DR, S.C UGWU1
Enugu State University Of Science And Technology
(ESUT)
Eme Okcchukwu2& Okeke Martin Ifeanyi3
Department of Public Administration &
Local Government Studies
University of Nigeria, Nsukka
E-mail: okechukwunnent@yahoo.com
E-mail: martinokekeifeanyi@yahoo.com
INTRODUCTION
It is axiomatic to posit that the severity of Nigeria’s socio-economic and political crisis dictates that all available human and material resources be effectively mobilized to reverse the trend in the afore-mentioned sectors. In recent times, local governments in Nigeria have been assigned specific responsibilities by constitution (sec the 1979 constitution). But this should not be taken to suggest that in the past local governments did not contribute to socio-economic development of Nigeria. For example, between 1955 and 1965, local governments were responsible for an average of 12 percent of total public expenditure in the polity.
In a federal polity like Nigeria, local government has been recognized as one significant instrument for rural transformation and for the delivery of social services. This is because; they are closer to the people and hence could effectively alter socio-economic and political conditions within their jurisdiction. Apart from providing and maintaining basic infrastructures, local governments can complement the economic activities of other tiers of government (Federal and state governments). In the sphere of the economy, the establishment of governmental organs such as the then Directorate of for Food and Rural Infrastructure (DFFRI), Peoples Bank of Nigeria (PBN) and Community Banks (CB). Better Life Programmes and Women Commission and the coordinating of their activities of the consultation with local government have helped in opening up rural areas for development. Local governments then had departments for Better life which mobilized rural women in matters pertaining to politics and economy with a view to making them well informed, productive and self-reliant. The peoples Banks of Nigeria and the Community Banks become very much handy in helping and promoting rural economic activities and grassroots developments. These agencies, therefore, became significant platforms of socio-economic and political transformation, thus strengthening the objectives of which local government was meant to attain.
Fiscal operations at the local government level become significant if macroeconomic stability is necessary in the wider economy. If fiscal imbalance appears rampant at the local level, it could pose problems for macroeconomics management of the economy. The scenario is even more complex when local governments depend on transfers from the center. In this era of economic crisis, local government in Nigeria face more challenges in terms of struggling to be less dependent on the higher tiers of government (federal and state) for financial resources. Though the revenue allocation system mandates that a certain amount of the federation account be allocated to local governments, these funds arc never enough to meet expenditure requirements. This is because the size of the account is related to revenue from oil, which is subject to fluctuation, litigations and deductions, and expectations of local councils far exceed the available resources. In a system characterized by ethnic jingoism, federal and state governments have attempted for political reasons to frustrate the existence of effectiveness of local government by defaulting on their statutory allocations to local governments, rendering local councils financially and politically impotent.
Guidelines for local Government Reform (1976:1) notes:
Local governments have over the years suffered from the continued whit (ling down of/heir powers, and state government bail continued to encroach upon what would normally have been the exclusive preserve of local governments and consequently there has been a divorce between the people and governments at their most basic levels.
Unfortunately, (he picture is now not different in spite of functions of local governments sources of revenues and other responsibilities now have constitutional backing. Ekpo and Ndebbio, (1991), Eme (1998) and Eme and Edeh (2006) not only traced the evolution of fiscal federalism within the Nigerian economy but also concentrated on fiscal relationships between the federal and state governments. There also exist economic relationships between state and local governments. An examination of local government fiscal operations becomes very significant for a complete understanding of intergovernmental fiscal relations.
The objective of this paper is to describe and analyze fiscal relations and operations between the federal and local governments in Nigeria using the Obasanjo administration (1999-2007) as a case study. The extent of self-financing, the fiscal gap and its volatility at the level will be examined. It is ‘anticipated that a study of this nature will contribute the existing literature on fiscal federalism in developing nations.
What Is Intergovernmental Fiscal Relations?
An intergovernmental relation refers to the vertical and horizontal interactions between and among different levels of government in a polity. There are various ways to describe the relationship between a larger comprehensive unit of government and its constituent parts. A confederation, for example is a system in which the constituent units grant powers to the national government, but do not allow it to act independently. A unitary system is one in which all powers reside with the central government, and various units derive their powers from the unit. France and Sweden, for instance are characterized by unitary systems, as is the relationship between States and localities in the United States; localities hold those powers specified by the state.
The relationship between Nigerian central government and the States and local governments, however is federal in that it involves a decentralization (or division of power) between and among the various levels of government. Some powers are granted specifically to the national government to conduct foreign relations, to regulate inter State commerce and banking, some are reserved by the states’ to conduct elections, to establish local government among others and some are shared or held by both levels, such as to tax, to borrow money and to make laws among others. This system of governance is also referred to as “federalism”.
The term “intergovernmental relations” is often used to encompass or capture all the complex and interdependent relationships among those various levels of government as they seek to develop and implement public programmes. Indeed, it is through this mechanism of intergovernmental relation ions that the federation functions and jobs get done. Intergovernmental fiscal relations had to do with fiscal federalism.
Fiscal federalism or intergovernmental fiscal transfer or relations describes the division of fiscal resources and responsibilities among various tiers of government. It deals with problems arising from the situation of divided political-juridical jurisdictions within an economically integrated polity. It equally covers ‘efforts to define the appropriate functions and finances of the various tiers of government as efficiently and complimentarily as possible to maximize welfare of the political community. Intergovernmental fiscal relations cover such issues as models, for the assignment of responsibilities and tax powers, discussions on intergovernmental spill over and intergovernmental grants, fiscal mobility and migration, vertical fiscal imbalance and dependence, macroeconomic management and fiscal, decentralization. According to Egwaikhade (2004:1) several pertinent issues are discernable from the literature. These
are,
First, is the problem of how to allocate revenue among (he three tiers of government, such that each tier can carry out its constitutional assigned functions. There is vertical revenue imbalance with the federal government appropriating more than its fair share from the federation accounts. The revenue expenditure divergence is reinforced through increased fiscal centralization. Intergovernmental fiscal conflict is the resultant direct effect of the concentration process in Nigeria. Second there is horizontal imbalance unequal fiscal capacity among slates. Derivation principle, which dominated the horizontal revenue allocation scheme between the late 1940s and mid-1960s, exacerbated the horizontal imbalance (E. Mbanefoh and Egwaikhide, 1988). It was advocated that this criteria should be de-emphasized or discarded since it promoted uneven development. Since 1970s when oil revenue started to account for a sizeable proportion of Nigeria’s total revenue, the use of derivation diminished to a negligible level. The third issue has to do with the oil production externalities in the oil-producing slates, which has climaxed to the demand for resource control by the southern governors and leaders.
Put differently, fiscal federalism in Nigeria has its legal basis laid in the constitution. For example, the 1999 constitution contains various clauses in the second and fourth schedules on the tax powers of the federal, state and local governments and also on the system of revenue sharing and management of public funds. Details of these are contained in sections (i) 162- .168, items 59 (part 1), Item A 1 a, b and 2 part (II) D 7-10 in the second schedule, item 32 a-c in the third schedule and item: 1b, section 7 of the Forth schedule respectively.
Fiscal federalism according to Anyanwu (1997:159) “… implies the co-existence of both national and sub national governments which perform the economic functions required by the society or an association of two or more levels tiers of government within a country”. He goes on to argue “the method of taking collective decisions is predetermined and that it is relatively efficient”.
What is Intergovernmental Fiscal Relations?
Intergovernmental relations refer to the interactions between levels of government in a state system. Intergovernmental relations arc particularly important in a federation because its condition reflects the health of a country’s federal structure. Indeed, it is through the mechanisms of intergovernmental relations that the federation functions and jobs gel done. Intergovernmental fiscal relations have to do with Fiscal federalism.
Fiscal federalism describes the division of fiscal resources and responsibilities among levels of government. It deals with problems arising from the situation of divided political jurisdictions within an economically integrated state-system. It covers efforts to define the appropriate functions and finances of the various tiers of government as efficiently and complimentary as possible to maximize welfare of the political community. Intergovernmental fiscal relations cover such issues as models for the assignment of responsibilities and .lax powers, discussions of intergovernmental spillovers and intergovernmental grants, fiscal mobility and migration, vertical fiscal imbalance and dependence, macroeconomic management and fiscal decentralization.
Theoretical and Scientific Debates on Intergovernmental fiscal relations
There is an age long debate about the benefits of federalism and the attendant challenges it throws up on intergovernmental relations. Kincaid (2001), for instance
believes that modern federalism emerged at about (the same time as the concept of the market economy and that one very important reason for the formation of the federal union was the need to create a common market that would facilitate (he movement of goods. Among the advantages of democratic federations identified by Kincaid (2001 :88) are (I) more efficient provision of public services; (2) better alignment of the costs and benefits of government of a diverse citizenry and, thereby, more equity in so far as citizens get what they pay for and pay for what they get (3) better fix between public goods and their spatial characteristics, especially the variable economies of scale of different kinds of public goods, (4) increases competition, experimentation, and innovation in government sector, (5) greater responsiveness to community and capacity to respond to their preferences, (6) more transparent and close to the citizen accountability in policy/making, (7) more sensitivity to sub/national regional concerns, including the power of constituent governments to provide for their own needs. These advantages have largely been teased out from the works of Hayek (1945) and Tiebot (1956). Hayeks point is that local governments enjoy the advantages of better access to information about local conditions, and are therefore in a better position to make decision than national governments in providing local public goods. Tiebot’s idea of laboratory federalism emphasizes the experimentation from which other regions may learn and imitate that which is successful. Such local experimentation reduces (he costs of failure under centralization, where such experimentation would have to be done on a larger scale. Thus, federalism ensures macroeconomic stability, promotes experimentations and innovativeness while securing a huge market so necessary for the achievement of economy of scale(Aiyede 2008:l)
Aiyede, (2008) goes on to posit that the political business cycle literature looks at the advantage of federalism in terms of the way federalism creates cheeks and balances among the levels of government. Such checks and balances commit central policy-makers policy to spending restraints, thus preventing them from reneging on their macroeconomic commitments. Absent such checks and balances, politicians at the central level have a tendency to expand the economy during election campaigns in an attempt to woo myopic voters, although the long term results arc sub-optimal. Such action might provoke inflation when it is financed by deficit budgeting. With federalism state governments can police the inflationary and deficit bias of these central officials Lohmann (1998), Qian and Roland (1999). Similarly, Lohmann (1997:17) argues that federations are more likely than unitary countries to develop politically independent, inflation-averse central banks that refuse to provide accommodating monetary policy. Besides, competition among sub-national units for tax revenue and investment constrains the size of the public sector and ensures efficient delivery of public services consistent with the diverse demands of disparate, decentralized constituencies.
These claims have however not been consistently proven by decentralization experience everywhere. Indeed, some scholars have argued that federalism often aggravate problems associated with collective actionin the formulation and implementation of economic policy, especially macroeconomic management and market reforms (Pmd’hommc 1995, Tricsman 1999). In a sample of developing countries, Wibbels (2000) finds higher and more volatile deficits and inflation rates among federations than among unitary systems. Using a higher sample, Treisman (2000) finds that federations do not demonstrate higher inflation rates than unitary systems, but if inflation problems develop federations are less likely to resolve them. According to the Wallis Hypothesis, decentralisation increases sub-national government size. Also, the collusion hypothesis is that sub-national governments try to circumvent the competition brought about by decentralization. There are a series of collective action problems that arc peculiar to federal systems that account for this state of things. For instance, Gandhi (1995) opines that the establishment of an efficient and modem tax system could be difficult if important taxes essentially belong to lower level governments. When borrowing is not strictly controlled by the national government, free spending sub-national governments may build up unsustainable deficits and then call upon the central government to provide special bailout transfers or otherwise assume their liabilities. Indeed, multi-tier governments face the possibilities that sub-national governments will try to over fish the common pool by shifting their costs onto others. This opportunistic behaviour on the part of sub-national governments’ described as the soft budget constraint, may undermine macro-economic stability. Thus, it will be difficult to achieve optimal and macro economically sound public debt policy, if lower sub-national governments have complete authority to borrow from whatever sources they may wish. There are several empirical studies to demonstrate that this possibility of overfishing the pool may make decentralisation dangerous if it allows sub-national governments to expand their expenditures while externalising the cost to others (Roddcn 2002, Vigneault 2005).
Ahmad, Hewittt and Ruggiero (1997) have observed that the reliance on transfers and grants from central government to finance sub-national government expenditure creates an incentive for sub-national governments to inflate expenditure and engage in perennial negotiations with the central government to attract more grants and transfers. Such competition among sub-national governments to secure larger portions of distributable central funds may lead to free riding, because sub-national governments have an incentive to inflate their budgets for fear of losing sharable revenues to competing jurisdictions (de Mello 1999, Fukasaku and de Mello 1998). This type of behaviour may entrench free riding in a context where central funds are derived from the exploitation of natural resources or foreign aid. The situation is worse 1 where such centralized funds are derived from natural resources that are located in sub-national territories of minority groups, as we shall see in the Nigerian case. Free riding may completely overtake competition for investment, replacing it with opportunistic competition, for federation funds. To deal .with these; problems a wide range of options have been adopted worldwide. Ter-Minasian and Craig (199.7) identify numerical debt ceiling restrictions on the use of debt, outright prohibitions of borrowing, limits on foreign debt, and balanced budget requirements are strategies adopted.
However, beyond the effort to remedy the difficulties of federal fiscal relations, others have argued in favour of more centralised systems. In some situations where decentralisation, has thrown up issues of coordination and control, there has been a reverse wave of decentralisation, like in Latin America where decentralisation drives have come to dominate the broader policy and, political agenda in several countries (Eaton and Dickoviclt 2004). It has been argued that the central government needs to control the main taxes and borrowing instruments to ensure effective macro-economic management. :Besides, central government needs to control investment capital in order to maximize, returns and to ensure that a coherent growth policy is put in place for the ;purposes of privatisation and building public and industrial infrastructure. As a corollary, centralisation enables the central government to allocate fiscal resources to goods and services with national benefits. If local autonomy is too broadly defined, it will create a situation where aggregate expenditure will be greater on these services that have more local benefits. Fiscal centralisation is also considered essential to achieve even development. That is, to reduce disparities in income and wealth between rural .and urban areas and across geographical regions and ethnic groups. This is the. case because centralisation allows the central government more discretion in shaping regional differences in levels of public services and taxation. The central government can use the tax policy and subsidies to shape spatial economic development. This indeed may be an important strategy of keeping a divided country together but it might also be a source of tension when the consequence of equalisation includes central government deficits. Russia has faced the difficult decision of choosing among equalisation, central government solvency and appraising the potential break away provinces (Bahl ‘1994:3-4,1995). This, is really the dilemma for countries in the developing world with divided societies like Nigeria, Aiyede (2008) concludes,
Conceptual frame work of Analysis
The conceptual and theoretical issues involved in intergovernmental fiscal relation are fully discussed in Ola (1984:8) and Ekpo and Ndebbio, (1991) and-Eme (2008). Ola (1984:8) for example identified three schools of thought, which are used in the explanation of local government. These are:
a. Democratic participating school
b. The efficiency- service school and
c. The developmental school. The former posits that local government is exists to bring about democracy and provide the local populace the opportunity to participate actively in political activities happening around them.
The efficiency service school argues that local government isessentially created to provide services and is judged by their success in providing services up to the standard measured by a national government. The developmental school on the other hand1 states that local government does not exist to bring about democratic participation or efficiency in service delivery, but exists essentially in a developing world as an effective agent of better life, an improved means to a better share in the national wealth. -This study will adopt the efficiency-service school of thought as its conceptual framework of analysis.
In other words, local government fiscal operations can play a significant role in macro-management of the economy. At the local level, certain goods and services are best provided through public means. Hence, issues7 of efficiency, resource allocation and distribution become relevant at the local government level. In addition, it is generally agreed that certain taxes rates and levies are better collected by the local government. According to Musgrave (1973:342), expenditure made at the local level may not be centrally financed, but also centrally directed. A local government that acts as central expenditure agents does not reflect expenditure decentralization in a meaningful sense, just as centrally collected revenue and shared taxes do not imply proper revenue centralization.
Ekpo and Ndebbio (1998:5) add that centralization could be measured between various tiers of governments. It is possible that within an economy, decentralization may take place between the federal and state governments while relative centralization remains at the local level. The converse can also occur.
They went on to posit that the issues on economics of intergovernmental transfers can be generally classified as either non-matching or selective matching. The latter are best suited as a means of subsidizing activities to which the higher level of government assigns a high priority by local governments. Such a case would occur in a degree of spill-over to some level of provision after which the external benefit abruptly terminate (Shah, 1991:22) On the former, no constraints are imposed on how funds are to be spent.
Shah, (1983), Broadway (1990) and Ekpo and Ndebbio (1998) have written on the economic, political and social justifications for fiscal transfers. Economic justifications for grants include efficiency, equity and stabilization objectives. Within the theory or grants, efficiency and equity objectives are complementary. Ekpo and Ndebbio (1998:6) quoting Broadway (1990) maintains that application of efficiency and equity principles suggests four main economic reasons for grants. These are:
(1) Inter-jurisdictional spill over- implying that intergovernmental transfers can be used to increase efficiency with which public goods and services are provided.
(2) Fiscal gap involving “a mismatch between means and expenditure needs goes up at various levels”. This results in a structural imbalance bringing about a shortfall in revenue for a lower level of government. Fiscal gap of imbalance could be due to.
a. Inappropriate expenditure and tax assignments
b. Limited and/or unproductive tax base available to a lower tier of government.
c. Tax competition between tiers of government, or
d. The centre crowding out tax room for state and local governments.
(3) Minimum standards of service: – connoting efficiency as well as equity criteria for ensuring common minimum standards across an economy especially in a federation and
(4) Differential net fiscal benefits across states occurring because some states are better endowed than others with national resources and thus have better access to an enlarged revenue base (Ekpo and Ndebbio, 1998:6).
Ekpo and Ndebbio (1998) conclude by positing that some states could have higher incomes, hence a greater ability to raise revenues from existing bases compared with others. Stabilization grants can increase in periods of slack economic activity to encourage local expenditure and curtail spending during the upswing of a business cycle.
Involved in intergovernmental fiscal relations are fully discussed in Ole (1984:8) and Ekpo and Ndebbio (1991) and Eme (2008).Ola (1984:8), for example identified three schools, of thought, which are used in the explanation of local government. These are
(a) Democratic-participatory schools
(b) The efficient-service school and
(c) The developmental school. The first posits that local government exists to bring about democracy and provide the local populace the opportunity to participate actively in political activities happening around them. The efficiency service school argues that local governments :are essentially created to provide services and are judged by success thesis of improving services up to -the standard measured by a national inspectorate. The; developmental school on the other hand states that local government do not exist to bring about democratic participation or efficiency in service delivery, but exist essentially in a developing world as an effective tool.
Fiscal Operations at the Local Government Level (1999-2007)
Local government as the third tier of government in Nigerians receives certain transfers from the federal and state government to enable it meet part of their recurrent and capital expenditures., The transfer ranges from statutory allocations to primary education funds. From States, local councils also receive statutory Allocations, grants and loans and funds for certain programmes and projects. The table below presents federal statutory allocations to local governments for the period 1991-May 2007
Table 1: Federal Ministry of Finance; Office of the Accountant-General of the Federation Abuja; Grand Summary of Revenue Allocation to Federal, States and Local Governments by Federation Account Allocation Committee, (June 1999 May 2007)
| “S/No | Beneficiary | State Governments | Local Governments | Total |
| 1 | Abia | 113,956,322,728.62 | 66,957,033,320.83 | 180,913,356,049.45 |
| 2 | Atlamawa | 111,973,469,608.66 | 88,385,118,660.50 | 200,358,588,269.16 |
| 3 | Akwa Ibom | 384,370,238,540.34 | 110,896,366,303.24 | 495,266,604,843.58 |
| 4 | Anairibra | 97,592,169,763.11 | 85,847,453,591.19 | 183,439,623,354.30 |
| 5 | Bauchi | 128,248,345,518.84 | 98,833,751,081.01 | 227,082,096,536.85 |
| 6 | Bayelsa | 414,158,710,867.12 | 38,101,830,075.82 | 452,260,540,942.94 |
| 7 | Benue | 120,963,431,284.39 | 100,676,342,004.41 | 221,639,773,288.79 |
| 8′ | Borno | 127,814,189,455.35 | 114,329,322,081.28 | 242,143,511,536.62 |
| 9 : | Cross River | 115,403,682,833.25 | 74,990,493,054.89 | 190,394,175,888.13 |
| 10 | Delta | 463,459,893,918.76 | 97,961,571,804.08 | 561,421,465,722.84 |
| 11 | Ebonyi. | 97,825,886,665.52 | 51,780,333,382.06 | 149,606,220,047.59 |
| 12 | po | 119,085,051,909.31 | 77,565,785,400.62 | 196,650,837,309-93 |
| 13 | Ekili | 92,732,057,109.79 | 60,134,219^25.71 | 152,866,276,435.50 |
| 14 | Enu^u | 103,979,483,787.19 | 68,964,491,966.13 | 172,943,975,753.31 |
| IS | Gombe | . 96,583,878,576.74 | 49,916,381,357.36 | 146,500,259,934.10 |
| 16 | Imo | 132,104,455,243.39 | 99,280,1 01 ,362.71 | 231,384,556,606.10 |
| 17 | Jigawa | 117,009,316,440.23. | 108,615,763,243.89 | 225,625,079,684.13 |
| 18 | Kaduna | 138,928,609,161.09 | 117,182,125,094.69 | 256,110,734,225.77 |
| 19 | Kano | 179,437,799,067.94 | 191,497,373,448.88 | 370,935,172,516.81 |
| 20 | Katsina | 140,721,433,816.83 | 139,822,729,992.43 | 280,544,163,809.26 |
| 21. | Kebbi.. | 109,325,901,797.25 | 86,787,009,340.22 | 196,139,911,137.47 |
| 22 | Koei | 108,937,683,153.98 | 86,187,515,182.33 | 195,125,198,336.31 |
| 23 | Kwara | 99,376,99 1, 21 4.56 | 66,01^107,696.79 | 165,588,098,911.35 |
| 24 | Lagos | 182,535,977,642,02 | 149,392,517,393.59 | 331,928,495,035.61 |
| 25 | Nassarawa | 90,518,301,030.98; | 54,487,876,090.81 | 145,006,177,121.79, |
| 26 | Niger | 126,254,889,591.23 | 111,114,801,956.06 | 237,369,691,547.30 |
| 27′ | Ogun | 114,180,594,528.10 | 81,197,512^55.95 | 195,378,106,884.06 |
| 28 | Ondo | 183,313,507,542.89 | 74,082,244^67.18 | 257,395,751,810.07 |
| 29., | Osun | 107,476,926,982.08 | 102,574,611,292;67 | 210,051,538,274.76 |
| 30 | Oyo | .135,928,952,381.15 | 127,369,093,326.38 | 263,298,045,707.53 |
| 31 | Phitucau | 81,759,592,808.53 | 73,434,508,057.07 | 155,194,100,865.61 |
| 32 | Rivers | 517,682,993,860.57 | 104,313,280,579.65 | 621,996,274,440.22 |
| 33 | Sokoto , – | 118,067,536,171.07 | 96,232,809,149.69 | 214,300,345,320.76 |
| 34 | Taraba | 103,462,234,004.51 | 72,869,810,839.60 | 176,332,044,844.11 |
| 35 | Yabc | 104,904,723,192.25 | 72,326,009,351.84 | 177,230,732,544.09 |
| 36 | Zamfara | 112,898,217,046.50 | 70,091,324,490.36 | 182,989,541,536.86 |
| 37 | FCT | 149,703,394,069.21 | 43,324,238,682.88 | 193,027,632,752.09 , |
| Total | 5,742,903,843,313.33 | 3,313,534,856,541.80 | 9,056,438,699,855.13 | |
| 38 | Federal Government | 7,390,688,951,768.72 | ||
| Grand.Total | 16,447,127,651,623.80 |
Source: Federal Ministry of Finance
It must be noted that states are mandated to allocate 10% of their internally generated revenue to local governments within their jurisdiction. In other words, of the allocations received from the federal government, the states must ensure that local government receive their allocations on the basis of factors such as minimum responsibility of government (equality of local governments), population, social development factors as reflected by primary school enrollment, internal revenue efforts among other criteria (Eme, 1998). Before analyzing the composition of revenue and expenditure patterns, let me look at the nature of financial transfers between levels of government.7
Local governments depend heavily on statutory allocations from the Federal government. The country’s constitution mandates that local governments receive 20% from the federation account. The ration has varied between 10% and 20% but the new unapproved allocation puts the ratio at 17% (less than what the constitution allows). Also, State governments are expected to pay 10% of their internally generated revenue to their local governments.
The evidence available suggests that local government revenue emanates mainly from the transfers from the federal government. On the average, federal statutory allocations constitute more than 70% of the local governments’ revenue. State governments have persistently not made allocations to local governments.
It is significant to note that state grants are not substitutes for state statutory allocations. The grants are made for specific projects such as building of school, health centre among others, by local governments. In some cases, grants are given to local governments for them to execute projects and programmes initiated by the state government, for example, the then Transition to Civil Rule prograamme, and Better life programme, among others for which local governments have to fund.
Local governments have attempted to generate their own revenue to finance their commitments. If local government autonomy is to make any sense, then financial independence ought to be sought by local governments. Financial independence at the local levels calls for fiscal decentralization. The efforts of some local governments are being thwarted by the intervention of state governments, in the functions of local governments. As a result, revenue sources meant for local governments become the purview of state governments.
Ayiede (2008:5-9) has identified four critical characteristics of politics that condition intergovernmental fiscal arrangements that promote inequitability in Nigeria’s intergovernmental relations. These are –
First, privatization of public office. Politics in Nigeria has been described variously as prebendal, neo-patrimonial, clientelistic or predatory, which means in the words of Joseph (1987) that ‘the existing offices of the state may be competed for and then utilised for the personal benefit of office holders as well as their reference or support group,’ The second is that majority politics has come to reflect in policy choices that do not favour the minority oil-producing communities as demonstrated in the changes in the revenue allocation formula. Since the ascendance of oil as the major source of revenue, derivation has increasingly become insignificant as a factor of allocation of revenue. Derivation as factor in-the distribution of revenue among the various sub-national governments used to be emphasised in the period when agricultural export was the main stay of the economy (Tobi 1991)
Table II: The Status of Derivation in Revenue Sharing m Nigeria
| Years | Producing state % | |||
| 1960-67 | 50 | |||
| 1067-69 | 50 | |||
| 1969-71 | 45 | |||
| 1971 -75 | 45 minus off shore proceed | |||
| 1975-79 | 20minus offshore | |||
| 1979-8,1 | – | |||
| 1982-92 | 1.5 minus offshore | |||
| 1 992 – 99 | Three minus offshore | |||
| 1999-2003 | 13 minus offshore oil | |||
| 2003- | 13 plus off shore oil |
Source: Adapted by author from Suberu 2001, Egwaikhide 2004
The third is the consequential marginalisation of oil producing communities who are largely minorities in terms of development projects and revenue allocation in the struggles between dominant majority groups for power, as the former lost control over oil resources. Thus, the oil communities have had to engage the Nigerian state man epic but alarming struggle for justice and equity (Graf, 1988, Joseph 1987, Obi, 1998, Lewis 1997, Aiyede 2002). The fourth is the fallout of-the increased centralization of revenue sources arid the heavy financial dependency on the centre by the federating units, These combined with the privatization of public office generates a situation where there is a preference for the practice of giving considerable importance to inter-state/local area: -equity * in the distribution of allocation from federally collected revenue to sub-national units. These encourage sub-national governments arid give them ‘every incentive to get more funds from this source, encourages financial irresponsibility and sets up strong forces for the creation of new states.’ (Tom Forrest as cited by Suberu 1994;3). Rather than the revenue sharing and tax assignments being a rational strategy of achieving the values and goals’ of Nigeria’s federation, they became a by-product of pressures for greater avenues for political and material advancement by local elites and their communities (Suberu, 1998:280). Thus, the political economy of existing revenue sharing arrangement and tax assignments show that they, reflect the politics of patronage and were done without spelt out basis that reckon with need to promote both equity and competitive growth. Little wonder it has remained one of the most contentious issues of federal practice in Nigeria. Nowhere is this result more evidenced than in the dysfunctional nature of decentralization in Nigeria which is buttressed by the widespread fall in government performance amidst a significant rise in government expenditure. Right now, sub-national governments suffer deficit in revenue powers that should enable them to prosecute their constitutional Junctions. While state officials have becomes ”millionaires by privatising public funds, local people do, not feel pressured to hold them accountable because public, revenue is not derived from citizens in most states and localities. Thus, government is propped up by oil money that is perceived as a national cake to be pillaged, while the real focus and work of government becomes secondary. Indeed, the present revenue arrangement has politically disempowered sub-national governments, and prevented them from economic autonomy. Sub-national units continue to rely, heavily on allocation from the federation account to meet basic responsibilities:
It should be stated here that before the advent of Obasanjo in 1 999, the revenue sharing formula looks like the Table III below:
Federal Government 54.68%
State Government 27.72%
Local Government 20. %
This sharing was further adjusted by the Obasanjo administration in 2002 to reflect
Federal Government 52.68%
State Government 26.72%
Local Governments 20.60%
In view of the frequent tinkering by the formula by the regime, the Revenue, Mobilization Allocation and .Fiscal Commission by Hamman Tukur in 2005 proposed to the National Assembly as follows;
Federal Government 47%
State Governments 35%
Local Governments 15%
Tukur said, local governments, were the worst hit but on the account of the delay in the passage of the new revenue formula. “No matter how good a revenue sharing formula is, if a beneficiary;: such as a local government, cannot fully benefit from it, then it is not of any benefit at all”, the RMAFC boss emphasized (Salaudeen,2008:A12).
He charged the National Assembly; Give us a dependable revenue allocation formula, so, that we can have equity and fairness. Indeed; the survival of a given federation as a sovereign entity will largely depend on the efficiency of its revenue allocation regime. He continued:
The political, social and economic stability of Nigeria as a sovereign state is predicated upon the reliability and acceptability of the revenue allocation formula, not a mere instrument used for determining what segment of the polity gets what percentage of the so called national cake.. Rather^ it is more of a tool used for ensuring fiscal efficiency, social justice1, and political stability, which will; guarantee growth and sustainable development within the context of a well defined national objectives (Salaudeen,2008:12)
Here we see increasing dependence sub-national government on-cetitralized resources meeting their basic expenditure obligations. Federal allocation accounts for up to average of 80 per cent of total revenue of the states against the highest point of 55.7 under the four-region structure. The ‘nature of the revenue (sources) assigned to the different levels of government and by the principles of allocation employed by the federal authorities’ determine the revenue, conditions of the various governments (Asobie, 1998:47). The nature of political restructuring of which revenue sharing and tax assignments are only a part is characterized by: ‘
The promotion of the ‘cake-sharing syndrome; the augmentation of the center’s political and economic hegemony via the erosion of the size and resource base of sub-national governments; the proliferation of unproductive, corrupt, wasteful and unviable political and administrative units; the intensification of ethnic, regional and. communal tensions over the beneficiaries and modalities of territorial restructuring; the stimulation of forms of parochial, divisive and exclusionary identities; and the legitimization of autocratic military rule (Suberu 1998:2)
A proper appreciation of the marked departure from the vision of the founding fathers of the federation can only be achieved when we make comparative review of the provisions of the 1963, 1979 and 1999 constitutions on fiscal relations.
The 1963 Constitution envisaged ‘several areas of interface between the national government and regional (later state) governments on revenue allocation. Section 140 refers to the mining royalties and rents that are collected by the federal government. The Federation was to pay a sum equal to fifty percent of proceeds of any royalty received by the Federation in respect of minerals extracted from a region. Subsection (2) required that 30 percent of such proceeds be credited to the Distributable Pool Account. Section 141 then described the formula for sharing the revenue in the Distributable Pool Account among the regions.
Although Section 143 allowed the Federal Government to collect customs duties, the regions were to pay the cost of collecting the duties proportionate to their share in proceeds of those duties received by the region in respect of each financial year.
The 1979 and 1999 Constitutions have made similar provisions, however, reflecting the flexibility that characterized the revenue allocation formula and structure of the Nigeria Federation from the 1970s on. Indeed, under the military between 1966 and 1979 and between 1984 and 1999 the revenue allocation formula was changed several times on the initiative of the federal government, sometimes after receiving the advice of a technical committee set up for same purpose. Under the 1999 constitution, mines minerals, including oil mining, geological surveys and natural gas are laced in the exclusive legislative list. Table IV shows tax assignments in Nigeria.
Section 149,150,151,152anditemAof the Concurrent Legislative List of the 1979 Constitution provide for revenue allocation and a Distributable Pool Account “to be distributed in terms, and in such manner as may be prescribed by the National Assembly”. Similar provisions are made in sections 162, 163, 164 165 and item A of the concurrent list of the 1999 Constitution. But the 1999 Constitution outlines basic principles to be taken into account in revenue allocation. These include: population, equality of states, internal revenue generation, land mass, terrain and population density. Furthermore, it requires that the principles of derivation be constantly reflected in any approved formula as being not less than thirteen percent of revenue accruing to the Federation Account directly from natural resources. For this purpose a permanent Revenue Mobilization, Allocation and Fiscal Commission (RMAF) was setup to advice the president.
TABLE IV: Tax assignments and jurisdiction in Nigeria
| Types of Taxes | Jurisdiction | ||
| Legislation | Administration and collection | Retention | |
| Import duties | Federal | Federal | Federation Account |
| Excise duties | Federation | Federal | Federation Account |
| Mining rents and royalties | Federal | Federal | Federation Account |
| Petroleum profits tax | Federal | Federal | Federation Account |
| Capital gains tax | Federal | State | Federation Account |
| Personal income tax | Federal | State | State |
| Value Added Tax | Federal | State | State |
| Company tax | Federal | State | State |
| Stamp duties | Federal | State | State |
| (lift tax | Federal | State | State |
| Property tax | State | State | State |
| Motor vehicle tax and driver’s license | State | State | State |
| Licenses and fees | Local | Local | Local |
| Motor park dues | Local | Local | Local |
Source: Revenue Mobilization, allocation and Fiscal Commission (RMAFC)
Personal income taxes of the armed forces, external affairs, and the Federal Capital Territory are federally legislated, collected and retained.
Conclusion
The study analyzed fiscal operations in the Nigerian local governments with concentration on the epoch period -1999-2007. The 1976 reforms resulted in a fundamental charge in the evolution of local government in Nigeria. More significantly, the changes occasioned by the reforms initiated statutory allocations of revenues from higher tiers of governments. Local governments began receiving direct funding from both the federal arid state governments in 1977.
For most of the period of study, however, state governments did not fulfill their statutory mandates regarding statutory allocations to the local government. Local governments like their state counterparts were heavily dependent on the federal statutory allocations in order to meet both recurrent and capital expenditures. And most of the former were for personnel costs. Some states have persistently defected in paying their statutory allocations ‘to local governments within their jurisdiction. Moreover the politicization of local governments brought about by the implementation of civil service ‘reforms of 1988, resulted in promised development projects hot matched by available resources. The deficits of local councils have been financed through state guaranteed loans, loans from commercial banks arid state grants. Surpluses that occurred as a result of the increase in the oil prices were not returned to the councils as such but were used to fund local projects by the states and the debt service by the center.
The 1976 reforms also stated the internal revenue sources of local governments, so as to minimize areas of conflict with state governments. For all the councils, taxes, rates; fines and fees increased during the period under review; though most of her taxing powers were reduced by the states. With the enormous task of developing areas under their influence, local councils ought to be encouraged to increase their internally generated revenue sources arid find new ways of enhancing revenues: The councils ‘, could embark upon joint ventures with public and private agencies and individuals, establishment of small and medium scale businesses. Local governments should be made to be more accountable to the electors, through monitoring. Fiscal decentralization should be encouraged through financial and political autonomy. There should be networking between local governments amid other tiers of government.
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