On the Approval of 13% Revenue Derivation from Solid Minerals to Northern States

By

Dr. Emmanuel Ojameruaye

emmaojameruaye@yahoo.com

The Vanguard of Monday, March 19, 2012 reported that the Federal Government had approved the payment of 13 per cent revenue derivation on solid minerals to Northern States with immediate effect[i]. According to report, “the Federal Government may have opted to appease some northern states … government was worried about rising insecurity in the northern part of the country with vociferous leaders of the north blaming the situation on poverty and inequality arising from alleged lopsided revenue allocation against them…It was learnt that government’s decision to pay the money was an indirect way of stemming the growing discontent and violence in that part of the country”. The report further stated that the Chairman of the Revenue Mobilization, Allocation and Fiscal Commission, RMFAC, Mr. Elias Mbam, stated that the payment would commence in April, 2012 and that the decision had no political motive, because “The payment is a constitutional matter, which states that derivation should not be less than 13 per cent and derivation is not limited to oil and gas. This also includes all other mineral resources. If you have minerals in your state and it is developed and it generates revenue into the federation account, you are entitled to 13 per cent of what is paid into the federation account.”

The report concluded that “N90. 4 billion is expected as non-oil Gross Domestic Product by the Federal Government in the next three years as contained in the revised Medium Term Financial Framework between 2012 and 2014.  The solid mineral states are expected to earn 13 per cent of the amount. On the other hand, the nine oil producing states will share at least N1.9 trillion as their share of 13 per cent derivation within the period”.

Elements of the above report are troubling because they are either deceptive or mischievous or are based on a lack of understanding of Nigeria’s public finance and macroeconomic data.

Firstly, the payment of 13% revenue derivation on solid minerals to Northern states will not appease them because the amount will be insignificant and will not make any dent of their revenues. This is because solid minerals account for such an insignificant percentage of federation account or federally collectible revenue (FCR) that it is not even reported in the federation account statistics posted on the Central Bank of Nigeria and the Federal Ministry of Finance websites. Since we do not know the exact contribution of solid minerals to the FCR, we can only speculate. My guesstimate is that it should be in the neighborhood N29.5 billion which is less than 0.3% of the FCR in 2011. Therefore, 13% of this amount equals N3.8 billion. If you divide this amount among the 19 Northern states, each will get an average of N0.2 billion or N200 million in a year. Compare this to the average of N7.87 billion or N7,870 million each the state received from the federation account in the amount of August 2010 alone which can be translated to about N93.36 billion or N93,360 million in a year. In other words, the payment of 13% derivation on solid minerals may result in an increase in the average Northern state’s revenue by only 0.2%. Tell me how N200 million or 0.2% increase in revenue can “appease” a state?

Secondly, Northern states do not have a monopoly in the production of solid minerals. The solid minerals in Nigeria are distributed all over the country. According to the website of the Federal Ministry of Mines and Solid Minerals (www.mmsd.gov.ng ) there are “34 types of solid minerals” located in Nigeria including limestone, gypsum, kaolin, clay, dolomite, granite, marble, gold, coal, bitumen, zinc, silver and iron ore. These minerals are found in both Northern and Southern states including oil producing states. In other words, if 13% of my guesstimated N3.8 billion revenue from solid minerals is shared among all 36 states, each state will get only N105.5 million a year which would mean only 0.1% increase in the revenue accruing to Northern States!   

Thirdly, it is wrong and baseless to assume that the “rising insecurity in the northern part of the country” is due “the situation on poverty and inequality arising from alleged lopsided revenue allocation against them.” There is simply no empirical basis to accept this hypothesis. Whilst poverty could be an explanatory variable for conflict and insecurity, it is usually a weak explanatory variable in cross-country, cross-state and intra-state studies. There are other stronger explanatory variables such as religion, ethnicity, corruption, small arms proliferation, heavy-handed military response, emergence of vigilante groups, elections, high youth unemployment, boundaries, growing income inequality, impunity by leaders, human rights violations, and struggle over scarce resources such as land.[ii]. The above factors are present in virtually all the states in Nigeria. In fact, poverty is common to all the states, including the oil producing states. Clearly, the rising insecurity in the northern part of the country caused by the Boko Haram insurgency has more to do with religious extremism and intolerance than poverty.

The federal government and the northern states need to conduct a detailed conflict assessment of the “rising insecurity” in the North in order to address the key causative factors instead of playing politics by blaming it on poverty and “lopsided revenue allocation”. After all, the “lopsided revenue allocation” has not solved the poverty problem in the oil producing states that are ostensibly benefiting from it. What about the non-oil producing states in the West and East that are also “victims” of the “lopsided revenue allocation”? Altering the revenue allocation formula as canvassed by the Northern governors will make things worse for them as it will lead to another round of militancy in the oil-producing Niger Delta region which will significantly reduce oil revenue which account for between 70% and 85% of the FCR, depending on the price and production of crude oil in a given year. This in turn will reduce revenue accruing to the Northern states. In other words, it may amount to killing the proverbial goose that lays the golden egg.

Fourthly, the author of the report erroneously or deceptively tried to equate Gross Domestic Product (GDP) with FCR by stating that “N90. 4 billion is expected as non-oil Gross Domestic Product by the Federal Government…between 2012 and 2014.  The solid mineral states are expected to earn 13 per cent of the amount”. Students of Economics 101 (Basic Economics or Elementary Principles of Economics) know that GDP and its components are different from government total revenue and its components. Not all components of GDP are paid into the FCR; hence FCR is usually significantly less than GDP. From an expenditure approach, GDP = C + I + G + (X –M), where C = personal consumption, i.e. expenditure by individual on durable and non-durable goods as well as on service, I = gross private investment, X = exports, M= imports, and G = government (federal, state and local) purchases or expenditure which equals revenue when there is a balanced budget (no deficit). In most countries, G is usually between 15% and 30% of the GDP, depending on the size of the government. From a production or output approach, GDP is the market value of all goods and services produced in a year less the market value of intermediate goods and services. In other words, it the sum of the value added by all the productive sectors of the economy, including agriculture, crude oil and gas, solid minerals, manufacturing, building & construction, services, finance, etc.

The FCR is the revenue (mainly taxes) collected by the federal government from the above activities or sectors. Thus, the FCR is usually a fraction or percentage of the GD, and the components of the FCR by sectors or activities are usually a fraction of the corresponding components of the GDP (value added) by sector or activities, with the percentage depending largely on tax/fiscal regime applicable to the sector. For instance, while the corporate tax rate for the oil & gas sector is set at 85%, it is between 20% and 30% for solid minerals sector. According to CBN data, in 2010, the GDP of Nigeria was N29,206 billion, of which oil & gas sector accounted for N9,747 billion (or 33.4%), solid minerals sector accounted for a paltry N46 billion or 0.16%, manufacturing accounted for N647 billion or 2.2% while agriculture accounted for N10,274 billion or 35.2%. On the other hand, the FCR in 2010 was N7,304 billion (or 25% of the GDP) while oil & gas accounted for N5,336 billion or 74% of the FCR while all the other sectors (non-oil revenue) accounted for only N1,908 billion or 26% of the FCR. The percentage contribution of solid minerals to the FCR is unknown (not published), but given the fact that it contributed only 0.16% to the GDP, one can surmise that it contributed far less than that percentage to the FCR, perhaps less than 0.05% if we are to use the rule of thumb given that oil & gas accounted for 74%. Thus, it is fatally erroneous to posit the projected “N90.4 billion expected as non-oil GDP” is the same as the “non-oil FCR”.

Furthermore, there is a difference between “non-oil” and “solid minerals”. Solid mineral is a small fraction of the “non-oil” sector as shown above. Even if the author used GDP instead of FCR, the fact is that 13% of “non-oil” revenue cannot be paid to solid mineral producing states alone. It is only 13% of the solid mineral revenue (taxes and royalties) that accrued to the FCR account that can be paid to the solid mineral producing states in accordance with section 162 (2) of the subsisting 1999 federal constitution. And this amount is very small, almost insignificant!

I do not have access the revised Medium Term Financial Framework which the author referred to. However, the “Fiscal Framework 2012 -2015” posted on the Federal Ministry of Finance website (www.fmf.gov.ng ) does not contain GDP estimates or revenue from solid minerals. The projected oil & gas revenue for 2012 to 2015 is N19,548 billion while the project non-oil revenue for the same period is N10,039 billion. If we therefore assume that the N90.4 billion referred to by the author is actually the expected revenue from solid minerals that will accrue to federation account (i.e. part of the N10,039 billion stated above), then 13% of  N90.4 billion amounts to only N11.752 billion for the three year or an average of N3.97 billion a year which is almost equal to my guesstimate of N3.8 billion earlier stated in the third paragraph above. As I demonstrated previously, this amount is insignificant and will not make a dent on the revenues accruing to solid mineral producing states in the North or South.

Finally, I agree with the Chairman of the Revenue Mobilization, Allocation and Fiscal Commission that 13% of the revenue from solid minerals (any mineral) should be paid to the states from which such minerals are derived in accordance with the section 162 (2) of the constitution. Frankly, I am surprised if this had not been the practice since 1999. If it has not been, it is probably because the amount involved is insignificant as I have demonstrated. However, no matter how small the amount is, it should be paid and published to ensure transparency and compliance with the constitution. But there should be no illusion that this will solve the poverty and insecurity issues in the north or any other part of the country.

In my next article on this subject, I will analyze and the clamor of the Governors of the Northern states under the aegis of the Northern Governors Forum (NGF) for a review of the revenue allocation formula in a way that will be “more equitable and favorable to the North”. This clamor came on the heels of an interview which the Governor of the Central Bank of Nigeria, Mr. Sanusi Lamido Sanusi, had with the Financial Times of London in January 2012. In that interview, Mr. Sanusi curiously linked the Boko Haram insurgency with the revenue derivation formula. He said[iii]: "attempts to redress historic grievances in Nigeria’s oil-rich south may inadvertently have helped create the conditions for the Islamic insurgency spreading from the impoverished north-east of the country...A revenue sharing formula that gave 13 percent derivation to the oil-producing states was introduced after the military relinquished power in 1999 among a series of measures aimed at redressing historic grievances among those living closest to the oil and quelling a conflict that was jeopardising output…There is clearly a direct link between the very uneven nature of distribution of resources and the rising level of violence…When you look at the figures and look at the size of the population in the north, you can see that there is a structural imbalance of enormous proportions. Those states simply do not have enough money to meet basic needs while some states have too much money….The imbalance is so stark because the state still depends on oil for more than 80 per cent of its revenues".

I have rebutted some of the above claims in this paper. I will complete the rebuttal of Sanusi’s claims and those of the NGF in my next article. Stay tuned.

[1] Nigeria: Boko Haram - FG Moves to Appease North With 13 Percent Derivation” by Dan Udoh, Vanguard, Monday, 19 March 2012. Also posted at New Nigerian Politics, Top Stories,  Monday, 19 March 2012

[1] See “Strategic conflict assessment in Nigeria. Consolidated Report. Institute for Peace and Conflict Resolution, The Presidency, Abuja, Nigeria. October 2002. Also see Zartman, W (2005). Need, creed and greed in intrastate conflict.

[1] “Nigerian Central Bank calls for end to imbalances” by William Wallis, Financial Times, January 26, 2012. Reported as “, Sanusi Links Boko Haram to Derivation” by Yemi Adebowale  and Ahamefula Ogbu, Nigeria’s This Day Online of  28 Jan 2012