Derivation, Resource Control And The NPRC

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

 

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