a. Principles of revenue allocation.

(i) Derivation: This principle was originally applied to the proceeds of export taxes on agricultural produce. The principle asserts that the state from which the bulk of the revenue is obtained should receive extra share over and above what other states receive.

(ii) Even development: The objective of government is that the Federation itself should grow and develop at an optimum rate and that each of the constituent states should grow and develop at the optimum (not necessarily equal) rate. The principle requires that growth and development should be spread so that serious inequalities or imbalances are reduced in the Federation. These may be achieved by sacrificing efficiency in the form of a reduced overall growth.

(iii) Need: The rate of growth and development a state is able to achieve depends on the revenue the state is able to generate. It requires financial as well as other resources not only to maintain its existing facilities but also to develop additional capacities. Given a set of these other resources, a state requires funds to enable it realise its potential. When the need of a state is compared with the need of others, it may be necessary to transfer financial resources from one state to another in the interest of efficiency.

(iv) National interest: This principle is used residually by the highest level of government to intervene and transfer funds to lower levels or units in the lower levels to serve various considerations. It lies therefore in the sphere of discretionary grants to be administered by the highest tier, that is, government of the Federation.

(v) Independent revenue: The principle is of the view that each level of government should be able to raise and keep some revenue for its use. The bulk of the revenue of the state revenue comes from what is raised and collected by the Federal government. The main sources left to the state governments are those on personal income taxes, capital gains tax and stamp duties, which should be exploited.

(vi) Continuity of government services: The principle suggests that each level of government has a certain minimum responsibility and that the level of services provided should not be allowed to fall below a certain standard. Where a state is unable to function effectively due to lack of funds, such a state should be assisted with federally collected revenue.

(vii) Equality of state: All men are created equal but are endowed differently. Similarly, states are created equally but they arrive, at creation and through passages of time with different endowments of economic, financial and political power. The principle asserts that revenue sharing among the states should be done on equal basis.

(viii) Equality of access to development opportunities: This was introduced to correct unequal endowments of the states. The principle asserts that preferential treatment should be given to those states which by some measures of development lag behind others or fall below a certain norm.

(ix) Absorptive capacity: It represents the capacity of the state to make proper use of funds. It is on exceptional and efficiency grounds, that is, funds should go to those states that are best able to utilise them.

(x) Population: This principle asserts that since government is about people, that development is also about people and that the essence of government should be the welfare of the people. Therefore, states with larger populations should receive extra share above others with smaller populations.

(xi) Tax effort: The principle, which applies in most federation, is designed to encourage states to exploit their tax capacities. The realisation of a state’s potential in respect of tax revenues will widen its development possibilities.

(xii) Fiscal efficiency: This principle asserts that states should minimise the cost of fiscal administration or obtain maximum revenue from a given cost. Fiscal efficiency reflects not only on the ability to raise taxes and collect them, but it reflects also the structure of the tax base itself as well as the overall administrative machinery of government.

b. Factors responsible for revenue sharing problems

(i) Over-dependence on oil revenue. The advent of oil in Nigeria and its high yielding revenue generation tendency has continued to undermine the development of the hitherto buoyant agricultural and other viable sectors such as industry, mining and human capital development. Consequently, oil revenue has become the major source on which the country critically depends on thereby becoming a mono-product economy. The current revenue sharing formula encourages laziness and idleness as states rely heavily on the federal allocation- a situation that makes most states, with the exception of Lagos parasitic in nature feeding voraciously on Federation Account.

(ii) Politics of revenue sharing formular. Revenue sharing among the component units of Nigerian federation has been, from the inception, replete with agitations, controversies and outright rejections due to the nature of the politics that is involved in it. The process of revenue sharing is inundated with conflicting criteria that were, often times, rejected by majority of the states. The determining factor in revenue allocation strongly revolved around political rather than economic criteria, thereby making the revenue allocation issue in Nigeria contentious and thorny.

(iii) Agitation for resource control. The historical facts of the use of the principle of derivation (emphasised earlier and de-emphasised later) have been a source of inter-regional or states conflict, rivalry and antagonism. The major fall out of the down play of the principle of derivation, which stipulates that the component units of a system should be able to control some of its own resources as they desire, is the agitation for resource control that has taken criminal dimensions in most of the oil producing communities and states of the Niger Delta. There have been multifarious cases of kidnapping, vandalism of oil pipes and installations, desperations and high scale violence.

(iv) Increasing fiscal units. The rapid changes in the number of fiscal units that is not necessitated by guided economic and political philosophy led to creation of states that are fiscally unviable and consequently increased demand for increased share of “national cake”. Many states in Nigeria will blame their inactivity and ineffectiveness on low or lack of allocation from the federation account rather than become inventive and innovative in ideas that will cause increase in their revenue generation. The increase in the number of fiscal units in Nigeria from 3 to 4, 12, 19, 21, 30 and 36 within a period of three and a half decades is contrary to what obtains in older and other federations.

(v) Unstable constitutional framework. The absence of a permanent and generally acceptable legal structure in the form constitution may result in chaotic tendencies. For instance, the last constitutional conference in the United States of America was in 1787 and only 27 amendments have been made as at 1999 as opposed to Nigeria in which several constitutional conferences had taken place since independence without general acceptability. In addition, states in Nigeria do not really have the statutory power to raise taxes and collect the proceeds and as such the problem had centred not on who should raise but how the proceeds should be shared. Therefore, expenditure and tax/revenue assignment is inundated with ambiguity and inefficiency. A good example is the case of Lagos State Ministry of Transportation (MOT), which became a legal tussle between the government and some activists.

(vi) Lack of will. The absence of sincere desire on the part of the public office holders to address the challenges of revenue sharing is aptly reflected in the refusal to convoke a conference of leaders of various groups and ethnic nationalities that may lead to design of acceptable resource allocation scheme. Even where such conferences have been convoked in the past, the will to implement suddenly disappears from the initiators.