SPEECH OF ENGR HAMMAN TUKUR CHAIRMAN RMAFC  AT A PUBLIC LECTURE ORGANISED BY LAGOS STATE HOUSE OF ASSEMBLY ON  JULY 29, 2004 AT SHERATON HOTEL LAGOS

1.0           Preamble

1.1           I would like to begin this lecture by commending the Lagos State House of Assembly for instituting the Annual Public Finance Lecture Series, for which we are gathered here today. This programme, to my mind, singles out the Lagos State Legislature as a highly responsive one amongst its counterparts in our current political dispensation.  I also wish to sincerely thank the Lagos State House of Assembly for considering and inviting me to present a paper at this year’s edition of the Annual Public Finance Lecture Series.  May I add that when I received the letter inviting me to deliver this paper, the objectives of the exercise and its relevance to the national economy influenced my decision to quickly accept the invitation.

1.2           As stated in the letter of invitation, the Annual Lecture Series is aimed at “providing a forum for seasoned experts and technocrats from the public and private sectors to brainstorm annually on germane and contemporary issues in public finance with a view to enhancing the quality and quantum of public sector resource generation, allocation and utilization towards national economic growth”. I strongly believe that with the calibre of participants at this lecture, matters arising from, and the solutions proffered in the paper, which is being delivered, and the contributions of participants would be taken seriously.  Otherwise, the aim of these series of lectures would have been defeated.

1.3           I am also particularly thrilled by the subject matter chosen for this year not only because it is apt and germane to the current realities of today but because the subject matter is very close to the functions and mandate of the Revenue Mobilisation Allocation and Fiscal Commission, which by the grace of Allah, I am the Chairman.  At this point, may I use the opportunity of this lecture, to inform Nigerians who are gathered here today, more about the Revenue Commission and its Constitutional mandate. This is necessary because it does seem to us at the Commission that, not many of our compatriots seem to have sufficient information about the role of the Revenue Mobilisation Commission.  I would, therefore, seek your indulgence, to speak briefly about this very important Constitutional body, before delving into the other aspects of the lecture.

1.4           The Revenue Mobilisation Allocation and Fiscal Commission is one of the fourteen (14) Federal Executive Bodies listed in Section 153(1) of the 1999 Constitution of the Federal Republic of Nigeria to provide mechanisms for checks and balances in our democratic process.  Such bodies include INEC, National Judicial Commission, National Population Commission, the Code of Conduct Bureau, etc.  These bodies are all independent of any tier of government (Federal, State or Local Government) though they source their funds from the consolidated revenue of the Federal Government of Nigeria (FGN) as a tier of government.  Thus the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) with its frontline role in the fiscal management of the country, the Commission was inaugurated by Mr. President, Chief Olusegun Obasanjo on 20^th September, 1999.  The Commission’s membership consists of an Executive Chairman and 37 Members, one from each State of the Federation and the Federal Capital Territory.  I am proud, and indeed happy, to say that Members of the Commission are Nigerians of proven integrity in various professional callings and experiences. This special composition of the Commission prescribed by the Constitution gives it the flair and character of a mini-Nigeria accommodating all shades of opinions and diversities.

1.5           Unlike in the past, where Ad-hoc Committees and Commissions were set up to review fiscal arrangements in the country, the Commission is now a permanent institution.  As such, its approaches to assignments have become necessarily different from those of previous ad-hoc bodies.  For instance, the reports of the Commission are more frequent in the form of memoranda to relevant Government organs and agencies.  Also, it benefits from varied and wide views by organizing seminars and brainstorming sessions, welcomes memoranda particularly those objectively submitted by institutions, groups and individuals, and engages the services of consultants and the media, where and when necessary.

1.6           It would interest you to note that the Revenue Mobilisation Allocation and Fiscal Commission was first established, under the Babangida military administration, by Decree No. 49 of 1989.  This was later amended by Decree No. 98 of 1993.  At that time, it was called and addressed as the National Revenue Mobilisation Allocation and Fiscal Commission.  The laws establishing the Commission, in line with its responsibilities, made the Commission a statutory member of the following agencies:

i.                     Federation Accounts Allocation Committee (FAAC)

ii.                    Local Government Joint Accounts Allocation Committees of all States of the Federation and the Federal Capital Territory

iii.                  Joint Tax Board (JTB)

iv.                  Ecological Fund Committee, and

v.                    National Council on Statistics

The same law equally empowers the Commission to demand and obtain regular and relevant information, data, or returns from any Government agency, including the following:

i.                     The Nigerian National Petroleum Corporation

ii.                    The Nigerian Customs Service

iii.                  The Federal Board of Inland Revenue

iv.                  The Central Bank of Nigeria, and

v.                    The Federal Ministry of Finance.

1.7           Despite all the above decrees (now Acts) the Commission’s role was further incorporated into the present Constitution where in Section 32 of Part 1 in the Third Schedule to the 1999 Constitution of the Federal Republic of Nigeria empowers the Commission is specifically empowered to:

(a)            Monitor the accruals to, and disbursement of revenue from the Federation Account.

(b)                 Review from time to time, the revenue allocation formulae and principles in operation to ensure conformity with changing realities, provided that any revenue formula which has been accepted by an Act of the National Assembly shall remain in force for a period not less than five years from the date of commencement of the Act.

(c)                  Advice the Federal and State Governments on fiscal efficiency and methods by which their revenue can be increased.

(d)               Determine the remuneration appropriate for political office holders including the President, Vice President, Governors, Deputy Governors, Ministers, Commissioners, Special Advisers, Legislators and holders of the Offices mentioned in Sections 84 and Federation in conjunction with the Debt Management Office (DMO). The report of the exercise has since been submitted to the Presidency and to all the state governments.  Further details of this issue are discussed later in this paper.

d)         On Budget and Fiscal Efficiency, the Commission as part of its constitutional responsibilities of advising governments (all tiers) on budgets and fiscal efficiencies routinely undertakes analysis of Federal and State budgets with particular emphasis on Federal budgets because of their far-reaching implications on the overall national economy. Its views have always been channeled through pre-budget memoranda to the Federal Ministry of Finance and the National Assembly in respect of FGN and the corresponding bodies at the State levels.  Unfortunately, the Commission has not been receiving the expected level of cooperation from the State and Local Governments to enable it contribute meaningfully to their pre-budget preliminaries.  Lagos State Government, unfortunately is one of the culprits.  The Commission’s role in the 2004 budget for example was to examine national revenue profile such that the revenues of all tiers of governments can be substantially increased from proceeds of the Federation Account.  It is in this context that for the 2004 Budget, the Federal Ministry of Finance recommended crude oil price benchmark of $23 per barrel. This was almost accepted by the National Assembly until the Revenue Mobilisation Allocation and Fiscal Commission through its own analysis and forecast based on past trends and current global realities disclosed that prices of current oil may not deteriorate below $28 per barrel. The Commission recommended $26 per barrel but the National Assembly finally adopted $25 per barrel against the $23 proposal by the Federal Government. The current happenings in the international market have indeed vindicated the Commission. All State budgets on revenues were therefore based on the $23/barrel benchmark.  With the adoption of $25 by the National budget all State Governments and their Local Councils are expected to share the $2 excess funds which go a long way in financing some of their deficit.  However, the raging controversies about the fate of the large excess crude revenues amounting to billion of Naira, will have to be resolved, in the Commission’s opinion through dialogue amongst the beneficiaries of the Federation Account in the spirit of our current democratic dispensation.  One thing is sure though, no economic theory however put will support the release of such transiently go.  Mr. President has in our view rightly directed that the excess funds be, at least for now be kept in an escrow account until the beneficiaries of the account mutually reach some concensus.  The Revenue Mobilisation Allocation and Fiscal Commission intends to put its suggestion officially on this subject to the National Economic Council where all tiers are adequately represented and the Vice President of the Federal Republic of Nigeria as the umpire.

e)         Equally, the Commission organizes Seminars and Workshops to enlighten the three tiers of governments and different stakeholders on how to improve on our fiscal operations. In 2001 for instance, the Commission organized a national sensitization workshop on Efficient Strategies for Revenue Mobilisation at State and Local Government levels in the country. Just recently too, the Commission organized a national stakeholders workshop on Diversification of the Nigerian Economy for stakeholders to appreciate the economic dangers of our mono-product economy and the urgent need for diversification to guarantee our economic future.

f)         On Monitoring accruals into and Disbursements from the Federation Account, which is considered very central to the fiscal survival of the three tiers of government, the Commission ensures that:

i.   all revenues accruable to the Federation Account are promptly collected and paid into the Account;

ii.  proper accounting is made for all revenues designated for the Federation Account;

iii.leakages and inefficiencies in the revenue collecting system are minimized;

In pursuing the above objectives, the Commission undertakes field exercises to monitor the activities of revenue collecting agencies namely: the Nigerian National Petroleum Corporation, the Department of Petroleum Resources, the Nigerian Customs Service, and the Federal Inland Revenue Service.  It is necessary to add that in the course of its monitoring activities, the Commission has met many challenging issues, which have far-reaching impact on the Federation Account in terms of the distributable amount that goes to all tiers of government including the States and Local Governments. The issues which the Commission has had to contend with include:

i)          Concessionary domestic federation crude oil allocation  and sales price of crude oil to NNPC

ii)         Concessionary fixed foreign exchange rate to NNPC

iii)        Exceptionally high joint venture cash calls invariably with higher  exchange rates

iv)      Opening of different accounts by the NNPC, especially    the Operating Cost Account

v)       Open-ended but undisclosed subsidy on petroleum products

vi)        Delayed remittance of monies collected by designated banks on behalf of the Nigerian Customs and Federal Inland Revenue Services resulting in substantial amounts hanging in transfer.

vii)  Shortfalls arising from duty exemptions/waivers.

Equally challenging, is the determination of the indices for the sharing of the funds that have accrued into the Federation Account to ensure that disbursements are made in accordance with the indices so provided.

1.10         Two crucial issues that have generated controversy in recent times in Nigeria’s fiscal finances are the creation of new local governments and the management of State Joint Local Government Accounts. On the creation of new local governments by State Governments, the implications are far-reaching. At present local governments are finding it difficult to operate as a third tier of government because of limited funding. This will be further exacerbated by the creation of new local governments. The sheer high overhead cost of running 774 local governments has almost crippled the capacity of local governments to deliver social services to the people. This situation will be worsened when the number of local governments is increased as already being done by most State Governments. While the Commission supports the idea of bringing the government closer to the people, we are concerned about the economic, political and legal implications of this. By increasing the number of local governments in the State, one or two things are bound to happen – the overhead cost of administration of local governments will increase and this will further render the local governments ineffective in terms of social services delivery. This brings me to the question of whether funds should be released to the newly created local governments. From the point of view of the Commission, this is both technically and legally difficult. For the purposes of allocation, the Commission relies on the local governments listed in the Constitution. To this end, efforts have been made to collect indices on these local governments and allocations are made based on these indices. Now, let us take the case of Alimosho local government of Lagos State as a typical example. Before the creation of new local governments in Lagos State, Alimosho existed as one of the 774 local governments listed in the Constitution. By the new creation, Alimosho local government has completely disappeared. The question now is; where will the allocation meant for Alimosho local government be channeled to, since the new ones are not listed in the constitution and can not fit into the horizontal allocation formula.

1.11 On the State Local Government Account, there are allegations that States are tampering with the statutory allocations to Local Governments from the Federation Account thereby leaving them with little or nothing to settle recurrent, how much less the capital expenditure.  Sincerely speaking, the Revenue Mobilisation Allocation and Fiscal Commission was at the fore front of those that urged States to enact laws that should facilitate the opening of their respective State Joint Local Government Accounts and the establishment of State Allocation Committees for such Accounts.  This was done with the understanding that it would provide opportunities for States to make their own contributions to the finances of Local Governments in their domain as required by Section 162(7) of the 1999 Constitution.  The Commission is aware that only few States have been paying some portion of their revenues to local councils as determined by their respective Houses of Assembly.  However, the Commission has had to face the problem of misinterpretation by some State Governments of the provisions of Section 162(3),(5), (6), (7) and (8) of the 1999 Constitution.

1.12         The provisions of Section 162(5) appear to contradict the provisions of Section 162(3) of the Constitution which has stated specifically that funds from the Federation Account are allocated to the States for the benefit of their Local Government Councils instead of stating that the allocations are to be paid directly to specific Local Government Councils.  This contradiction has enabled the State Governments to under-pay the Local Governments of their respective allocations from the Federation Account.

1.13         Similarly, the provision of Section 162(7) of the Constitution appears equivocal because it is not clear from which total revenue the proportion mentioned therein is to be taken. Is the proportion to be taken from the total of a State’s Allocation from the Federation Account and State Internally Generated Revenue put together or from the State Internally Generated Revenue only?

1.14         The Commission also notes that Section 162(8) of the Constitution appears ambiguous because it would amount to a redistribution of the Federation Account by the House of Assembly of what had already been legally distributed by the National Assembly.

1.15         The Commission is of the view that these seeming ambiguities and contradictions have served as the basis and excuse for the wide allegations of utter disregard by some of the State Governments in diverting funds meant for the Local Government Councils.  Whatever efforts the Commission has made or is making to ensure transparency in the administration of Local Government funds would be unsuccessful unless the provisions of Section 162(3), (5), (6), (7) and (8) are clear to and complied with by all and sundry. 

1.16         Whereas I have attempted so far to examine some of the contemporary issues associated with the subject matter of this paper, permit me at this stage to examine briefly the conceptual and other related issues pertaining to the theme of this year’s lecture series by:

i)                     Examining the issues involved in resources allocation by looking at the ingredients of and arguments for fiscal federalism.

ii)                   Reviewing the historical background of the development of fiscal federalism and the evolution of different revenue allocation arrangements in Nigeria.

iii)                  Explaining the high level of fiscal dependence of Federal, States and Local Governments on statutory allocations in Nigeria.

iv)                  Commenting on the issue of high national and sub-national debt overhang and their implications for economic transformation.

v)                   Discussing the issue of diversification of the Nigerian economy and its implications for revenue mobilisation in Nigeria.

vi)                  Explaining the symbiotic relationship between revenue mobilisation and service delivery, and

vii)                Identifying the impediments to resource mobilization in Nigeria and examine some of the strategies for enhanced revenue mobilisation among the three tiers of government.

2.0           The Concept and Basic Arguments for Fiscal Federalism

2.1           Fiscal federalism is a concept and practice usually associated with federal systems of government. This is because the federal structure provides the grounds for intergovernmental relationships between a central government and other sub-national governments or federating units such as regions, provinces, States, Local Governments etc. Fiscal federalism is, therefore, commonly understood to imply a miscellany of financial arrangements and relations among tiers and units of government which allow significant fiscal functions (both revenue generation and incurring expenditure) to be undertaken or exercised at sub-national or lower levels of government. Under this situation, elaborate fiscal arrangements between the central (federal) and other levels of governments (States and Local) are made in such a way that tax powers of each tier of government are clearly and legally defined. In addition, provisions are also made for how funds are to be transferred from one level of government to another. Thus, it is these intergovernmental fiscal relations that enable the federation to achieve its national objectives and at the same time, preserve equity and efficiency of the national economy. Each tier of government is highly conscious of its fiscal powers and responsibilities, yet they work together to achieve common national objectives interests and goals.

2.2                 From the above explanations, it becomes very clear that fiscal

Federalism (decentralized fiscal arrangements) can only exist where there are decentralized political and administrative arrangements involving the transfer of the authority to plan, make decisions and manage public functions from the central government to other units of government. Nigeria is an example of a federal system where fiscal federalism is practiced in that, sub-national governments i.e. States and Local Governments have the legal or constitutional powers to assign taxes and carry out spending activities within clearly established due process. Apart from Nigeria, other countries with stable fiscal relations include Canada, Brazil, the United States of America, Australia, Switzerland, Germany, and India.

2.3                 Many arguments have been advanced and continue to serve as

Basis or guide for the practice of fiscal federalism in many countries. In Nigeria for example, some of the dominant arguments in favour of fiscal Federalism include: the principle of diversity, need for fiscal equalization, principle of derivation, the efficiency principle. The diversity argument contends that varieties and diversities in culture, geographical and historical background, and local needs of the people etc. require the adoption of a federal system of government since it has the ability to accommodate a large variety of these diversities. It is believed that one government alone at the centre cannot provide or address all the problems and peculiarities of all the parts of a nation. It follows, therefore, that different levels of government will be required to exist, side-by-side. Under this condition, an inter-governmental fiscal relation is imperative.

 2.4          Another fundamental argument often used in furtherance of fiscal decentralization is the principle of fiscal equalization. This argument postulates that there are regional differences in resource endowments and concomitant differences in fiscal capacity.   Since all the Federation Units are not equally endowed with resources, there is need for balancing through.   There is also a need for fiscal equalization among states and local governments to ensure a minimum level of public goods and services available to the citizenry, irrespective of his/her location. Inter-governmental fiscal transfers and assigned independent tax jurisdiction will provide for each level of government, the fiscal capacity to provide a minimum level of essential goods and services. Additional to the fiscal equalization principle, is the derivation argument, which requires that the component units of the federation should be able to control their own resources and apply them to their varying and distinctive preferences. On the basis of this argument, regions, states, provinces etc., where particular resources are available are given special fiscal consideration in the sharing of the yields of such resources. A typical example of this is the 13% derivation on natural resources being applied in Nigeria.

            3.0           Historical Background of Nigeria’s Fiscal Federalism

3.1           The historical evolution of Nigeria into federalism can be traced to the amalgamation of the Northern Protectorate and Southern Protectorate, under Lord Frederick Laggard as Governor-General in 1914. Hitherto, these Protectorates were administered separately. The amalgamation process necessitated some fiscal arrangements, which should allow some fiscal autonomy for the protectorates under the Lieutenant Governors, while the Governor-General, at the centre, had the responsibility for security. Thus, each of the Lieutenant Governors prepared separate budgets for the protectorates, which were scrutinized by the Governor-General and published as a single budget document along with that of the central Government. After the amalgamation exercise, there was a series of political developments and constitutional reforms, which marked the beginning of the process of formalization of inter-governmental relations and the advent of experimental fiscal federalism in Nigeria.

3.2           The first major landmark of the constitutional reform process was the Richards Constitution of 1946. Under this Constitution, the Regions were granted internal autonomy and responsibilities were shared between them and the Central Government. Then, came the 1954 Macpherson constitution, which consolidated some of the gains of the Richard’s constitution and set the stage for further decentralization, and by extension, the formal birth and practice of fiscal federalism in Nigeria. The regions became the independent components of the federal structure. With the introduction of full-fledge federalism in Nigeria, all subsequent Constitutions and Decrees (as was the case with military regimes) made provisions for the sharing of revenues between the Federal and Regional/State Governments as well as the fiscal jurisdiction of each tier of government.

3.3           Since then, the structure of the Nigerian federation has been changing from 4 regions in 1946 to 36 States and 774 Local Governments in 1998 as depicted in Table 1. However, it must be noted that military intervention in Nigeria altered the chemistry of fiscal federalism in Nigeria.  As we all know, military regimes have a unified command structure. The consequence of this has been that all tiers of government are not productivity conscious.  Rather, they strategically compete for sharing of revenues from the distributable pool called the Federation Account with conflicting interests.

Table 1:Tiers of Government in Nigeria (1946-1998)

Source: Extracted from CBN Publication: The Changing Structure of the Nigerian Economy and the implication for Development, August 2000

Note: (i) * 4 regions were in existence before the creation of 12

                     States in 1967

                (ii) ** 4 regions existed until the Southern Cameroon pulled out

                     in 1961

                (iii) *** Mid-West Region was created in 1963

3.4           As changes in the structure of Nigeria federation continued,  so also were corresponding tinkering with principles, parameters and strategies of sharing revenue among the emerging federating units. The various Commissions/Committees that have handled revenue sharing arrangements in Nigeria include:

                i)              Philipson Commission (1946)

                ii)             Hick-Phillipson Commission Report (1951)

                iii)            Chicks Commission Report (1953)

                iv)            Raisman Commission Report (1955)

                v)             Binns Commission Report (1964)

vi)                  Dina Report (1968)

vii)                Federal Military Government (1967-1995) Decrees

a)                    Decree No.15 of 1967

b)                   Decree No.13 of 1970

c)                    Decree No.9 of 1971

d)                   Decree No.6 of 1975

e)                    Decree No.7 of 1975

viii)          Aboyade Technical Committee Report  (1977)

ix             Okigbo Commission (1980)

x)             Federal Government Revenue Act (1981/82)

xi)            National Revenue Mobilisation Allocation and Fiscal           Commission (1989)

xii)           Federal Government (Revision) (1992)

xiii)               Modified Presidential Order 315 (July, 2000)

3.5           As it is well known, the Revenue Mobilisation Allocation and Fiscal Commission is mandated by Section 32(b) in Part 1 of the Third Schedule to the 1999 Constitution of the Federal Republic of Nigeria to “review, from time to time, the revenue allocation formula and principles in operation to ensure conformity with changing realities”. Attempts by the Commission since its inception in September, 1999 to introduce a fair, just and equitable revenue allocation formula have been victims of the dynamics of legislative-executive controversies and judicial pronouncements with the resultant delay in the enactment of the appropriate laws. The Commission, after collation and analysis of views and memoranda received from various stakeholders, professional/interest groups and the general public submitted in August, 2001, its first Report of the Revenue Allocation Formula to the President, as constitutionally required, for him to table same before the National Assembly for due consideration.  The report was withdrawn by the Commission in May, 2002, following the pronouncements of the Supreme Court in its Judgment in Suit No. SC 28/2001 of 5^th April, 2002 on Resource Control. 

3.6           The major highlights of that judgment were to restate the provisions of Section 162(3) of the 1999 Constitution to the effect that revenues standing to the credit of the Federation Account belong to and should be distributed only to the Federal, States and Local Governments, and the declaration as illegal, all special funds items, which were hitherto part of the formula and then treated as first-line charges on the Federation Account.

3.7           In December, 2002, the Commission completed the review of the 2002 Main Report on Revenue Allocation taking into cognizance the full implications of the Supreme Court Judgment and submitted it to the President.  It was tabled before the National Assembly by the President in January, 2003.  Again by some strange twists and turns of development, this very Report suffered the fate of its 2001 predecessor as the President withdrew it from the National Assembly in November 2003, on the allegations that many versions of the Revenue Allocation Bill where in circulation in the National Assembly as well as improper weighting of certain constitutional responsibilities.  Once again, the Commission is in the process of completing work on, and submitting its third substantive proposals on the Revenue Allocation Formula for Nigeria to the President.

4.0           Fiscal Dependency of Sub-national Governments

4.1           As already mentioned, the sharing of funds from the Federation

Account in Nigeria has been characterized by intense competition by the three levels of government, each trying to secure as much share of the statutory allocations as possible. The ultimate consequence of this has been the high level of fiscal dependency of sub-national governments on statutory allocations from the Federation Account to the relegation and detriment of internal revenue mobilisation. This high fiscal dependency is manifest in the way virtually all the States and Local Governments in the country wait prayerfully for monthly Federation Account Allocation Committee (FAAC) distribution in order to carry out routine recurrent expenditure responsibilities, such as payment of salaries.  They literally, easily, catch cold when the meetings are delayed or the volume of the Federation Account falls. This high level of fiscal dependency of sub-national governments is reflected in Tables 2 and 3 below.

Table 2: Degree of Fiscal Dependency of State Governments (1990-1996) (%)

Source: Chete (1998)

4.2                 The table shows that the average fiscal dependency ratio of the

36 States of the Federation during the period under consideration ranges between 30.4% for Lagos State to 87% for Niger State, with 32 States having over 6o%. Similarly, a comparative analysis of total contribution of Federation Account Allocations and Internal Revenue to the Current Revenue of States between 1980-1998 shows that the contribution of Internal Revenue has been very low for most of the period 1980-1996 as indicated in table 3.

Table 3: Comparative Contribution of Federation Account Allocations and Internal           Revenue to Current Revenue of States (1980-1989)

Source: Source: CBN Annual Report (Various years)

Table 4: Contribution of Federation Account and Internal Revenue to the Current              Revenue of Local Governments (1991-1998)

Source: CBN Publication: The Changing Structure of Economy and the Implications for Development

5.0           Public Debt and Nigeria’s Fiscal Operations

5.1           One major area of concern in Nigeria’s fiscal management has been that of high and frightening public debt overhang for both the Federal and State Governments.  The sources and causes of Nigeria’s debts and some of the projects for which the loans were obtained and spent are worrisome. Economic analysts believe that most of Nigeria’s debts arose out of extensive budgetary malpractices, lack of adequate expenditure framework, lack of transparency and accountability in the management of public funds and poor management of budget deficits. Indeed, most Federal and State budgets, these days, are deficit budgets to be financed with loans. Definitely, the current debt burden of Nigeria cannot be blamed on current governments as 1980-1983 stand out clearly as the high season for the scramble for external loans and accumulation of debts. The procedures for negotiation and signing of the loans were deliberately over-simplified, apparently in order to throw a bait at the unsuspecting borrowers who took them with total disregard for their macroeconomic consequences.

5.2                 The sheer magnitude of Nigeria’s debt is alarming and very worrisome. Nigeria has been gradually thrown into a vicious cycle of perpetual debts as interest payment charges and penalties, on compound interest terms, have accrued and continue to do so on the entire stock of loans to the extent that the cumulative liabilities have virtually become quadruple of the original loan amount. In short, you should have known by now that Nigeria has four levels of the debt burden.   There is the original debt (Principal Amount) and the interest on the debt, which constitutes the second level itself.  This is then followed by the delayed payments and, lastly interest on delayed payments.  For now, Nigeria is busy servicing the interest and penalties for delayed/default payments.

5.3.               Currently, the external debt profile of the country, as declared by the Debt Management Office shows that Nigeria’s total external debt as at 31^st December, 2003 stands at $32.916 billion. Of this, the Federal Governments share is $25.258 billion (76.7%) while the States have a combined share of $7.658 billion (23.3%). The composition of the total national external debt stands as follows:

(i)                               Paris Club $27.469 billion

(ii)                             Multilateral $3.042 billion

(iii)                            London Club $51.441 billion

(iv)                            Promissory Notes 911.39 million

(v)                             Non-Paris Bilateral 51.63 million

In 2003 the Commission was directed by Mr. President to lead the reconciliation of all the external debts owed by the 36 States of the Federation. The assignment, which was carried out in conjunction with the Debt Management Office (DMO) was successfully completed and submitted to the Presidency and to all the state governments.  Details of the reconciliation are shown in the Table 5 below.

Table 5: Breakdown of External Debts of the 36 States of the Federation as at 31^st December, 2003.

Source: Debt Management Office

5.4                 The payment profile of these debts indicates that the debt burden would keep on accumulating because of penalties on default and interest rates being tied to floating exchange rate. Similarly, the domestic debts for both the Federal and State Governments are mounting too. Truly speaking, it is not just the loans that matter now, but also the impact of their repayment on the fiscal capacity of the States to deliver needed services and dividends of democracy to the citizenry. When public debts are high, the implication is that the wellbeing of the entire Nation is mortgaged as the funds available to governments for development are almost proportionately low. The Revenue Mobilisation Allocation and Fiscal Commission supervised a debt reconciliation exercise between the States of the Federation and the Debt Management Office, in 2002. The resulting picture was frightening. This compelled the Commission to recommend that embargo should be placed on further loans for 20 years so as to encourage Federal and State Governments to look inwards for resource mobilisation

6.0           Dependence on Oil Revenue and Diversification of the                 Nigerian Economy

6.1                 Nigeria’s poor economic situation is further compounded by the near single source structure of its revenue earnings. Nigeria is one of the world’s most striking examples of a mono-product economy. Conservatively, over 70% of the total earnings of Nigeria come from oil resources signifying a high dependence on oil mineral resources for its survival. The consequence of this situation is that the entire operations of the governments depend on oil prices that are exogenously determined by international politics and market. The level of contribution of oil and non-oil revenues to total federally collected revenue from 1990 to 2000 is shown in Table 6 below.

 Table 6: Contribution of Oil and Non-oil Revenue to Total Federally Collected Revenue (1990 – 2004)

Source: CBN Statistical Bulletin Vol. II, No.2 (December, 2000)

6.2                 An analysis of the table shows that oil and non-oil revenues contributed an average of 77.74% and 22.26% respectively to total federally collected revenues between 1990-2000. To this extent, implementation of budgets of all levels of government in Nigeria gets distorted once there are negative signals and developments in the international market price of oil.

6.3           But we can still remember fairly clearly, that in the past, agriculture formed the backbone of the Nigeria economy. Thus, apart from providing employment opportunities and incomes for the people, it was the major source of income and foreign exchange earnings for Nigeria before the discovery of crude oil. Indeed, Nigeria relied on earnings from the production and exportation of agricultural products and solid minerals such as palm produce, groundnuts, cocoa, coal, tin, bauxite, etc. to finance basic infrastructure, pay the cost of administration and other development projects. Today, the story is different, as agricultural products for which Nigeria was known as the greatest world supplier, have descended to the rear in our list of foreign exchange earners. Similarly, solid minerals in the country remain largely untapped and subjected to illegal mining. The coal and tin mines in Enugu and Jos respectively have been relegated and neglected because of oil.

6.4                 We tend to forget the economic dangers and complications of total dependence on oil products.  We need to recognize the fact that oil as a commodity is exhaustible and non-renewable. Equally notable, is the problem of lack of accountability and transparency in the oil sector. As you all know, the cost of Joint Venture Cash Calls, which has raised and continues to generate controversies is extraordinarily very high, taking, almost 65% of the country’s oil revenues at times. Nigeria surely needs to make provision for the rainy day by creating optional sources of revenue. The best way to do this is by diversifying the economy and investing the earnings from crude oil in the other sectors of the economy in order to broaden our productive base and revenue capacity.

6.5                 The task of diversifying the productive base of the Nigerian economy, in order to expand its fiscal capacity, appears to be the greatest challenge current facing the Nigerian leadership. This is against the background of the fact, that most succeeding economies in the world today are not oil-based.  Rather, they depend mostly on non-oil revenues for their development. Even those which relied on crude oil initially have succeeded in using earnings from oil to expand or diversify their economic bases and consequently, their sources of revenue despite its vast natural potentials.

7.0           Issues in Tax Jurisdiction in Nigeria

7.1           As already mentioned in the introductory section of this lecture,

fiscal federalism, which translates into inter-governmental fiscal relationships, is all about sharing of tax powers and ownership of the proceeds of the taxes. This is usually the product of the assignment of weights to the constitutional responsibilities of each tier of government. The trend in Nigeria shows that the Federal Government controls and collects the major taxes for, and on behalf of the Federal Republic of Nigeria which are payable into the Federation Account. Each tier of government has its own internal revenue sources.

7.2                 A careful review of Nigerian Constitution, the Report of the Presidential Commission on Revenue Allocation (1980), Value Added Tax Decree (1993 and amended in 1995) and Income Tax Act of 1998, shows the sources of revenue for Federal, States and Local Government as follows:

(a)           Federal Government

§          Companies Income Tax (CIT)

§          Withholding Tax on companies (WTC)

§          Petroleum Profit Tax (PPT)

§          Value Added Tax (VAT)

§          Education Tax

§          Capital Gains Tax (Abuja residents and corporate bodies)

(b)           State Governments

§          Personal Income Tax (PIT)

                (a)            Pay-As-You-Earn (PAYE)

(b)                 Direct (Self/Government) Assessment

(c)                  Withholding Tax (Individuals only)

§          Capital Gains Tax

§          Stamp Duties (instruments executed by individuals)

§          Pools betting, Lotteries, Gaming and Casino Taxes

§          Road Taxes

§          Business Premises Registration and Renewal Levies

                (a)            Urban Areas as defined by the State registration (N10,000) and renewal (N5,000) maximum per

                                annum.

(b)           Rural Areas – registration (N2,000) and renewal   (N1,000) maximum per annum.

§          Development levy (individuals only) not more than N100 per annum per taxable individuals.

§          Naming of street registration fee (State Capitals)

§          Right of occupancy fee (State Capitals)

§          Market (where State finance is involved)

Local Governments

§          Shops and Kiosks rates

§          Tenement rates

§          On and Off Liquor levies

§          Slaughter slab fees

§          Marriage, Birth and Death Registration fees

§          Naming of Street registration (excluding State Capitals)

§          Right of Occupancy fees (excluding where state finance is involved)

§          Domestic Animal License

§          Bicycles, Trucks, Canoe, Wheelbarrow and Carts fees (other than mechanically propelled trucks)

§          Cattle Tax

§          Merriment and Road Closure fees

§          Radio/Television License other than radio/TV transmitter) and vehicle radio license (to be imposed by local government in which it is registered)

§          Wrong Parking charges

§          Public convenience, sewage and refuse disposal fees

§          Customary, burial grounds and religions places permits

§          Signboard/Advertisement permit

8.0           Revenue Generation by States and Local Governments in Nigeria: Problems, Prospects and Strategies

8.1           It has been explained in various parts of this paper that all the tiers of government in Nigeria depend heavily on statutory allocations from the Federation Account and that earnings/accruals into the account, itself, flow mainly from the sale of crude oil and other oil-related sources. We have equally stated that the oil sector and, consequently, its revenue, is vulnerable to, and easily susceptible to international political forces and price changes. Worse still, extremely high operations cost, in the name of Joint Venture Cash Calls (JVC), and high debt service obligations considerably reduce the quantum of shareable and take-home allocations of Federal, States and Local Governments. Therefore, it is obvious that these tiers of government have to look inwards for ways of generating revenue internally from independent sources to augment or complement funds allocations from the center. This is necessary in order to reduce the fiscal gaps which invariably exist between revenue and expenditure.

8.2           It has been pointed out and established from Tables 3 and 4 above, that the average contribution of internal revenue to recurrent revenue of States and Local Governments respectively is quite low. So many factors have been adduced for this low trend. Most of these constraints are posed by inadequacies in the technical capacity of the machinery of collection (collecting agencies); institutional/legal framework; the disillusionment and or attitude of payers, commitment of political leadership, general negative economic forces etc.   Other inhibiting factors include: -

i)              Dearth of information on taxpayers, making it difficult to trace and     identify them.

ii)             Absence of functional compliance-enforcement mechanisms eg. adequate punishment for default, revenue courts.

iii)            High tendency for tax avoidance and outright evasion.

iv)            Inadequate collection facilities e.g. operation/enforcement vehicles, documentation aids (computers, communication aids), etc.

v)             Poor internal and external monitoring processes leading to leakages and wastages.

vi)            Poor funding of revenue authorities, which negatively affect their operations.

vii)           Poor service conditions and lack of incentive packages for revenue collecting and monitoring agencies.

viii)          High prevalence of collusion/connivance and sharp practices,

ix)            Poor knowledge of tax conditionalities/requirements (e.g. what to pay, when to pay, where to pay and how to pay) thereby making                 prospective payers victims of fraudsters, fake revenue agents and undesirable elements within the rank and file of revenue authorities.

x)             Neglect of revenue authorities and preference for use of revenue consultants to assess, collect and account for taxes.

xi)            Inadequate executive capacity of revenue authorities-lack of experience/professional tax administrators.

xii)           Frequent interference by political leadership on activities of  revenue agencies e.g. exemptions, concessions etc.

xiii)          Lack of political will to enforce collection of major revenue items e.g. tenement rate because of fear of impact on electoral chances.

xv)           Wide gap between revenue generation and service delivery   (utilization/accountability for fund) leading to high level of resistance and non-compliance.

xvi)          Low economic empowerment of the citizenry thereby reducing the taxable capacity of the population.

xvii)         Multiplicity of taxes, fees and fines on the citizenry leading to resistance and evasion.

8.3                 Despite the numerous legal, technical, attitudinal and political

problems facing tax yields and revenue generation in Nigeria, the prospects for increased internal revenue generation are quite high. However, adequate strategies must be put in place by both States and Local Governments to maximize the collection of various revenue items under their jurisdiction. Some of these strategies are examined below:

i)                     Sensitization Or Enlightenment Of The Paying Public:

The knowledge of the various categories of taxes, levies and rates to pay, the rationale and the conditionality for payment by the paying public is a fundamental precondition for effective revenue mobilisation. Basic information and clarifications such as what tax and why it is being paid, when, where, and how to pay are necessary to eliminate procedural confusion and encourage voluntary compliance amongst the payers. It has been observed that absence of adequate information on the tax system has been exploited by fraudsters to swindle the unsuspecting paying public, thereby constituting heavy losses to government. To this extent, governments and their Ministries/Agencies/Parastatals responsible for revenue collection should invest substantially on enlightenment programmes in order to close the communication gaps between the paying public and revenue collecting agencies.

ii)                   Gathering And Documentation Of Data About The Paying Public:

One of the critical conditions for effective revenue generation is the information about the payers. The number of people, facilities, businesses, properties, catchments areas etc. for specific taxes is necessary for revenue planning, realistic target-setting, proper assessment and maximum collection. To this end, it is always advisable to conduct revenue census and adopt the integrated data bank approach. This approach emphasizes data collection from relevant and related Ministries/Agencies such as Ministries of Commerce, Industries, land/survey Mortgage/Commercial Banks, Corporate Affairs Commission, National Security Services etc. which have large bulk of information on registered businesses, properties, deposits etc. With such information about payers, the actual tax capacity of the State or local Government can be established while at the same time, tax avoidance/evasion and other forums of fiscal disobedience can be minimized.

iii)                  Improving The Executive Capacity Of Revenue Agencies: The effectiveness of revenue mobilisation of any tier of government to a large extent, depends on the executive capacity and efficiency of the machinery of collection i.e. the revenue agencies. Therefore, States and Local Governments should be able to recruit qualified/experienced tax personnel, train and retrain those on ground. It should be noted that revenue mobilization, nowadays, especially in a democratic setting like ours, has gone beyond enforcing compliance through unconventional/unorthodox methods such as the use of task forces with militant colouration, closure of business premises etc. without due regard for the fundamental rights of payers. Resource mobilisation now requires careful planning based on reliable and valid data as well as clinical execution using competent hands. Under this modern situation, only well trained and reasonably motivated staff with the correct mix of professional attainments and psychological attitudes, fit the bill.

iv)                  Use Of Modern Operation Equipment/Facilities:

Effective collection of revenue, monitoring and enforcement of payment require the use of modern equipment/facilities. Although the facility requirements of governments Ministries/Agencies and Parastatals vary significantly in accordance with the nature of the revenue item being collected and the location of the government, facilities such as vehicles, computers, and communication machines are indispensable. Lagos State, with all the urban Local Governments, should be a maximum user of these facilities.

v)                   Well Coordinated External Supervisory And Monitoring Machinery:

As already explained, revenue generation in Nigeria has been characterized by high level connivance, embezzlement, leakages and wastages. Such losses have been attributed to the absence of a well-coordinated internal and external monitoring of collection machinery and payment procedures. So many cases abound where monies collected were not remitted to State or Local Government treasuries either by revenue staff or designated banks. Of course this is also true of the Federal Agencies.

vi)                  Reform In Tax/Revenue Laws Required:

The legal framework for revenue generation in Nigeria is fairly loose in terms of enforcing compliance and meting appropriate penalties for payment defaults. In many advanced countries, for example Canada, where compliance level is adjudged to be very high, non-payment of tax as and at when due is seen as a criminal offence and corresponding penalties are very strict. In Nigeria, it is mostly the salaried workers who routinely pay taxes, because such taxes are deducted at source. The majority of the population especially the rich, who are self-employed, do not pay taxes. The laws governing taxation need to be reviewed with in-built mechanisms to facilitate voluntary compliance to adequately punish defaulters so as to serve as deterrent to others.

vii)                Adequate reward system for the revenue personnel and external monitors of the revenue mobilisation process:

                The application of good incentive systems has worked wonders in several countries which boast of success stories of revenue mobilization today. In most cases, apart from adequate funding of the operations of the revenue collection authorities, which, in itself, is a motivation, efficient performance is induced by awarding a percentage of total collection or excess collection over budget targets, as bonus packages. This approach has been used successfully to reduce revenue diversions and institutionalized leakages. In addition, with attractive conditions of service, qualified personnel can be engaged and retained by revenue agencies.

viii)               Looking  beyond traditional sources of revenue:

Most States and Local Governments over the years have concentrated on constitutionally stated sources of revenue. While all efforts should be put in place to optimize contributions from such sources, they should also begin to explore investment-oriented sources such as commercial ventures and business undertakings that have short-      term pay back capacities e.g. investment in shares/bonds/securities etc. We should equally note that with the current policy on privatization and the proportion of a private sector driven economy, nothing stops States and Local Governments from going into partnership with the private sector in commercial undertakings.

9.0           Revenue Mobilisation. Prudent Resource Management and Service Delivery at States and Local Government Levels.

9.1                 One of the key issues that this lecture seeks to address is the

delicate and symbiotic relationship between resource mobilization, prudent resource management and service delivery (revenue utilization). The basic objective or purpose of taxation and resource generation is to mobilize financial resources in order to provide basic services and amenities such as electricity, water, good roads etc for the welfare of the citizenry.  Therefore, once these taxes are paid, it is natural for the payers to expect returns, and dividends in terms of the services to be rendered by the Governments. Government is under obligation to provide those services by the prudent use of the financial resources collected. When there is a high positive perception about accountability, transparency and judicious revenue utilization in terms of service delivery, there is high level of voluntary compliance in payment of taxes, arising from the payers inclinations to build confidence in Government. On the other hand, if there is serious incongruency and gap between tax burden, revenue receipts and service delivery, then taxpayers will exhibit negative tendencies manifesting in resistance and poor response to payment of taxes, mainly because the resources are not prudently managed. Indeed, this is one of the greatest problems facing revenue mobilisation in Nigeria today. The truth of the matter is that the general perception and hard feeling among tax paying Nigerian public is that the accountability and transparency level at all tiers of government is very low and taxes are being paid to enrich only those in government while the general citizenry suffer. Market fees and sanitation levies are being collected, yet the markets are ever dirty and the sanitary condition of our environment is getting worse.

9.2                 Economic theory and experience show that when resources are

Scarce thus making prudent management becomes imperative. With the high fiscal dependency ratio of State and Local Governments on statutory receipts from the Federation Account and very little contribution from their internal revenue sources, there appears to be no alternative to prudent management/utilization of such mobilized financial resources. Contrary to such expectation of a high level of prudence in resource management, however, fiscal operations at various levels of government in Nigeria are characterized by fiscal indiscipline which manifest in the form of poor prioritization of projects/programmes in budget planning, deficit budgeting, high deviation in budget implementation, resulting in excessive extra-budgetary spending etc. Unfortunately, what we see today is that budgets are mere annual rituals which are abandoned, immediately after legislative approval and executive assent. Particularly at the Local Government level, budgets are prepared simply because they are compelled to show evidence of such.

9.3                 For prudent and optimal utilization of scarce resources, States

and Local Governments should ensure adequate economic planning that will promote strategic priorities. That is, resources should be allocated on the basis of priorities (projects/programmes) that would make the greatest contribution to the achievement of government objectives and add value to the well-being of the citizens. Our current economic situation no longer requires white elephant projects that will end up being abandoned. Also, we must insist on accountability and transparency in the use of available resources to avoid wastages and leakages. The ‘value for money’ principle must be the guiding rule for public expenditure.

10.0         Summary and Conclusion

10.1         The overall target of this lecture has been to review the issues

involved in revenue mobilization and optimal utilization of financial resources mobilized at the Federal, States and Local Government levels in Nigeria. In the process, the paper examined the concept, practice and historical evolution of fiscal federalism in Nigeria. It was noted that fiscal federalism is practicable only in a federation because the system requires the existence of inter-governmental relations in terms of statutory allocations and tax powers assigned to each level of government to facilitate the performance of its assigned constitutional responsibilities.

10.2  The paper also mentioned the various Commissions in Nigeria’s revenue allocation history as a Federation and concludes that invariably these reflect its political and economic realities of each period. It equally noted the determination of the Revenue Mobilization Allocation and Fiscal Commission, based on its constitutional mandate to fashion out a fair and equitable formula which would be fairly acceptable to all the beneficiaries of the Federation Account. Furthermore, the paper provided some data, which show the high fiscal dependency ratio of States and Local Governments on fiscal transfers from the center and the frightening public and accumulated external debt profile, which has a crippling effect on the quantum of resources and the capacity of the States to provide basic amenities and services. It was, therefore, noted that with this situation, the States and Local Governments are compelled to look inwards for resources to fund their projects and programmes. Also, the need for Nigeria to diversify its economy from the single-resource base (oil) to broaden and dippen its productive capacity and provide other options for revenue mobilization was emphasized, noting that most developed economies in the world today are based on the non-oil products.

10.3              We identified some of the fundamental impediments to

effective revenue mobilization in States and Local Governments.  It was specially noted that these constraints have some relationship with inadequacies in institutional and legal framework, quality of personnel of relevant revenue agencies, attitude of tax payers and commitment of political leadership, coupled with poor information on the tax system and procedures for payment. Some strategies, which are by no means exhaustive, were, therefore, recommended for efficient revenue generation in States and Local Government.

10.4              The paper also made it clear that there is a significant, delicate and systematic relationship between resource mobilization and service delivery which government should always be aware of and concerned about. Generally, dissatisfaction and negative public perception about the level and quality of service delivery breeds non-compliance with tax laws and other forms of payment resistance.  It was stressed that, perceived positive performance of government further motivates the paying public to meet up tax payment obligations. It was, therefore, advised that prudent management/utilization of resources by States and Local Governments should be a cardinal concern and mission statement of Governments. To this end, States and Local Governments should embrace strategic economic planning that emphasizes only priority projects/programmes capable of maximizing welfare and benefits to the people instead of embarking on programmes that will not add value to the well-being of the citizenry.

10.5              In conclusion, I would like to state that in all these fiscal management issues, the Legislature has a crucial role to play because of their legislative and oversight functions. For instance, legislative approvals and confirmation in the budgeting process should not be seen as a mere ceremonial duty. Rather, it should provide the opportunity for objective scrutiny and constructive executive-legislative partnering in inculcating prudence in resource management for service delivery. I do hope that the State and Local Government functionaries, participating in this lecture must have realized, by now, that optimal interest in revenue generation is the only solution to fiscal imbalances between statutory transfers and their expenditure commitments. Therefore, internal resource generation and prudent fiscal management of mobilized resources are necessary and non-negotiable if service delivery expectation of the people must be met.

10.6         Finally, I wish to thank my hosts, the Lagos State House of Assembly, for inviting me to deliver the year 2004 Public Finance Lecture and for all the courtesies extended to me.  If nothing else, it shows the high esteem in which the Revenue Mobilisation Allocation and Fiscal Commission is held.  It has reinforced in us, the need to continue to serve the country with justice, fairness and equity, which are the key tenets of the actions of the Commission.

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