MID-WEEK ESSAY:  DERIVATION, RESOURCE CONTROL AND THE NPRC -  JOINING THE DEBATE

By

Mobolaji E. Aluko, PhD

alukome@comcast.net

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), where a fundamental disagreement – and one might add confusion - over resource control and mineral derivation funds has arisen,  leading to serious contentions and a walkout by the South-South delegation, support by the South-East and South-West (largely over procedural matters), and threats of walkouts by the Northern delegation.  A suspension of the NPRC has now been effected by President Olusegun Obasanjo until cooler heads prevail. 

Since mineral derivation is almost exclusively from 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 the constitutionally-stipulated minimum of 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 thereafter within the framework of the RMAFC  as mandated by the Constitution. (RMAFC stands for Revenue Mobilisation, Allocation and Fiscal Commission,  which sets the terms for the monthly  meeting of the Federation Account Allocation Committee (FAAC),  a revenue-sharing shop of the federal government and all states.)  This conservative zone’s agenda even beyond the derivation principle at the NPRC 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 quite confused and bewildered, having been thrust into the conference in turmoil without a roadmap or 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, turning the delegates into spectators at this NPRC.

In this essay, we will briefly review some historical information on revenue allocation in Nigerian and then evaluate the effect on state and federal allocations of increasing the derivation percentage from 13% to 50%.  Finally, we will suggest a phased and mixed resource control/derivation regimen that will be a win-win for all parties and that will, in twenty years in four quanta of 25%, lead from the current 0% resource control to full control, with an immediate increase to 20% derivation of any interim portion of land and sea that is not resource-controlled.

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,  and therefore with little or no hindrance, take full responsibility for 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 prolonged 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 Nigeria’s 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 total mining revenue -  of which  50% was to be returned to the 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 allocations 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?” concern (is it of mining rights + royalties, or of some total revenue,  or of some net revenue, or what?) 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 of General Olusegun Obasanjo 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, leading to the contentious dichotomy between on-shore and off-shore oil revenues that eventually led to the need for a Supreme Court ruling.  [ Off-shore oil is currently roughly 40% of total revenue (See Table 8), with virtually all of Akwa-Ibom’s revenue being off-shore.]

.

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/mineral 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  

State Government:            s

Local Government:       (1-s-g)

A further fraction z of g goes for further oil area development (for schemes like PSTF, OMPADEC and now NDDC), which, in itself, is part of a “Special Funds” category of 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:                      

(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 the pocket of the “local” governments of the communities of derivation 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, then 1-m-t = 0.55, and  hence we see that in that case, derivation is not kosher !

In general, if under full resource control w is the government tax rate, then it is only when:

                                           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, and full control at 50% taxation is clearly much more desirable than resource control at 13%.

5.  PROMOTING EQUITY AND FAIRNESS - A MATHEMATICAL BASIS FOR CHOOSING DERIVATION PERCENTAGE

Finally, there is another issue that needs to be looked at closely before leaving this section:  that is the promotion or lack thereof of a measure of equity in the finances of the oil states relative to the non-oil states during this derivation-focused debate.  If we recall that 9 states out of 36 (encompassing 185 local governments out of 774) are considered oil-producing, and defining a measure of that equity as the ratio  ARO / ARN where

ARO =  average revenue of oil producing state

ARN =  average revenue of non-oil producing state

then we have that:

ARO/R =  {d + s(1-d)*(9/36) + z*g*(1-d) + (1-s-g)(1-d)*185/774}/9

and

ARN/R = {s(1-d)(27/36) + ((1-s-g)(1-d)*589/774]}/27

where we have taken into consideration oil-derivation funds, state-based funds, oil-area-development funds and local government allocations for the oil-producing states.

As a nation, we will have to come to some agreement as to what is fair in terms of this ratio – which is independent of Memorandum fraction  m and Transfers fraction  t -  BOTH to the oil-endowed states AND for the unity and stability of the entire country, bearing in mind that the royalty and mining rights are typically 10-20% of oil revenue, and the total oil revenue is roughly 75-80%  (that is Oil to Non-oil revenue ratio of 3 to 4) of the total federally collected revenue.

For example, with current  d=0.13, g=0.55, s=0.3 and z*g = 0.0175,   

{ARO/R}/{ARN/R}= 0.0274/0.0115 = 2.383

On the other hand, when d=0.50, this ratio more than triples:

{ARO/R}/{ARN/R} = 0.0647/0.00839 = 7.712

Table 9 lists the value of this ratio as a function of the derivation fraction d.  It is interesting to note that when 0.186 < d < 0.268,   that is when derivation is roughly between  19-27%  then 3 < ARO/ARN < 4, commensurate with the current oil to non-oil revenue ratio in the country, which, by the way, is not DECREED to last for ever !

Thus a mathematical basis of choosing d  is thereby given - and therefore a basis for increasing it to within the 19-27%  range, with 20% being my own recommendation in the first instance.

Finally, ARO/ARN is a ratio of averages, but it must be noted that the ratio (RO)max/(RN)min - that is the maximum revenue of one of the oil-producing states to that of the minimum of a non-oil-producing - can be quite large - as much as 2 to 30 times the ratio of averages.

.  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 Constitutional Conference of 1995 fixed d to be 13%, and the 1999 Abdusalami Abubakar Constitution engrained it AT A MINIMUM of 13% .  It was not however until April 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 [Table 6a on a state-by-state basis, Table 6b on a zonal basis. Table 6c shows some physical information on the states.] 

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 together constitute 90%  of the derivation (Cross-River, Edo, Ondo, Abia and Imo make up the rest 10%). For example, from Table 4, we notice that the 13% derivation fund increased seventy-fold from N2 billion in 1997 to N137 billion in 2003, at a time when the gross oil revenue increased five-fold 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 all states (based largely on population) and local governments (based largely on their numbers in each state.)   From Table 6b,   those of Akwa-Ibom (N6.839 billion) and Delta (N6.240 billion) are not too far behind;  each of these AkBaDeRi states is  higher than any of the other states in the federation by at least a factor of 2 [closest is Lagos at N3.081 billion] and as high as 6.5.  [Nassarawa has N1.397 billion and Ekiti N1.408 billion.]  The gross amount of all the six South-South states (N35.164 billion; total 1991 population about 14.1 million)  for May 2005 is higher than that of all the 19 Northern States put together [for a total of N33.349 billion and 1991 Census of 51.6 million people; with  NW = N13.458 billion, NE = N9.991 billion and NC= N9.800 billion].

It must be noted that in DOLLAR terms, the gross oil revenue and 13% derivation fund increases from 1997 (dual exchange rate – official $1 = N21.9; AFEM: $1= N84.7)  to 2003  (average DAS exchange rate $1 = N129.3) are not so dramatic. For derivation fund, they represent an increase from $0.024-0.09 billion to $1.06 billion – still a twelve-to-forty-four-fold increase in dollar amount.

.  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 and considering past deprivations, 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 February 2005 and 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.   (We are using 52% because of ease of calculating figures by multiplying 13 by 2 (to get 26) and then by 2 again to get 52.  Conclusions will not change substantially.)  Delta State’s total May 2005 intake (N8.94 billion) would have gone up to N31.2, at a time when the average state intake in May 2005 was N1.7 billion, which would have been 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 un-manageable 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 Nigeria.]  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.

.  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 since each state has mineral and other resources that it can tap.  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 resources by themselves due to constitutional restrictions clamped on by both federal ownership and federal disinterest in the effort to tap certain minerals.

We therefore hereby 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 control with appropriate taxation in steps of 25% increase every four years. During the transition period, present derivation formula should be fixed at about 20% for  EVERY MINERAL in the resource-uncontrolled portions of each state.

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.

.  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, free, fair and democratic country moving towards nationhood, then cool heads must prevail as we right historical wrongs without creating new ones.  The first place to start is to be very mindful that there is a clear difference between resource control and derivation percentage, and not for even some of our best minds to glibly quote percentage figures for these two issues (that is derivation and resource control)  as if one could be exchanged with the other.

I rest my case for now.

[ END NOTE]:

Due to storage size and formatting reasons, you may find the tables referenced in this essay missing below;  in that case, they have been archived as in a URL on my website:

    http://www.nigerianmuse.com/essays/Derivation_resource_control_NPRC_debate.htm

TABLE 1:  REVENUE ALLOCATIONS FOR 1959, 1960 and 1961

The following table is adapted from Table 11.1 of a book entitled “Nigeria:  The Tribes, The Nation or the Race”  [MIT Press, 1965; page 206] by  F.A.O. Scwharz showing amounts received by the then three Regions East, West and North of Nigeria from the Federation (in Pounds)

See:

http://www.nigerianmuse.com/important_documents/?u=historical_revenue_allocation_outline.htm

Note:  A small amount of income tax was also transferred in 1959-60 and 1960-61, so that the sum of the listed figures is somewhat less than the totals.

Table 2:  Brief Historical Outline of Revenue Allocation Formulas in Nigeria

*General Ecological Fund (1.50 per cent); Solid Minerals Development Fund (1.75 per cent); National Agricultural Development Fund (1.75 per cent) and National Reserve Fund (1.50 per cent).

Table 3:   Budget and Revenue Allocation Items

*Note: The items MF + TF are controlled by the Federal Government, and are different from FGF which form the bulk of the Federal Government Annual Budget.  Thus in reality, the FGN controls at least MG + TF + FGF

   Table 4:    Federation Account Operations for the Years 1997, 2000, 2002 and 2003

(Source:  “Annual Report and Statement of Accounts – For the Year Ended 31^st December, 1997, 2000, 2002, 2003) -  Published by the Central Bank of Nigeria (CBN)

1/   Revised

2/   Provisional

3/  Consists of export and domestic oil revenue

4/   As contained in memorandum items

5/   Includes Education Tax, Customs levies and Privatisation proceeds

6/   Before the 2002 Supreme Court judgment was an item under “Special

       Fund: is now an item of distribution directly from the Federation Account

7/    Before the 2002 Supreme Court Judgement, was being deducted from

       the Federation Account, but is now being deducted from FG share of the Federation Account.

8/   In 1997, “Others” was transfer to PSTF (Petroleum Special Trust Fund)

Sources:  Federal Ministry of Finance.&   Central Bank of Nigeria

TABLE 5:  STATE-BY-STATE REVENUE ALLOCATIONS FOR 1999 – 2004

Summary of Allocations to Different Tiers of Governments

In Nigeria from June 1999-July 2004 (Source: Federal Ministry of Finance, Nigeria, website)