administration established a Revenue Mobilisation, Allocation and Fiscal Commission comprising a chairman and onc member from each state of the country. The Commission wils ~mpowered,among otl~erassignments, to + monitor the accruals to and disbursement of revenue from the Federal Account; + review, from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities; + advise the federal, state and local governments on fiscal efficiency and methods by which their revenue is to be i~~creased,and + makc recommendations and submit its findings, by way of a report thereto, to the goveri~inentsof the Federation and states as the case may be, regarding the formula for tlw distribution of the Federation Account and the Local Government account^.^^ il? - 2000 -90 Rc~aenileallocatio~l systeiir Nigeria, 2946 The 1990 system of revenue allocation approved in 1982 was again adopted without modifica ti on^.^' However, in 1992 there was a review of the allocation formula involving a reduction of the federal government's share in the Federation Account to 48.5%0 and the states' share to 24%. The share going to the Special Fund, including the ecological fund and the fund for the development of oil-producing areas, was increased from 5 to 7.5%. The share of the local governments was increased to 20% in recognition of the expanded responsibilities of local govcrnmen ts2' In 1995 the formula remained unchanged as of 1992. Minor differences occurred in the structure and jurisdiction of revenue. Until 1994, sales tax used to be a major source of in ternally-genera ted funds for state governments. In that year, however, it was replaced by the value-added tax (VAT) in an attempt to ensure that state governments adopted uniform rates and to enhance receipts. The federal government assumed responsibility for the administration and collection of the proceeds of VAT. Revenues of VAT were initially shared in the proportion of 2O:5O: 30% to federal, state and local governments respectively. In the 1995 budget, the sharing formula was revised to 50:25:25% respectively. Later the same year, the corrcyx)nding shares were amended to 4: 35: 25°/o.27 In 1999 there was a return to democratic rule. Section 162 of thc. 1999 Constitution reserves for the National Assembly the power to determine the formula for allocating the Federation Account, taking into account the principles of population, equality of state, internal revenue generation, landmass, terrain as well as population density, provided that the principle of derivation shall be constantly reflected in the formula as being not less than 13% of the revenue accruing to the Federation Account directly from any natural resources. However, pending the determination of the system by the National Assembly, ~ectibn313 of the same Constitution provides that the system of revenue allocation in force in the fiscal year (1Jan - 31 Dec 1998) should apply.2" F.E. Oiia11 9 1

In effect, therefore, the system approved in 1992 remained in force with minor differences up to the whole of the year and beyond. A notable modification was the increase in the share of the derivation principlc in rcspcct of mineral revenue, to 13% with effect from 1999. The distrib~~tionof revenue among the states and local governments was based on the following principles and weights as approved by the National Assembly: Equality of states and local governments 40 per cent I'op~~lation of states and local governments 30 per cent Social development factor 10 percent 1,and rnass/tcrrain 10 per cent Internal revenue effort 10 per cent

C11anges 11avc also occurred in the distrib~~tionof thc procecds of the value-added tax (VAT). In 1996 the forinulci for sharing the proceeds was revised to 35: 40:25 per cent for the federal, statc and local govcrnmcnts, respectively. This formula was furtlier revised to 25; 45 and 30 per cent, respectively while in 1999 the ratios were changed to 15: 50: 35 for the federal, state and local governmen ts. 2') Notes a. There were two kinds of income tax in Nigeria at the material time: i the direct tax assessed and collected by native authorities and other local authorities, who paid a capitation share to the I-kgional Governments. This is the direct tax referred to under the independcnt revenues of regions. ii the income tax proper, which was assessed, collected and retained in full by the central government. It was assessed under the Income Tax. Ordinance and contained three Schedules. The first schedule provided for a tax on men with small incomes not cxcccding £150 (equivalent of N300 at the 1973 exchange rate) a ycar and on women with income of over E200 per annum. The sccond schcdule provided for a progressive income tax on personnel who were not subject to tax under the Direct Taxation Ordinance. The third schedule provided for a flat rate tax on the profits of incorporated companies

References I. A. S. Hornby, (1 985), 0.sfor.d A~ivnnce~iLca~ncr's Dictionary of C1rrr1~11tEiiglisll, Fifth Edition, Oxford, Oxford University Press, y. 1212. 2. Okigbo, IJ.N.C. (1965), Nigeria P11blic Financc, London, Longmans, Green and Co. Ltd. 3. 0.Teriba, (1966), "Nigerian Revenue Allocation Experience, 1952-65: A Study in Inter-Governmental Fiscal and Financial Relations", The Nigerinll ]o~li.llnlof Econo~nicand Social Sttldies; Vol. 8, No. 3 yp. 361 -83. 4. A. Adedeji (1969), Nigerian Fcdcrnl Finnncc, London, Hutchinson Educational Ltd. 5. A.0 Philips, (1975), "Revenue Allocation in Nigeria, 1970-8- 11," The Nicgrriajozrrnal of Economic nnd Social Studies, Vol. 17 No. 2; pp. 1-28. 6. of Nigeria (1980), Report of the Presidel~tial Co~vlnissioli OM RCU~MII~A//ocflI1017, Vo1. I; Ayapa, The Federal government Press, y. 16. 7. lbid, p. 17. 8. lbid, p. 17. F.E. Orral? 93

9. K. W. Baker-Beal, (1951), "Copy of Memorandum prepared for Finance Cornmittce on the Calculation of Regional Revenue Allocations, 1948-49 to 1950-51", Federation of Nigeria, Con7i11ission olr licariil~rAllocntron, p. 185. 10. Federal Republic of Nigeria (1980), Op. clt; p. 17 1 I. 0.Tcrib,~ (1966), Op. crf; p. 323. 12. Federal Iiepublic of Nigeria (1977), Report of tlw Ti~clzilrcnl Co1i71nittei'011 I~CT)C~~IIPA/Ioc~7tioii, Lagos, p. 2. 13. 0. Teriba, (I%%),Op. cit., p. 366. 14. Nigeria, (1953), Report ofFiscnlCoinmissior~~~.onFiirnr~inl Eficts of lI'rop~scdNriu ~oi7stif1rtionn;~rrnn~~~incizts, Lagos, pp. 1 1-22. . 15. 0. Teriba, (1966), Op cit, p. 368. 16. Federal licpublic of Nigeria, (1980), Op. cif; p. 21. 17. Federal Republic of Nigcria (1977), Op. cit., pp 1 -11. 18. Federal Republic of Nigcria (I980), Op. cit; p.22. 19. Federal Rcpublic of Nigeri'i ( 1978), Reports of tlrc Coiistitrrtionnl Drnftrirg Coi?inrrtti~i~,VoI. 11, Lagos, Fed. Ministry of Inforn~ation, I'rinting Di\iision, p. 133. 20. Federal Iiepublic of Nigeria (1970), Tllr Coilstitrrtioi~oj the Fid~rnlKCpr~blic of Nipv,in, Lagos, Daily Times Ltd. Section 272, p. 96. 2 I. Fcdcral Rcpublic of Nigeria (1%0), Op. cit; pp. 13-14 and 641. 22. 1-cderal govcrnmcnt of Nigeria (1982), Srlpplci~writto Officinl Cnzi~tti.,No. 8, vol. 69, I ,ages, Federal Government Press; pp. 1-2. 23. CBN (1985),Atliii~l K~port nud Stntemrr~fofAccorri?f, 1985, pp. 10. and 1 1. 24. Federal Iiepublic of Nigeria (1989), lievc~i~eMol7rlizntioi7, Allocntroir nnd Frscnl Coir~rnissroirDccrec 1989, pp. 1-2. 25. Federal government of Nigeria (1990), Tlzr Laws of the Fcdrrntioi7 ofNigerin (Decree 90), Abuja, Federal Ministry of Justice, pp. 347-353. 26. CBN (1993), Annrrnl I

Ben E. Aigbolihan

Introduction The Nigcrian govcrnmcnt has since independence in 1960 stated in its National Development I'lans and annual budgets the objcctivc of achieving rapid transformation of the economy in pirticulcir and society in general. Nigcria at indcpcndence had n thriving economy driven mainly by devcloplncnts in the agricultural sector. The manufacturing sector was also rapidly expanding to the extent that Kilby (1969) described it as onc of thc most y romising in Africa. Given the very stage of economic development of the country at thc time, a lcading role was canvassed for the govcrn~-rwiit,especially against the background of Keynesian n~~icrocconomicswhich predicted a higher multiplier effect of public spending than private spending in speeding up development. Up to the mid-1960s, foreign exchange and govcrnmcnt revenue earning generated esscntially by agricultural exports enabled government, under a three and latcr four-region structure, to finance its development programmes. With the active exploitation of oil since the late 1960s, from which the country is estimated to have earned over $200 billion in twenty-six years, many resources were made 96 Fiscd fcdcrdisr?i mid economic, iridristrid orld socid devploprncrit available to government to pursue its national economic, industrial and social development programmes. As the population grew, and coupled with political dcvclopments in the country in the late 1960s, the need arose to restructure the country into smaller administrative units in 1967, 1976, 1987, 1991 and 1996. With each restructuring also arose increased units with fiscal responsibilities. To be sure, the primary reason cited each time of the restructuring is the need to spread and speed up development by bringing government closer to the grassroots. Ability of these units to undertake thejr fiscal responsibjlities geared towards national development, however, depends on availability of funds, which in turn dcpends on the fiscal arrangements existing among the various tiers of government. Nigeria is a federation with three tiers of government, namely federal, state and local governments. Thus, Nigeria operates a system of fiscal federalism. This chapter examines how the existing pattern of fiscal federalism has contributed to economic, industrial and social development of the country. To this end, section 2 analyses the structure of fiscal federalism in Nigeria. Section 3 examines its implication for industrial development. Section 4 examines social devclopmen t consequent upon the structure, and section 5 examines the issue of economic growth and development. Section 6 provides the concluding observations.

Economic rationale for fiscal assignment The nature of fiscal arrangements prevailing in a country dcpends largely on the form of multilevel government it operates. There are three main forms of multilevel government: unitary, federal and confederal. In a unitary form of government effective control of government functions rests with the central government. The unitary form tends to facilities central decision-making to promote national unity objectives, and places a greater premium on uniformity and equal access to publjc services. Examples of countries with multilevel governments based on unitary constitutions are China, Egypt, France, Indonesia, Italy, Japan, Korea, New Zealand, Norway, Ben E. Ai,qbolchnii 97

The Philippines, Portugal, Spain, Turkey and the UK. Some are nonetheless quite decentralized. For example, in China in the 1980s subnational governments secured a significant degree of autonomy from the central government (Zhang and Zou, 1996). In n fcderal form of multilevcl government, decision-making is shared by all levels of government. Thc form is considered to be conducive to greater freedom of choice, innovation, political participation and ac~ount~ibility,which are all necessary for eco~iomicgrowth. In some, the federal influence on subna tional governments is very strong, as in the case of Australia, India, Malaysia, Mexico, Nigeria (under the military) and Pakistan. In soii~c,it is moderately strong as in the case of Germany, and USA, and in others it is weak eg Brazil, Canada and Switzerland (Shah, 1994). In centralized federation, conditional transfers (grants) by the fcderal government play an important role in influencing the priorities of lower governments. In a confederation, the government serves as the agent of member mits, usually without independent taxing and spending powers. The important point to note is that deccn traliza tion of fiscal responsibilities is feasible in my form of multilevel govcrnmcn t.

Expenditure assignment The literature on fiscal federalism provides guidance on how expenditure assignment could be optimally designed on the grounds of locative efficiency, manageability, autonomy and accountability. According to the decentralization theorem, proposed by Oates (1972), local provision of services allows greater responsiveness to the preferences and needs of local residents, as well as enhances inter-jurisdictional competition and innovation in the provision of public services. Thus, the principle provides a case for the lowest of government with the goals of idlocative efficiency. There k nonetheless a case for some degree of centralization. First, the exishence of benefits/costs spillover to non-residents, which may result in under-provision respectively, would provide a basis for central provision to 98 Fiscd federnlism orid ecoriomic, indirstrial and socinl developrnenf internalize such benefits/costs. Second, economies of scale make some services require jurisdictions larger than a local one for cost effectiveness. And third, on account of adininistrative and compliance costs, a centralized administration generally leads to lower cost of financing service provision. Tlwse considerations arc in addition to the stabilization and rcdistributivc functions of the central government. Based on t11c above pri~-~ciplesa suggcstcd division of spending powers could bc. suminariscd thus: 1'~rblicgoods and services which arc national in nature (eg dcfcncc) should be assigned to the federal government, while thosc whose benefits accrue mainly regionally or locally should bc assigned to the lower lcvcls of government; Quasi-private goods and services such as education, healtli and wclfarc services should on account of efficiency of dclivcrp be assigncd to tlic lowcr lcvels of government. The fcdcral government may no~-Icthclcsshave an interest in tlic w;ly tlicy arc providcd; licplations of cconoinic institutions and activities such as tlic capita! inarkct, labour market and commerce are best suitcd for the fcdcral govcmmcnt; Transfers to individuals (social benefits) arc best suitcd fos thc fcdcral govc~rnnicnt,while states may wish to supplement fcdcral schcmcs, based 011 local preferences. Transfers to busincsscs arc suited for the federal; otl~crwiseit may result in beggar-thy ncighbour policies.

Tablc 4.1 provides a summary view of the broad guidance provided by economic theory. Revr E. Aigbokllrrn 99 Table 4.1: Conceptual basis of expenditure assignment

Expenditures Service Provision of category responsibility service Defence F F arc national Forcign affairs F /I International trade F Environment F Banking and F currency Internal commerce F Iinniigra tion F Airways/railways F Industry and S,L Significant agricul turc interstate spillover Ed im tion s/L Transfers in kind Health SIL Social welfare s,L Police S,L Primary local 3enefi ts Highways SIL some roads 7ave nterstate ;pillover, ~ther are 3rimarilv ocal Natural resources S,L Promotes a common market cal Sources: Adapted from Anwar Shah (1994)) p.7 I()() Fiscnlfederdis~~~and eco~~oiilic,ii~dirstrinl aid socinl developrriei~t

Tax assignment The decentralization of expenditure responsibilities requires similar decei~tralization of taxing or revenue-raising responsibilities. In fact, federalism literature suggests that expenditures assignment should precede tax assignment. This is because tax assignment would generally be guided by exptmditure requirement of different levels of government and this cannot bc worked out in advance of expenditure responsibilities. The absence of tax assignment would result in tlic dependence on federal government by the lower levels of government. It is recognized, however, that the two assignments ~~ecdnot correspond exactly. Inter-governmental transfers could be used to make up the difference. As a guide in tax assignment, equity (consistency of revcnue means with expenditure needs) and efficiency (minimizing resources cost) cri teria suggest the following principles (Shah, 1991): Progressive redistributive taxes should be central; T;lxcs suitable for economic stabilization should be central; Tixes on mobile fxtors of production are best administered at the centre; liesidcnce-based taxes sucli as sales or excise arc suited for states; Benefits taxes and user charges could be used at all levels; Tax bases distributed Iiighly unequally between jurisdictions should be centralized.

Table 4.2 presents a summary view, based on the above principles, of how specific taxes should be assigned.

Table 4.2 Coi~ce~tualbasis of tax assignment Tax type Determinationof: Collection & Comment Base Rate administration Customs F F F International trade tax Corpora tc F F F Mobile factor income Resource taxes F F F Unequally distributed Personal Redistribution, income mobility stabilisation Wealth taxes Redistributive Payroll Social Programmes Value-added Admin costs tax stabilisation Sales tax Higher compliance costs "Sin" taxes: Health care Alcohol, shared tobacco responsibility Gambling, State and local Lo ttcries responsibility Taxation on Global/ncitional "Bads": Carbon pol1~1tion Motor fuels, Tolls on road effluent use/by extent charges of pollution Congestion Tolls on road tools use Parking fees Local congestion Motor Station revenue Vehicles: sources Regi~tr~ition, driver's licences Business taxes Benefits tax Excises Immobile base Poverty Land Fron tage/bctte Cost recovery rmcnt Poll tax Non-distorting User chcirgcs Payment for

services 4. Source: Adapted p. 27. 102 Fiscal federalism nr~deconon~ic, i~~dustrinl nd social deuelopri~ent

Intergovernmental transfers As pointed out above, there may not necessarily be correspondence between expenditure assignment and tax assignment. Intergovernmental transfers from higher to lowcr- levcl governments have therefore formed a part of fiscal arraiigements in multilevel governments. For example, central transfers account for 85% of subnational expenditures in South Afsica, 72% to 95% of state-local expenditures in Nigeria, and 70% to 90% of cxpenditurcs in lcss prosperous states in Mexico.' Thc design of these transfers is equally important for efficiency and cquity in local public service provision. Such transfers could bc used to ameliorate the imbalance that may arise from expenditure and taxing assignments. lntc~rgovernmentdtransfers or grants fall into two broad ca tegories, namely, matching and non-matching grants. Matching or conditional grants require that the rccipien t uscs the grant for a specific purpose as wcll as provide a specific proportion of the total programme cost to supplement the amount granted. Non-matching grants, which may be ei ther conditional or unconditional, do not rcquire thc recipient to provide a ma tclling or supplementary amount. Where conditional, such a grant would nonethcless need to be spent on a specific programme. Such grants are usually used whwe it maybe necessary to subsidise programmes considered to bc of high priority by a higher level of government but lower priority by a lower government. Thus, the principles which should guide intcrgovernrncntal transfers are: fiscal imbalance or fiscal gap2; redistributive role of the public scctor which would sometimes require the central government to redress regional disparity; preservation of an internal common market, which may require the federal government to ensure a common minimum level for public services; stabilization objectives; and interjurisdictional spillovers which may otherwise lead to the under-or over-provision of public services. Ben E. Ai,ybokhn 103

Fiscal arrangements in Nigeria Table 4.3 and table 4.4 show constitutional provisions on expenditure assignment and tax assignment in Nigeria respectively. A comparison of Table 4.3 with Table 4.1 indicates that expenditures assignment provided for in the constitution corresponds closely to what is suggested by economic principle. The federal government has responsibility for major economic activities, particularly those with interjurisdictional benefits, such as international trade, currency and banking, air and rail services. It also has respcmsibility for defence, foreign affairs and the police. Conceptually though, responsibility for the yolicc is to be the responsibility of states and local governments . . (Table 4.1). Federal government shares with subnational governments responsibility for natural resources, with the latter groups having responsibility for such resources as timber and logs, which usually have restricted jurisdictional benefits. There is also joint responsibility for social services such as education and health, as well as economic activities in agriculture and industry. Federal government has responsibility for these services at the tertiary level, while subnational governments for secondary and primary levels. Education, however, provides a ~iniq~ieexample of wliere this division is not adhered to. Federal governnicnt shares responsibility for secondary education with state government. It also shares responsibility for primary education with local government, specifically by paying teacher's salaries. Conceptually, responsibility for environmental issues is to be shared by the three levels of government. In practice, local government is rarely involved. Yet these are services that have significant local jurisdictional consequences.

Foreign Affair Immigration International Trade 104 Fiscalfederalism md economic, industrial and social developmnt

Money and Banking F Environment F,S Air and Rail F Industry and Agriculture FS Education F,S,L Health F,S,L Pol ice F Highways F,S,L

Table 4.4: Tax assignment in Nig ria TYpe ,egisla tion Zollection Personal income tax F F,S Companies income tax F Withholding tax F Resource tax (petrolcum, solid mineral) customs (imporl and export duties) F VAT F Education tax F Capital gains tax F St'lmp duties F I'ools betting and lotteries S Koad taxes S l~usinesstaxes S Dcvelopnien t levy S Land S Market taxes S Naming of streets S Property (tenement rates) L Estates S En tertninment L Advorlisc.inen t L Fees (birth-marriage - death registr- L ation, motor parks, driver's licence, shops, liquor licence, slaughter slab) Gifts tax S Capital transfer S Ben E. Aigbokhm 105

A comparison of Table 4.4 and Table 4.2 indicates also that tax assignment as provided for in Nigeria's constitution closely corresponds to the one suggested by economic principles. The federal government has exclusive responsibility for resources, international trade, company income and value added taxes. These are, however, the buoyant tax handles. States have responsibility for residence-based taxes, while they share with other levels of government access to benefit taxes and user charges. Local governments have responsibility for taxes on urban properties and service taxes. The nature of the taxes means that the lower levels of government have access to taxes that yield a small proportion of their revenue needs, and have to depend on transfers from the federal government to finance a greater proportion of their expenditures. Various criteria have been introduced over the years for sharing federally-collected revenues among the three tiers of government and for transfers from the federal to subnational governments. Ekpo (3 994) provides a good review of the various criteria. The federal government further modified some of the ratios in its 1998 and 1999 annual budgets. In the context of the focus of this paper, it would be interesting to find out how the pattern of fiscal assignments and transfers translates to growth implications. A channel for this is the resultant degree of fiscal decentralization. The most common measure of the extent to which a system is decentralized (or centralized) is the concentration ratio, the proportion of total direct government expenditures made by the central government. Another measure is the extent of vertical fiscal imbalance, which depicts the extent of expenditure- revenue mismatch among the various levels of government. Table 4.5 reports both measurcs. Table 4.5: Vertical fiscal imbalance in Nigeria, 1993-97 YC'IJ- I

As shown in Table 4.5, in the period 1993-97, the concentration ratio ranged between 68% and 75% for expenditure and 94% to 97% for rcvenue.'The table also shows thatboth state and local governments' revenues significantly fell short of their expenditure needs and it is more propounded for states. The opposite is the case for the federal government. These figures should not be interpreted to mean that the federal government runs a budgets surplus. It merely means that the revenue share of the federal government exceeds its expenditure share, whereas the converse is the case with state and local governments. Two observations may be made here. First, states may face harder constraints in the future if the present pattern of assignment continues. And second, on the grounds of allocativc efficiency argument above which recommends lower level provision of services, unless intergovernmental transfers arc regular and adequate, growth prospects may be constrained. At the moment, due largely to the problem of mismatch and irregular flow of transfers, lower-tier governments often delay for a number of months the payment of salaries to their workers and fees to their contractors. These have tended to negatively affect, the efficiency of workers and of service delivery and invariably economic growth. A third measure of decentralization is a class of coefficients of vertical imbalance proposed by Hunter (1977) and applied by Shah (1991).Thesc measures attempt to measure the degree of control exercised by the federal over lower levels of government. A value of zero indicates absolute federal control, while a value of unity indicates absolute autonomy of lowcr levels of govern~nentin their decision making. A value closer to unity is considered to be consistent with the assignment principles discussed above. The coefficients are V,, V2, and V?, calculated as follows: V,= I- (S,+ B) E ...... (1) V,= 1- (S,+ S,,+B)/E ...... (2) V7= 1- (S,+S,,+Ts+B)/E ...... (3) where SLis federal conditional transfers to states, S,,is federal t~nconditionaltransfers to states B is net borrowing by states Ts is shared taxes, and E is statcs' expenditures.

Table 4.6 sliows results from applying these measures to Nigerian data. It should be stressed that the quality of the data used would not permit strong conclusion to be drawn from the results. It was difficult isolating conditional and unconditional grants from published data. 011 the assumption that conditional grant constitutes a small proportion of federal grants to state and local governments (see footnote 4 below), the bulk of the grant is trcatcd as ui~coi~ditionalgrants. The results are, however, sufficientlyillustrative to permit some inferences to bc drawn.

Table 4.6: Coefficients of fiscal balancc in Nigeria, 1993-97

Year VI V2 V 7 A B A B A B 1993 0.922 0.939 0.86 0.893 0.234 0.171 1994 0.893 0.913 0.831 0.863 0.222 0.177 1995 0.934 0.989 0.867 0.888 0.302 0.236 1996 0.94 0.953 0.743 0.793 0.1 24 0.110 I997 0.991 ' 0.991 0.952 0.956 0.747 0.208 Notes: (A) is for statcs alone, (8)is for statcs plus local govcrnments. Sorim: Cornputcd fsom CBN A~ln~lIZcporf, 1997. 108 Fiscalf~.deralismaid economic, indtlstrial aid social development

As the able shows V, and V, are very close to unity, suggesting a high degree of autonomy for the lower levels of government in their spending decision^.^ This reflects the fact that unconditional grants usually account for the bulk of intergovernmental transfers in Nigeria. Indeed, Ubogu (1982) notes that the experience in Nigeria shows that unconditional grants are favoured since conditional grants do not respect the sovereignty of the spender but of grantor.5The results also seem consistent with the evidence found by Ekpo (1994), which suggests that "all evidence confirms revenue concentration while there were certain episodes of expenditure decentraliza tion""n the period 1960-90. Thc low value of V, may reflect the fact that the lower levels of government depend to a very high degree on shared revenue from the federation account to finance their expenditure. The introduction of the variable into the formula therefore throws up results which tend to suggest a high degree of federal control (centralization of reven~e).~

Fiscal federalism and industrial development As Table 4.3shows, expenditure responsibility for industry and agriculture is shared between the federal and state governments. Fiscal federalism has direct and indirect effects on industrial development. The direct effect arises from direct involvement in production by the different tiers of government, subject to the availability of funds. The indirect effect derives from expenditure on socio-economic infrastructure needed for industrial location and expansion across the country. As pointed out above, one of the principal reasons given each time for restructuring the administrative units in Nigeria is to evenly spread economic development by encouraging competitive development among states. However, discussions in section 2 have shown that state governments suffer fiscal imbalance. The table above also shows that expenditure responsibility for infrastruct~lreis shared between the federal and state governments. However, as a result of the fiscal imbalance suffered by states and the consequent budgetary cons train ts facing states, there has been under-inves tment in basic infrastructure, both for the maintenance of existing ones and the creation of new capacities. Yet such infrastructure is needed to attract much needed investment for industrial development. In the early 1960s regional (state) governments introduced industrial estates as economic infrastructure to attract industries. Table 4.7 shows allocations by states for the provision of industrial estates in the 1970s and 1980s. Two observations from the table are, first, there were uneven allocations by states, and second, while allocation by some states increased over the two plan periods, that of others declined. If this pattern translates to decisions of industrialists, it may mean that some states would be able to attract more private industries than others. Tables 4.8 and 4.9 show the distribution of industrial establishments by states. The picture is truly of uneven distribution of industrial development. Even tho~ighthe federal government enjoys fiscal surplus relative to the other two tiers of government, its allocation to infrastructure has not matched its increasing share. As a result of thc combined under-investment on infrastructure, there is cvidence of inadequacy of infrastructure in the economy (Aigbokhan, 1996). Notable evidence of inadequacy of infrastrricture provision in the country is provided by a survey of 179 manufacturing firms by a World Bank study team. The study found that many of the firms had to provide their own infrastructure to supplement publicly provided ones. For example, only 8% of the firms depended on publicly provided electricity alone, while 78% depended on it as the main but not the sole source of electricity. On the other hand, only 11% used generators as the main supply but also used ptlblic supply when available. The study also found that 56% of the firms did not havc boreholes for their water supply, 37% had their own radio equipment for communications and 30% had motorcycles to suppleinent telephone services; 62% had their own vehicles for .I freighting, 26% for transporting personnel, and 13%for garbage disposal (Lee et a1 1996). 1 1 C) Fiscnl federalism and economic, iiidlrstrial adsocial devrlopmcnf

The relevance of the foregoing for industrial development is that where firms depend, as small scale enterprises do, on existing public infrastructure to reduce their setting-up cost, inadequacy of infrastructure would retard the pace of industrial development. Yet the experience of advanced industrial economies shows that small-scale enterprises form the base for eventual industrialization. As a result of inadequate infrastructure provision by tiers of government and financial constraints and loss of fiscal (taxing) power to offer fiscal incentive to investors, coupled with the absence of other conditions necessary for a conducive industrial environment, the pace of industrial development has been slow in Nigeria despite the earlier promises in the 1960s. As a result, the contribution to gross domestic output (GDP) by manufacturing is still below 10%, as Table 4.10 shows.

Table 4.7: Plan allocations for provisjon of industrial estates qmillion) 4 "1 Nat. Cumu- Average Total Dcv. Plan. Dcv. Plan lative hcclasage of total estates 1989

3.6 (5.54) 9.6

0.47(0.72) 2.47

2.5 (3.85) 5.5 2.5 (3.85) 6.5

0.47(0.72) '1 I .97

4.0(6.16) 6.5

0.47(0.72) N/\

3.6(3.54) 5.6 (Ka tsiiia) 3.87(5.97) 5.5(8.05) I<'lno (Jipwa) 7.83(12.07) 5.5(8.05) Uwara 4.4(6.78) NA (Kogi)' L,agos 7.6(11.78) NA Niger 0.5(0.77) NA Ogun 3,43(5.28) 7.6 Ondo (Ekiti) 3,43(5.28) NA Ovo (Osun) 3.43(5.28) 1.25(1.83) I'la tca~ (Nassara\va 2.5(3.85) l.O(l.46) I

Table 4.8: Some indicators of spread of estates and industries by states No. of No. of No. of lowns L o w n s ind us with with 5 tries eslnLcs/ firms or I n layouts more each (1979) state

New Old . 1 1v v

h 5 154

3 I 8 1 12 Fiscalfcdrralisin aid c~co~~oinic,indiistrid and social devc4opmrn t

Edo/ll Bendel el ta Dcn~~e D o r n o Borno (Yobc) C/l

Table 4.9: Distribut a1 establishment by state, 1997 Eslabs. Ownership S~LIC'(LIW - kcrs En No. No.

Ahin Adama W a Akwa Ibom Ancmhr 1 ILiuchi Hcnuo Borno Cross liiver Dcl ti1 Ed0 F:nr~g~l Abujn Imo jigacva ILldun '1 Keno Ualsina Kcbbi Kog i I

Tnblc 4.10: Gross dolmcstic product at 1984 constant factor

iActivitv srvzlor Agriculture Livestock Fores try Fishing Mining and 1 14 Fis~~lfid~rnliSii~~IZLIKOMOII~~C, iiidr~sfrid ortd social developrnenf

cli~arrying Manufacki~ring Utilitic.~ I3uilding and conslruction Transporl Communication Wholcsalc and retail L-radc Hotel and restaurants Finnncc and insurance I

Fiscal federalism and social development As the discussion in section 2 shows, state government functions priinarily rclate to social development and community services such as education, health, water, sewage and roads. These services enhance the quality of life. The prevailing budgetary constraints facing states have impinged even on the proportion of their expenditure on these services. In this section, the focus shall be on health and education services." Studies have found that' there is a positive correlation between human infrastructure and productivity growth and poverty alleviation. For example, higher skills which are acquired through educa tion, combined with good health which derives from access to adequate health care, enhance the quality of labour and thus productivity of labour and capital. Available data suggest that there are currently over 14 teaching hospitals, 856 general hospitals. 7030 dispensaries, 4775 ma terni ty centres and 3004 health centres in Nigeria.'' The health care system comprises primary health care, secondary health carc, tertiary health carc, and the referral system. Primary health carc is largely the responsibility of the local government, with the support of state ministries of health. T'riinary health care covcrs general health services at prevcntive, curative, promotive and rehabilitative levels. It sometimes serves as an entry point into the health carc system. Secondary health care provides specialized health scrvices to patients referred from the primary heath care level. It operates in-and out-patient I-tospital scrvices for general medical, surgical, pediatric cases as well as community health scrvices. It also provides laboratory, diagnostic, blood bank, rehabilitation and pliysiothcrapy scrvices. Tertiary 11ealth care consists of highly specialized scrvices made up of teaching and specialist Iiospitals, which provide carc for specific diseases and ailments. The ownership structure of registered health institutions has been decci~tralized.Each tier of government owns and opcr,ites various health facilities within its jurisdiction. Table 4.1 1 shows the ownership structure of registered health insii tu tions. Table 4.3 shows that responsibility for the financing of health carc in Nigeria is shared between the three tiers of go~~riiinent. Ability, especially of lower Licrs of government, to do this i~ffcctivc~lydcycnds largely on c~deq~~cicyof funds, which i tsc>lfdepends OR the prevailing fiscal rirrang~~iicmt~within the fiscal fcdcralism. Agiin, budgetary constraints facing lower t~crsof govcrnrnent as a resill t of the fiscal imbalance thcy suffcr rcad~lycome to play here. 7ab)c 4.12 shows the trend in health spcnding in the 1990s. The clvidcnce is that of declining \pending, ,i~;d of SCCU~I-ent c~xpc~lcdi t~~l-c dominating capi tal 1 16 Fiscnl fedcrnlisrn nnd i~cor?omic,indrrstrial md socjal d~veloprneizt expenditure. As a result of this, basic health indicators in Nigeria reflect a remarkable decline in the heath status of Nigerians, and health-related indicators of economic development in Nigeria are low compared to many other countries (see Tables 4.13). It is, therefore, little surprise that Nigeria, according to the United Nations Development Programme's Human Development Report 1998, which ranked 131 out of 148 countries in 1996, had by 1998 fallen to 146 out of 171 countries. As with health, responsibility for expenditure on education is shared between the three tiers of government. Primary education is the responsibility of the local government (though the federal government in the 1990s took over direct payment of teachers' salaries, and in July 1999 decided to transfer it to. states). Secondary education is the responsibility largely of sta te government, with federal government contribution through spending on federal 'unity schools'. Tertiary education is mainly federal responsibility, though since the early 1980ssome states have established their own state universities, polytechnics and colleges of education. Student enrolment has expanded at the various levels of education, as evidence in Table4.3 4 shows. However, like other social services sectors, spending on education has not kept pace with the expansion in student enrolment, due in part to tl~e problem arising from existing fiscal arrangement among the tiers of government. As a result, there has been underspending at every level of education, culminating in the deterioration of facilities and overpopulation of classrooms and lecture halls. One notable consequence of under-funding in the face of increased student enrolment is the declining teacher/student ratio at the three levels, as shown in Table 4.15. The foregoing thus shows that the existing structure of fiscal federalism in. Nigeria has hampered the pace of social development. Ben E. Ai,qbokhnn 1 17

Table 4.11: Ownership of healthcare facilities in Nigeria, 1987-93 Year Fedcral Govt. State Govt. Local Govt. Private Others 1987 158 2982 6760 1905 808 1988 201 3251 7087 2058 829 1989 205 3277 71 49 2058 829 1990 205 3353 741 2 2295 832 I 991 205 3353 7267 2295 841 1992 205 3353 7267 2295 841 1993 185 2239 8208 3061 678 Notc: Others include con~munity,missions, joints, corporations and industrial. So~lrcc: FOS, Abstract of Statistics 1997 edition (Abuja, 1998)

Table 4.1 2: Fcdcral .wcrnment healtli in Nigeria 1982-1997 Year Capital Tolal Total Rccurren t Capital as (Nominal) as % of O/u Of Notni~ial Nominal Total Total 54.1 45.9 63.5 36.5 71.6 28.4 73.6 26.4 79.1 20.9 52.3 47.7 73.1 26.9 70.2 27.8 60.8 39.2 80.2 19.8 85.1 14.9 90.6 9.4 73.7 26.3 71.7 28.3 65.7 34.3 L 64.2 35.8 Naira major devaluation took place in 1986. This explains the jump

in nominal value of expenditure. 8 Source: CBN Stntisticnl B1111ttill.jil~le 1996 & Aluiunl Report 1998 1 1 8 Fiscnl fideralisrn nrld cconornic, industrinl arid social devdopmerz t

Table 4.1: ic health information- in Ni e Indicators 1 'If -+ -8 Crud(% birth ra tc,' Crude dc'1l11 ralr* Inf'lnI 87.2 111orId I i ly rn tr* Ma tcrnal 15 mortality rate* Total 6.3 fertility rate**** 1, i f cs c'xpcclakcyat birth 1Jndc.r-five 192.4 mor1,lIity rrllc'*' Access to 52 sdllilali~ll*"~* Accc-ss lo snfc W', tvI.**"" Acccw lo 11 r ,I I 1 11 S(>,yic.p*-* I'opulnlion pSr hospiLll hcYi I'opul,~lion 166 pLSr 11~1r,sillg slaff I'opuI,~Iion 852 per medical doctor L '0 1 *"per 1,000 live birth *** per 100,000 +*** perccntagcs f=Fcmalc in=Male Solrrc-c.: Amaghionyediwc (2999), p.394. Ben E. Aiaboklzan 1 19

Table 4.14: Student enrolment by level of Education, 1987-1995 Year Primary Secondary University 1987 11540.178 2934349 160,967 1988 12690798 2941781 169,174 1989 12721087 2723791 180,871 1990 13607249 2901993 190,823 1991 13776854 3123277 200,774 1992 14805937 3600620 224,879 1993 15870280 4032083 227,999 1994 16190957 4451329 236,261 1995 1574 1678 4448991 253,121 Sources: FOS Abstract of Stcltistics 1997 Edition (Abuja, 1998) & Social Stcltistics in Nigerirr 1990 fLagos).

Table 4.15:Teacher-Student ratio bvJ Level of Education, 1987-1995 Year Primary Secondary University 1987 1:37 1:22 1:13.9 A988 1:42 1:22 1:14.2 1989 1:37 1:20 1:15.2 1990 1:36 1:21 1:15.3 1991 1:37 1:22 115.4 1992 1:39 1:25 1:lB.l 1993 1:27 1.27 1:18.3 1994 1:37 1:29 1:20.5 1995 1:36 1:28 1:2O.3 * Figures for 1994-1996 do not include State Universities1 of Agriculture. Sourcc: FOS, Aiii~r/nlAbstrnct of Statistics 1997 Edition (Abuja, 1998) & Socinl Stntistics ill Nigrrin 1990 (Lagos).

Fiscal federalism and economic growth and development Economic development broadly involves changes in the composition of output and in the allocation of inputs. It describes the underlying determinants of economic growth such as structural and technological changes. Economic development thus involves positive and qualitative changes in the output and social structure of society. Discussions in sections 3 and 4 have shown that there have not been noticeable improvements in social and industrial development in the 120 Fiscn1,fkferalismnizd ecorromic, indc&rinl nnd social developmeiit country. In this section, focus is on the growth component of economic development.1° Theoretically, efficient local provision of services is growth- promoting. However, discussion in section 2 suggests that the existing fiscal arrangements in Nigeria are not likely to create a necessary enabling environment for efficient local provision of services and thereby for growth. This section formally examines this proposition, drawing on a theoretical growth model.

Theoretical model A Barro-type endogenous growth model has been adopted for this paper. The model assumes that growth is influenced by policy variables other than thc technical relationship between capital and labour (Barro, 1990). The flexibility introduced by variables has made the model popular in the analysis of growth of nations, especially developing countries. The model dcveloped lwre is an extcnsion of Ram (1986) and Aigbokhan ('1996). The model assumes that there arc two sectors, private (P) and public (G). Output in each depends on labour in P. Thc production functions of the respective sectors ~ircthus:

P = p(L,,K,,G) ...... ('1) C = g&,, K,) ...... (2) where the subscripts denote sector inputs.

Total inputs arc given as LT =L,,+L, ...... (3) I<, =I<,+I<, ...... (4) Total output (Y) is given as the sum of sectoral output or a function of sec toral input Y .= P+C, or ...... (5) Y = P(L,,I<,,C)+g(L,,I<,), or ...... (64

Y = LT+KT+C * ...... nu.. (6b) The model further assumes that the public sector comprises three subsectors, and by extension public spending is carried Ren E. Ai,qbokhnn 1 2 1 out by three levels of government: federal (f), state(s) and local (m) T~ILIS,

It has been suggested in the literature that the size of government tends to influence the growth rate (Aigbokhan, 1996). It has similarly been suggested in the fiscal federalism literature that fiscal deccntraliza tion tends to reduce the size of government (El~daie,1994). Drawing on this literature, it could be argued that fiscal decentralization would have an impact on growth. In fact, there is evidence which suggests that increased decentralization tends to impact ncptively on growth (Zhang and Zou, 1996). Thc nature of intergoverninei~talfiscal arrangements or fiscal federalism would, therefore, be expected to influence the output of G. Introducing fiscal decentralization (FDC) into thc model on the basis of equation (7), thcrefore, equation (6) bccomes

Eq~~ation(9) is deduced from (8) on the basis of the argument above that t11c size of G depends to a certain degree on FDC. Equation (9) is the estimated basic growth equation."

Y=a+bL+cK+dFDC+e ...... (10) where a is the constant term, which also incorporates the influence of technical progress on growth, e is the error term.

Data, scope and estimation procedure Data used in the ?nalysis were drawn from the Central Bank of Nigeria (CBN)A1z17lrnl Rcport and Stntisticnl Bulletin. Aggregate output (Y)is gross domestic product at current market prices. Cross fixed capital formation is used for capital due to lack of data on net investment. Annual change in it is taken as net 122 Fiscd fedcmlism and economic, incltrstrinl nnd social developmnt investment. National population figures are taken as a proxy for tlic labour force in the absence of time-series data on total labour force of employment. This point would need to be borne in mind when interpreting the results. All the data relate to national aggregates and cover the period 1976-97. Data on government revenue and expenditure relate mainly to federal and state governments. However, for the years 1980-97 the data all relate to the three tiers of government. Local government revenues and expenditures for 1980-1991 are mainly from Ekpo and Ndebbio (1998).'~For states and local governments, revenue figures are for internally generated revenue. This rather than total revenue was chosen because it reflects better the level of taxing assignments the governments have access to. For federal, it is total federally-collected revenue. Expenditure figures are the total expenditure by state and local governments respectively, while for federal it is total direct federal expenditure (all expenditures except transfers made to subnational governments). These data were then used to derive a measure of fiscal decentralization. There is broad consensus that "an operational measure of decentralization is the share of decentralized expenditures and revenues of state and local governments in the nation's total fiscal activities".'? Zhang and Zou (1996) measure it as the ratio of total subnational spending to total central spending, w hilc Ehdaie (1 994) measures it as the ratio of total subnational governments' own-source revenues over total national (federal plus subna tional) expenditures. For this paper three measures of fiscal decentralization, FDC'l, FDC2, and FDC3, are used. The first two reflect separately decentralization of taxing powers and spending powers respectively, while the third attempts to capture the simultaneous decentralization of both powers. Failure to consider such simultaneity, Ehdaie argues, is a major whkness in the empirical literature. FDCl = subnational own-source (internally generated) revenue as a ratio of total central (federal) revenue; FDC2= subnational expenditure as a ratio of total federal expenditure; and FDC3 = subnational own-source as a ratio of total federal expcnditure. Ordinary Least Squares (OLS)technique was used in estimation of the model. Levels data were used for the variable.

Regression result Table 4.16 reports the estimates from the model. Equations 1,2 and 3 in the table are estimates of the basic model in which three alternative measures of fiscal decentralization were included. Adjusted coefficient of determination indicates that variations in CDP are sufficiently explained by the variables incl~tdedin the model. Both labour and capital have signs predicted by theory, and statistically significant. Of more interest to this study, however, is the coefficient for decentralization. In the basic equa tions (equations 1,2,3) the coefficients did not show a consistent pattern. Equation 1 shows ,I positive relation between decentralization and growth, but the coefficient is statistically weak. Equation 2 shows a negative relation, implying that the decentralization did not promote growth. But again the coefficient is statistically weak. It would be recalled that these two measures reflect separate decentralization of taxing and spending power respectively. The third measure, which reflects simultaneity in decentralization of taxing and spending power (DC,), shows a positive coefficient and is significant at looA level. As pointed out above, the quality of data used, specifically the low coverage of local government revenue and expenditure statistics would tend to underestimate the magnitude of coefficient for decentralization. This point should be borne in mind in interpreting the results. To see whether the results are sensitive to other conditioning factors, as well as to gauge the nature of the rela tion between overall fiscal opera tions and growth, the basic model was re-estimated with government investment rate (total government investment relative to gross domestic product) as 124 Fiscal fede~alismand economic, indtistuial and social dcuclopment

an additional factor. For an oil-exporting economy like Nigeria whcrc oil revenues have made resources available to government and for an economy where government plays a leading role, government investment might be expected to be an important factor in the growth process. The coefficients of labour and capital maintained positive and significant relation to growth. DC, measure of decentralization which earlier had positive and insignificant coefficient produced negative and signjficant (at 10% level) coefficient. DC, had earlier been negative but insignificant. While maintaining the sign it becomes reasonably significant at a 10% level. The results on these measures imply that decentralization has been harmful to growth. Put differently, growth falls with increased decentralization: However, when the third measure of decentralization (DC,) is considered, the magnitude of the earlier positive coefficient is reduced although the level of significance remains largely ~lnchanged.

Table 4.16: Regression result on decentralization and growth 2ndcnt variable: In GDP Equation 4 Equation 5 Equation h 5.73(3.52) 5.13(3.58) 6.0(3.78) 1 .19(3.53) 1.08(3.35) 1.21(3.61) 1.26(2.18) 1.25(2.65) 1.27(2.43)

0.01(1.55)

0.09(1.67) 0.98 1 .I7 321.93 22 Note: Figures in parentheses are t-ratio

On the basis of these results, it would seem that, overall, the effect of decentralization on growth in Nigeria is largely negative. Although the magnitude of the estimated coefficients is low, this conclusion is reinforced by the observation from the equations that overall government investment rate (G/Y) does not promote growth so far. This evidence confirms the conclusion that "government spending has a positive impact on privatc sector output, although the overall impact is negative" (Aigbokhan, 1996). Before considering the implica tions of these results for fiscal federalism reforms in Nigeria, it might be necessary to draw some lessons from comparative evidence. Theoretical arguments exist which suggest why decentralization might impair growth. Prudhomme (1995) and Tanzi (1995) feel that corruption may be more common at the local level than at the national level, especially in developing countries. This, it is argued, is because the absence of arm's length relationships is assumed to be more pronounced at the local level. However, as Wildasin (1995) notes, "by virtue of their more limited powers, it is difficult for local officials to engage in enormous corruption schemes, whereas a corrupt minister of a central government may be able to do massive harm. It seems impossible to say a priori which would dominate the other.""ildasin's observation would be relevant to Nigeria where as a result of their limited fiscal assignments, local governments have limited resources at their disposal as to be able to engage in massive corrupt practices as to have a noticeable impact on growth. Other factors may however explain the observed negative impact of decentralization. One is the quality of local bureaucracies. Central or federal bureaucracies attract more qualified staff as they offer better careers and remunerations. The scarcity of local high skilled staff may thus constrain the positive effects of decentralization. This also explains the weakness in public expenditure management systems. Budget offices lack facilities and staff capable of forecasting expected revenue and spending, budgetary classifications that allow the controlling authorities to dete'rmine whether funds are actually being spent as budgeted. 8 Lastly, the experience of many developing countries suggests that subnational governments are likely to contribute to the aggravation of macroeconomic problems, or make it difficult to correct such problems (Tanzi, 1995). This is particularly in countries where there is an expenditure assignment, which is not matcl~edwith a taxing assignment. In such situations subnational governments accumulate debt. All these factors are prevalent in Nigeria and may therefore explain why there may be a negative impact of decentralization on growth. Although the level of development argument has sometimes been advanced to explain a negative impact on growth, it may be difficult to find this argument relevant to Nigeria. For example, it is argued that at the lower level of development central expenditure may be necessary to engender growth through spending on infrastructure. This argument has been invoked to explain the observed negative and significant coefficient on decentralization in China, and therefore provides a case for slowing down the pace of decentralization in the country (Zhang and Zou, 1996). What seems to obtain in the Nigerian case is that the administrative decentralization being pursued through continued state and local government creation is not being matched by corresponding fiscal decentralization. At the same time the administrative infrastructure is not developed enough for effectiveness of the intended administrative decentralization. The overall result of this is growth-impairing decentralization arrangement.

Conclusion This study investigated the implication of the existing pattern of fiscal decentralization on economic growth in Nigeria. The study found evidence of a high concentration ratio of both expenditure and revenue suggesting that there is limited fiscal decentralization. The study also found evidence of mismatch, with the states being harder hit. That is, spending responsibilities are not matchkd by taxing responsibilities. Alloca tive efficiency recommends lower level's provisions of public services. However, the prevailing vertical imbalance couplcd with irregular transfers from federal government generate constraints on local provisions. Although estimates of fiscal bcdance (V, and V,) suggest a high level of autonomy in spending decision, estimates of V, suggest high federal control on rcvcnues. The study investigated the effect of this on industrial development. It was found that because of budgetary constraints, there has been limited provision of economic infrastructure necessary to attract investment, and where firms had to provide their own infrastructure this has added to the cost of setting up business or expanding existing ones. This has, therefore tended to discourage industrial development in Nigeria. The study similarly investigated the effect of fiscal federalism on social development. The evidence is that if anything, there has been a general decline in the social indicators of development. This explains the general decline in the quality of labour and growing unemployability of much of the output from the education system. Lastly, the study investigated the effect on economic growth. It was found that the prevailing pattern of fiscal decentralization tended on impair rather than promote growth. As Nigeria marches into the third millennium, the urgent reform that is required in the Nigerian fiscal federalism would be to redress the prevailing mismatch by raising the level of taxing powers of subnational governments. It is recognized that the assignment of such powers is dictated by two theoretical considerations, namely administrative efficiency and fiscal independence. Whereas the former entails the centralization of tax powers at the higher level of government, the latter requires decentralization with more powers to the lower levels. A way has to be found to redress this imbalance nonetheless, especially as the current procedure of intergovernmental transfers does not make for effective planning and service delivery by subnational governments; this makes them less able to contribute effectively to economic, industrial and spcial development of the country. It is to be hoped that with 128 Fiscd fdevtllism and economic, industrid find social development

advancement in constitutional gbvernment, true adherence to the principles of federalism as enshrined in the constitution . would bring about some of the required fiscal reforms. i'.

Notes 1 Shah (1994) p.24 2 Fiscal imbalance takes two forms-horizontal and vertical. The former refers to the mismatch between revenue-raising ability and fiscal needs of governments- at the same level in a fede;ation, while the later refers to the mismatch between revenue means and expenditure needs at various levels of government.- The latter is more relevant for the focus of this paper. 3 For comparison, France 77%, Canada 4l0/0, USA 55.5% (see Rosen, 1995 p. 508). 4 For comparison, Shah (1991) estimated for Brazil in 1998

b 0.91 0.87 0.76 5 Ubogu (1982), pp 6-7. 6 Ekpo (1994), p.3 7 A referee of this paper pointed out that V,=IR/E, where IR is independent revenue of states, would be a more robust measure, espe&ally as the measure is indicative of the sensitivity of state and local government expenditure to the fiscal operations of the federal government. While this issue deserves further empirical verification: for the purpose of the paper, V, as presently meaiured is capable of highlighting the extent of federal control exercised through grants and shared taxes. 8 The discussion on health draws on Amaghionyediwe (1999) 9 Amaghionyediwe (1999) p. 381 10 The section draws on Aigbokhan (1999a) 11A related model developed by Zhag and Zou (1996) is: Y = M+N+DC+DSD M consists of labour force and tax rate, N consists of investment, degree of openness, and inflation rate, all variables commonly included in studies on economic growth. DC is decentralization measure, and D denotes provincial dummy variable. Ben E. Aigbokhan 129

12 ~he'fig~lresfrom Ekpo and Ndebbio cover only very few iocai governments for 1910 - 1991. Figures for 1992-97 are from CBN 1997. The decision to use them nonetheless was informed by the constderation that limited, as the coverage is, it may still provide some insight, albeit on a low end, into what the trend is likely to be if the three tiers are considered, compared to if only two tiers were considered. Besides, the picture is not expected to be significantly different if all local governments were fully included since the tier's internally generated revenue, for instance, is usually very low in Nigeria. 13 Ubogu (1982), p.3 14 Wildasin (1995), pp. 327.

References Aigbokhan, B. E. (1996), "Government size and Economic Growth: the Nigerian experience", Nigeria Econoii7ic Society Annlrnl Conjerence Proceedings, pp. 505-523. (1999a), Federalism and Economic Growth in Nigeriaf, Paper presented at the NES Annual Conference 1999, pp. 333-352. -(1999b), "Evaluating Investment in Basic Infrastructure in Nigeria', Paper present at CBN Annual Zonal Officesf Conference, Kaduna (June). Amaghionyediwe, L. A. (1999), "Fiscal Federalism, Health Care Spending and National Developmentf, Paper presented at the NES Annual Conference 1999, pp. 379-403. Barro, R. (1990), "Government Spending in Simple Model of Endogenous Growth", Iocrrnal of Political Economy, 98: S 103-S125. Boadway, R. Roberts and A Shah (1994), "Fiscal Federalism Dimension of Tax Reform in Developing Countries", Policy Rrsenrch Working Pnper 1385 (November), The World Bank. Ehdaie, J. (1994), Fiscal, "Decentralization and the size of Government: an extension with evidence from cross-country data", Policy Resenrch Working Pnper 1387 (December), The World Bank. Ekpo, A. .H. (1994), "Fiscal Federalism: Nigeria's Post- Independence Operations in Nigeria", AERC Research Paper Seventy Three (March). 130 F1sm1 federnlis111nrxf rconornic, i~ldlrstrinlnnd socinl developnrc~~if

Hunter, J. S. H. (1977), Fcderalisrn and Fiscal Balnnce (Canberra: Australia National University). l

Roseline C. Onah

Introduction Two main related issues constitute the focus of the structure of fiscal federalism. The first concerns how to establish which level of government has the authority to impose and administer taxes. The second has to do with determining which government should administer and/or retain what proportion of revenue actually realized from taxation. In dealing with these issues, fiscal federalism also attcmyts to grapple with the twin q~wstionof socio-economjc disparities among the component units of the federal system, economic growth, stabilization and development of the whole federation (Oyovbaire, 1985: 104). The Nigerian federation typically exhibits these disparities. Consequently, over the years, the vital problem has not been so much that of allocating power and jurisdiction over taxation, as of allocating the revenue produced by certain taxes between the various governments of the federation. In a federal structure, the public goods and services consumed at the local level are supplied, to a very large extent, by the state and local authorities while the central government concentrates on the provision of services that are centrally consumed. Therefore, in order to prevent conflict and ensure the efficient delivery of goods and services, the functional responsibilities and revenue-sharing arrangements are always cnshriiicd in a constitution (see FRN 1999 Constitution, schedulc 11). Today, state and local governments are the nation's key hervicti providers; they have important policy and economic dcvclopinent responsibilities. The prominent role expected of local governments in social services delivery and economic development is explicitly stated in the Fourth Schedule of the 1999 Constitution. These developments demand equitable and efficient intergovernmental fiscal relations. This chapter therefore aims at achieving the following objectives: To present an overview of fiscal federalism in Nigeria. To examine the challenges facing fiscal federalism in Nigeria. To proffer suggestions towards overcoming or ameliorating these challenges.

Conceptual Framework A federal government is a constitutional arrangement which divides law-making powers and functions of the state between two or more levels of government which are coordinated in status. Wheare (1944), one of the greatest pundits in federal studies, argues that each level of government should have adequate resources to perform its functions without appealing to the other level for financial assistance. In other words, the distribution of tax powers in a federation should be such that each level of government will be financially autonomous. He emphatically states that (Olowononi, 1998: 248): If state authorities, for example, find that the services allotted them are too expensive for them to perform, and if they call upon the federal authority for grants and subsidies to assist them, they are no longer coordinate with the federal gover~mentbut subordinate to it. Financial subordination makes an end of federalism in fact, no matter how carefully the legal forms may be preserved. It follows therefore that both states and federal authorities in a federation must be given the power in the constitution each to have access to and to control its own sufficient financial resources. Each must have the power to tax and to borrow for the financing of its own services by itself.

The above classical concept of federalism, though a relevant springboard for fiscal federalism, has ceased to be generally accepted as an appropriate modus operandi in contemporary federal fiscal relations. This is because the preservation of the federal structure is not the only thing that is important in devising a fiscal policy. An economically sound fiscal policy of the federal government is indispensable for sustaining a federation. Thus, autonomous taxing, borrowing and spending activities of the state and localgovernments may run counter to that crucia{,federal gove~rqpentpoIicy function. It is'also argued that cbntrary to the proposition of classical federalism, thc prattice in some federations (including Nigeria) where the federal government 'does not only have the sole responsibility of levying and collecting the most lucrative taxes but also deciding, in the light of changing circumstances, how the federally collected revenue should be shared out between itself and the other levels of government is not only economical but also permits the efficient use of tax as a regulator of the economy (Olowononi: 249). It also enables the federal government to facilitate the process of even developinen t throughout the country through the revenue allocation system. Contemporary discussions on federalism should supersede contentions on definitions and descriptions. There are numerous issues that provoke controversy and serious reflection. The peculiar circumstances of a given federation can also create a 'gap between theory and practice. But this notwithstanding, Wheare's assertion remains relevant even in the recent time in many systems. For instance, in the United Statcs (Cigler 1993:182) and Nigeria (Anyanwu 1997: 168 - 172) it has been established that vertical fiscal imbalance and its corollary sub-national government's dependence on the federal government are part of the problems that bewilder fiscal federalism. These and other problems facing the Nigerian fiscal system will be examined in a later section. Our immediate concern will however be to present an overview of the operations of fiscal federation in Nigcria.

An overview of fiscal federalism in Nigeria Fiscal fedcmlism in Nigcria involves the assignment of functional responsibili ties and taxing powcrs among the federal, state and local governments. This allocation of functions and powers is embodied in the federal constitution and classified into three categories of legislative powers. The first is the exclusive list on which only the federal government can act. This consists of responsibilities which can be morc efficiently ~indcrtakenby the federal government than thc lower tiers of government or where the benefit covers the entire country. The concurrent list contains responsibilities shared by both federal and state goveriiinci~ts.The benefits areas of the responsibilities in this list are often morc local than national but with the possibility of spillover effects beyond state or regional boundaries. Responsibilities that are purely local in character in the. sense that their benefits accrue to a limited geographical arca in thc fcdcration arc assigned to local government councils and are listed in thc fourth schedule of the constitutioi~.The rosidual list is reserved for the state government only. Closely associated to the allocation of responsibilities is the assignment of revenuc/taxing powers. This is shown in Table 5.1.

Tablc 5.1 : Assignment of Revenue/Taxing Powers in thc 1999 Consti tu tion Federal Govt State Govt Local Govt

I Customs and 1 Stamp allties 1 Collection of ra tcs Excise duties 2Export duties 2 Tax or duty, fee 2 Collection of or rate for the licences on radio, administration of television, bicycles, law trucks, wheel barrows and carts 3 Stamp duties 3 Collection of taxes 3Registration of on capital gains, births incomes or and marriages persons othcr than companies

4. Taxation of income, profit and capital gains 5.lioyalty on mines and minerals 6. Value Added Tax Soll~ci,: Federal Kcpublic of Nigeria (1995

According to Table 5.1, the major sources of rcvenue such as pc.trolcu~nprofits tax, import duties, mining rents and royalties and companies' income t~xcome under the jurisdiction of the feder'ii government. Apart from personal income tax at the state level which is high j~iclding,sta tc and local govcrnmcnts lici\/cjurisdiction over poor revenue yielding sourccs. I'ropcrty t'isation h'is high yielding potentials but this is yet to bc fully cxploitcd by most local goveriinic~~ts.Otlicr sources include cwtcrt'iinmen t tax, motor veliicle and drivcrs' licence fccs and motor pclrI\ cnuc allocation fol.mul;l. r.I hc sources of rcvenue for the Federa tion Account include (a) any receipt from the operation of any law; (b) any return arising from or in respect of any property held by the government of the federation; and (c) any return by way of interest on loans and dividends in respect of shares or interest held by the government of the federation in any company or statutory body (FRN, 1999, Section 2 62).

The state and local governments retain the revenue in ternally generated by each of the two tiers. These comprise those from the sources indicated in Table 5. 1. It is however pertinent to point out that the neatly outlined fiscal system in Nigeria notwithstanding, fiscal federalism in the country faces numerous challenges. This forms the subject of the next section.

Problems and challenges facing fiscal federalism in Nigeria Fiscal federalism has been a recurring issue of political tension in the history of the Nigerian federation. The debate on Nigerian federalism had been conducted largely because of its fiscal and financial significance. Such debates are quite instructively, conducted largely by officially commissioned panels such as the numerous revenue allocation commissions set up at various times in the country and often centred on issues connected with revenue sharing among the various levels of government in the federation. Although this is a thorny issue, there are other problems and challenges facing fiscal federalism in Nigeria.

Imbalance between the tax powers of the federal government and the sub-national governments This is one of the greatest problems facing fiscal federalism in Nigeria. ldealiy, each tier of government should be given adequate financial resources to enable it discharge the duties and responsibilities assigned to it. But this is not so in Nigeria. There is usually a lack of correspondence between the responsibilities assigned to the various levels of government c~ndthe revenue sources assigned to them. Under the Nigerian fiscai arrangement, the federal government enjoys a greater ability to raise revenues to meet its expenditure obligations than state and local governments do, as shown in Table 5.1. The state governments, in turn, are better placed in terms of revenue generating capacity than the local governments. Where this non-correspondence occurs between the fcderal govcrnment and the sub-national governments, it is tcrincd vertical fiscal imbalance. Under this circumstance, there exists a coiisiderablc divergence between the sources of revenue and cx ycndi t~rreobligations of the various governments of the federation. In other words, there could exist an imbalance between the fiscal powers and responsibilities of the federal and state, or between state and local governments as is obtainable in tl-rc Nigerian fiscal system. The existence of this imbalance creates a situation of depcndence of the state and local governments on the federal government for the bulk of their funding. This dependence was instituted into Nigeria's federal structure by the Binns Report (R~portof the Fiscnl Revicw Coininissioiz 1965:7) which states: That there must be growing dependcnce of regional governments on the fcderal govcrnmcnt (in order) to maintain the strength and unity of the federation, (and that) it was misleading and unrcal to speak of achicving and maintaining regional fiscal autonomy.. . The immcdia te ecoiiomic advantage of a region must be subordinate to thc welfare of Nigeria as a whole.

Following this report, the Distributable Pool Account was enlarged and a clear recognition of the primacy of the fcderal govcrnmcnt ii'l fiscal federalism was made. The ihcreasing dependence of the state governments on revenue collected and distributed by the federal govcrnment has provoked in tense disquiet from states, politicians and interested scholars especially towards the terminal rule of the military in early 1979. The agita tion wasessentially for a refurnishing of the states with constitutional functions and an unconditional statutory allocation of funds from the total of federally collected revenue (Oyovbaire, 1985: 164) Although this measure has been adopted and a compulsory statutory allocation from the Federation Account to the state and local governments is now in operation, the dependency of the sub-national governments on the federal government has continued to constitute a problem in Nigerian fiscal federalism. In fact, the expectation of tlie monthly statutory allocation has led to low intcrnal revenuc generation efforts on the part of both state and local governments. For instance, for the year 2000, the summarv of internally generated revenue for local governments in Rorno, Liigos nnd Enugu statc.; was M40.4 million, M321.3 miilion and W4.6 million respectively (CDN, 2000:109). These reprcw~it'1 nicrc 3.3 per ccnt, 10.6 per cent and 3.5 per cent of thc r~spectivestates' total revenues. With such low internal rcvcwtlc, local governments can neither meet up with their rccurrcwt c.xpc\nditurc nccds nor embark on capital projects \without relying on statutory allocations. f'iscal iinbalcincc m'ip also exist between different units of government at the same Icvc~lin a federation. This is referred to as liorj/ontal imbalance and is also manifest in the Nigerian fiscal systcln. 111 2001, tlie summary of internal revenue of local go\ c\rnmcnts in Ablci, Ilcl ta and Kano sta tcs MICIS #2,208.4 ~njllion, W8,22 1.0 million and N4,309.5 million respectively (C13N, 200 1: 1 18). Thcsc. fig~rrcssho\v marltcci diffcrcnccs in rc\ C~IILICgcnc~rci tion capnci ty. In view of the nature of thc items ovcv- \\/liicli loccilgobel-nmcnts possess tcixing/rcvcnuc powers, lli~brlll nncd highly popi~l~itcd loccil governmcnt5 arc better cmdowcd wilii rcvcnucs from rcitc.s, market stalls, motor park fcvs, liqiror liccn~es,clc. 11~1ra1local govwnnients, on the other Ii,lncj, Iinvc. Icss ;~nd10w~r rcvcnuc yiclding sources, yet they arc in grc~~lcrnccd of basic arncwitic.~ s~rclias potable watcr, ~~I~ctrrc~ty, ~iiotorablc~ roads ;111dhospitals. A \v~dc\gap therefore c>x~slsIx~twe~n the financial rcwurccs av,lilable to such locLiI govc~n~iient .i~id tlwi r necds. Some loccil govern~ncnts thus Roselinc C. Onoh 139 remain impoverished while others arc reasonably financially buoyant.

Crises of Revc~zt~eAllocation: Finding an acceptable formula for sharing the federally collected revcnue to the state and local governments has posed a serious challenge to fiscal federalisin in Nigerki. Suberu and Agboje (1998:335) describe this phenomenon CIS a crisis of distributive federalism. They posit that the primary pa thology of Nigerian federalism involves the wholc motivations, orientations and actions associated witli the co~~ntry's 'cCikc-sharing' culture. This culture manifests itself in tlic' domination of public discussion and attitudes by individuals and sectional competition for access to federally controlled revenues and resources. In this regard, Ayu (1 994:l5l) asscrts: The first remark (to make) about Nigerian federalism is its preocc~ption with revenue allocation or the distribution of rewards. Most ycoyie who have either written about or formulated policies for Nigeria have placed emphasis on distribution, or what is cynically referred to as the sharing of the national cake. Unfort~inately, not much emphasis has been placcd on the baking of the cake by every member or componcn t part or segment of the Nigerian political community: incvi tably distribution or sharing has cornyletcly vvcrshadowcd prod~~tionand effective growth.

F~rrthei-to Ayu's proposition, Suberu and Agbajc (P342) posit that the issue of revenuc ;11location has involved at least four major axes of ii~tcrgovcriinientalconflict thus: 1 The conflict among the federal, state and local governmepts ovcr what proportions of national revenues should be allocatcd to each of thesc three tiers of goveri~ment. 2 The tensions among the states and among thc localities ovcr thc criterici to be used in sharing or distributing federal financial devolutions to these two sub-national tiers of government; 3 The tensions between the oil-producing states on the one hand, and the federal government and many of the states which do not produce oil, on the other, over the proportion of federally collected revenues that should be allocated to the former on the basis of the derivation principle and/or compensation for the ecological risks of oil production; and 4 The general intergovernmental conflict over suspected irregularities or anomalies in the centre's administration of the Federation Account.

The submissions of Suberu and Agbaje summarize the complex problems which revenue allocation has created in the Nigerian fiscal system. The controversy is such that presenting a generally acceptable formula for that purpose has remained an intractable problem. The agitation by the oil-producing states for the control of resources originating from them is an open expression of their dissatisfaction with the application of the various revenue allocation principles especially derivation. The dclmand for resource control by the oil-producing states remains not only a thorny issue but also an unsettled one in Nigerian fiscal federalism. Another consequence of the distributive pressure associated with Nigeria's fiscal system is the turbulent politics of national population counts. The post-independence census (1962, 1963, 1973 and 1991) organized in Nigeria have all generated intense controversies. While the controversies over the pre-3970 head counts were basically against inter-regional (mainly north- south) pressure to manipulate such counts for political electoral purposes, those over 1973 and 1991 had added dimensions. Decree No 13 of 1970 not only included population as a major principle of revenue allocation but also gave it an astonishing50 per cent. Although the percentage has fluctuated over the period, population remains an important principle of revenue allocation in thc country. Thus, it has become not only a viable instrument for securing a higher percentage share of the Fcdcra tion Account but also that for attracting greater public amenities such as pipe-borne water, schools and hospitals.

Creation of states and local governments Tlic coiitinuo~~scrca tion of new states and local governments constitutes an impediment to the effective application of fiscal fcderdism in Nigeria. Between 1976 and 2003, the number of states in the country has risen from 12 to 36 plus the federal tcrritory, and local governments from 30 to 774. A corollary of the creation of new statcs and local governments is increased overhead cost to financc new infrastructural requirements, provision of new secretariats and staff emoluments, among others. This has thc effect of lowering tlic outlays on maintenance and new capital expenditures as money meant for thcsc is ukilixcd for the establishment of the emergent states and local governments. As state and local governments are duplicated, the statutory allocations of each tier of government dwindlc and becomc inadequate for their numerous cxpcmdi turc nceds.

Political Instability: This has been identified as a major ~.~roblcmof fiscal fedcralism in Nigeria (CBN 1997: 70). Political instability has often culmina tcd in military intervention in governance. This, in turn results in the suspension of the country's constit~~tionand laying aside of the norms and lcgalitics of the tenets of fiscal federalism. The states and local governments ra thcr than enjoy autonomy constitutionally gsmtcd to thein are subordinated to the federal government. Thc sclspension of the constitution also leaves the country with a physical federal structure under a centralized adininistration. The aftcrma th'of centralization of the administrative process is increased federal government responsibility. This results from the attcn~ptby the central government to provide basic social ;~mcnities(such as inass transit and boreholes) to areas which would havt~been under the jurisdiction of states or loyal governments under a constitutional federal set-up. This expanded functional role outweighs the constitutional statutory allocation. Consequently, to be able to finance and sustain the programmes, the federal government now resorts to ad hoc policy measures aimed at transferring federally collected revenue to itself and effectively neutralizing the statutory allocation formula. These ad hoc measures which include the use of Dedication Accounts, Stabilization Funds and Petroleum Trust Funds, substantially reduce the statutory allocations that arc received by state and local governments (CBN, 1997: 70).

Corruption and financial recltlessness No discussion on problems and challenges facing any political or economic process in Nigeria can be considered exhaustive without addressing the problems of corruption and financial recklessness. These two phenomena are generally accepted as the cankers that threaten to destroy the fabric of the Nigerian socio-economic and political system. This malaisc is manifest at all levels of government in the federation. It takes different forms including short-accounting, inflation of contracts, failing to prepare financial reports, fraud and outright embezzlement of public funds. Alarming cases of widespread corruption among local government officials were highlighted by Ikejiani- Clark (1995: 139 - 245). In other incidents reported by N~ws7uatclzMagazine in 2002, no fewer than 31 local government chairmen from different parts of the country were either under investigation, impeached or on suspension for various forms of financial corruption (FRN, 2003:109). State governments also display financial recklessness to the extent that they mortgage their future allocations to contractors at source deduction from their monthly allocation from the Federation Account (Vo~~pnrd,22 September, 2003: 1). A corollary.of this widespread corruption and fraud is mutual mistrust and suspicion of the intents and actions of the various tiers of government. The absence of trust and goodwill no doubt militates against efficient fiscal operations. Roselinc C. Onah 143

Increased local government responsibilities The array of responsibilities statutorily assigned to local governments as contained in the fourth schedule of the. country's constitution poses a challenge to Nigeria's fiscal federation. In addition to the vertical imbalance in tax powers already discussed, the country's population is growing rapidly and there is also an increase in urbanization. Local government tasks are therefore becoming more complex, difficult and resource demanding. Urbanization creates slums and over- crowding which in turn aggravate health and sanitation problems for councils. Increased urbanization also exerts pressure onexisting social amenities such as liospitals, health centre.;, scliools and housing, thus creating a need for their increase. The dearth of funds becomes more acute with the direct deduction from source of primary schoolteachers' salaries which leaves most local governments with very meagre financial resources for recurrent and capital expenditure. Many local governmcnts are therefore unable to cater adequately for liedltl~care,sanitation, water and electricity supply, among others. However, sometimes local governments fail because the upper tier governments abdicate their duties. The failure of state governments to remit the 30 per cent share of internally gencrated revenue to the local governments as statutorily requircd is a case in point. For instance, 18 out of the 36 states in tlic federation did not remit any allocations to their local governments in 2001 (CBN, 2001: 120). For those that did, the aniounts were so meagre that their impact on the financial stand of the local governments was negligible.

Constitutional problems The pliglit of the local government is further worsened by its increased subordination to the state government under the 1999 Constitution. In' this regard, section 162 of the Constitution directs that the amount standing to the credit of local government councils in the ~ederationAccount be allocated to the states for the benefit of their local government councils on such terms and in such manner as may be prescribed by the National Assembly. It also provides that the remittance is to be made into a special account to be established by each sta tc govcrn men t and called Stnte Joint Locnl Government Accozin t. It is instructive to point out that state interference in the management of local government fui~dsis one of the main financial problems of local governments. It is therefore not only antithetical to the spirit of federalism but also both morally and administratively wrong to further subject local goveri~mcntsto the financial control of state governments which do not even oblige them their 10 per cent statutory allocation. To say that the allocations if sent through the State Joint Government Account would be tampered with by state governinents is simply a truism.

The way forward Since the Nigerian fiscal system is plagued by such numerous problems and challenges as have been identified, what options exist for overcoming or at least reducing the debilitating effects of these problems and cl~allenges?This is the subject of this section. Owing to the uneven distribution of natural and material resources across the country, allocation of greater tax powers to the federal government remains imperative. This is because in the spirit of give-and-take which is implicit in federalism, the resources generated from the better endowed federating units should be partially used to develop or fund the less advantaged ones. This can be most effectively done through a central account such as the Federation Account, into which the federally collected revenue can be paid. Based on the above premise, the problems of both vertical and horizontal fiscal imbalance must be accommodated through increased internal revenue efforts. State and local governments must pursue internal revenue generation with greater vigour so as to reverse the prevailing low internal revenue trend. To this effect, potential and yet not fully 'exploited sources of revenue available to local governments include property rates, television and Eadio licences as well as entertainment tax for both state and local governments. These taxes, if effectively collected, can yicld a substantial amount to the sub-national governments, thereby reducing their dependence on statutory allocations for carrying out their fulictional responsibilities. Capacity building aimed at increasing local governments' managerial and fiscal abilities would enl~anceproper record keeping and accounting, thus leading to an improvement in revenue generation. In addition, although primary schools are under the functional responsibility of local governments, teachersf salaries should bc deducted under first charge, that is, prior to the sharing of thc Federation Account. This measure is necessary bccause of the heavy sum required for thc payment of teachers' salaries. In fact, the deduction of primary schoolteachers' salaries from councils' statutory allocations has been identified as the major source of their financial stress. The underlying philosophy of state and local government crca tion is that it facilitates socio-economic and political dcvclopment. It is believed that new state and local government headquarters invariably become growth centres from which development spreads to their environs. Undoubtedly, this situation is obtainable where stlch state or local governments possess the necessary facilities for being viable. These include a fairly high population, natural resources as well as some crucial infrastructure. Conseqtlcntly, in addition to existing principles for state and local government creation (Dasuki Report 1935; Oladosu, 2001:38- 56), another necessary precondition should bc that the interested parties should first put up at least a building to serve as the secretariat. The present practice of renting private buildings for use as local government headquarters should cease. This measure, if adopted, would, to a reasonable extent, reduce the prevailing practice of creating unviable local governments just to appease political allies. There is a dirc need to de-emphasize the controversial dcrivation principle in Nigeria's revenue allocation process. Both derivation and resobrce control are divisive and an ti the tical to national cohesion. There is no gainsaying that region of the federation that suffer various forms of disadvantage or economic deprivation in the course of mineral exploitation need to be compensated. But this can be done through the equitable distribution of social infrastructure and improved employment opportunities in these areas. It is noteworthy that most agitation for derivation and resource control by the oil-producing states is premised on unacceptable neglect of their region by the federal government in the distribution of social infrastructure (Offiong 1996; Ekpo 2002). This adliiini~tr~~tivcprocedure, coupled with improved transparency and accountability by the federal government in its c~dministrationof the Federa tion Account, will certainly reduce thc crisis of revenue allocation. It is also advocated that the share of the Federation Account to be allocated on the basis of internal tax/rcvenuc efforts should be raised to at least20per cent. This will ginger up state and local governmcnts towards intcsnnl revcnuc genera tion. Rccltlcss financial management and corrupt practices have posed insurmountable challenges not only to fiscal federalism but also entire administrative, political and economic processes in the country. As a result of corruption, many Nigerian csi-ablisii~ncntsperform below expectation even in the face of war-cidecluate funds. These can hardly be adequate funds in the midst of widespread corruption and financial imprudence. The problem of corruption ~JINigeria is attitudinal and systemic and must be tackicd from both dimensions. Nigerians must be reoriented to see corruption as an evil practice that must-be condemned in all its ramifications. Thus, people known to be corrupt should ~ioiongel- be accorded public recognition. In fact, they should suffer public rejection. The National Orientation Agcncy (NOA) has a big role to play in this public cduca tion/enlightenlnent. Although a lot of controversy surrounds the Anti Corrupt Ihctices Act bnd the operations of the anti-graft commission, a sustained war must be waged on corruption. This implies stringent penalties for proven cases of corrupt practices to be administered by officials of impeccable integrity. Conclusion In the course of this chapter, the problems and challenges facing fiscal federalism in Nigeria have been identified. The various dimensions of these problems have also been discussed and a n~~mberof suggestions towards addressing them proffered. It is our thesis that if these measures are adopted, Nigeria will be rescued from these yroblcms that have bogged down its fiscal system.

References Adedcji, A (1969), Niprirrrr Federnl Firrnrrr-0. London, Hutchinson. Anyanwu, J. C. (1997), N(syrinn Public Firzarlce. Oni tsha, Joance Educational l'ublishers. Central Bank of Nigeria (CBN) 1998), Arintrnl Report nrrd Stnti~i~rentof Accorrntfor th~Ymr endrd 31 D~c~'rizber1998, Lagos. (2000), Arzrrrrnl Report nrrd Sfntcw~entof Accorrnt for f11e Yrwr rrzdr~f3 1 Dcccwdwr 2000, 1,agos. (2001),Anrzr~nl Report nrzd Statement of Accorirzt for f11c Yrwr end~d31 Decc17117er2002, Lagos. Cigler, B. A. (1993),"Challenges Facing Fiscal Federalism in the 1990s" in Politicnl Scirvmj nncl Politics, Vol XXVI No 2. Federal Republic of Nigeria (1999),The Cor~stitrrtionofF~'dun1 Rrpublic of Nicyerin. (1965), Repor't of thcj Fiscnl Krviriu Cornr~lission(K. J. Binns). Federal Republic of Nigeria (1985), Report of tlw Dnslrki Corninittw or1 Locnl Covcrrrrnent Sllstem. Hanson, A.H. and S. perloif (lc)h3),"State and Local Finance in the National Economy" in R.A. Musgravc (ed) Essnys in Fiscol Fr~drrnlism.New Yoric, ~c~rawHill. Offiong, 0 J. (1998),quoted in N. Ekpo (2002),"The Effects of Social Instability and Its Management on the Oil Sector in Nigeria: A (,lsc> >LLILIV of Slic~ll I'ctroleum Development (West). (ilnpi,blisIicd MPA thesis) University of Nigeria, Ns~~ltkn. Onuorali, S. (2003), "Local Government Reforms and Suspended Constitution", Var~girard,23 Sept 2003. Oladosu, S.A (200 l), Gr~idelirlc~sforCrcnhng Locnl Govcrnrirerrts, S(4ccfingLocnl Gozwrrrrircrrt Headqilarlcrs nrld Gradirlg Chiejtarncrcs ill Nigcrin. Ilorin, Hopeful Press. Olowononi,C. D. (1998), "Revcnue Allocation and Economics of Fcdcralism" in Irin. Ibadan, Spectrum Boolts. The problems and prospects of fiscal federalism and nation-building in Nigeria

John C. Anyanwu

Introduction The parallel existence and mutual interaction of "state" and "market" in the modern world create "political economy". Such political economy is the reciprocal and dynamic interaction of the pursuit of wealth and the pursuit of power. That is, political economy indicates a set of questions to be examined by means of an eclectic mixture of analytic methods and theoretical perspectives, where these questions are generated by the interaction of the state and the market as the embodiment of politics and economics in the modern world. Such questions ask how the state and its associate political processes affect the production and distribution of wealth and, in particular, how political decisions and interest influence the location of economic activities and the distribution of the costs and benefits of these activities. Currently, Nigeria operates a federal political economy (federalism) implying a series of legal administrative relationships established among units of government possessing varying degrees of real authority and jurisdictional autonomy (Anyanwu, 1995,1997). The Nigerian federal system has metamorphosed from a two-tire federal arrangement tomprising three unequal regions 150 The prob1o11.sarid prospects of fiscnl feclcrisn nncl vintion-birildiiig to a threc-tirc federal system of 36 states, one federal capita1 tcrritory and 774 local governments, each of which is constitutionally recognized. Between 1962 and 1999, for instance, the federal system comprised 3 regions, 4 regions (1963), 12 states (1967), 21 states (1987),30 states (1 991) and now 36 states (1996).The local governments have also increased from 299 in 1970 to 301 (1979) and then to 781(1981) beforc they were reverted again to 301 (1984) and then increased to 449 (1987), before reverting to 774 (1996) (see Table 6.1).

Table 6.1: The n~ctamor~hosisof Nizeriafs federalism, 1960- 1999 Units of Government

Year Federal Regions States Local Government -7-Government 1960 1963 - '1 967 299 (in 1970) '1 976 30'1 (in 1979). '1987 781 (in 1981) 199.1-1996 449 (in '1987)

1996- Date 774 (in 1996) So~~rce:Author1 There are, currently, 24 federations populated by about two billions people or 40% of the world's population; they encompass about 480 constituent or federated entities. Some of thosc fcderations are among the world's wealthiest countries, while others are part of the developing world. Some bring together immense populations (India), while others arc very small in size (Coinoros) or population (Saint Kitts and Nevis). Some are well established federations (the United States, 3 789; Switzerland, 1848; Canada, 1867; Australia. 1901) while others arc just beginning their experience with federalism. Tl~us,we have established federations (United States, Switzerland, distribution of powers. If each order of government is to deliver properly and effectively the programmes and services under its jurisdiction, sufficient fiscal rcsourccs must obviously be made available to that government. The distribution of financial powers in federal systcrm has bccn designed not only to meet the task of matching fiscal capacities to jurisdictional responsibilitics, but also to provide for a degree of effective control over the functioning of the economy. However, a large and growing numbcr of countries around the globe are re- examining the roles of various levels of government and their partnerships with the private sector and civil society with a view to creating governments that work and serve their people (Shah, 1998, 1999). This rethinking has led to a resurgence of intcrcst in fiscal federalism principles and practices but at the sarne time invited much controversy and debate. In this debate, perceived potential of multi-ethnic and loose federal systelns for "separatism" and retarded nation- building has invited most intense interest. This chapter reflects on the debate on "fiscal federalism and nation-building: problems and prospects" by providing a synthesis of the theoretical and analytical evidence on this subject. Thus, the next section considers the problems of fiscal fedcralisrn in Nigeria. Section 3 examines the prospects of Nigeria's fiscal federalism while section 4 concludes the paper.

Problems of fiscal federalism in Nigeria Contemporary Nigeria is a multi-ethnic state, which, in accordance with thc 1999 constitution, is a federation. The federal state of Nigeria is characterized by a whole number of specific traits making it different from more classical examples of a federation, such as Canada, the USA, or Germany. This fact is accounted for by history of Nigeria as amalgam of various and scparatc "nationalities" and multi-ethnic groups. The Nigcrian fed6ration now finds itself in a period of transition: from a former unitarist military state to a true federation. The problems of fiscal federalism in Nigeria can be assessed in relation to five criteria: (a) the importance of overall fiscal dcccn traliza tion, (b) the importance of sub-na tional governments' expenditures in rela tion to the general government expenditures, (c) the importance of sub-national governments' revenues relative to the general government revenues, (d) sub-national governments' financial autonomy, and (e) the extent of vertical fiscal imbalance. Thus, the indicators used to study the problems of fiscal federalism are: The 011crallfiscn1decentralization, defined as the ratio of sub- national governments' own-revenues over general government expenditures The expendit L[~Cdecm tralization rntio, defined as the per centage of total government expenditure spent by sub- national governments. The revenue decentralization mtio, which assesses the significance of sub-national revenues. It is defined as the per cen tagc of sub-national governments' revenues in total government revenue. The financial n~rtol~onyrntio, which gives an indication of sub- ua tional governments' funding. It js the percentage of locally (at state and local government levels) raised revenue in total local expenditure. Vorticnlfiscal imbalance, which is calculated as the ratio of the federal government's revenue (measured as a percentage of total government revenue) to its expenditure (measured as a percentage of total government expenditure).

As Lijkron (1996) has indicated however, these fiscal federalism indicators should be treated with caution and complemented with additional information since: (a) it is possible that a country decentralizes its expenditures but keeps a tight control over standards and priorities, so such financial delegation may be meaningless; (b) it is difficult to estimate and quantify the contributions 'people make to self-help projects; and (c) the degree of fiscal federalism depends also on several factors such as the population of the country, size, area and income, (Oa tes, 1992). Overall fiscal decentralization As Table 6.2 shows, there had been tremendous fiscal conccn tra tion at the federal level over the years in Nigeria. The concentration ranged between 49.41 per cent and 110.31 per cent bc.twcen 1993 and 1998; fiscal decentralization to states in the icderation ranged only between 2.25 per cent and 5.72 per cent over the same period. Fiscal decentralization was worse at the local government level where it ranged from merely 0.41 per cent to 0.60 per cent.

Table 6.2: ! w-ia:Overall fiscal decentralization, 1993- 1998(%) Ycar Federal (Fiscal1 State 1 Local PConcentration) 1993 1994 IC)C)S 1996 1997 1998 Average 1 Soi~m:At~thor's calculation from data extracted from CBN, A17nunl l

Expenditure decentralization in Nigeria Table 6.3 presents evidence of expenditure decentralization in Nigeria between 1993 and 1998 for which data were available for all three tiers of government. It is clearly evident that expenditure powers are concentrated at the federal (central) level, averaging 72.05 per cent over the period. The average expenditure decentralization at the state level averaged only 21.06 per cent while it was worst at the local level, with an average of a mere 6.88 per cent. This gloomy picture can be properly appreciated when one realizes that the average expenditure detentralization at the local level in the industrial countries is about 41.78 per cent and even about 13.64 per cent for developing nations as a whole (Lijeron, 1996). This means that Nigeria's expenditure decentralization is not only far below the industrial countries' average but also below the developing nations' average.

Table 6.3: Nigeria: Expenditure decentralization ratio, 1993- 1998 (YO) Year I Federal I State 1 Local

Average 1 72.05 1 21.06 1 6.88 Sorrrcc.: Author's calculation from data extracted from CBN,

Jieccnt international data buttress this fact: in 1997 expenditure decentralization in Australia was 47.9 percent, while it was 49.4 per cent in Canada, 37.8 per cent in Germany, 53.3 per cent in India, 37.6 per cent in the Russian Federation, 46.4 per cent in the United States, and 25. 6 per cent in Nigeria (also World Bank, 1999).

Revenue decentralization in Nigeria Table 6.4 summarizes evidence of revenue decentralization in the Nigerian federation between 1993 and 1998. The picture here is even more abysmal than the expenditure decentralization scenario. Revenue concentration at the centre averaged 95. 26 per cent within the period. On the other hand, revenue decentralization at the state level averaged just 4.24 per cent while it was merely 0.50 per cent at the local government level. Again, on a comparative basis, Nigeria is clearly lagging in revenue decentralization. As Lijkron (1 996) had indicated, revenue decentralization in industrial counti-ies overages about 14.99 per cent at local government level. In tile developing countries it averages abbut 6.900 per cent. Also recent international data show that, in 1997, revenue dccentraliza tion in Australia was 22.7 per cent; it was 43.5 per cent in Canada, 156 The probIe~zsand prospects offiscal federalism and nation-building

28.8 per cent in Germany, 36.1 per cent in India, 40 per cent in the Russian Federation, 32.9 per cent in the United States, and only 4.9 per cent in Nigeria.

Table 6.4: Nigeria: Revenue decentralization ratio, 1993-1998 (%)

Year Federal State Local 1993 96.61 2.87 0.52 1994 94.33 5.1 1 0.56 1995 95.95 3.61 0.44 1996 96.03 3.59 0.37 1997 95.12 4.47 0.41 1998 93.54 5.79 0.67 Average 95.26 4.24 0.50 Source: Author's calculation from data extracted from CBN, Annr~pl Report and Statement ofAccor.rnts, 1998.

Degree of decentralization of expenditures and revenues As tables 6.3 and 6.4 show, the degree of decentralization of expenditures is higher than the degree of decentralization of revenues. The consequence of this is that sub-national ~;ovcrnrnents are usually dependent on central financial allocation for their expenditure needs. This has resulted to what Herber (1979) called the problems of non-correspondence or verticalfiscal imbalance. That is, there is considerable divergence between the sources of revenue and functional expenditure obligations at the states and local governments.

Shares of revenue by tiers of government in total government revenue Table 6.5 presents the percentage shares of revenue by the various tiers of government in total government revenue for the period, 1993 to 1998. On the average, revenue is concentrated at the centre to the tune of 73.36 per cent, leaving only an average of 19.54 per cent to the states and a merely 7.1 per cent average to the local governments. The above figures clearly expose the deception of the revenue allocation formula which currently shares the federation account (not "total government revenue") among the three tiers of government as follows: Federal (central) Government: 48.5% State Governments: 24% Local Government: 20% Special Funds: 75% 4 Federal Capital Territory: 1% stabilization: . 0.5% Develppent of oil mineral producing areas: 3% General-qology: 2% .. . It is also clear that-lt%.6dykhat is paid into the federation account that is shared; 6thenvise the rest of revenue goes to the central (federal)government. Even when one takes the revenue allocation formula serious, it is observed that it is the federal (central) government that n%inages/disburses the 7.5 per cent special funds, leaving it with 56 per cent of the federation: account in a so-called federation.

Table 6.5: Nigeria: Shares of revenue by tiers of government in total government revenue, 1993 -1948 (%) Year Federal State Local 1993 71.12 18.92 9.96 1994 67.89 23.13 8.98 1995 80.72 14.19 5.09 1996 79.05 16.53 4.42 1997 79.09 15.83 5.08 1998 62.29 28.64 9.07

Average ' 7336 19.54 7.10 Sou3ce: Author's calculation from data extracted from CBN, Annual Report and Statement of Accounts; 1998. ~inancialautonomy of Nigeria's sub-national governments: The poor capacity of sub-national governments to rely on their own tax-base Table 6.6 shows evidence of the financial autonomy of the various tiers of government in the Nigerian federation between 1993 and 2998. Again, it shows that the central (federal) government has far and above itsexpenditure requirements (an average of 143.38%)hence the observed fiscal irresponsibility, high level of official ct7rruptinn, treasury looting, and privatization of national resources by most past federal leaders- witness the reported montrmental looting by the Abachas, Gwarzo c~td, past ministers, etc. On the other hand, the financial autonomy at the state level averaged only 22.30 per cent. At the Iocal government level it averaged only 7. 57 per cent between 1993 and 1998. Again, as Lij i'ron (1996) had shown, financial autonomy in the industrial worId's local governments averages about 80.26 per cent while it is 67.94 per cent in developing countries, This shows that there is little or no autonomy for Nigeria's sub- national governments, even in terms of developing countries' experiei~ces/standards. Thus, sttb-national governments in Nigwia have e restricted capacity to rely on their own resources because they have limited tax possibilities. This is the direct consequence of the central government's practice of reserving for itself the most buoyant and lucrative tax revenues. This point can be demonstrated by simply looking at the tax responsibilities of the central and sub-national governments. Local governments, for instance, rely mainly on rates, tenement rates, market and trading licenses and fees, motor park duties, advertisement fees, entertainment tax, and radio/television licenses. On the contrary, the central government tax powers include the most lucrative sources as: import duties, excise duties, mining rents and royalties, petroleum profits tax, company income tax, and value-added tax. -- John C. Anyanzw 159 Table 6.6: Nigeria: Financial autonomy ratio, 1993- 1998(%) --Year Fec State Local Collected Actually left with 1993 5.32 1994 6.36 1995 ,9.41 1996 8.36 1997 8.37 1998 7.80 -Average 143.38 7.57 Source: L~thor'~calcu tio on from data extractec from CBN, Anhual Report and S~atemcntof Accounts, 1998

Central transfers and sub-national governments' financial autonomy As a consequence of the limited capacity of sub-national governments to rely on their own tax-base, intergovernmental transfers (through revenue-sharing/allocation grants and others) play a critical role in sub-national governments' finance. The available data about the contribution of the central transfers to sub-national governments' revenues show that, on the average, transfers stand for a very important part of sub- national governments inflows (Table 6.7). In fact, central government transfers account for 77.86 per cent and 92.66 per cent of states and local governments' revenues in Nigeria, respectively. Again, to show the unfederal character of Nigeria's fiscal relations, Lijeron (1996) had shown that central transfers to local governments averages 60 per cent in industrialized Countries ad35 per cent in developing nations.

Lack of dynamism of sub-national taxes Another characteristic of sub-national governments in Nberia is that they rely on taxes that do not change with the economic activity and prices as at the federal level. In other words, sub- national taxes (revenues) are more neutral or anti-cyclical in ,' 160 Tlw problems n1n-l prospi~tsof fiscal fidernlism mid ilntion-build in^ relation to the fluctuations of income (GDP) and prices (inflation) than their federal counterparts.

Table 6.7: Nigeria: Federal transfers as proportion of sub-national overnments' total revenues, 1993- 1998(%)- Year '-ytate 1 Local

Average 77.86 92.66 Source: Author's !lcnlations from data !xtracted from CBN;

In order to demonstrate this, we can use a correlation analysis that should give us the following results: ' r (AC, AY) > r (ASGT, AY) ...... (1 r (A CR, AP) > r (ASGT, AP) ...... (2) where: r = linear correlation ACli = percentage change of central government revenue AY = percentage change of the Cross Domestic Product (GDP) I I ASGR = perc'entage change of sub-national government (state or local) tax revenues. AP = percentage change of the Consumer Price Index (CPI)

From (1) we expect that central government's taxes (revenues) will be more correlated with the general economic activity (in this case GDP) than sub-national taxes (revenue).' Proposition (2) is intendedst0 demonstrate the same as (1)but using the rate of inflation instead of the percentage change of GDP. The results are shown in Table 6.8. ' From the results, local governments' revenues have the lowest correlation between tax revenues and income, showing that they have the least capacity to adjust or reevaluate their taxes AS economic activities change. The resullts, however,show that the central government is the most dynnmic in re- evaluating its taxes as economic activity and prices change.

Table 6.8: Nigeria: Sub-national tax revenues and economic fluctuations. 7993- 1998. ---Economic Fluctuations Correlation Coefficients - ACR, AY 0.952 ASR, AY 0.354 Al ,R, AY -0.181 ACR, AP 0.755 ASR, AJ) 0.706

--ALR, AP 0.333 where ASK = I'erccntage change of states' revenues. AI,R = Percentage change of local governments' tax revenues. Source: Autl~or's calculations from data extract'ed from CBN, Ailnun1 Ri>portnnd Stntcrncrzf of Accounts, 1998.

The probJem of vertical fiscal imbalance Vertical fiscal imbalance (VFI) is a situation where the central government in a federation raises more revenue than it spends, while the constituent governments raise less. Table 6.9 shows evidence of vertical fiscal imbalance in Nigeria between 1993 and 1998. This ranged from 1.29 to 1.38 for that period. This gave an average of 1.32 per cent for the period, 1993 to 1998. Indeed, this shows that Nigeria has one of the highest degrees of vertical fiscal imbalance in the world. For example, in 1991, vertical fiscal imbalance was 1.05 per cent in Austria, 1.18 per cent in Canada, 1.06 per cent in Germany, 1.09 per cent in Malaysia, and 1.05. per cent in the United States. In fact, a substantial body of literature as well as views expressed by practitioners, indicates a certain malaise in the federal system in Nigeria. Data analysed above show the centralization of power that has taken place steadily throughout the period of the 162- 'llw problpn~snncl prosppcts of fiscd feealsn and nation-building military domination in Nigeria. There is a sense that federal balance has tilted too far in favour of the central government. This excessive centralization of power has occurred particularly as a result of the central government's fiscal dominance. Public finance specialists refer to this situation of central fiscal dominance as one of extreme "vertical fiscal imbalance". Such excess vertical imbalance has several undesirable consequences: Vertical fiscal imbalance reduces the accountability of the federal /cen tral government to its citizens for the expenditure of funds; At the same time, vertical fiscal imbalance reduces the accountability of su b-national governments to their citizens. This occurs because the dependence of sub-national governments on transfers of the federation account funds leaves their activities hostage to federal taxation and expenditure decisions. If the federal/central government does not transfer sufficient funds to the sub-national governments (as is the case), sub-national governments' inadequate taxing powers leave them unable to raise sufficient revenues to meet the demands of their citizens/electorates. In addition to sub-national governments' programmes being less accountablq vertical fiscal imbalance undermines the virtues of federalism, as it reduces the budgetary flexibility of sub-national governments to tailor programmes to individual sub-na tional government's needs. In this sense, the policy autonomy of sub-national governments is eroded.

The problem of equalization or horizontal fiscal imbalance If fiscal imbalance occurs horizontally between different units of government at the same level of government in a federation, it is referred to as the problem of equalization or horizontal fiscal imbalance. For example, considerable differences in the per capita distribution of income and wealth as well as in the volume of sales transactions exist among the states and local governments, thus creating horizontal fiscal imbalance among the states and local governments. These differences in the resource endowments cause the per capita revenue collectjon potential of the states and local councils to vary sharply.

Table.- 6.93eria: Vertical fiscal imbalance (VFI) 1993- 1998 (%) Year T~cderal Govt. re~~e~iueas ekpcnditure (after transfers a proportion of to other govts.) as a total govt. revciiuc percentage of total govt. expenditure - 75.03 68.24 70.91 72.69 74.45 71.00 72.05 tic Author's calculaiI ms from data extracted Though one mcrjt of decentralized fiscal decision-making by states and local gtnrernments is the fact thatn particular revenue structure can be adapted to the unique resource characteristics of a given state or locality. However, since resource endowment is the ultima tc source of governmental revenue colkction capaai ty, a given sta tc or local council enjoying consid~rable wealth and income-producing ability and a strong salcs/revcnue base is capable of providing either a greater per capita output of public and quasi-public goods than a resource-poor jurisdiction, at the same revenue effort, or the same output of such goods at a lower revenue effort than the poorer jurisdiction. Indeed, fiscal federalism results in varying tax capacity of subordinate units reiative to their expenditure needs. The potential tax base and expenditure needs are unevenly distributed by local unit. Some jurisdictions (state or IocaI) enjoy a high taxable capacity (the tax rate needed to obtain a given 164 TIw p~oblemsand prospects offiscalfedcralisrn and nation-building

level of revenue is low as in L,agos state and urban LGAs like Onitsha Sou th/North) and have a relatively low level of need (the amount required to provide certain service level is small). They are thus in a fiscally strong position as measured by the ratio of capacity to need. Others are in the reverse position such as rural local governments, newly created states and local government in Nigeria. Table 6.9 illustrates the problem of horizontal imbalance among Nigerian states and the fedma1 Capital Territory (FCT) in 1997. While states like AbihAkwa Ibom, gayelsa, Bauchi, Beye, Cross River, Delta, Edo, -Ek+iti,Enugu, Gombe, Kano, *fmo,- Katsina, Kebbi, Kogi, Kwara, Lagos, Nassarawa, Niger, .Ondo, Rivers, Sokoto, and FCT had more than enough revenues to meet their expenditore responsibilities in that year, the rest had varying degrees .of shortfalls, reaching 34.94 per cent in Ebonyi, 31 .92 per cent in Jigawa, 33 per cent in Plateau, 27.31 per cent in Oyo, etc. . The case of local also shows varying revenue shortfalls in 1997: Kaduna (16.12%),Jigawa (15.78%), Kwara (13.40°/0), Kano (12.92%)) Bayelsa (l0.58%), Benue (7.70%), Lagos (3.91%), Zamfara (3.60%), Katsina (2.83%), Gombe (1.92%), Plateau (1.27%), and Nassarawa (1.14%).

Table 6.10; Ni erian States: Horizontai fiscal imbalance, 1997 (Pdm) States TotallT o t a 1IRevenue)Shortfall revenue expenditure expenditure (Ratio (%) Abia 1549.3 1410.6 109.83 Adamawa 1874.3 1959.6 95.65 Akwa Ibom 3 120.9 3017.9 103.41 Anambra 2076,9 2081.8 99.76 Bayelsa 2027.4 1827.4 110.95 Bauchi 2106.9 1611.1 125.19 Benue 1997.8 1419.3 140.76 Borno 2179.9 2397.2 90.94 Cross River 2227.2 2131.1 104.51 Delta 4276.6 3997.3 106.99 Ebonyi Ed0 Ekiti Eni~gu Gombc I mo Jigawa Kadui~a Kano Ka tsina Kebb i Iagos Nnssnrilwa Niger Ogun Olld0 Osun oyo Plateau Rivers Sokoto Ta ra ba Yobe Zamfara FCT, Abuja I Solrrcu: As' in Table

One result of the differences in tax capacity is wide variation in the pattern of adjustment of activities among the units. Obviously, activities will be carried farther in wealthy areas than in poor ohes. The poor areas would have to impose higher taxes even to maintain levels of activities that are far lower than those provided in the wealthy areas. Such differences not only retard the development of the poor areas, they also tend to perpetuate and aggravate the differences overtime. Also, since states and local councils with lower per capita personal incomes 166 The problem ond prospects offiscal fede~nlisrnand nation-building

tend to have either lower per capita public-type-goods consumption than wealthier jurisdictions, or higher revenue effort (and tax effort) burdens, or both, the relevant question becomes: should deliberate federal budgetary policy be undertaken to "equalize" the consumption of public and quasi- public goods and revenue and tax burdens between the various states/localities? Such a policy, if embarked upon, may be referred to as equalization policy. An affirmative response to the above poser could be based on stabilization, distributional and allocational grounds. Thus, horizontal inter-governmental inequalities in resource quality may serve as an argument for the institution of intergovernmental equalization programmes in order to promote the stabilization goal since lower volumes of short-run output and lower long-run rates of economic growth will result for the economy as whole. In terms of distribution, the problem takes the form of variations in the fiscal capacities of the states and local councils. Given that these jurisdictions possess differential fiscal capacities to supply public and quasi-public goods, the citizens of poorer jurisdictions are likely to consume fcwer such goods, to bear high revenue effort (or tax effort) burdens or to experience some intermediate position of both undesirable effects. Thus, the collective consensus of a democratic federation might oppose significant inequality in the interstate and inter-locality consumption of public and quasi- public goods as well as unevenness in the inter-state and inter- locality distribution of revenue and tax effort burdens among the taxpayers residing in the re~pectiv~jurisdictions. Also, society may wish to exert positive equalization non- neu tralities due to alloca tional considerations focusing on the concept of inter-governmental externalities. A poorer state or locality, through its budget policy, is likely to affect negatively the allocational patterns of production and consumption in wealthier states or localities in an interdependent, specialized society in which inter-governmental externalities are common, hence the need for a fiscal policy of an equalization nature. John C. Anqanzou 167

Problem of inter-governmental revenue sharing There has been increasing wave of discordant voices from state and local governments over revenue allocation in Nigeria in recent times. This suggests that appropriate balance is yet to be struck in the use of revenue allocation to correct the imbalance between responsibilities and revenue powers at the lower levels of government. The state governments are seriously q~wstioning the recent diminution in their share of the Fcderation Account from 30 per cent to 24 per cent (excluding 1 per cent to the FCT). Equally, the local governments are complaining that the recent hikes in their share of the Fcderation Account from 30 per cent to 15 per cent and later to 20 per cent have not kept pace with the additional responsibilities assigned to them, especially with respect to primary education and primary health care. Another problem in inter-governmental revenue sharing has bccn on evolving the most acceptable principles for revenue sharing. The exclusive reliance on political (eg landmass and terrain) rather than efficiency factors have led to an excessive and increasing dependency of the states/local governments on shared revenue from the centre and also to an explosive political pressure for the creation of more states and local governments which no federal administration (military or civilian) has been able to resist. Until very recently, when internal revenue effort (10 per cent) was included as a factor in I state allocation, the revenue allocation system negated the Structural Adjustment Programme's goal of revenue diversification. There has been little or no incentive from the revenue sharing arrangement for states and local governments to generate increased internal revenue. On the other hand, the share of the federal government is still believed to be on the high side given the view that it has surplus funds, is-wasteful as it has an almost limitless capacity to donate large sums of money both within and outside the country to questionable causes- the then Liberian crisis, the Sierra Leonean crisis, book launches, endowments, Namibia, musicians, and the creation of a new range of public 168 The problems and prospects offscalfederdism find nation-building institutions like new states, local governments, universities, colleges of education, polytechnics, etc, all of which are well funded in the presidency at a period of institutional rationalization, etc. This has shown up in huge federal budgetary deficits over the years compounded by huge debt servicing. All these point to the absence of proper accountability for public funds in government and an issue of imbalance between the tiers of government in terms of the mismatch bctwecn functions and revenue sources. Other problems in Nigeria revenue sharing include the failure on the part of lower-tiers of government to utilize the allocated funds to meet the most pressing needs; careless spending on their part, and problems of macro-economic management in situations where substantial portion of total public spending is outside the direct control and monitoring of the authority responsible for macro-economic coordination in the country.

Corruption in overall government expenditure Evidence shows that government expenditure at all tiers of government in Nigeria is characterized by chronic corruption. This is worst at the federal level, followed by local govcrnrnents, and then the states, Our correlation of government expenditure and corruption index between 1996 and 1998 shows a correlation coefficient of 0.88 for federal expcnditurc, 0.80 for local governments' expenditure, and 0.70 for states' expenditure. A regression analysis shows that for every naira spent by the federal level, 233.6 percentage points are lost to corruption; for the local governments the loss for every naira spent is 162.5 percentage points, and in the states the loss is 147.7percentage points. These results indeed conform to what have been witnessed from recent revelations of massive looting, fraud and corruption during the military era generally, and the Abacha regime itn particular. It is no wonder that the ordinary Nigerian has no behefit from the huge amounts of money amounted by these levels of government in their annual budgets which eventually ended up in huge deficits. , , The prospects of fiscal federalism and nation-building in Nigeria The design of intergovernmental fiscal relations of Nigeria, as in other economies, is influenced by political, social, and cultural factors, as well as by economic considerations. Within the narrower economic context, this design reflects a balance among different (and not always easily reconcilable) objectives, namely the efficient allocation of government resources, income redistribution, and macroeconomic management. The balance of these objectives and its evolution over time also tend to reflect a atio ion's social and political history, or the absence of serious macroeconomic imbalances (Ter-Minassian; 1997). Also, given the tensions between the federal and local communities (especially the oil-bearing ones) in Nigeria, the importance of developing a transparent, fair, consensus- based framework for intergovernmental finances with revenue- expenditure correspondence cannot be emphasized. To establish such a system in Nigeria requires a number of specific steps.

Collective agreement on required revenues First, we must collectively (through special studies and debate in the National Assembly) agree on the aggregate revenues required by the central, state and local governments as well as oil-bearing communities (for development and pollution- alleviation), based on their expenditure assignments. Some proportion of these revenues must then be shared among the tiers of government and agencies on the basis of origin of collections-giving wealthier jurisdictioi~s(or resource-bearing jurisdictions) with greater tax capacity greater revenues; the rest should be shared on the basis of a jointly (by consensus) determined and agreed transparent formula. Such an approach is flexibie and ian be adjusted to accommodate changing expenditure assignments. 170 The problenls and prospects offiscol federalism atzd natioll-building

Need for periodic review A corollary of the above is that periodic review of jurisdictional assignments is essential to realign responsibilities with changing economic and political realities. With globalization and localization, the federal (central) government's direct role in stabilization and macroeconomic control is likely to diminish over time but its role in co-ordination and oversight is expected to increase as regimes and sub-national governments assume enhanced roles in these areas. The constitutional and legal system and institutions must be amenable to timely adjustments to adapt to changing circumstances.

Financial transfers from surplus to deficit units Two forms of financial transfers are the grant system and revenue sharing. The grant system has been criticized on the grounds of elevating the federal government to a "Father Christmas" status while subjecting it to abuse, quite apart from the fact that recipients are likely to apply efficiency criterion in spending, and poor areas that have lost or have ncver had economic base may be perpetuated. However, for equalization, conditional variable matching grant cannot be ruled out. With respect to revenue allocation, greater emphasis should continue to be laid at the grassroots (localities) where the bulk of the people live and where development appears little or non- existent in spite of many years of rural development efforts. In terms of principles for allocation of revenue among states and local councils, population should be viewed in two broad perspectives: the numerical strength and the poverty index, with the latter carrying greater weight not only as the more appropriate measure but also to serve as an additional check on population explosion and the politicization of the census issue. Greater emphasis must also be laid on fiscal effort than hitherto as an extension of the campaign for self-reliance and an incentive to be inward-looking in revenue generation. The concept of derivation needs a better definition in Nigeria such that local government areas benefit in greater proportion from John C. Anyanwu 17 1 the mining fees, rates, duties and royalties, while the federal government retains a lesser percentage. The necessary statistics on federal projects will help lend greater credence to the "federal presence" principle while spurious principles such as "landmass and terrain" should be totally expunged from our revenue allocation statutes. While revenue sharing remains an unfinished business, these are some of the critical issues that must guide the formation of any revenue sharing system in Nigeria to enable us forge a stable fiscal federalism for rapid socio-economic cum political development.

The need for fiscal rules Fiscal rules accompanied by "gate keeper" intergovernmental councils/committees provide a useful framework for fiscal discipline and fiscal policy co-ordination. In this context, we can draw upon industrial countries' experiences with "golden rules", Maastricht type guidelines and "common budget directives" to develop our own guidelines. To ensure voluntary compliance with the guidelines, appropriate institutional framework must be developed. Transparency of the budgetary processes and institutions, accountability to electorate and general availability of comparative data on fiscal positions of all levels of government further strengthen fiscal discipline.

Increase in internally -generated revenue The Structural Adjustment Programme emphasizes the need for state and local governments to increase their internal revenues above the existjng levels through a combination of improvement in efficiency in revenue collection from already existing revenue sources, increase in the rate of existing taxes and the broadening of revenue base by introducing new forms of taxation. There are indications that these tiers of government are yet to set up efficient revenue collection machinery while the potential gain from raising tax rates must be juxtaposed with the possible disincentive effect. In the same vein, the introduction of new taxes complicates the tax system while creating collection and compliance problem given the 172 The pr0171~111sn~~d prospi~cts of . .fiscnl f~.dcrfllismand nntion-building

limited administrative capacities of these tiers of government. Thus, we recommend that it will be more beneficial for these tiers of government (including the federal level) to focus a ttcntion mainly on devising an efficient machinery for revenue collc~tionfrom alreadv familiar sources. Onc important area is property taxation/tencnicnt rating for local councils and the success story of Lagos local governments in this direction lends itself for emu1a t'ion. . ,

Higher level assistance in financing local capital projects Higher level institutional assistance is needed for financing local capital projects. This assistance can take the ,form of establjsliing municipal finance corporations run on commercial principles to lower the cost of borrowing by using the superior credit rating of the central government and municipal rating agencies to determine credit worthiness.

Four guiding principles for reviewing governmental roles and responsibilities As we debate a new and improved constitution, we must be guided by the following four principles in reviewing governmental roles and responsibilities: Thc Nigerian nation principle: All governments in Nigeria recognize the social, political and economic imperatives of nationhood and will work cooperatively to ensure that national issues are resolved in the interests of Nigeria as a whole; The IJrinciple:Responsibilities for regulation and for allocation of public goods and services should be devolved to the maximum extent possible consistent with the national interest, so that government is accessible and accountable to those affected by its decisions; The structtird efficiency principk: Increased competitiveness and flexibility of the Nigerian economy require structural reform in the public social sector to complement private sector reform: inefficient federal-states-local divisions of functions can no longer be tolerated; John C. Anyanwtl 173

TIw accotrntn6ility principle: The structure of intergovernmental arrangements should promote democratic accountability and the transparency of government to the electorate.

Conclusion Nigerians must realize that fiscal federalism, involving decentralizing pa tteriis of distribution of power and resources, is dynamic rather than static, and continually evolving and oscillating between greater unity and diversity. Indeed, federalism is more than effective method of governance. It is also an apprenticeship in negotiation, the art of conflict resolution, an inevitable dimension of life in society. One of the advantages of the federative form of government is that solutions can be found more easily when disagreements take place in the open, among constitutional partners, rather than in the ivory towers of huge centralized bureaucracies that weigh down the functioning of unitary countries or by armed conflicts which end up only in destruction, loss, disruption, and greater disunity. Nigerians are currently experiencing one of the most difficult debam a federati&"cari have: the possibility of the nation's break-up. Some of our fellow citizens in Ijawland, Ogoniland, Ogbaland, ~rhobolafid,Itsekiriland, etc, think that the Nigerian federation is not suited to them, and that they must become independent countries. It is important that this difficult debate be conducted with respect for democracy, the rule of law and human dignity. Our experience with the civil war and the experiences of the former Yugoslavia, Bosnia and Herzegovina, Kosovo, Somalia, Burundi, Rwanda, Liberia, and Sierra Leone should help in this respect. In fact, the travails of Somalia (monolingual society/single ethnic group) as well as Rwanda and Burundi testify *that breaking up a multi-ethnic state into monoethnic states is not a guarantee of legitimacy, development,quity, and stability. However, equity in resource allocation, balanced development, accountability, effective government, democratic legitimacy, etc, is clearly / linked to the central issue of nation-building and national 174 Tlie problem and prospects offiscalfederalism nnd nation-building integration. If these can be addressed collectively, real nation- building and national integration can develop in Nigeria, thus leading to the resolution of the problems of fiscal federalism and accompanying nation questions.

References Anyanw~l,J.C. (1995), "Revenue Allocation and A Stable Fiscal Federalism in Nigeria" Jotrrnal of Economic Mai~qel~z~nt,vol. F, No. 2, October, 1-27. Anyanwu, J.C. (1997), Nigerian Plrl?lic Financ~',JOANEE Educational Publishers Ltd, Onitsha. Anyanwu, J.C. (1999), "Fiscal Relations among the Various Tiers of Government in Nigeria", NES, Fiscnl Federalisin and Nigeria's LTOI~OIIII'C D~'vi~lopi~'itt,Ibadan, 119-114. Broadway, R. et al ( 1994)) Fiscnl Fidernlisrn Diinrvisio~zsof Tnx rr>fom ii7 DPTJP~O~~YI~Col~i~t&s,Policy Research Working paper 1385, November, The World Bank, Washington, DC. Central Bank of Nigeria (1998), Ai~i~lialReport aid Stntement of Accorrirfs, Deccmbcr 1998, Abuja. Herber, B.P. (1979), Modun Pt~l?licFlnnnce, Richard D. Irwin, Inc., Homcwood. Lijbron, J.H.E. ( 1996), Dcceirtrnlizntioi7, Locnl Goacrri~~~ciilsAiid Mnrkrfs: A Co~iipnrnli~)~Slirdy of RL'CPII~Trends in Selectid Co~r~~tries, Institute of Social Studies, The Hague. Oates, W. (1992), Fiscnl Fcdrrnlism, Harcourt Brace, New York. Shah, A. (1998)) "Fostering Fiscally Responsive and Acco~rntable Governance: Lessons from Deccntralization" in Picciotto, R. and Weisner, E (eds), Eanliratioi~and Developnzi~i~t:T~ZP lnstitufloi~alDimei~sioii, Transaction Publishers, New Brunswick and London, 83-96, Shah, A. (1999), Fiscal Fedemlisn~ ar7d M~croeconornic Governance: For Better or For Worse?, Operations Evaluation Department, The World Bank, Washington, D.C. Tcr-Minassian, T. (1997), "Decentralizing Government", Fiiiancr b Developnierit, Vol. 34, No.3, September, 36- 39. World Bank (1999), World Development Report 1999, Washington D.C. The challenges of internally generated revenue of state in Nigeria

R I Chima and K K Ogujinba

Background The message of the analytical models and their integration is that capital formation matters in growth and development process. Thus, if capital formation is raised to a sufficient level and in desired quality, there would be growth and development in the economy. A part of the development planning process in a developing etonorny,ar a growth process in a developed economy, is to find the ;equired rate of capital formation consistent with the desired or "warrant" or "target" rate of growth, since savings is assumed to be the base of capital formation. From this, it becomes immediately apparent that saving can bc mobilized internally from the economy or from the external sector of the economy. Whether savings are made by capitalists or wage earners (although this division is important for income distribution analysis akin to Ricardian system), the totality of savings and hence capital formation is made in an "economy" by both the private and government sectors. In general, private sector savings are a function of its income while government savings are a function of its revenue from taxation of the private sector's income and consumption. 176 The chnllengcs ofir?ternnlly genernted revenue of stnte in Nigeria Although a tax may be imposed for the purpose of providing public services and goods, it has effects on the behaviour of the payer and some variables within his income and consumption functions. The allocative role of taxation has occupied the minds of economists of all ages, and in a survey, von Furstenberg and Malkiel reviewed the several effects of government (fiscal) policies on inflation, capital formation and the rate of return. Although there was 110 conclusive observation, the study shares the general belief that government raises its capital formation through taxation financing. Studies done by Musgrave and Buchaian look at taxation in general within the context of economic theory. Their purpose was to examine the basic principles of public finance and the effects of taxation on economic activities of individuals, firms and governments. In a similar general analysis, Pealock and Sliaw examined the effects of fiscal measures on some macro- economic variables such as income, output, prices and balance of payments. This was based on the assumption that government fiscal measures such as taxation and government spending have important relationship with movements of these macro-economic variables and hence with the control of the economy. The study shows that if government fiscal measures were properly appiied to economic aggregates, the desired changes would be achieved in the management of the economy as rooted in Keynesian economic thinking. Attention in developing economies seems to be given to the role of taxation not just as a fiscal instrument but also as a means of generating revenue for government. This role of fiscal capacity, and in raising capital formation in developing economies for development, has been debated over time by scholars. It was observed that the dependence of states and local authorities on the federal government for funding erodes their fiscal autonomy. It weakens their capacity to perform devolved responsibilities and to efficiently produce and provide public goods and services. The friability of the states and local authorities to perform devolved responsibilities and efficiently provide public services is argued to be the main cause of public policy failure in Nigeria.' The realignment of devolved fiscal responsibilities, fiscal capacities and taxing powers of the various tiers of government will bring about a just and fair distribution of welfar-e.2Thc paper argues that the burden of fiscal responsibilities devolved among the tiers of government is heavier on the bottom rung of the vertical intergovernmental relations. It also argues that in spite of the imbalance in the fiscal capacities of the tiers of government, there is a more serious problem of misalignment between the fiscal capacity and fiscal responsibilities of the tiers of government. In sum the paper claims that while the devolved fiscal responsibilities of government are 'bottom heavy', the fiscal capacities of government are 'top heavy'. This alludes to the fact that while the federal government may possess the fiscal capacity to perform devolved responsibilities, the statcs ;~nd local govcrnments may not be able to do the samc. 111 ~i~scribingand analyzing fiscal operations of local governments in Nigeria, the paper evaluated the sources of revenue, the pattern and growth of local government expenditures in 13 local governments in Nigeria during the structural adjustment. It establisl~edthe observable disparities in local government finance and the inherent conflicts between states and local government revenue sources in Nigeria.7 The assessment of Nigeria's tax structure and its administration indicates that the determination of tax base, tax rate and tax allowances constitutes a principal problem for the tax authorities in Nigeria. It asserts that these are maters of legisla tion and where tax legislations are weak, non-existen t or ever changing there would be problems with the administration of the tax structure and the resultant tax yield from the relevant tax4 The institutional arrangements for tax administration in Nigeria outline the various taxes, their relevant tax legislation, including amendments and the jurisdictional assignment of taxes to the respective tiers of government. The tax laws include the Petroleum Profit Tax (PPT) Act, 1959.5There have been several amendments to this act that continually increase the PPT tax rate. There is also the 178 Tlze clzallnzges of internally generated revenue of stat^ in Nigeria personal income tax management Act, 1961 (PIT). There has been over 22 amendments to this Act since 1961. The legislation assigns the collection of revenues from this tax to the states with the exclusion of personal income tax from the armed services, the police, Foreign Service staff and the Federal Capital Territory. Another is the Companies Income Tax (CIT) Act, 1961, severally amended and consolidated with the companies' income tax decree of 1979. The tax is assigned to the states also for revenue collection. There is the Capital Gain Tax (CGT) Decree, 1967, amended by the finance and miscellaneous taxation provisions decree of 1977. Each state has a capital gains tax law. The property tax law exists in each state; the sales tax laws exist in each state. In Nigeria the unified tax structure took effect with the promulgation of the uniform tax decree No. 7 of 1975. The uniform tax decree standardized the personal income tax rates and relief throughout ~i~eria.'The main objective of this study is to determine whether state governments in Nigeria possess the fiscal capacity to raise revenue and to perform devolved fiscal responsibilities.

The specific objectives are to: Determine the nature and composition of the existing tax instruments in Nigeria Determine the sensitivity of non-oil revenue to changes in tax base, tax rate, and tax administration. To determine the diversionary effects of oil on non-oil revenue potentials.

Objective 1: To detprmivle the nature and composition of the existing tax ir~strumentsin Nigcrin. Taxcs are compulsory levies imposed by the government on the citizens, non-diplomatic residents and property within the country irrespective of the exact amount of service rendered to the taxpayer in return. Taxes are commonly,classified into direct and indirect taxes. Direct taxes are imposed on individuals, households, firms etc. On the other hand, indirect taxes are taxes levied on R I Chima and K K Ogtijinba 179 goods and services. The distinction is about who ultimately pays the tax. However, the direct - indirect dichotomy can be mistaken because it is based on the assumption that we know the answer before we start. An example may help. Is an employer's social security (national insurance) tax a direct or indirect tax? One view is that the employee will be better off when retired because of national insurance, and that as a result he accepts a lower wage because of his employer's national insurance contribution. Thus the employer's contribution is a direct tax. Another view is that wages are not affected by employer's social - security contributions and that these taxes are passed on to the consumer in the form of higher prices7 Thus, the ernploycr's contribution is an indirect tax. This particular view has been adopted by most industrialized nations. Nonetheless, while it does little harm to speak loosely of income tax as a direct tax or VAT as an indirect tax, our preference is to avoid the use of the terms except in thc most clcar-cut cases. Another reason for avoiding the direct-indirect terminology is that it led to a long and largely fruitless debate in the literature that turned out in the end to revolve around a misunderstanding of the terms. In our view, it is preferable to avoid classification systems that prejudge important questions. We therefore have a general preference for classifications that are descriptive, not prescriptive. It is also obviously convenient to have a classification system that is used as widely as possible.

Structure of taxes in Enugu, Benue and Cross-River states Criticisms of the tax system in Nigeria usually focus on two main aspects - its structure and its administration. At the structural levcl, the tax provision does not adequately reflect the peculiar socio-economic character, goals and problems of these states. In examining the system for possible improvement therefore, it would be appropriate to give attention to the major aspect of the structure. Howe'ver, this in itself is a very wide subject. All that is attempted here is to identify the main features of the instruments used by the states. This will provide a general perspective, which would serve as background for proposing changes. The structure of taxes in the states studied is derived more or less as the residual of the federal tax structure. These states collect only taxes not included in the exclusive list of the constitution of the federal Republic of Nigeria; their powers to impose taxes, though seem unlimited, are in fact confined to those tax bases which are often of low yield. These are, apart from the personal income tax, quite regressive in character because they tend, as it were, to fall heavily on the low income groups of thc population and therefore do not often consider the principle of ability to pay.

I ,~hlcl7. I liovcniie collected by Enugu State Board of Internal lic\rcniw, (131 R) 1992-2000. R 1 Chima and K K Owiirrbo 18 I

(2.41) (2.69) (4.31) (2.56) (1.58) (1.99) (2.33) Slrh 10.83 22.46 1 1 .882 138.395 322.606 304.9 406.0 (22.64) (23.50) (1068) (63.21) (76.08) (72.33) (75.1) /.~~rv~cc~~ 5.06 01I 42.6 6.061 7.593 11.153 16.68 (8.29) (9.43) (38.30) (2.77) (1.79) (2.65) (3.09) So~~scc: Collcclcd f1~0111the Statc BIIi X. Figusc in pnrcnthcsis arc cnlc~tl,~tccipcrccntngc,s of cach instrument to Ihc totd rcvcnuc.

Table 7. 2: Revenue collected by Benue State Board of Internal Revcnue (B1K), 1990-2000.

t--f""Motor Kq. ,040

1 L Sourcc: Collected f )m the State BIR 182 The cl~alllwg~~sof intcr~zall!~ ,YL'IZL'~~~~ wmJnlLeof state ill Nig(v%l * Figures in pnrcntliesis arc calculated percentages of each instrument to the total rcvcnue.

Table 7.3: Revenue Collected by Cross-River State Board of Internal Revenue (BIR), 1996-2000.

Pools Br~ttirlg 71 2 .649 (0.84) (0.48) I Stflnlp Duties 11.412 12.189

(1.96) (136) 120st T(ix Receipt ,023 ,023 (0.027) (0.02) Sources: Collected from the State BIR "Figures in pCirenthesisare cnlculated percentages of each instrument to the total revcnue. -

111 Tables 7.1,7.2 and 7.3 webbserve that the major taxes are the ones on income. These are pay-as-you earn (PAYE) and direct assessment. Both types of taxes are personal income tax. It R 1 Chimn nnd K K O

An analysis of the comparative performance of the tax structure in the states shows that the bulk of the tax revenue emanates from personal income tax. It accounts, on the avcrage, for over 35 percent of the total tax revenue of states. Thus, in spite of the number of taxes, relative importance of most of these is low and varies from state to state, depending on the vigor with which they are collected. Some of these other taxes are generally in the form of user charges. Consequently, their burden is borne by the user irrespective of the payer's ability to pay. Such taxes are generally lump sum or proportional. It has been observed that there is a serious defect in design of these other forms of taxes. Among the states studied, the rules of computation arc too vague and complex, thus making the liability uncertain. Also, the relevant legislation leaves too many loopholes, thus enabling the intended payers to evade payment. The issue of tax structure addresses the question of how taxes are or should be composed. Over the years, various theoretical approaches to tax structure have emerged. All the same, we are intercsted in the empirical approach to the issue of tax structure in developing economies. This focuses on the rcla tionship between separate taxes and the principal variables, reiatinl: to the stage of development of the economy (per capita incomc :i~~dan index of monetization) and relating to the degree of openness Front :lijs proposition, sales tax and stamp duties are closely related to the degree of monetization of the economy, as distinct fr(;m its level of per capita income. As the taxes are not self-assessed and so do not require literacy, they have been found to be important new taxes in developing economies. In summary, the tax structure at a given time and place is dependent on the set of available (administratively feasible) tax b,iscs, the level of development reached, social and political factors as well as cultural styles of the taxing government, the degree of urbanization, and the prevailing political interest groups and philosophies.

Objective 2: To drtrrrniric. the scwsitivity of 11017-oil Y~~UCI'ILWto cl~nngrsin tax base, tax rate and administmtion. The optimal solution of a linear programming (LP) problem represents a snapshot of the conditions that prevail at the time the model is formulated. In the real world, environments rarely remain static, and it is essential to equip LP with the capacity to determine changes in the optimal solutions that result from making changes in the parameters of the model. This is what "sensitivity analysis" does. Tt provides efficient computational techniques that allow us to study the dyna~ic,bcl~avio~~rof the optimal solution. Sensitivity analysis deals with making discrete changes in the parameters of the model. A generalization of this situation is the case in which the parameters change according to predetermined continuous functions. But, in this case, we would determine the degree of changes. This analysis is thus carried out after the current optimum solution of LP model has been obtained. The goal of the above objective is to determine whether cl~angesin model's coefficients will leave the current solution uncl-~anged,and if not, how a new optimum (assuming it exists) can be obtained. 'The data for Enugu State were computed from 1992-2000. The Tax instruments used for the study are: r PAYE tax Withholding tax Stamp Duties * Land Tax Objvar contribution 0.9978 0.000 I X, 1 -0.0000 -. - I 27.500_ 0.000 Source: Computed usin:,: ,111 I I' nlodc.1

From tlic ~L~overcsults ob1,)incd LISII-I~a linear programming approach, c11~1ngcsin thC c-o-efficient of X, and X, (ie, tax rate and administrativc pcrformancc) would have no improvement 01- otherwise in the objective value with respect to the tax instrunients used. The analysis also shows that the maximum cocfficient of the variable X, would be infinity while its minimum value would be 84.3333. Also, the minimum coefficients of the variables X,and X,showed ncga tive infinities. It is clear from the foregoing that the adininistrntive level value in Enugu State is very poor. Also, the rates of the instruments used, if changed, would not yield any significant value. The study also shows that the capability of Eiiugu State to increase its internally generated revenue within the period studied was infinite and that the boundaries were not the optimum values. This goes to confirm that the state can do much better if necessary steps are duly taken. Thus, changes in our model with respect to X, would definitely leave the current solution changed and a new optimum value for the model. The data for Benue State were computed for 1990-2000. The tax instruments used for the study are: PAYEtax Stamp duties Entertainment tax Ii I Chimn nrzd K K Ogrrjinbn 187 Optimum solution summary Obj value =0.8268 Variable I Value I Obi coeff / 0 b j v a 1 1 Reduced contrib. cost 0.1698 4.3390 0.7366 0.0000 X2 1 0.0000 2.21 10 0.0000 0.1622 X3 1 0.020024 1 36.9600 1 0.0902 1 0.0000 Sorrrcc: Compted using an LP model

From the above result, changes in the coefficients of X,, and X, (Tax base, and admiu) would have effcct on the objective valuc. The analysis also shows the maximum valuc of the coefficients to be 10.0562,2.3732 and 228.3684 respectively. Also X, shows a negative minimum coefficient while X, and X, had positive val~~es.It is therefore clear, that the administrative rate in tlic state could still be bettered to increase revenue. The study shows that the capability of Benue State to increase locally generated funds was not properly utilized. It had an infinite capacity. T~LIS,changes in our model would definitely not be insignificant. The data from Cross River werc comp~~tc~ifrom 1996 to 2000. The instruments used for the period of thc. study arc: PAYE tax Stamp duties

Q Capital Gains

Optimum solution summary Obi value =0.5563 Variable Value Obj coeff 1 0 b j V a 1 Red uced contrib.. cost x I 0.0193 10.6600 0.2056 0.0000 x2 0.2927 1.0530 0.3088 0.0000 X, 0.0021 '19.6000 0.0428 0.0000

The results show that the'valucs of the co-efficient and the variables are quite significant. Thc analysis shows further that the maximum co-cfficicnts of X,,X,,and X, were 13.3367,1.2340 I 88 The clrnllr~r~gesof ill terndl y pencrated revcruw of state ill Nig-rh and 21.2101. Also, the minimum co-efficients were of the same size as the current co-efficients, implying that there is room for iniprovcment from all angles. The study also shows that the capability of the state to improvc rc3\rcwucovclr the period (1997-2000) was infinite. The othcr ycar ( 1996) Iiad a pcg 011 it. Nonetheless, manipulations in thc model would yiclcl sonic structural changes in the objective function.

Summary of the sensitivity of non-oil to changes in the co- efficients of the variables. From the foregoing analysis, a 25% increase or decrease in the co-efficient of tlic variables in Eiiugu State would have no 1 significant change in the objective value of the function. The reasons are that the val~icsof the variables are insignificant. Also, clianging the different variables by 100% and 150% would Iiave no meaningful effect ~CC~LISCof the nature of the values. Thus, how sensitivepon-oil revenue becomes to changes in the tax base, tax rate and administration level in the State would be determined only by one variable, tax base, and the change must be very significant. In Benue State, a change of 25% (positive or decrease) in the co-efficient of the variables would result in the objective value changing by the same magnitude. The value of the second variable, tax rate, is quite insignificant, thereby making any changes on it to have zero effect on the value of the objective value. Changing the different co-efficients by different percentages would definitely affect the final value but the effect would mainly be from the first variable, tax base. This is quite similar to the case of Enugu State. How sensitive non-oil revenue would be to changes in tax base, tax rate and administrative levels in Cross River State would certainly depend on all the variables in the study. A 1% increase or dec~easein the co-efficient of tax rate would have the greatest impact on the overall value of the objective function. Changes in the cb-efficients of the first and last variables would yield insignificant results. One common factor is the effect the tax base would have on the expected revenue generated internally.

Objective 3: To determine the diversionn y effects of oil on non-oil rmenz/cJpottrztials. In analyzing this objective, the growth rates of oil revenues and non-oil revenues of the states studied were compared. The essence is to determine whether or not statutory allocations to states affected in any way, the drive for non-oil potentials in the states.

Growth ratc of oil and non-oil revenue in Enutj I State Year Internally generated Revenue Oil Revenue % (IGR)%

56.4 16.5 96.8 93.7 -0.58 28.1 36.4

1 36.3 I Source: Computed from BIR and CBN for various years.

The growth of internally generated revenue in Enugu State within the period of study was quite unstable. Between 1994 and 1995, there was a quantum leap in the revenue of the state. This continued till 19% before the crash in 1997. The actualized figure for 1997 was far below the estimated target of the tax officials. The growth rate was quite low. Incidentally, the growth rate of the oil revenue was also negative during this period. The rate picked up again in 1998 and remained at an average between 1999 and '2000. Between 1998 to 2000, internally generated revenue was growing at almost a constant rate. 190 Tlie drnllctlges ofinterrznlly genernted rcveirrrc of state in Ni$y~ia A look at the table shows that the growth rate of 35% of oil revenue from 1992 to 1993 had an impact on the growth rate of non-oil revenue from 1993 to 1994. The leap in statutory allocation between 1992 and 1993 could have reduced the quest for non-oil potentials in the state within the period. The growth rates of internally generated revenue (IGR) reveal that the potential of non-oil revenue in the state had not been fully tapped. However, the growth rate of statutory allocation to the state had not been constant as expected. In absolute terms the values were on the increase. A diversionary trend was slightly noticed between 1993 and 194 and between 1998 and 1999. On the average, the allocation to the state had not really been a reason for the unimpressive outlook of the non-oil potentials. The graph in fig. 1 shows that the growth rate of IGR was above that of non-oil revenue until 1997. The figures show random movement of the growth rates, thus, we can conclusively opine that within the period the diversionary effects of oil on non-oil revenue were quite insignificant.

-Growth rate of non-oil sector ...... Growth rate of oil sector 100

Graphl: Growth Rate of oil and non oil revenue in Enugu State li 1 Chiina atid K K Opjinba 19 1

Growth rate of non-oil and oil revenue in Benue State Year I Growthratenon-oil / Growth rate oil revenue revenue 1992 -13.6 - 1993 32.7 46.2 !994 30 -4.5 1995 44.8 25.3 19% 20.3 21.7 1997 27.6 1.5 1998 -7.9 100 1999 70.5 21.7 2000 163.5 - Source: Calculated using BIR values and CBN Bulletin of various years.

. a. .Growth Rate of non oil Revenue -Growth Rate of oil Revenue

Graph 2: Grow-th Rate of oil and non-oil revenue in Benue State

The trend of IGR in the state was quite significant within the. period of study, rising from a negative value in 1992 to an 192 TIw cl?allrizgcs ofinter~?nllypticmtcd rcvcnz~cof state in Nigcwia impressive figure in 1993. The leap within this period was quite outstanding. The negative performance in the previous year could have motivated the performance. This trend did not quite continue. There was a slight fall in 1994 to 30%. The growth rate in 1995 was impressive after which came the crash of 1997. It was observed that during 1995-1998, the growth rate of oil revenue was relativelv stable while that of IGR was continuously on the decline. However, a trend was noticed, that as more revenue was accruing to the state from the federation account, the pursuit of internal funds were neglected. The negative effect in 1998 changcd to a positive rate in 1999 and 2000. The trend was quite synonymous with what was observed in Enugu State. The poor growth rate of IGR can not be totally attributed to increases in oil revenue. Thus, the diversionary effect of oil revenue on non-oil revenue in the state was negligible and can be over looked. In conclusion, the poor nature of the ICR is attributed to administrative bottlenecks and lack of proper focus by the rclevant authorities.

Growth rate of non-oil and oil revenue 1 Cross River State Year Growth rate of non- Growth rate of oil ---oil revenue revenue IW2 188.6 1993 147.4 1904 19.7 'I 995 86.7 1996 -75.07 1997 59.2 1998 11.6 1999 -18.4 2000 --15.7 Sowcc.: Calculated using BIR values and CBN Bulletin of various pears. R I Chima and K K Ogi/jirzbo 193

. . . .@ ...... Growth Rate of non-oil Revenuc

@ r Growth Rate of oil Revenuc .., ...... 1. ?! a .. ..

19% 1993 1994 1%~i99h 1997 195% 1999 200 ......

Graph 3: Growth rate of oil & non-oil revenue in Cross-River State

The trend in the Cross River State was a bit different from what was observed in other states. From 1992 to 1993 there was a 14% growth rate, which came crashing in 1994 to almost the figure in 1992. On the other side, the growth rate of oil revenue increased tremendously by 1993 and came to negative value of -0.8% by 1994. Both variables followed the same trend between 1994 and 1995. Between 1995 and 1998 the growth rate of oil revenue was fairly stable while that of internally generated revenue was highly unpredictable. It was observed also that between 1996 and 2000, as the allocation from the federation account was increasing, the funds from local sources were on the decline. Thus, .within the last five years, the diversionary effects of oil revenue on non-revenue were quite significant. 194 The chnllenges of iizternnlly gcnernted revenue of state ill Nigeria Conclusion P~tblicsector economics focuses on the inquiry into the facts, techniques, principles, theories, rules and policies shaping, directing, influencing, and governing the use of scare resources of governn~ent.The study sought to determine the composition of existing tax instruments in the country, sensitivity of non-oil revenue to changes in tax base, tax rate, tax administration, and efficiency of tax rates in the states studied. Empirical evidence shows that PAYE yields a greater amount of revenue than all other forms of taxes in the three states studies. Also, it was observed that the rules of computation were too vague and complex, thus making the licibilitiesof the state uncertain. The. issue of efficiency has been compromised to a large c.xtcnt in the three states studied. The violations of the first princ.iplc~ of tax administrative procedure in the states were highly significant. Results also show great apathy on the citi~cnryto pay taxes. However, there was no clear-cut diversions-y trend, in states, of oil revenue on internally generated funds. In all the states studied, the sensitivity of non-oil revenue depended on the tax base.

References Anyniiwu, John CBN (1997). Nigeria Pllblic Finnnce Onitsha: Joance Ed~tcationalPublishers. Chima, Reginald I (2000). Distributive Justice and Fiscal Federalism: Tlw Crisis of Public Policy Faili~re.Nigerin Economic and Finnncial Reviuu, Central Bank of Nigeria (forthcoming). Ekpo, Akpan H and Ndebbio, John E C (1998).Local Goverizmen t Fiscnl Operations in Nigeria (Rescorch Pnper 73,AERC), Nairobi, Kenya. Ndekwu, E C (1988).Tax Structilre mnd Administrntion in Nigeria. Omorogiuwa, A P (1988). "Tax Administration: Institutional Arrangement's" in Ndukwu, E C D Tax Structtlre and Administration ill Nigeria. Kusi, Newman K (1988j. Tar Reforin nrld Revenue Prodirctivity in Glinnn (Resenrch paper 74 AERC), Nairobi, Kenya. R 1 Chiina nrrd K K 0,gujinbn 195 Barro, Stephen M (1986). State Fiscal Capacity Measures: A Theoretical Critique in H Cylde Reeves, ed.,Mensicring Fiscal Cqmrty Cnrlibridg~MA: Lincoln lnsti tu tc for Land Policy. Politicisation of revenue allocation in Nigeria

Introduction Federalism consists of a series of legal and administrative relationships established among units of government, possessing varying degrees of real authority and jurisdictional autonomy. This necessitates revenue sharing arrangements as there coexist both national and sub-national governments which perform the economic functions required by the people within the country. The need for revenue sharing arrangements is also underscored by the existence of fiscal imbalance. This implies that there is often a disparity between revenue sources and responsibility especially with regard to states and local governments. Resources that accrue to these lower-level governments are also often less than those of the central government. The issue involved is therefore intergovernmental financial relation with the adjustment of fiscal imbalance among different levels of government. So it has been with the distribution of resources in Nigeria. Commenting on this, Teriba posits that "an important problem that Nigeria shares in common with other federations, but by which she is plagued in greater intensity is the recurrent one of intergovernmental fiscal jurisdiction and revenue 198 Politicis~tionof revenue allomtion in Nigeria allocation'.Tl~isgenerally emanates from two basic questions viz: (1) What should constitute adequate funding of the various levels of government? (2) What share of revenue should each component unit of these levels have as its due? The resolution of these issues in Nigeria has not been easy, thus resulting in a number of commissions of inquiry, as the nature and conditions of financial relations in any federal state is crucial to its survival.

Having stated that resource allocation in federal states are always associated with problems, it is pertinent to note that the more advanced federations such as Canada, Australia and United States have over the years evolved institutionalized strategies of mediating and ameliorating these problems. Consequently, they have become non-sensitive, insignificant and administratively handled and contained. Although every federation is unique in respect of its structure, its history, its political, economic and other characteristics, the Okigbo Commission in its report clearly highlighted some similar features in the measures adopted by the "older" or more advanced federations in their revenue allocation arrangements. They are: Use of tax efforts: This makes the lower levels of government less dependent on federal sources; Use of population in its unweigl~tedform: There is however, a little dispute on the reliability of data used; Use of in-built grant scheme for fiscal equalization. Under this provision, states deemed to lie below prescribed "average" in respect of their revenue - raising capacity are assisted with supplementary grants so that they do not raise their taxation level unnecessarily. Use of loans'that are tied to programmes or projects. Non reliance on ad hoc review commission in their revenue allocation, rather making use of institutionalized bodies for the exercise. Roselirze C. Ot~nlz199

Use of highly sophisticated revenue sharing formula as there is copious availability of reliable data on virtually all aspects of the socio-economic system2.

The resultant effect of these arrangements is that revenue allocation in those societies has gone beyond politicization. This is quite unlike Nigeria where revenue allocation is political. This politics, argues Olisa, is complex, intense, persistent and mu1 ti-dimensional '.

The objectives of this chapter therefore are to: dcterinine the extent to which effective revenue allocation in Nigeria has been marked by political influences. establish the possible consequences of politicalization of revenue allocation on Nigeria's fiscal federalism. Provide suggestions towards minimizing the politicization of revenue allocation in Nigeria.

Assignment of tax powers and fiscal responsibilities in Nigeria An appropriate springboard for a discussion on revenue allocation in a federal set-up is the assignment of fiscal responsibilities and tax powers to the different tiers of government. The various units of the Nigerian federal system have responsibilities constitutionally assigned to them under what is termed the legislative lists. Section 4, second schedule of the 1999 constitution of the Federal Republic of Nigeria spells out the allocation of these legislative powers. Part (I) of the schedule contains the legislative powers of the federal government under the exclusive list. The legislative powers of the state government are spelt out in part (ii) of the same second schedule under the concurrent legislative list. The residual list which should consist of areas of legislation of local governments are not clearly spelt out in the constitution. These comprise issues not included either in *the exclusive or concurrent legislative lists, hence, the concept of 'residual'. These powers are as contained in the fourth schedule of the 1999 constitution captioned functions of local government. Table I summarizes the pattern of allocation of tax powers.

-Table J: Assignment of tax Turisdiction in the 1999 Constitution Federal State Local Excise Du tics Capital gains Rates Export Du tjes Inconies/profits of Radio licenses persons other than companies Import Du tics Of persons other TV Licenses Mining Rents and Stamp dutjes Bicycles, truck Royaltics I'ctroleum Profi t tax Wheel barrows Companies Income tax Liquor licenses Incomc Tax Market and Trading licences and fees. Profit and capital gains Motor Park fees tax. Source: Fidml Goverrlinent of N~~yeria,the 1999 constitution sclzed~~les 11 nnd IV.

A critical analysis of the table indicates that all the high revenue yielding sources such as petroleum, profit tax, import duties, mining rents, etc, come under the jurisdiction of the federal government, with the exception of personal income tax (at the state level). State and local governments have jurisdiction over minor and poor- yielding revenue sources. These include motor vehicle and drivers license fees, football pools, market and trading licenses. In fact, bicycle, truck and wheelbarrow licenses are, in practice, non existent in most local governments. A corollary of this nature of revenue jurisdiction is a serious over-dependence of lower level governments on the federal finances. The federal government enjoys a grea ter ability to raise revenues to meet its functional expenditure obligations than the states and local governments do. Thus, there is unbalanced intergovernmental revenue sharing. These fiscal ri.sources generated by the federal government accumulate in the Federation Account from where they are transferred to the state and local governments via various revenue allocation principles. The problems that have been associated with this unbalanced iiitergovernlnental revenue sharing have been varied and politicization of he process, intense.

Politicization of revenue allocation in Nigeria Ordinarily, revenue distribution in a federation should be purely a11 economic exercise. In such 'older' federations as the United states and Canada, that is the case. With such societies, revenue allocation is a mechanism for supplementing the finances of states and local govcrnmcnts, rather than being the major source of revcnue. However, this is not so with Nigeria. States and local a~ithoritieslook unto allocations from the Federation Account as the major source of the finances for running their programmes. Consequently, the stake in rnaxmising allocations from the central government becomes so high that this policy process becomes a political one. It determines who gets what, whcn and how, which is the essence of politicsi. Rules of access and eligibility also create spatial distinctions! For this reason, thc ciitire membership of the Nigerian political class is very intcrcsted in this spatial categorization and the attendant allocation of revenues there from. Commenting on the situation, Cookcy and his associates described revenue allocation as one of tlic most contentious and controversial issues in the nation's political lifen7.They further stated: So con tcntious has the matter been that none of the formulae evolved at various times by a commission or by a decree undcr diffcrcnt regimes since 1964 has gained general acceptability among the component units of thecountry. Indeed, the issue, likea recurring decimal, has yainf~illy remained the first problem that ncarly every incoming regime has had to grapple with since independence. 202 Politicisat ion of revcwuc nllocntion in Nigcrin

Against this backdrop, let us analyze how revenue allocation in Nigeria has been politicized by examining the main bones of contention against some of the principles so far advocated by thc various commissions. The influence of regime type on revenue allocation will also be considered.

Derivation principle Protagonists as well as the antagonists of the principle of derivation have put up arguments in support or to discredit its use. According to the principle of derivation each region should receive revenue from the central government in proportion to its contribution to the centrally collected revenue. Some critics assert that the principle negates equity principle. It has also been expressed that derivation principle tended to favour weal thy regions at the expense of the poor ones. In fact, scholars like Aboyade%nd Scott' argued that the derivation principle had little or no place in a cohesive fiscal system for national and social develop~nent.This implies that for a country trying to forge a national character, unity and identity, the derivation principle would prove to be a counter-productive policy to pursue. This is beca~~sein practice, the principle tends to thrive rnost where the states have little sense of national unity. With the einergence of oil as the major source of national revenue, the antagonist of the use of derivation increased rapidiy. The core of their arguments is that derivation excessively favours the oil producing states. Specifically, Phillips argued that the application of derivation principle excessively favoured Mid-Western (later became Bendel) and Rivers states, the major oil producing states. He further used the coefficient of variation as an index of inequality and made estimates which revealed that there was increased inequality in interstate revenue between1970/71and 1974/75 fiscal years10. This increase-was attributed to the use of derivation. This trend may have been invidious in two senses. The first is the unbalanced development which the use of the principle could foster. The second is political. The point is that derivation could lead to a radical shift in revenue from majority groups, Rosclinc C. Oiwh 203 which are very influential and powerful, to minority groups that are politically powerless. Accordingly, the persistence of this trend may lead to a shift in political power and a corollary shift in economic power. In response to the issue of uneven development, Mbanefoh and Egwaikhide" were quick to point out that by the nature of fiscal federalism, disproportionate growth and development is incvitable. This is directly related to the important issue of unequal fiscal capacity of fiscal federalism. Reference can hardly be made to a developing country with a decentralized fiscal system that has achieved balanced development. Hence, the application of derivation cannot be blamed for the existence of this phenomenon. From the preceding point of view, it can be safely inferred that if the numerically dominant and more politically powerful groups are oil producing communities, the use of derivation as a major revenue sl-taring principle would have continued as it was between 1946- 1960s when the dominant groups were producers of major national income earning items. It is also argued that since the principle of derivation implies differential treatment of certain groups in the country, it breeds regional conflicts and hostility. It is therefore perceived as an element of factionalism. Evidence from Nigerian political history shows that although the importance of derivation tapered off for over a decade, interregional antagonism, discontent and tension remained unabated. Therefore, derivation cannot be blamed for interregional antagonism and conflicts. Rather, it is the absence of or improper application of the principle of derivation that generates conflict. This manifests clearly in the incessant agitations by the oil bearing states against government neglect and subsequent demands for resource controlT2. Protagonists of derivation however, defend the principle on equity grounds. They argue that areas from which the bulk of the national revenue is obtained should receive an extra share over and above that of others. The principle is justifiable particularly in the case of mineral resource owing to difficult geographical terrain in which they are generally found and the Politicisnfior~of wzwnric nllocnfion in Ni~erilr attendant hazards of the oil industry which create additional responsibility for increase in the cost of welfare and the reliabilitation/resettlement of the people and the areas conccrncd. The controversy surrounding the principle of derivation notwithstanding, cvery revenue sharing scheme has incorporated it ever since, until 1977 when, for the first time, it was dropped on the recommendation of the Abayode Technical Committee. The line of argument of the protagonists is not whether it should be applied but how much weight should be givcn to it. Hence, the benefiting states are quick to admonish that any attempt to remove it totally would endanger interstate harmony and licnce political stability. During the 1995 constitutional conference, there was a consensus agreement that derivation should not only be one of thc principles for sharing revenue but should attract a minimum of 13 per ccnt. This recommendation was entrenched in the ? 999 consti tutionl'. The unwillingness of the government to adhere strictly to the provisions of the constitution in this regard has as earlier on mentioned, generated a lot of crises in Nigeria's fiscal federalism. The benefiting states are as clctermined as ever, not to let go what is constitutionally their right, as emphatically stated by Edevbie, the one time Delta state commissioner for financel'l.They bemoan the gross neglect of welfare of the oil bearing states by the various regimes in the country. The bone of contentions is that these states argue that they have been starved by various governments of basic infrastructure and social amenities such as roads, pipe borne water and electricity, among others. This neglect persists irrespective of tlie fact that oil constitutes no less than 80 per cent of Nigeria's foreign exchange earning. Oil drilling has also bcen said to expose tlie inliabi tants of the areas to diseases such as Holoprosanceplial and Hypertalorism'~Holoprosancephal is a medical'term which describes a situation where a child is born with a single brain fixed in the middle instead of the normal two brains. ~~~ertalorismon the other hand, describes a victim with only one nostril. The prevalence of these health Roselirze C. Onah 205 problems coupled with damage to farm crops and marine lives wliich constitute their main source of livelihood have created bitterness against the governments in power. The neglect and insensitivity suffered by the people have been attributed to the lack of adequate representation of the people of the region in federal institutions. Consequently, little or no attention is paid to issues concerning their predicament. The current agitation for resource control by the states in this region is a further reaction to this gross neglect. They argue that to internalize the external diseconomies of oil production, the principle of derivation should be adopted as a mandatory principle under the horizontal revenue allocation, failing wliich, they should be allowed to control resources derivable from their area and to pay royalties to the federal government. Although the Supreme Court decision of April 5,2002 confers thc right to revenue derived from off-shore oil exploitation on the federal government, the case is far from over'! For as rightly pointed out by Justice Karibi-Whyte in July 2001, what is at stake is political rather than legal17. Let us examine other principles which have also been controversial and highly politicized.

Population The principle of population was introduced into revenue allocation formula in 1980 by the Okigbo Presidential commission. Although the chairman of the commission was a southerner, the Shagari Administration which gave it its mandate was, to all intents and purposes a northern dominated one. Consequently, the inclusion and assignment of 30 percent of the Federation Account to population is seen as a ploy by the northerners who were in control of the political power at the centre. The bias of the Okigbo commission towards protecting the interest of the central government also manifested in its recommendation of 50 percent share of the Federation Account to the federal government as against 30 percent and 10 percent to the state and local government respectively. This factdr contributed significantly to the agitation against the 206 Politicisation of reventre allocation in Nigeria commission's report especially within the prevailing view that the central government was becoming unduly strong at the expense of the federating units.

Landmass While the principle of population subsisted, although the rate was reduced to 30 per cent by the Danjuma Commission in 1989, the principle of landmass was introduced by the Armed Forces Ruling Council (AFRC) in January 1990". Landmass and terrain was to be allocated 10 per cent of thc Federation Account. It is widely believed that this principle was introduced to take advantage of the vast landmass of the north and the state apparatus which it controls to maintain the internal domination of less extensive and minority ethnic groups. The application of the principle of landmass is not only unfair but retrogressive.

Summary and Conclusion Three main issues are discernible from Nigeria's experience with revenue allocation. Firstly, what was ever found acceptable with the work of any of the revenue allocation commissions was usually a reflection of the wishes of the dominant political class in the country at that point in time. Secondly, the contending political forces over revenue allocation in the country have never bordered about raising the revenue. Rather, they have always been preoccupied with sharing the proceeds -national cake-that has been derived. Thirdly, what to do with derivation and how revenue is to be shared among the political units are the primary contentious issues of Nigerian revenue allocation". Revenue allocation is as much a political problem as it is economic or technical. It is thus this conception of revenue allocation that creates in the political class the overriding passion to cbntrol the resources of the nation for their particularistics desire. Nnoli aptly describes the situation thus: "they all schemed to ensure that their region of political dominance and, therefore, their own ethnic groups controlled Roscline C. Onal~207 the federal resources. This would enable them to appropriate a disproportionate share of these resource^"^^'. Implicit in this observation for the control of the centre is the acquisition of the power to manipulate priiiciples of allocation as such group deems favourable. Presently, derivation, population and landmass still remain instruments in the hands of power wielders for the nianipula tion of revenue allocation for the satisfaction of their selfish ends. The aftermath of this is that revenue allocation will continue to be a source of discontent and intergovernmental wrangling, culminating in national disunity rather than integration. Most importantly, until such principles as internal revenue effort, and social development are projected over and above population and landmass, revenue allocation will remain highly politicized. In addition, population census will continue to be politicized and obtaining accurate population figure of Nigeria will remain elusive. Finally, the issue of derivation and resource control can only be laid to rest if equity and justice form the bases for delivery of services and allocation of amenities by governments.

References 1. 0.Teriba, "Nigeria Revenue Allocation Experience, 1952- 1965: A Study in Inter-governmental Fiscal and Financial Relations" T~PNigerian jo~irnalojEconomic and Social Studies. 1966 p. 361. 2. P.N.C Okigbo et 01, Report ojthe Presidentid Commission on Revet~r~eAllocntion, Lagos, 1980 p.23. 3. M.S.O. Olisa, "Revenue Allocation and Effective Federalism in the Third Republic"(Paper preinted at the National Confergnce on the Transition to Civil Rule). Unijos, May 1988. 208 Politicisntion of revcruic nllocation in Nipria

4. C.F. James and M. Buchama, "Federalism and Fiscal Eq~~ity".American Economic Review, 40,1950. Cited in E. Ofuebe, "Infl~~enceof Politics on Revenue Allocation in Nigeria" (Unpublished mimeograph,) 1997 p. 3. 5. See Harold D. Lasswell, Politics: Who Gets What, When, How? I11 Walter Raymond, Dictionary of Politics: LawrenceVille, Brunsi~uckPublishing Co, 1973 p 532. 6. B.C. Smith, "Spatial Ambiguities: Decentralization Within the State". Ptrblic Administration and Development. 6 (4), 1986 p. 456. 7. MAMSER, 'Report of the Political Bureau of MAMSER", Quoted in E. Ofuebe, "Influence of Politics 011 Revenue Allocation in Nigeria". (Unpublished mimeograph) 1997 p.4. 8. Ajieh C.J.T., "Fiscal Federalism and Politics of Revenue Allocation in Nigeria". (Unpublished Seminar Paper). Nsukka 2002 p.21. 9. Ibid. 10. A.O. Phillips, "Revenue Allocation in Nigeria 1970-1980". The Nigerian Jotlrnal of Economic and Social Studies. Vol. 17, No I 1975, pp 1-28. 11. G.F. Mbanefohand F.O. Egwaikhide, "~evenueAllocation in Nigeria: Derivation Principle Revisited". In Kunle Amuwo et a1 (ed), Fedcrnlism arrd Politicnl Restnrcturing in Ni

F. E. Onah and C. I. Okoli

Introduction Local governments are no longer there just to pay salaries. They are there to ensure collective participation in governance, motivate physical and economic development, create the conditions for employment opportunities, and provide social services which can improve the well-being of our people.'

Local Governments are essentially set up to effect delivery of basic social services among geo-political entities. In Nigeria, these services are articulated in the local government reforms of 1976 and listed in the Fourth Schedule of both 1979 and 1999 Nigerian Constitution. The Local Government Reform of 1976 was the first time that full recognition was given to local government as a tier of government in its own right, with the following implications: The establishment of a full government appara tus fully supported with the symbols and instruments of power and authority. A government with distinct responsibility for managing its finances through internal generation of 2 10 R~~sorira~-rspri~~fif~~~regap in locnl government finarms

revenue and cornplcmented with allocation from the Federation Account. A government with the capability to initiate its own development projects in such areas as roads, agriculture, health, and others2

111 1976, the various systems of local government administration hitherto operating in Nigeria were overhauled, streamlined, and made uniform nationwide. In terms of structure, composition, administration, finance and functions, they were reorganized into single-tier multi-purpose elective councils. The system was then accorded a third-tier unit of governance alongside the two other tiers of government hitherto in existence, i.e., the State and Federal governments3. Essentially, the major concern of government is how best to make local government an effective instrument of development and most importantly to stimulate development at the grassroots level. To this end, the principal aims of the local government are to: i. make appropriate services and development activities responsive to local wishes and initiatives by devolving or delegating them to local representative bodies .. u. facilitate the exercise of democratic self-government close to the local levels of our society, and to encourage initiative and leadership potential iii. mobilize human and material resources through the involvement of members of the public in their local development, and iv. provide a two-way channel of communication between local communities and government4

Given the constitutional recognition of local governments as the third tier of government, they are entitled to statutory revenue allocations from both the federal and state governments for the discharge of'their responsibilities. This chapter therefore sets out to examine the reyenue-expenditure profile of local governments in Nigeria, focusing especially on (1) constitutional provision and/or functions, (2) sources of F. E. Onah mzd C. 1. Okoli 2 1 1

rcvcnuc, (3) expenditure profile, (4) the constraints, and (5) rccommcnda tions.

1. Constitutional provisions/functions The functions and responsibilities of the local Government administration arc generally to assist in maintaining order and good government within the area of its authority. Hence, in the handbook on 1976 local government reform, local government was defined as: Government at local level exercised through reprcscntativc councils cstablishcd by law to exercise specific powers wi thin defined areas. These powers should gjve the council substantial control over local affairs as well as the staff and institutional and financial powers to initiate and direct the provision of services and to determine and impiement projects so as to complement the activities of the state and federal governments in their areas, and to ensure through of functions to these councils and through the active participation of the people and their traditional institutions that local initiative and response to local needs and conditions are maximized5.

To this end, local authorities are to perform those functions: which require detailed local knowledge for efficient performance; which are of personal nature requiring the provision of amenities close to where the individuals affected live and in which the significant use of discretion and understanding of individuals is needed. that provide framework within which local resources, both human and material are effectively mobilized6.

The functions .of local governments under the 1976 local-government reforms and the 1979 Constitution of the Federal Republic of Nigeria are specified under two categories as follows: 2 12 Resorrrce-expenditrrre gap in local governmen tfinnnces

Functions of Local Government Category A (Exclusive F~~nctions) :ategory B (Functions shared with tate Govt.) - -- - Markets and motor parks Aedical services Sanitary inspection igricultural services

Slaughter Iwuses and slabs nformation and public nlightenment

Regulation of food establishments 'rimary and adult education

Registration of births, deaths, and up port for arts and culture marriages

Collection of local taxes toad construction and maintenancc

Cemeteries and burial gro~inds 'ublic health education Control of animals turd and semi urban water supply

Sewage or refuse disposal, or both 'own and country planning

1'~iblicconveniences :ire protection

Grazing grounds 'ublic housing

Community and recreation centers )peration of Commercial lnterprises

Control of prim te forest estates

I'arks, gardens, and open spaces

Regulation of self-propelled vehicles Source: (FGN, 1976 & 1979)

2. Sources of revenue Local government as an important tier of government has been allocated three principal sources of revenues by the 1976 and 1979 constitution respectively. The first source of revenue is the federal allocation, which is shared amongst local, state and federal governments. The second is the contribution from state F. E. Onnlz and C. 1. Okoli 2 13 government and a variety of specific grants from both federal and state government7. Local government revenue is made up of external (federal and state) and internal (internally generated revenue). Studies have shown that federal allocation forms over 60% per cent of local government revenue. As a result, local governments are heavily dependent on federal allocations in order to meet both recurrent and capital expenditures. Most of the recurrent expenditures are for personnel costsS. However, local government's internally generated revenues are composed of taxes, rates, fines, fees, licenses, etc. They are enumerated thus: Taxes: local government taxes are collected in the following forms- community tax, poll tax, cattle tax, imposition of taxes on ostentatious goods like cigarettes, liquors, etc. Fees, fines, licenses and rents: These include fees and fines from courts, market stalls, motor parks, forest, public advertisements, regulated premises, registration of births and death, slaughter houses, bicycle licenses, radio licenses, cart and wheel barrow licenses, dog licenses, goldsmith and blacksmith licenses, liquor licenses, dane gun licenses, minor industry licenses, etc. Rents: Royalties, rent from land, real estate, miscellaneous sources such as renting of local government halls, chairs, tractors, tippers, motor cycles and vehicles. Rates: Rates include capitation and property rates. Investnzents: These include co-operative ventures, purchase of shares in companies, establishment of bakeries and farms E~ztertaivzment:Encouraging and establishing sporting events and clubs, music and dramatic clubs and choirs Regulation of minerals such as sand, coal, cement, etc, depending on availability Hawkers Pernzit: imposition of tax or compelling hawkers to obtain permit for hawking ,etc9.

T11c rural local governments appear to show a near absence of fines as a source of revenue. hisis not surprising in a rural setting where problems of urbanization are yet to manifest 2 14 Resozace-expendit~~recgnp iii locnl cpoaer~i~nentfinnilccs themselves"'. A critical look at the structure of local govcrnments' revenue shows that it is mainly derived froin external sources. For instance, in Table 1 the federal allocation to local govcrnments in 1997 is 64.9%)while the independent revenue is mere 8.11%.

Table 1: Distribution of revenue to the federal, state and local novernmen ts, 1997 Sources of revenue State Local Oil revenue Independent revenue 8.11 Value added tax 24.33 Custom and excise State allocation 2.22 Conymny tax Grant and others Federa tion account 64.9 Stabilization fund receipts - Sonrccs: Leolqnrd Wnntclzcko~rnnc The. nature of these external sources of revenue (state and federal all~c~ltions)and the manner of their disbursement introduce a dependency syndrome in local governments' revenue mobilization effort. Local governments also receive a sl~arcof VAT, which was introduced in 1994. The contribution of VAT to local government revenue is growing and some local governments have come to depend on it as a distress-avoidance mechanism in the light of significant financial challenges facing thernI2. The federal and state governments control almost all viablc sources of revenue in the country. As a result, local governments in Nigeria depend too heavily on federal c~llocations.Tables 2 and 3 show statutory revenue allocation formula from 1960 to 1998 and allocation of VAT revenue from 1994 to 2004, respectively. F. E. 011nl.1and C. I. Okoli 2 15

Table 2: Nigeria: Statutory revenue allocation 1960- 1963-67 1980- ' 1982 1987 I990 1993 1995-98 Federal 70.0% 65.0% 55.0% 55.0% 55.0% 50.0% 48.3% 48.5%

State ' 30.0% 35.01%) 34.5%- 34.5% 32.5% 30.0% 24.0% 24.0% Local 0.0% 0.0% 8.0% 10.0% 10.0% 20.0% 20.0°', 20.0'% Other\ 10.07, 0.0'l/0 2.5% 0.5% 2.5% 0.0% 7.5% 7.5% Source. Approved Rir~Igrjtsof.tlw Goz~crnn~entof the Federal Repzrblic of N@"" Note: l/lnclzdc Special F~rnds,Fedtrnl Capitnl Territory, Derivation, and D~irdoprncilfofMinero1, Genrrol Ecology n11d ~fnfnforiSfobilizafiorr.

'Table 3: Nigeria: Allocation of VAT Revenue 1994 1995 1 1996 1997 1998 1999 2004 Federal Govt 20% 50'% 135% 35% 25% 15% 15% Statc Govt 50%) 30% 40% 40% 45% 50% 50% Local Covt 30'% 20%) 25% 25% 30% 35% 35% ~ourcesyApprovcd Budgets of the Government of the Federal Rep~~blicof Nigeria; Leonard Wantchckon and Tamar Asadurian, 2002

Both the statutory allocations and the externally generated revenues are often not sufficient to meet the multifarious needs of the local government councils. Local governments are expected to compliment their federal and state allocations with revenue earned from their internal source^'^.

3. Expenditure profile According to Nycmutu, the degree of local autonomy that exists in Nigeria at any moment has critical implications for the ability of local governments to mobilize and utilize revenue for dcvclopmental purposes. The implications can be positive or negative, and are normally dependent on the existing nature and structure of local govcrnrnent finance. Tables 4 and 5 highlight expenditures of 774 local governments between 1993 and 2000 on the basis of their capital and recurrent expenditures. It can be seen from the tables that the resources of local governments between 1993 and 2000 were unequally appropriated between capital and recurrent expenditures. We find that from the second table, recurrent expenditure accounted for an average of 70.5% of the total expenditures of local governments. From 1993 to 1997 recurrent expenditure maintained a steady percentage allocation of not less thal~, 71.27% of the total expenditure. By 1998, there was a slight decrease to 68.30%. Between 1999 and 2000, the figure slightly increased from 68.94% in 1999 to 69.32% in the fiscal year 2000. On the capital expenditure side, the average percentage allocation between 1999 and 2000 was below 21.53%. It was only in 1998 fiscal year that capital allocation went up to 31.70%).

Table 4: Local Government Expenditures (74 million), 1993-2000 7. Year liecurrcnt C a p i t a 1 Total Expend i ture Expenditure Expenditure 1993 13,966.5 5,508.8 1994 14,884.2 4,082.9 1995 16,317.2 6,126.1 1996 17,292.5 6,969.2 1997 21,856.5 8,083.4 1998 29,192.2 13,549.0 1999 41,614.0 18,747.3 2000 90,973.6 40,241.4 Sources: CBN Annual Report and Statement of Accounts for the Year Ended 31st December 2001; and Statistical Bulletin, Volume 9, No. 2 December 1998.

Table 5: Percentage distribution of expenditure between recurrent and capital expenditures Year Iiecurrent Capital Total 70 YO Expenditilre Expenditure Expenditure R.E to T.E C.E to T.E 1993 13,966.5 5,5082 19,475.3 71.71 28.29 F. E. Onnh ntd C. I. Okoli 2 17

The above analysis indicates that the bulk of local government financial resources from both internal and external sources go into financing personnel emolument and overhead costs, while other charges take up the balance. The reality is that local governments are unable to declare recurrent budget surpluses, which could be transferred to capital budget for the execution of capital development. This problem has in turn reduced the ability of their being agents of development for their communities. Capital expenditures, when they occasionally occur are usually made for the maintenance and upgrading of primary rural and community infrastructures. The limited size of the capital budget has always been a constraint to local governments' capacities to embark on any major socio-economic projects. Thus, the major characteristic of local government expenditure in Nigeria is almost the non-existence of major capita1 expenditures except in a handful of local governments. Besides, the bulk of local government revenues from both internal and external sources go into financing non-developmental expenditures. It is our belief that a virile local government should not only be in control of its funds but also have a good proportion of it for the provision of amenities for the people14. The near absence of significant capital expenditure is illustrated in Table 6. The table shows that the observed surpluses reported in local government finances do not actually reflect surpluses; they rather constitute a smokescreen. Column 11 of the table indicates actual current revenues which are obtained by subtracting opening cash balances (closing cash balance brought forward from the preceding year), loans and advances from total receipts. Column V shows total expenditures which when subtracted from current revenues consistently show deficit balances as reflected in column VI. Over the ten-year period covered in the table, one observes an increasing tendency of deficits 2 1 8 Rtsorrrcc-cxpcndi111repp in local governinen t finnnces

Summarl ~f local g ,wrnmcnt finances, 993-200: [ million) 11. 111. IV. ' 1 v. v .I '. VII. 1 Yea 1. Total Recurre Capital i Total Overall Finai~cing~ Currenl nt Exy. ' 'Exp. Balance Revenue2 Exp. , I993 19,377.5 13,966.5 5;508:8 19.475.; -97.8 -497.0 1994 18,895.6 14,884.2 4,082.9 18,967.1 -71.5 -327.5 1995 22,392.8 l6,3 17.2 6,126.1 22,443.3 -506 -2,OI 9.9 1996 23,942.1 17,292.5 6,969.2 24,261.7 -319.8 295.6 1997 29,860.5 21,856.5 8,083.4 29,939.9 -158.8 -1,322.8 1998 43,960.1 29,135.2 14,864.7 43,999.9 -79.4 - 1,008.2 I999 57,682.2 41,613.9 18,827.3 60,441.2 -2,759.0 -3,118.4 2000 146,774.2 93,899.9 59,964.9 153,864.8 -7,090.6 -5,103.1 200 1 l67,6 18.3 122,7 12.7 48,661.8 171,374.5 -3,756.6 -3704.8 2002 164,892.1 124,701.6 45,118.6 169,820.2 -4,928.1 -7,259.0 2003' 354357.8 21 1,633.1 150,130.1 361,763.2 -6,805.4 -15,213.1 Notes.

2. Calculated as total receipt minus theopening balancelit., closing balance in the preceding year brought forward), loans and advance. 3. Positive (+) denoles surplus while negative (-) denotes deficit. The figures sland for opening balances, loans and advances. Source: Computed from data on Annual Survey of 1,ocal Government Councils (CDN: AIIIII,~~Rq7ort nird Stflt~ofAccollrrts for 1996, 1998, 1999 & 2003)

4. Constraints/problems The prevailing structure of local autonomy means that local governments are totally at the mercy of the federal government in mobilizing revenue. It is clear that neither the enhanced autonomy nor the increased and direct fund disbursement over the years has been adequate to meet their needs. Lack of adequate financial resources to back up the workings of established local councils has become an economic constraint, which reinforces their relative lack of autonomy. Consequently, many local governments' in the country have ended up spending the bulk of their revenue on recurrent rather than capital expenditures''. The revenue allocation system mandates F. E. Oldz nnd C. I. Okoli 2 19

that a certain fraction of the federation account be allocated to local govcrnmcnts. However, these funds are never enough to meet expenditure requirements. This is so because the size of the account is related to revenue from oil, which is subject to fluctuations, and the expectations of local governments far exceed the available resources. Studies also indicate that most state governmen ts default on their statutory allocations to local governments, thus rendering local governments financially and politically impotent'". More over, local governmen ts have over thc years suffered from the continued whittling down of their powers, and sta tc governments have continued to encroach upon what would normally have been the exclusive preserves of local govcrnmcnts and consequently there has been a divorce between the people and government at their most basic levels.

5. Recommendation Studies have shown that the revenue accruing to local govcrnments sta tu torily is inadequate to finance their numerous functions. Although federal allocations to local governments have continued to in~provcover the years, their responsibilities have equally increased tremendously. Therefore, local govcrnments should not over rely on statutory allocations, in ordcr not to jeopardize their effectiveness and abilities to carry out dcvelopmen tal projec ts in their various communities. A11 effective means of augmenting the resources of the local gove~.nnicntsis by reviewing the tax powers of the three tiers of government and ensuring optimum exploitation of internally generated revenue possibilities at the local government level. This will enhance their revenue base to enable local governments exccu te their socio-economic programmes without complete dependence on the Federation Account. Besides, there cannot be ;I virile and dynamic local government system without ensuring that functions assigned to local government8 are properly aligned with fiscal jurisdiction, and that designated revenue rights are guaranteed and adequately protected. Local government councils in Nigeria are charged with a number of responsibilities most of which touch 220 Rcsorrrcc-ex-pcnditrrregnp in local 80vernnwntfinnnccs

on the welfare and living standards of large segments of the country'spopulation, particularly those living in the rural areas. State governments should see local government as partners in progress and thereby stop infringing on the revenue rights of local governments. In the first place, any transfers from states to local governments, statutorily determined, should be enforced. Moreover, the activities of, local governments should be monitored to ensure compliance with laid down guidelines and regulations.

References l.Babangida, I. B. (1988). "Making Councils the Power Base of Democracy", National Day Broadcast, 1October 1988, The Guardian, Lagos 4, October, pp. 18. 2.0basanjo Olusegun (2003), "Presidential Address at the Inauguration of The Technical Committee on the Review of the Structure of Local Government CounciIs", Abuja, June 25. 3.0zor, Ebonyi. (2001), "Local Government and Urban Administration in Nigeria- Problems and Prospects" in Issues in Llrbnizizntion mid Urbnti Adniinistrntion in Nigv-in, ed. E. 0 Ezeani and N. N Elekwa, Enugu, Nigeria, 4.Nyemutu Roberts, (1999), "Local Government Autonomy in Nigeria Federalism: Implications for Revenue Mobilization and Utilization for Development" in Fiscnl Fcdernlism crud Nicqerln's Economic Deuelopnmt, Selected Papers (Presented at the 1999 NES Annual Conference). 5.Federal Military Government of Nigeria, 1984. "Local Government" R(yort of tire Coinwzittcc on tile Review of Locnl Gouernrne~it Adnr iilistrnfio17 in Nigcrin, September, Reproduced by States and Local Covernment Affairs Office, Presidency Abuja. 6.0nah, R. (2002), "Urban Local Government Authorities and the Provision'of Urban Services: An Appraisal" In Urbaizization and Llrbn~iAdmil71strntion it7 Nigeria, ed E. 0 Ezeani and N. N Elekwa, Enugu, Nigeria. F. E. Ormh nnd C. I. Okoli 22 1

7.0bi, M.A.0 (2001), "Sources and I'roblems of Revenue Genera tion by Urban Local Governlnents in Nigeria" In Urbar~ization mid llr11n11Adi~~i~risfrntiorr ill Niprin, ed, E. 0 Ezeani and N. N Eleltwa, Enugu, Nigeria 8.Ekpo, A. H and J.E.U Ndebbio, (1998), " Local Government Fiscal Operations in Nigeria" AERC Rescwrch Pnp~r73, Nairobi, I

F. E. Onah and E. R. Ukwueze

Background of Nigerian federalism Today, Nigeria is a federal state with three tiers of government. These are the federal government at the center, 36 state governments and 774 Local governments. Each level of government in this multi-level system has some fiscal responsibilities and functions to perform. The Nigerian federation is a child of the struggle for and of the African continent by the colonialists. The colonial masters, on arrival, discovered that there existed various kingdoms organized under kings. They discovered that the inhabitants were scattered all over the place in different tribes and kingdoms under traditional political and administrative institutions through which their affairs were conducted and regulated. They also discovered that the inhabitants had peaceful administrative settings, and so, went ahead to use the administrative heads as their agents. They (the colonialists) first grouped those kingdoms in the north as the Northern and those of the south as the Southern Protectorate. On May 1,1906, the colonies and of Lagos and the Southern Protectorate were amalgamated by Sir Walter Egerton: This was the beginning of the entity called Nigeria. They did not stop there. On January 1, 1914, the Sou thcrn and Northern Protectorates were amalgamated by Sir Frederick Lugard to form what is today called Nigeria. Thus thc colonialists united more than 400 ethnic groups into onc entity. This union of various or diverse ethnic groups has always seemed to be a curse for the country because the relationship has always been strained. According to Adesopo and Asaju (2004:277), "this relationship is being traced to the amalgama tion partly because of the irreconcilable differences in vision, religion, ethnic traits, culture, resource endow mcnt, charactc~r,linguistic and dcvelop~nei~tof the ethnics". Thc sccond reason, according to the authors is the fact that thc hallmark of such co-existence is the treaty and, unfortunately, the Nigerian federalism was built without one. Consequent upon the amalgamation, the North and the South were divided in to provinces under provincial Residents. This was done for case of administration and these Residents represented the au thori ties at the centre. The administration of the Nigerian state was Inore of a unitary system under Lugard, Hugh Clifford and Sir Bernard Bourdillon. Nigeria became a quasi-federal State with the introduction of the Richards constitution in 2946 (under the leadership of Sir Arthur Richards). Undcr this constitution, Nigeria was divided into three regions namely, Eastern, Western and Northern regions. Each region had some functions to perform. This administra tion did not last long because the nationalists were opposed to thc provisions of the constitution for not providing cnough powers to the regions. Richards Constitution was replaced by the Macpherson Constitution. Sir John Macpherson succeeded Richards as the Covernor of Nigeria in 1948, although his constitution was compiled in 2951. This was advancement over the Richards constitution as the regional governments had both the executive and Iegisla tiv~powers. The Regional Executive Council was headed bv the Lieutenant Governor whereas the legislative organ was the regional House of Assembly. The shortcoming of this constitution was that there was no clear-cut demarcation bctween the powers of the Executive Councils and the Houses of Assembly in the regions, and thus, there were series of conflicts in the regions. The nationalists criticized this constitution seriously, and this culminated in a constitutional conference in London in 1953, and eventually led to the compilation of the 1954 Lyttleton constitution that finally formalized the Nigerian federalism. Hence, Nigeria became a federal state in 1954, with federal structures and fu~ictions.This constitution established a11 the principles and provisions of a federal system of government. Several other constitutional conferences were held between 1954 and 1960, whcn Nigeria finally got her independence on 1" October. Ever since independence, Nigeria has bclcn battling with a lot of political and constitutional problems. In addition, the struggle for power and ethnic rivalry are some of the "teething "problems that led to break down of various administratioiis. There seems to be more of ethnic loyalty than national loyalty. While some ethnic natio~ials corny lain of neglec t and discriniina tion in the appointniciit to federal positions and ernyloyment of their you tlis, others comphin bitterly of marginalisation in the provision of basic infrastructures, share of resources, cxplora tion and exploita tiou of resources, etc. With all these at the background, one sees the need to critically re-examine the Nigerian federal system with a view to appraising the structure of its resource control.

Resource endowment and distribution Nigeria is richly endowed with natural rcsourccs which can bc har~wsscd to provide a strong rcvenuc base for economic development. The rcsourccs with which Nigeria is endowed include coal, arable farmlands, oil deposi ts, columbite, salt, iron ore, ctc. Each state in the federa tion has at least one economic resource with which it can be identified. The distribution of resourccs according to states in the fcdcra tion can be seen in Table '1, Table 1: Dis ibution of Nat~~ralresources bvJ state. State Agric related Oil and 'as. Abia Brine, iron ore, Cowpcas, Soya beans, Crude oil Lignite, I

Taraba Baryte, Bauxite, Iron Rice, Guinea corn, ore Yam, Cassava, Fruits

Yobe Arabic Gum, Cotton, Millet, Gypsum, lhnestone, Groundnuts, Maize, Clay, I

I corn. Source: Adap tcd from Adesopo and 4saju (2004:279-280)

Some of these resources can be exploited in situ and include gold, salt, iron ow, aluminum, clay, columbite, uranium, coal, lime stone, crude petroleum, etc. From the above table, it is clear that Nigeria has everything it 'takes to make federalism thrive. No~ictheless,all the states are not equally endowed with natural resources. This spatial difference in the distribution of resource F. E. Onah nnd E. R. Ukwmze 229 endowments shows that not all states and local government arcas have equal potential to grow and develop. Also, according to Akpan (1999: 74)) these resources are not, and for some economic reasons, cannot be exploited at the same time to guarantee equity in development and reduction in inter - regional inequality, tension and crises. This stems from the fact that exploration and exploitation of natural resources depend not only on endowment, but also on development, and internal capacity of the area to exploit the resources. Nigeria has a peculiar way of paying attention to her endowments. Prior to independence and about a decade later, agricultural exports formed the primary source of foreign exchange earnings to the country. By that time, there was little or no attention paid to any other alternative source of revenue. Later in the 1970s) there was a complete shift of interest from agriculture to the petroleum sector, and interest has remained there with a decline in the contribution of agriculture and other sectors of the economy. Naturally, the revenue potential of any zone or state depends on the spatial distribution of resources and the ability to exploit such resources to produce goods and services. Greater revenue potential places some states or zones with large resource endowment in a better position for rapid development. This creates an imbalance in the effort and ability to develop. The effect of this imbalance in economic development is the creation of competition and tension among the units that make up the federal state. The tension thus generated leads to agitations on the best way to share the revenue collected in the economy, hence, the urge for appropriate revenue allocation formula. The states with less endowment of resources always insist on equality, population, land mass and other criteria for sharing the revenue; the areas well endowed with resources would always prefer a revenue sharing method based on derivation. The fact remains that the revenue allocation formula (principle) is problematic and as Emenuga (1993) puts it "arbitrary and unstable". As discussed above, Nigeria had/has a monolithic source 230 Rcvcn ue nllocntion nnd resozrrce control in Nigerin of revenue, both before and after independence. Before and some years after independence, the source of revenue was mainly agriculture; in the 1970s and up till today, the source has shifted to oil revenue. In 1970, oil revenue accounted for 26% of the total federally collected revenue, while the non-oil sectors contributed about 73.72%. During this period, agriculture was still the main stay of the economy. In 1973, oil revenue was about 59.94% of the total revenue, whereas the non-oil resources accounted for 40. 06%. This period shows the beginning of oil boom. The contribution of oil money as a proportion of total revenue continued to rise to the extent that in 2003, it accounted for 80.55"h (CBN Stntistical Bulletin, 2003). It is known that in terms of mineral resources potential, Nigeria is one of the richest countries in Africa. But with the near total neglect of other sectors by concentrating on one product brings more problem than benefits. This is because concentrating on one product especially petroleum, has somewhat become a double-edged sword, being the mainstay of the Nigerian economy on the one hand, and the source of ethnic conflicts as well as environmental hazards on the other hand. There is therefore the need to diversify our interests in other sectors so as to create various sources through which revenue could flow into the country.

Resource ownership and revenue allocation That natural resources are spatially or unequally distributed in Nigeria is not debated, and that there exists unequal distribution of revenue among the various levels of government is a truism. As a result of this, various units of the federation clamour for appropriate method of sharing federal resources- hence the concept of revenue allocation principle. Revenue allocation involves the redistribution of fiscal capacity between and among the various levels of government or the disposition of the fiscal rdsponsibilities between/ among the tiers of government (Anyanwu, 1997;181)According to Mbanefoh and Anyanwu (1990), revenue allocation refers to the transfer of financial resources from one level of government to another F. E. Onah and E. R. Uk7utreze 23 1 which arises because of the revenue advantage which the former has over the latter, mostly as a result of the powers conferred on it over tax revenues. In a federal system, each tier of government has numerous duties and responsibilities assigned to it and thus needs adequate financial resources to undertake these responsibilities. Although this is necessary in principle, in practice, however, it is impossible to adjust the responsibilities (especially in a federal system) of the tiers to match the financial resources. In practice, there exists imbalance in financial resources; some tiers may have more financial resources than they need, and others less. In Nigeria, it is easier for the federal government to meet its expenditure responsibilities than the states and local governments. This vertical imbalance in financial resources among the different levels of government is what Herber (1979) called the problem of non-correspondence or vertical fiscal imbalance. On the other hand, when such imbalance occurs horizoi~tallybetween different units (among states, for example) at the same level, it is called the problem of equalization or horizontal fiscal imbalance. One result of these imbalances in expenditure responsibilities and tax capacity of different tiers of government (both vertical and horizontal) is that the various units raise their voices on how to share the resources to help them meet their fiscal responsibilities. The issue of revenue allocation formula generated such intense debate that has led to the demand for a national conference (Ekpo, 2004:3). The criteria for allocation have a high correlation with the political development (history). They came to focus with the conception of regional government sequel to the introduction of the Richards Constitution in 1946 and the subsequent sharing of responsibilities between the central and regional governments. Consequent upon this, the first fiscal commission known as the Phillipson Commission was set up. ekee en 1946 and today, Nigeria has made 19 attempts at producing or evolving an appropriate revenue sharing formula and yet no success has been recorded. Before independence, the key principle for sharing the national 232 Revcnrrc nllocnfiorl nid rcsozrrcc control in Ntgrrin revenue was the derivation principle. At the early part in the history of revenue comn~issions,the derivation principle was given a weight up to 50 percent. The wave changed after independence, precisely in 1964, following Binns Con-rmission,which rejected the distribution of revenue based on derivation. From this point, the lower units of government began to witness hardship and slow economic development. Subsequently, different regimes, especially the military administration, reduced and at times forgot completely the derivation principle. Tlie administration of the military in these periods was hyper centralized. For instance, in 1975, the derivation principle applied to only 20 percent of onshore mining rents and royalties. The decline of the derivation criterion is undoubtedly owed to the centralizing naturc of military rule, and to the fact that the "oil wells werc located in a few southern (minority) states with little political clout" (Adebayo, 1990:255 and Naanen, 1995). At the same time, throughout the late sixties and seventies, the derivation principle was stigmatized and demonized by many prominent public finance experts as the "devil" of revenue sharing in the country (Adedeji, 1969:254). With the near total removal of the derivation principle from the revenue sharing formula, one may bc tempted to ask the following questions: How can these states source funds for their onerous tasks and functions? How can tlwsc states provide the needed social infrastructures in the polluted and degraded environment? What are the consequences of the near total neglect of oil producing states? In a federal system, every unit in the structure has rights in some areas of taxing and spending policies. These powers of the federating units stem from the constitution and as such are inalienable. One of such rights is a measure of raising revenue from the resources available to the unit. The Nigerian system of government is-copied from other federating states like Canada, Switzerland, France, U. S. A,, etc, and none of these countries has the same system of revenue sharing as Nigeria. Oil - producing states in Nigeria have polluted air, water, land, (degraded environment) and should not be allowed to continue F. E. Onnh nnd E. R. Uk7ouczc 233 suffering from these harsh and hazardous negative externalities of oil exploitation. The near total neglect of these states from whcre the bulk of Nigeria's revenue is derived could tempt them to conclude that "it is because they are from the minority tribes or that they have no political clout", that such treatment is given to them. Such attitude buttresses the wrong impression expressed by certain pessimists who liken the "oil - producing regions of the Niger Delta as a sort of internal colony of Nigeria" (Hartzok, 2004:5). The states, local governments and communities in the oil producing areas of Nigeria feel that the percentage of the nationally derived revenue allocated to them is grossly inadequate, (1.5% between 1981 and 1992; 3% between 1992 and 1999 and, now 13%).It is argued that the area suffers grave damages as a consequence of the activities of oil companies' exploitation. Serious damages have been done to the aquatic and marine lifc of the comm~~nitiesas well as damage to the lifc of the pcoplc. It is quite reasonable to expect that the areas producing the nation's crude oil would be very highly developed as compensation for what is taken away from their land as well as for thc devastation of their land engendered by the exploration process. There should have been development of physical and social infrastructures, human capital creation, and economic empowerment of the general citizenry in these areas. A clear picture of ncglect can bc drawn from the fact that a home of more than 15 million impoverished people, the Niger Delta region produces 90 percent of Nigeria's wealth, and yet most of its people are struggling to s~irviveor eke out a living under the strain of polluted air, water and land, gas flaring, acid rain and other environmental hazards. Away from the state capital cities/towns, there is no development at all, no roads, no electricity, no clean running water, no teleplmnes and no access to other necessities of life. In the face of all these conditions, the inhabitants of this region have continued the agitation for resource control and a true federal structure in Nigeria. According to Adesopo and 234 Reuen~uallocaliori and resource control in Nigeria

Asaju (2004: 283), "since that 1966, the kind of federalism we have been practicing in Nigeria has been unitary in nature; with the federal government holding other units as mere vassals with virtually no power for self-determination". The solution to this problem is the decentralization of natural resources. Resource control is not about secession as feared in the northern part of Nigeria; resource control includes men and material and natural resources including land and water. Participatory democracy without resource control is a farce (Aboro, 2005). Resource control means the right of a community to a measure of control of its natural resources; it is a guarantee for sustainable development by providing the needs of the present generation without jeopardizing future generations. By this, each littoral state would have some control of its resources in line with the tenets of true federalism. This is what is obtainable in all federal states all over the world. Communities should, in a true federalism, be entitled not only to their constitutional and legitimate shares of the federally generated revenues but entitled also to a considerable measure of control and ownership over their revenue sources (Ugwu, 2002: 12). It is only when this is done that we can have fair play in revenue :el~aringin Nigeria. The genesis of the clamour or agitation for resource control was the child of the gradual removal of the principle of derivation from the revenue allocation formula. In 1953, Chick's Revenue Allocation Commission recommended that Federal Government should retain revenue from company income tax and sales on the export; 50%)of import duties (except on tobacco and motor spirit) was to be shared among the regions and Southern Cameroon. Regions were to collect and retain revenues from personal income tax. 50% of tobacco import duties export and excise duties, and 100% duty on petrol were to be shared among the regions in accordance with regional consumption. This is an indication of greater share of revenue based on derivation. In 1958, Raiseman Commission slashed the percentage due to derivation to 50 percent. Commenting specifically on allocation of mineral royalties and rents, the F. E. Onah and E. R. Ukzmeze 235 commission, observed in the report that the allocation of the proceeds of mining presented the commission with a most perplex problem. At this period, the revenue from tin and columbite rose rapidly. If these were the only minerals concerned, the commission remarked, there might be no difficulty in recommending the continuation of existing system, namely, that all mineral royalties should be returned in full to the regions in which they originate. The problem at this time was oil. This is because the test production of oil on commercial quantities had already commenced in the Eastern Region, and exploration was going on both in the North and West as well as Lagos - the capital city. This was then the turning point. The committee also remarked that although the yield from oil royalties was at that time comparatively small, it could not be ignored that the yield might rise very remarkably within the next few years. They therefore, stated that there was a double obs tack to their recommending the simple continua tion of the existing method of allocating mineral royalties: First, it would involve in the revenue assessments for the next few years, crediting the Eastern Region with a source of income, which was, at once, too uncertain to build upon, and too sizeable to ignore. Second it would rob their recommendations of any confident claim to stability for the future since an oil development might take place on a scale, which would quite upset the balance of na tional development (Ugwu, 2002:4).One can see from these two statements that the Raiseman Commission surreptiously laid the foundation for the denial of communities of the control of benefits of minerals located in their areas. There was a gradual reduction in allocation through derivation principle, especially with the Decree No. 13 of 1970 and Decree No. 9 of 1971 until it was completely removed following the recommendation of Aboyade Technical Committee on revenue allocation in 1977. This was the turning point in the history of neglect and marginalisation of the Niger Delta. 23(, Revrlnue rlllocation and resolme control in Nigeria

A Lesson from other federal systems A brief survey of some countries will reveal that what Nigeria is operating is somewhat peculiar to its federalism. For example, in the U.S.A, the communities in the state of Wyoming in 2001 reaped the full benefits of the proceeds of its oil boom. Before 2001, the state witnessed a depression in the economy, but in 2001 there was a surplus of $700 million, yet the US Federal Government did not and could not interfere with the state's earning or direct how the income could be spent (Ugwu, 2002: 12). In Alaska, another state in the US, there is oil deposit that is exploited. The citizens of this state are distributed with cheques every year out of interest payments to an oil royalties deposit account called Alaska Permanent Fund (APF). The APF is a public trust fund - a diversified stock, bond and real estate portfolio - into which are deposited the oil royalties received from the corporations which extract the oil from the lands of Alaska (Hartzok, 2004: 1).According to the author, the first citizen dividend cheque from the interest of the APF was issued in 1982 and was for $1000 per every person in Alaska who had resided in the state for at least one vear. Alaska relies on oil for about 80 percent of its revenue and has no sales or income tax. The state was mandated to invest 25% of its oil revenue into the APF while the other 75% of oil royalty revenue is dispersed to other government funds to finance education, infrastructure and social services. In Indonesia, for example, fiscal equalisation is a major objective and some natural resource revenue is returned to the areas where the mining or extraction occurred, with this differing with the type of mining and by area. The distribution mechanism for mining and oil-based revenue that was written into the decentralisation legislation in 1999 included a large number of elements differentiating between provinces where rcvenue originated and provinces where it did not originate, municipalities where the revenue originated and municipalities where it did not. In each of these groups, the distribution to the originating areas was based on the value of production or contribution to a goods and services tax (GST) from the area, F. E. Onah and E. R. Ukmieze 237 and the distribution to non-originating areas was based on population. Australian federation has six states with two territories. The states include New South Wales, Victoria, Queensland, Western Australia, South Australia, Tasmania, Australian Capital Territory (ACT), and Northern Territory (NT). The Commonwealth of Australia came into existence when six self- governing colonies federated together in 1901. After federa tion, a clause known as "Braddon Clause" was entrenched in the constitution, which guaranteed the return of three quarters (3/4) of federal customs and excise revenue to the states (McLean 20025) . The Australian government introduced a goods and services tax (GST), which is functionally equivalent VAT in 1999. The Commonwealth nation of Australia agreed that the whole proceeds of GST, net of cost of collection, would be remitted to the states. Another example is Spain which is not even a federal state. Tn this country, a considerable measure of autonomy over resource control was granted to the Basque region, which has been fighting for secession or separate identity. Thus even a region seeking secession has been granted some measures of resource control. In a similar way, the province of Quebec in the of Canada was granted substantial autonomy in management of its resources and internal affairs when it was fighting for secession from Canada. In Switzerland, another federal state, the federating units known as 'the Cantons" are so au tonomous not only in self government but also in the control of their natural resources that Switzerland can easily be called a federation of quasi-independent states. The political arrangement is such that the office of the president of the Republic rotates among the cantons so as to ensure equality, equity and freedom of association among the federating units (Ugwu, 2002: 13). The above biief survey clearly shows that the clamour or agitation for resource control is not out of place. It shows that it is perhaps the best and most progressive way of developing a nation. Had Nigeria observed this way of doing things, there Revenue allocation and rcsource control irl Nigeria would have been competition among the federating units, since if one state with natural resources is developing faster than others, every other state would then look inwards in order to decipher available resources to exploit and develop itself. By so doing, emphasis would no longer be paid only to oil revenue; some other natural rcsourccs would be exploited. Even agriculture would be improved by using modern technology dnd innovative methods. A case that comes to mind is Botswana which, at independcncc, its head of state banned the mining of diamond, the main source of foreign exchange earning, and concentrated on farming. Botswana built her wealth on farming and today it has thc strongest economy and wealthiest nation in Africa, not in terms of quantity of money but in human development indices and standard of living indices: energy, potable water, food, housing, healthcare delivery, education, etc,. Today Botswana stands taller than the so-called giant of Africa, Nigeria, in all respects (Aboro 2005: 2). Thus, granting control of resources to the constituent units would mean encouraging each unit to exploit and develop resources in its arm. It would mean diversifying the economy, a situation which would find solution to Nigeria's economic problem. A reasonable measure of resource control offers the best hope of weaning the Nigerian state from dependence on oil rcvenuc and of starting a genuine process of rehabilitation for the people of Niger Delta, (Edevbie, 2001; 11). The stability of the largest concentration of the Black Race is threatened because the central government is more powerful politically and economically than it should be in a federal state. In ordcr to control this power and wealth, each ethnic group would always want to produce the president. This situation is understandable because the direction of the flow of wealth is determined by way of political power. This breeds rivalry in the political system, which usually heats up the polity. The tension generated by this heat causes a lot of loss of lives and property. The grievances of negative ext&rnalities of oil exploitation usually result in youth restiveness, conflicts and wanton destruction of lives and property. According to (Herbst 2001:5), "in the case of Nigeria, there has been considerable conflict because different groups in the south east of the country believe that they have had to suffer from the negative externalities of oil production (notably localized pollution) but have not received enough of the benefits". In the final analysis, we recommend that the following be done: There should be a revisit to the pre-independence revenue allocation formula based on derivation principle. The concept of derivation should be a separate and substantive principle with a better and wider definition in Nigeria so that the states, local government and communities have greater benefits from thc returns on the natural resources located in theirarcas while the central government retains a smaller share. This will quell the agitation for resource control and conflicts in various states. This agitation for resource control arose from the failure of the central government in providing and developing social amenities. The central government should discharge its functions and responsibilities effectively. There is an urgent need to re-examine the fiscal relations existing among thetiers of government in Nigeria. We have scen that there is a high concentration or centralization of powers at the center in the share of the Federation Account. A change in the right direction would ensure the following: + Outright abolition of the policy of deducting "first charges" as introduced by the military government. This is contrary to the provision of a federal system of government and is an abuse of power by the central governtnen t. + Proper documentation and recording of the Federation Account is necessary to avoid leakages in the system for proper acco~antability. + Some' criteria used in revenue sharing (horizontal allocation) like population and land mass should be viewed with cautibn. For example, the population can be manipulated during the census. Population 240 Rcuenuc nllocntion nnd resource control in Nigeria

should be viewed in two broad perspectives namely, the numerical strength and the poverty index; the latter should carry greater weight not only as the more appropriate measure but also to serve as an additional check to population explosion and politicization of the census figures. In the same vein, land mass does not make any economic sense because a wide expanse of land without people is more or less useless. Greater emphasis should be placed on the fiscal effort of the component units than hitherto as an extension of derivation and campaign for self reliance in all spheres of national life. The internal revenue effort of the states which has a current weight of 10% in the allocation principle is on the low side if the government wishes to encourage the lower levels of government to improve on their revenue drive. + There is the need for corporations and multi-national companies to compensate inhabi tants for the environmental hazards of their operations. They should be encouraged to contribute to the social and economic development of the oil - producing states/communities. This would pacify the militant groups who mount pressures on their governors for resource control.

Conclusion We have shown that the case of resource control in Nigeria is a serious one. The Federal government has arrogated so much fiscal power to itself that the federating units have little or no fiscal powers over their resource endowment. In this respect, the practice of Nigerian federalism does not seem to correspond with those of other countries. It has also been shown that varieties of natural resources are found across the length and breadth of Nigeria. It is therefore envisaged that a measure of resource control would at one time or another benefit every state of the Nigerian federation. It would promote greater unity F. E. Onah and E. R. Ukwueze 241 and prosperity in tlic country. Suggestions have been made in order to ensure changes towards decentralization of resource control. Finally, since the Sovereign National Conference has failed in this respect, it now behooves the National Assembly to entrench in the constitution the resource control act that would ensure a fair allocation, compensation, and environmental promotion to mineral - producing states.

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Roscn, H. S. (1995), P~iblicFinance, 4"' edition (Chicago: Richard Irwin). Sch warz, F. J r., Nigeria, Tlw Tribes, The Nation or The Race, Cambridge, Mass: MIT Press, 1965. Shah, A. (1998), "Fostering Fiscally Responsive and Accountable Governance: Lessons from Decentralization" in Picciotto, R. and Weisner, E (eds), Evall~ationand Developrncnt: TIw Institutional Dimension, Transaction Publishers, New Brunswick and London, 83-96. Shah, A. (1999), Fiscal Federalism and Macroccononiic Governance: For Bettc~'or For Worse?, Operations Evaluation Department, The World Bank, Washington, D.C. Shah, Anwar(1994), 'The Reform of lntergovernrnental Fiscal Relations in Developing and Emerging market Economies', Policy nnd Researcll Series No. 23, The World Bank. Shah, ~nhar(1991), Thc New Fiscal Federalisi~ill Brazil, Disc~!ssions Papers NO. 124, The World Bank. Smith, B.C. "Spatial Ambiguities: Decentralization Within thestate". Pllblic Adnzinistration and Development. 6 (4), 1986 P. 456. Tanzi, V. (1995), 'Fiscal Federalism and Decentralization: A Review of some Efficiency and Macroeconomic Aspects', Annual World H61nk Conference on Development Economics, The World Bank, yp. 295-316. Tdl Magazine, April 9,2001 p. 27. Tell Magazine, January, 22,2001 p. 36 Ti41 Magazine, 15/8/94, p. 3. Tdl Magcizinc, 2/1/95, p. 14-15. Tell Magazine, 2/1/95, p. 14-15. Ter-Minassian, T. (1997)) "Decentralizing Government", Finance & Development, Vol. 34, No.3, September, 36- 39. Teriba,O. (1966), "Nigerian Revenue Allocation Experience, 1952-65: A St~tdyin Inter-Governmental Fiscal and Financial Relations", The Nigcrinn ]ournal of Economic and Social Stdies; Vol. 8, No. 3 yy. 36'1-83. The Io~irrznlof African Affnirs, Vol. 70, No. 281, October, 1971, p.334 Thompson, D.L. and Ronen, D. (eds) Ethnicity, Politics and Developnzent. Bounder Co: Lynne Rienner Publishers, 1986. Thompson, J.B. Ideology and Modern Culture Cambridge, U.K.: Polity Press, 1990. Ubogu, R. (1982) 'Fiscal Decentralization and Economic Development Among Nigerian States', Nig~rian jormnl oj Economic and Socinl Studics, 24,l (March) pp. 1-21. Ugwu, C. N. (2002). "Decentralising Ownership of Resources and Assets: An Imperative for Peace and True Feder a 1'ism in Nigeria" (A Paper Presented as the Executive Director Socicty for the Improvement of Rural People (NSIRP)), University of Nigeria, Nsu kka; at National Workshop on - "Nigeria: Sustainable Development" organized by the Institute of Pr~blicPolicy Andysis. Lagos, Nigeria, September, 18 pp 1- 13. Vfllzgrmrd Ne-tospap~rs,Nigeria. October, 17 Wheare, K. C. Fedcral Governnliwt New York: Oxford University Press, 1966 Wildasin, D. (1995), Comment on" 'Fiscal Federalism and Decentralization, A review of some Efficiency and Macroeconomic Aspects' by Vito Tanzi, Anrnral WO& Bank Corifirence or1 Development Economics, The World Bank, pp. 323- 328. World Bank (1999), World Development Report 1999, Washington D.C. Zhang, T. and H-Fu Zou (1996), "Fiscal Decentralization, Public Spending, and Economic Growth in China', Policy Research Working Paper 1608 (May), The World Bank. Zolbcrg,A. Crmting Politicnl Order Chicago: Rand McNally, 1966 A Bucharian's criterion 50 Abacha regime 168 Bureaucracy: meaning of 17 Aboyade (Professor) 81 Bussa 65 Aboyadc Technical Committec 235 C Abuja, Federal Capital Territory Canada vi 1'1, 24 Capital formation 175,176 Adams (Sir) Theodore 5 Cartons 237 Africa 8 Central Bank 47 Agbajc, Adig~in13 central government 141 Aigbokhan, Ben.E 95 Central government transfers159 Alaska Permanent Fund (APF) centralization of power 161,162 236 centralized federalism 97 Alkali courts 20 Chamberlain, Joseph 4 allocating mineral royalties: Chick (Sir) Louis 71/74/75 obstacle to siinplc Chick Commission 71,234 continuation 235 Chima, R.1175 allocation of authority v China 97 American theoretical model 10 Civil war 79,173 Anti Corrupt Practices Acts 146 civilian federalism ix Anyanwu, John C. 149 Class conflict 2 Australia vi classical federalism 133 Australian federation 237 Clifford, Hugh 5,224 Awolowo {Chief) Obafemi 7 Colonial masters 223 Colonialism: racist ideology of 6 B computation 68 Belgium vi concurrent list 134,199 Bello, Ahmadu 8 confederation v,31,36,37,97 Benue State 186, 187, 188 conference of residents 65 Binns Commission 77,232 Constitutional conference 225 Binns Report 137 corruption 142,146,158,168 borrowing: fow limitations of Court rule system 4 45-46 creating federalism: basic modes Botswana 238 of 31 Bourdillon (Sir) Bernard 65, 224 Cross River State 187,188,193 Braddon Clause 237 cultural pluralism 15: politics of Brazil x, 32, 34, 38/49! 60 11 British paternalism 7 . cultural separatism 6

253 custom and excise, department expendi ture decentralization of 68 154,155,156 Expenditure figures 122 D expenditure responsibilities : thc Danjuma Commission 206 decen traliza tion of 100 decentralization theorem 97 decentralized system: measures of 'I 05-1 06 Federal Character Commission declared revenue 67 3/15, 16, 17 democra tic idea '1 1 federal character principle 3/15, derivation: bases of 69; principle l6, 18 of 65,67,69,76,202,203,205 Federal council of minster 69 207, 232, 234,235 federal democratic temperament di t-ect assessment 182,183 23 direct tax 92, 178,179 federal govcrnmcnt 10,104- Distrib~itable pool Account 106,108,122,127,132-1 35,137, 77,78,79,137 142,144,146,157, 158, 161, distribution mechanism 236 167, 170, 177, 200, 21 3, 214, distributional polices: three 21 8,223,231,232,234,240 partially economic issues federal principle: specification of 49- 50 9 divide and rule 6: racist ideology federal system vi of 21 federalism 30,31,32,100,173,197, 228, 234, 236: reason for vi; E defined v; process of 11, vi, Economic development 119 concept of v, 9; the specific camomic resources 225 aims of 31; essential quality effect of decentralization 124-125 of 31; expend 3; adoption of Egerton, (Sir) Walter 223 8; principles of 32-34; Enahoro, (Chief) Anthony 13 problem of 30 E~U~LIState 183, 185, 186, Federalism and a federation: A 188,194 distinction 29 Eq~~alizations 5 1,52,53,54,56 Federalism in Nigeria viii, 1 equity 173 Federa tion Account 135,141,142, ethnic conflicts 230 145, 157, 167, 192, 193,251, ethnic group 224 205,206,219,239 ethnic nationalS 225 finance recklessness 142,145 even development, princi yle of fiscal assignment: Economic 65 rationale for 96 exclusive list 134, 199 fiscal coinmission 64 expcndi ture assignment 102,103 fiscal decentralization x, Holoprosaricephal204 121,122,125,126,154: three Holy Roman Empire: rulers of measures of 122-123 124 the 36 fiscal fedcralism ix-xi, 15/29! 30, Horizontal imbalance 38, 42,96, 97, 108, 116, 121, 144,162,l 64,231 125, 127, 131, 132,134, 136- House of Assembly 224 139,151-153 163, 171,173, House Rule System 4 203, 204: features of 38; in Hypertalorism 204 Nigeria: An overview of 134-136; indicators 153; I Background to 30; some of Ifesinachi, Ken 1 the problem of 30 imperialism 1 fiscal imbalance 108, 115, 133, income tax 92 138, 162,197 income tax ordinance 70 fiscal jurisdiction xi Independent revenue67: fiscal policy 133,166 principle of 69 fiscal potential: Equalization of India vi, x, 32,39,60: The Union 52 of 35 fiscal relation 15 1 159 Indian Empire 35 fiscal structure evolution of 63 lndirect taxes 178,179 fiscal surplus 109 Indonesia 236 fiscal transactions 49 Inter-ethnic conflicts 19 forms of taxes 184 intergovernmental transfers 102, four countries: Origins of 106, 108, 127, 159: Principle federalism in 32-38 102 Frederick, Carl 16, in ternally generated revenue (IGR) 190, 191,192 G IsJamic purity of the North 6 goods and service tax (GST) 236, issue of revenue aIJocation 139- 237 140 government revenue earning 95 Ivory Coast 6 Government saving 175 government unitary form of 96 K Grants-in-aid 41/42/43 Kaiama 65 I

Landmass principles 206, need, principle of 155~69~76 207,239, 240 Niger Delta 233 Lieutenant Governors 224 Nigeria viii, 1, 96, 116, 120, 124, Lijpharts, Arend 14 125, 126, 127 , 136, Local Covernmen t Reform 140,142,146, 209,211 137,149,158,159,161, 162, local government 105,122,132- 164, 167, 168, 169, 174, 177, 134,136- 138 ,141- 145, 155 178, 197, 198, 199, 201, 209, ,I 56, 158-160, 163, 164, 167, 210, 214, 215, 219, 223, 224, 168, 171, 177, 197, 200, 209- 225, 229, 230, 231, 232, 233, 220,223,229,233,239 243, 236, 237,238, 239, 240: Local governments: The demand for restructuring functions of 211 -21 2 11; development of loofoc~ncyI4 federalism 3; Expenditure ~ootocrnk23 dcccntralization in 154; 1,ugard (Sir) Frederick 224 Revenue decentralization in iyttleton constitution 225 155 Nigeria federal finance 69 M Nigeria federalism 2,3,9, 11 -13, MacPherson (Sir) John 224 136, 139, 149, 223, 224, 225, MacPherson constitution 68 240: structure of 9; major source of revenue 135 structures and challenges of matching grants 102,107 8; Backgrotind of 223 Maybin (Sir) John 65 Nigeria Political history: military adnlinistration 80,89 problem of 8 military federalism ix, Nigeria: 1995 constitutional Milner (Lord) 5 conference 204 Misleading distinction 16 Nigeria: 1999 constitiition motor spirit 69 143,199,204,209 multi-ethnic state 173 Nigerian constitutional mi~ltilevclgovernment: federal conference 71 form of 97 Nigerian federal finance 64 Muslim/ Muslim ticket 21 Nigerian fiscal federalism 138,140,141,143,144,147,152 N Nigerian government 95 NafAbba, Uniar Ghali 11 Nigerian National Council of native authorities 64, 65: sourcc States 20 of revenue 64 Nigerian politics: Saliency of Native courts ordinance 19 ethnicity and religion 21 natural resources 225, 228, 229, Nigcrian unity: Ixichard's 230,234, 235, 237,238 perception 5 Quebec 237 non declared revenues 67 non-ma tching grants lO2,1O7 108 R non-oil revenue 230 Raisman Commission 75, 234, Northern protectora te 223,224 235 recurrent expenditure 216,218 0 Regional police force, cost of 70 Obinna, O.E. 29 regressional analysis 168 Ogujinba, K.K. 175 religious conflict 19 oil companies exploitation 233 ren t- driven paradigm 1 1 oil rcvenuc 230, 238 residual list 134,199 Okigbo Commission 84,198,205 resource control 15, 234, 237, Okigbo I'NC 63,209 239, 240,241 Oiiah, F.E v, 63,209,223 revenue allocation : summary of Onah, Roseline C. 'I31 197 the system of 76-77; report ordcr in council 70 of the coinmission 68 revenue allocation P 201,202,206,207,210,229,230 Pakistan 5 ,231,232 Pa lmcr (Sir) liichmond 5 revcnue allocation arrangements Pareto optimali ty 55 : features of 198 Patrimonialism 8 revenue allocation in Nigeria: Pay-as-you earn (PAYE) Poli ticalization of 201-202 182,183,194 revenue allocation system 63 personal income tax revenue allocation to Region: l35,l 78,380,182,184,200,234 three principle of 67 Phil lipson (Sir) Sydney 66/68 Revenue decentralization 155 I'l~illipson comnlission 66 revenue receipt 76 I'hillipson Constitution 231 revenue: distribution of 91 plutocrats 23 reviewing governmental roles political economy 149 and responsibilities: four pop~dation140-140 l5O,l70,l8O, principles in 172 205 206 , 207,220, 237,239 Richard constitution 66: I'otential approach: The strength I'rovision of 66/67 of the 52 Richards (Sir) Arthur (also Lord I'owcr- sharing 12, 13, 14 Milverton) 66 ~'rebend,?lparadigm 11 Iiichards constitution 224 prc-federal system 64 right over taxation 65 Private sector saving 1?5 rolling-rover: the principle of propcrty tax 135, 178 44,45 public administration 15, I6 258 Fiscal Federdism ir.1 Niaerin

rotational presidency: concept of character of the 37 14 Swiss Union: The creation of the Iioyal Nigcr Company 2,3,4 36 Rural local governments 138, Switzerland vi, x, 40, 97,237 164,213 T S tax assignment 100,102,103,104 sales tax 90 tax jwisdiction ix, x, 63/75 secondary health carc 115 tax receipts 65 Segmental autonomy 14 tax system in Nigeria: Criticisms self independence, principle of of the 179-180 69 Taxes 178,179,180,182, 183, 184, sensitivity anaiysis 185 185, 186, 188, 189, 194, 200, separation of process: principle 219; The nature of the 105; of 10 The specific objectives are Shagari Administration 205 to 178-193 Sharia, introduction of 19 Tertiary health care 155 Sources of revenue 212,213 Theoretical model 120 Southern protectorate 223,224 Thompson, John B 14 sovereign process vi Thornson, (Sir) Graeme 65 sovereignty v three- tier federal system 150, Spain vi, 237 210,219 Speciai Grants Account 79/82 three-tiers of government, fiscal :tabilization 47/48 relationship 66,115 statc government 105, 108, 109, tiers of government 171,172,177 114, 116, 122, 132, 133, 134, ,199,209, 232,231 136,137,141, 142, 143, 144, tribalism 6 145, 156, 163, 167, 171, 177, 178, 197,199, 200, 213, 214, U 219,233 Ukwueze, E.R 223 States Joint Account 79/82 unitary state vi Structural Adjustment Untied States vi, x, 9/41)60,201, Programme 171 236: the federal system in structure of physical federalism the 37 ;the people of the 32; 131 Federal Government 236 . structure of taxes 180,184, 185 urbanization 143 sub-ethnic conflict 19 Sule, Maitama 12 v Supreme court 205 Value Added Tax (also VAT) Swiss federation: A unique 90,91,103,179,214 vertical fiscal imbalance x, 137,143,161,162 World War I 5 vertical imbalance 230 Zolberg, Aristide 6 Wheare, I