As was widely expected, and as I observed in my column in this paper a few weeks ago, the issue of fiscal federalism is proving to be a hard nut to crack at the National Conference. It is still being debated at the committee level and it was reported that the committee had agreed tentatively on the reduction of the federal share of the national revenue by some 10 per cent to be distributed among the states and local governments. But there were press reports also last week that the Northern delegation had circulated a 47- page position paper at the conference rejecting all claims to oil resources by the oil producing states, particularly in the Delta region. Specifically, the position paper is demanding that all minerals, including oil, should remain under the exclusive list of the federal government, and that the previous dichotomy on offshore and onshore revenues be restored.
In effect, the Northern delegation is giving notice in advance that it will oppose the principle of derivation as the basis for sharing the national revenue, particularly the oil revenue which accounts for over 80 per cent of the total national revenue. The Northern position is evidently an opening gambit in what is going to be a very contentious issue at the conference. After all, the oil bearing states already receive 13 per cent of the oil revenue in partial recognition and acceptance of derivation as a principle that cannot be totally ignored in revenue sharing.
There has so far been no official response from the oil bearing states to this Northern position paper. But it can be assumed that the oil bearing states, particularly in the Niger Delta, will vehemently reject the Northern position on the issue as totally unacceptable. They can expect support from the Southeast. But the position of the Southwest on this issue is not altogether clear. For reasons of political expediency the Southwest delegation is refraining from taking a position openly. But it should, as a matter of principle, take a position, and not wait for the Northern and Southsouth delegations to slug it out between themselves. After all the outcome of the dispute will have some financial consequences for the Southwest too. At the Obasanjo Reform Conference of 2005, the Southwest delegates were willing to support an increase of additional revenue for the oil states from 13 per cent to 19 per cent, but this modest increase was rejected out of hand by the delegation from the Southeast and Southsouth which insisted on nothing less than 25 per cent of the total oil revenue. It was on that dispute that the 2005 Conference broke down completely.
The irony of the present dispute over revenue sharing is that until 1966 when the military seized power, revenue sharing among the three regions of Nigeria was based on 50 per cent derivation. This was generally acceptable to all the parties concerned and was in conformity with the principle of revenue sharing in a truly federal system. But all this was before oil revenue became so dominant in total national revenue. Before independence in 1960 the British colonial power had taken a great care to ensure that all frictions on revenue sharing were resolved. Between 1946 and 1958 four separate commissions set up by the departing colonial power recommended that 50 per cent of total revenue be shared on the principle of derivation, that 35 per cent be shared by the regions, and only 15 per cent to the federal government. In fact, in 1964, after independence, the Binn Commission reduced the allocation of the federal government from 20 per cent to 15 per cent. This was the basis of revenue sharing among the federal and regions before the military seized power in 1966.
Under the military, the share of the federal government in total revenue was progressively increased. Oil had become a major factor in national revenue. The process of the erosion of the principle of derivation for revenue sharing began with the military’s Decree 13 of 1970, which reduced by 5 per cent revenue shared on the basis of derivation. In addition, the decree transferred all the revenue from off shore oil wells to the federal government. Between 1976 and 1979, the military regime reduced by a further 20 per cent revenue distributable on the basis of derivation. In 1981 the Shagari regime made a further reduction of 20 per cent on revenue sharing on the basis of derivation. With this, revenue distributable on the basis of derivation fell from 50 per cent at independence to only 5 per cent. When the military returned to power in 1984, revenue sharing on the basis of the principle of derivation was further reduced to 1.5 per cent. It should also be noted that virtually all the leaders of the military regimes, except the Obasanjo regime, that undermined the principle of derivation as the basis for the sharing of the national revenue were from Northern Nigeria. This further complicated the problem as most of the oil is located in the Delta region. In 1992 the Babangida military regime decided that the share of the federal government in national revenue would be 48.5 per cent, the states 24 per cent, the local governments 20 per cent, and the balance of 7.5 per cent was to be held by the federal government as special fund. In effect, the total share of the federal government in the national revenue, over 80 per cent of which is from oil exports, was 56 per cent.
Now, this is a massive negation of the principle of derivation and of fiscal federalism. It is totally unacceptable and the oil bearing states are right in demanding a drastic review of the existing formula on revenue allocation as it hurts the financial viability of the states (37) and local governments (774) very badly. While the FG gets over 56 per cent of the total revenue, states get less than 1 per cent each and the local governments even less. The issue is not even about the financial profligacy, or massive corruption of the federal government, or its colossal financial mismanagement. The issue is that this imbalance in revenue sharing between states and the federal government has been a persistent source of friction between them as it places the other tiers of government in the federation in an invidious situation of having to rely on the federal government for financial bail outs. This runs counter to the principle of fiscal federalism which should be based on the recognition that both the federal government and the federating states are co-ordinates, equal in all respects to one another.
It is in the interest of the states for the federal government’s share of the national revenue to be reduced so that individually all states, including the Northern states, can get more from the total national revenue. The position of the Northern delegation is obviously based on political expediency, on the expectation that power will revert to the North in 2015. If the situation was reversed, and most of the oil was located in the North, there is no doubt that the Northern delegation would insist on the principle of derivation as the basis for revenue sharing.
However, there is one issue on which the littoral oil bearing states stand on a weak wicket. It is that of their claim to offshore oil as well as onshore oil. These states cannot legitimately claim exclusive ownership of offshore oil, the proceeds of which should be shared by both the states and the federal governments. This position was affirmed at the UN Law of the Sea Conference of 1982 in which I participated when I was Ambassador at the UN and which the Northern delegation referred to in their position paper. The littoral oil bearing states cannot claim 50 per cent of the revenue accruing from offshore oil as offshore resources belong to the entire country and should be shared equally among them. Neither can the federal government claim exclusive ownership of revenue from offshore oil. After all, without the states there can be no federal government. There is no provision in the convention agreed at the UN Law of the Sea Conference vesting total ownership of offshore oil in the federal government.
It should be possible for these huge differences over revenue sharing to be resolved at the conference. What is needed all round is compromise and a spirit of give and take on all sides in the overall interest of the nation.
