MID-WEEK ESSAY: DERIVATION, RESOURCE
CONTROL AND THE NPRC - JOINING THE DEBATE
By
Mobolaji E. Aluko, PhD
Burtonsville, Maryland, USA
June 23, 2005
1. INTRODUCTION
This is an essay of short sentences and a
few long tables: so please bear with me.
It is inspired largely by the dramatic
developments in these dying days at the National Political Reform
Conference (NPRC), when a fundamental disagreement over resource control
and mineral derivation funds has arisen, leading to serious contentions
and a walkout by the South-South delegation and threats of walkouts by
the Northern delegation - and a suspension of the NPRC until cooler
heads prevail.
Since mineral derivation is almost
exclusively petroleum oil at this time, delegates from:
(i) the oil-resource-rich 6-states
South-South Niger-Delta zone (Delta, Edo, Bayelsa, Rivers, Akwa-Ibom,
Cross Rivers) are insisting on increased derivation percentage:
immediate increase from 13% first to 25%, then to 50% over a five year
period.
(ii) the oil-challenged 19-states Northern
zone are saying "Ba Hanya !" (no way!), arguing (correctly) that such a
sudden increase would stifle the funds and hence economic development of
all the other zones. They appear ready to settle for an immediate
increase to 17%, with any other adjustments being made within the
framework of the RFMAC as mandated by the Constitution. (RFMAC stands
for Resource and Fiscal Mobilization and Allocation Committee). The
conservative zone's agenda even beyond the derivation principle is
apparently simply to maintain the status quo of the Nigerian polity as
much as possible.
(iii) one half of the 6-states South-West
zone delegates (Lagos, Ogun and Ondo) and one half of the 5-states
South-East zone (Abia, Imo) are voicing muted support for the
South-South zone, each probably because of some currently limited (Ondo,
Abia, Imo) or potential (Lagos, Ogun) oil-resource-rich status of their
states.
(iv) the other half of the South-East zone
(Anambra, Enugu, Ebonyi) is prepared to support the South-South zone in
exchange for the granting to its zone of a sixth state (maybe Orlu State
(?) ). This would increase the number from the current five states (to
equalize the number of states per zone). A guaranteed 2007 presidency
slot for the zone is also in the bargain.
(v) the other half of the South-West zone
delegates (from Osun, Oyo and my Ekiti State) is apparently confused
and bewildered, having been thrust into the conference in turmoil
without an agreed agenda in mind, under thumb of the president and his
PDP agenda. The allegation is that the earlier
zones-as-federating-units and parliamentary system agenda of the Yoruba
has been sabotaged by the PDP governors of the South-West.
In this essay, we will briefly review some
historical information on revenue allocation in Nigerian and then
evaluate the effect of increasing the derivation percentage from 13% to
50% of state and federal allocations. We will finally suggest a phased
and mixed resource control/derivation regimen that will be a win-win for
all parties.
One hopes that cool heads will eventually
prevail.
But first things first.
2. RESOURCE CONTROL AND
DERIVATION - OUTLINING THE DIFFERENCES
In order to survive, all animals and human
beings need air to breathe and for plants to thrive; water to drink,
wash, cook, fish and cool with, land (earth) to move, farm and live on,
and of course the Sun (as a primary source of energy) to light, to warm,
and to photosynthesize plants.
In short, whoever controls the natural
resources of air, water, land and energy controls Man's survival. True
unadulterated "resource control" is therefore the ability to control, by
one's self and for one's own uses, these stated resources and whatever
may be contained within them. It means the ability to harness or to
withhold or to somehow limit, with little or no hindrance, the
development by that community itself (and/or with the assistance of
people of its choice) of these resources for the benefit (biological,
financial and economic) of that individual or community and their
posterity.
It may happen that an individual or a
community willingly gives up that right to determine the use of those
resources to some other community or external governing body, but then
negotiates some economic or financial benefit in a mutually beneficial
manner. The level of this derived benefit or revenue allocation - or
derivation fund - would be based on the willingness and ability of
the benefactor-community to harness the said resources, and the
negotiating prowess of the benefactor and the host community.
There is a third situation however:
complete deprivation or enslavement, where there is an external
marauding, ravaging community or entity that completely takes over
another community's resources and uses them completely for their own
benefit without taking into consideration the feelings of the host
community. This circumstance completely violates the dignity of the
community of human beings and is clearly unacceptable.
It is in the above context that we
should in the ensuing discussion view derivation as a veritable way
station between resource control and complete enslavement, even within
the context of a federal system of government.
3. POWER RELATIONS AND REVENUE:
THE CASE OF NIGERIA
With about 130 million people, almost 1
million square kilometers of area , 1 federal government, 36 states,
774 local governments, 8,810 wards and 375 ethnic groups, and
innumerable identifiable communities, Nigeria is certainly a country
where survival is a premium, competition is keen, and the battle
between the contending situations of resource control, derivation and
enslavement is evident. With the British first as colonial enslaving
masters, some official coming-together of the country first occurred
in 1900, followed by formal amalgamation in 1914, limited rule in
1957/59, independence in 1960, military dictatorial rule from 1966 to
1979 (a period punctuated with a civil war in 1967-1970), return to
civilian rule from 1979 to 1983, another prolon ged era of military
rule from 1983 to 1999, and then finally civilian rule from 1999 to
date. During all of these periods from pre-independence to date, there
have been various power relations between various communities and
levels of government in the country, leading to various revenue
allocation formulas from the central government to the lower tiers of
government.
The story of such formulas starts with
the Phillipson Report of 1946, but it is the Reismann Commission of
1958 which cleared the way and was adopted for Independence in 1960
for a country comprising one Federal (Republican) Government and at
first three (North, East and West) and then four regions (with the
Midwest added in 1963). Key to the Reismann report was the notion of
a Distributable Pool Account (DPA) to be constructed and then
distributed among the regions on the basis of ?continuity,
minimum responsibility, population and balanced development of the
federation?
Key revenue sources
of this DPA that got carried into the 1960 Independence and 1963
Republican Constitutions were mining royalty and rent revenue - not
of total mining revenue - of which 50% was to be returned to region
of derivation, 30 percentage to other regions and 20% to the federal
government. However, 100% of taxes on sales produce and motor
vehicles were to be returned to the relevant regions.
[See Table 1 for
sample revenue allocat ions for the
period 1959-61.]
Since Independence, the revenue
allocation formulas have witnessed a number of adjustments, with the
derivation percentage coming down as low as 1.5% OF SOME TOTAL
REVENUE, but in 1995, attaining a height of 13% OF SOME TOTAL REVENUE
up until present, even though the percentage of "what?" (is it of
mining rights + royalties or of some total revenue or what?) concern
has always been an issue. [See Table 2 - a historical overview of
revenue allocation formulas of Nigeria.]
Therefore with respect to
derivation, the confusion, often glossed over even by the best of
minds in Nigeria, but certainly with the mischievous knowledge of many
politicians, has been not only over "percentage numbers" but
"percentage of what" as well.
We need not further rehash
history except to state that in 1978 a departing military regime
inserted a Land Use Decree into our Constitution granting all land
and minerals contained thereon, to federal and state governments (not
communities or individuals). The sea and its mineral contents as
being held in trust by the federal government had also been enacted
some years earlier.
This therefore is the summary:
our governments control the resources, and the communities/individuals
"derive" benefits there-from from the government. Revenue allocation
is from higher levels of governance to lower levels, and special
derivation funds to certain selected communities are based on
high-value derivations there-from.
4. QUICK EXERCISE IN
ALGEBRA OF REVENUE ALLOCATION
Suppose the total revenue accrued
to the federation (TFF) in a given year is R billion naira, of which
a fraction [a] is oil revenue (OR) and the rest is non-oil revenue NR.
[A further fraction y of the OR is mining rents and royalties.]
The traditional budgeting method
is for the Federal Government to remove a fraction m of this through
Memorandum items (MF), and another fraction t via transfers (TF) to
certain dedicated accounts. The rest of the money R(1-m-t) is called
the Federation Account (FA), which is a Distributable Pool Account (DPA).
Out of the FA is taken the
Derivation Fund (DF), according to a fraction d. The rest is then
distributed thus according to various fractions:
Federal Government: g
{A fraction z goes for further oil area development}
State Government: s
Local Government: (1-s-g)
[See Table 3 for display of
Budget and Revenue Allocation Items.]
After the determination of R, the
fractions of importance for revenue allocation, grouped according to
decreasing importance, are thus:
(R)
(a) (m, t) (y, d) (g, s) and (z)
The interesting thing is that by
manipulating m and t, the value of DF, FGF, SGF and LGF can be kept as
low as desired even if d, g, s and z are revised despite increases in
R.
So it could easily be a case of
"the more you have, the less you see".
True resource control enables the
local community to determine R, a, m, y, t and v. In focusing our
energies on derivative fund - essentially the ratio d - we lose focus
as to where we should be in terms of managing our own affairs.
For derivation
fraction d, at the moment what goes into their pocket is Rd(1-m-t)
billion naira. For full resource control, a federal taxation rate
(1-d) would leave oil-producing areas with aRd billion naira in their
bank.
So it is only when
a = 1 - m - t
that
resource control and derivation amount to the same thing for d
fraction!
If 1 -
m - t < a, derivation is NOT to the advantage of the oil producing
states.
Typically, we have a = 0.8; m = 0.25 and t = 0.2, hence we see that
in that case, derivation is not kosher !
In
general, if under resource control w is the government tax rate, then:
a(1-w) > (1-m-t)d
for
resource control to be advantageous . For example, if we have that a
= 0.8, w=0.5, m = 0.25, t = 0.20, d = 0.13, we have that 0.4 >
0.0715
5. BUDGET AND REVENUE
ALLOCATIONS SINCE 1999
Since military incursion in
Nigeria in 1966, m (Memorandum items) and t (transfers) have been kept
high and d (derivation fraction) has been kept low in the 1.5-3%
range, until the Abacha Constitution Conference of 1995 fixed it to
13%, and the 1999 Abdusalami Abubakar Constitution engrained it AT A
MINIMUM of 13% . It was not however until 2002 when a Supreme Court
ruling forbade a number of Memorandum items and transfers (thereby
reducing m and t) ? and in its aftermath d was positively fixed by the
RFMAC at 13% - that substantial monies have started to accrue to the
oil-producing states.
Table 4 shows financial
operations of the Federal Government of Nigeria in 1997 (the last full
year of Abacha's rule), when compared with 2000 (the first full year
of Obasanjo's civilian rule), 2002 (the last full year BEFORE the
major Supreme Court ruling on dichotomy/resource control/derivation)
and 2003 (the first full year AFTER the Supreme Court ruling). Table
5 shows all the revenue allocations from June 1999 to July 2004, and
Table 6 shows the allocations for May 2005.
What is unmistakable in these
tables even to the naked eye - despite the disproportionate control of
funds at the federal level - is the substantial improvement in the
financial fortunes of the nine oil-producing states, particularly the
AkBaDeRi oil states (Akwa-Ibom, Bayelsa, Delta, Bayelsa and River),
which constitute 90% of the derivation. For example, the 13%
derivation fund increased from N2 billion in 1997 to N137 billion in
2003, at a time when the gross oil revenue increased from N417 billion
to N2.1 trillion. Most or all of these nine states continue to obtain
money from three sources: the 13% derivation fund, the Niger Delta
Development Corporation (NDDC) funds AND the federation account pool
for al l states based largely on population.
6. EFFECT OF INCREASING
DERIVATION PERCENTAGE TO 50%
As stated before, the present
impasse at the NPRC is based on demands for increase of the derivation
percentage from 13% to 50% of revenue, largely based on the argument
that 50% was the original figure in the 1960/1963 Constitutions, but
forgetting that that 50% was of mining royalties and rents, NOT of
revenue.
We will now be concrete by
showing what an increase from 13% to the range of 17% to 50% would
have been if it had been effected on the country?s revenue allocation
in May 2005, for example.
The data are presented in summary
form in Tables 7a and 7b. In May 2005 (see Table 7b) at 13%, the
derivation fund was N22.7 billion and at 52%, it would have been N70.7
billion, with the Federal Government budget reduced from N110.9
billion to N68.4 billion with the state and local governments
absorbing the rest of the reduction. Delta States total May 2005
intake (N8.94 billion) would have gone to N31.2, at a time when the
average state intake in May 2005 was N1.7 billion, which would have
reduced to N1.1 billion.
More generally, the effect of
such an increase being proposed is unmistakable: it would have led to
a transfer of N7 billion to N70 billion to the oil producing states,
with the highest budgets of those states being tripled and the budgets
of many non-oil producing states being halved from their original
values. This would have led to a traumatic effect on 27 states and a
possibly unmanageable influx of finance into the oil-producing
states, bearing in mind that one questions how much improvement has
been seen in those states since 1999 when they have experienced
substantial increases already. [This accountability question applies
to all levels of government in Nige ria.] Furthermore, the
highest-to-average allocation ratios would have increased from 6-to-1
at 13% to 30-to-1 at 50%, leading to much greater unhealthy inequity
in the country with respect to state finances.
7.
TOWARDS FULL RESOURCE CONTROL: A PROPOSAL
We have sought here to
distinguish clearly between resource control and percentage
derivation. 100% resource control - meaning the local ownership of
land such as to harness, withhold or limit development thereon, with
rent, royalty and taxes accruing - is very supportable and
achievable, is consistent with human dignity, and would be favorable
to ALL states in the federation. However, resource control is NOT
equal to 100% derivation as Nigeria?s federation is currently
structured, wherein in effect many non-oil-producing states are being
compensated for opportunities LOST due to their inability to tap their
many res ources by themselves.
We will therefore like to propose
a win-win situation that will ultimately end in resource control.
That is a phased and mixed resource control / derivation regimen
where, starting in 2007 and over a twenty-year period, we move
immediately from 0% resource control that we have now to 100% resource
in steps of 25% increase every four years. During the transition
period, present derivation formula should be fixed at 20% for the
resource-uncontrolled portions of the resources.
In practical terms, the portion
of land and sea that states and communities control and can harness
resources independent of government - with appropriate taxes being
paid to government - would increase in quanta of 25% every four years
until in Year 2027, we would have full resource control.
I believe that this proposal will
reduce financial shocks that would otherwise arise in many other
proposals, and will give enough time for economic development plans to
be properly effected.
8. CONCLUSION
The issues of revenue allocation,
derivation and resource control generate a lot of passion in Nigeria
and among Nigerians. However, if we are to remain a united, strong,
happy and democratic country moving towards nationhood, then cool
heads must prevail as we right historical wrongs without creating new
ones.
I rest my case for now, and
comments are, as usual, welcome.
END NOTE:
For storage size and formatting
reasons, the tables referenced in this essay have been archived as
part of the essay in the URL on my website:
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