Government revenue allocation is one aspect of governance that grabs the interests of politicians and citizens of the country.
In our previous post on the major sources of government revenue and government expenditures, we’ve talked about how the Federal government derives its revenue from different sources.
The revenue realized is paid into a the consolidated revenue fund. But how does the government allocate this revenue? What is the sharing formula?
Before we go about that, you should know more about:
- The regulatory body in charge of the revenue allocation in Nigeria,
- Government revenue allocation and sharing formula across the three levels of government, and
- The committee in charge of allocating funds from the Federation Account to the three tiers of government.
The Revenue Mobilization Allocation and Fiscal Commission RMAFC
- Monitor the accruals to and disbursements of revenue from the Federation Account;
- Review from time to time, the revenue allocation formula and principles in operation to ensure conformity with changing realities;
- Provided that any revenue formula which has been accepted by an ACT of the National Assembly shall remain in force for a period of not less than five years from the date of commencement of the Act;
- Advise the Federal and State governments on fiscal efficiency and methods by which their revenue can be increased.
- Use all legal ways and means to strengthen its monitoring mechanism and block leakages of revenue from the Federations Account. All relevant laws and regulations on revenue collections and remittances should be fully complied with and appropriate sanctions visited on defaulters.
- Concentrate more on expanding the sources of revenue to the Federation Account and other non-oil sources including solid mineral.
Revenue Allocation – How Government Distributes Revenue – Sharing Formula
Fundamentally, there are two components of the revenue allocation formula used for the disbursement of the Federation Account to the three tiers of government:
1. Vertical Allocation Formula (VAF)
2. Horizontal Allocation Formula (HAF)
The Vertical Allocation Formula:
This formula shows the percentage allocated to the three tiers of government i.e. federal, states and local governments.
This formula is applied vertically to the total volume of disburseable revenue in the Federation Account at a particular point in time.
The VAF allows every tier of government to know what is due to it; the Federal Government on one hand and the 36 States and the FCT and 774 Local Governments on the other.
The Horizontal Allocation Formula:
The formula is applicable to States and Local Governments only. It provides the basis for sharing of the volume of revenue already allocated to the and 36 States and 774 Local Governments.
Through the application of the principles of horizontal allocation formula, the allocation due to each State or Local Government is determined.
Thus, it can conveniently be concluded that the vertical allocation formula is for inter-tier sharing between the three tiers of government while the horizontal allocation formula is for intra tier sharing among the 36 States and the 774 Local Governments in Nigeria
The approved Allocation of Revenue (Federation Account, etc.) Act of 2004, states as follows:
The amount standing to the credit of the Federation Account, less the sum equivalent to 13% of the revenue accruing to the Federation Account directly from any natural resources as a first line charge for distribution to the beneficiaries of the derivation funds, in accordance with the Constitution shall, be distributed among the Federal, States and Local Government Councils in each State of the Federation on the following basis:
- Federal Government = 56%
- State Government = 24%
- Local Government Councils 20%
So, how does the Federal, state and local government utilize funds allocated to them from the Federation account?
56% of Federal Government Revenue Distribution
The 56% of total revenue allocated to the Federal government will be utilized/distributed as follows:
- Federal Government = 48.5%
- General Ecological Problems = 2%
- Federal Capital Territory = 1%
- Stabilization Account = 1.5%
- Development of Natural Resources = 3%
Total = 56%
24% of State Government Revenue Distribution
The 24% standing to the credit of all the states, from the Federation Account shall be distributed among the 36 states of the Federation.
The factors for distribution are specified in the Act as follows:
(a) Land Mass: Land mass of a state of local government shall be the proportional area size (PAS) of the State or the Local government to the total size of Nigeria, and shall be donated as follows:
For each state:
PAS = (Area size of State x 100)/Total Area size of Nigeria
For each local government:
PAS = Area size of the Local government/Total area size of Nigeria
(b) Terrain: Allocation due to terrain is made on the basis of the proportional area size of the three identified major terrain types present in the State or Local government area respectively, which are:
- Wetlands/water bodies
- Plain; and
(c) Education: This parameter for allocation to Social Development Factor (SDF) shall be measured in terms of primary schools enrollment which attracts 60% of the allocation, while the remaining 40% is made using secondary/commercial school enrollment.
The allocation on primary school enrollment is made solely on direct proportion. 50% of the allocation on the basis of secondary/commercial school enrollment is made in direct proportion while the remaining 50% is made in inverse proportion. School enrollment refers to public funded schools only.
(d) Health: This has a parameter for allocation to social development factor shall be measured in terms of the number of State/Local government hospital beds there. 50% of the allocation to health shall be made in direct proportion to the number of the state hospital beds, while the remaining 50% shall be made in inverse proportion.
(e) Water: This as a parameter for allocation to social development factor shall be represented by the mean annual rainfall in the state headquarters and territorial spread of the state.
50% of the allocation to water shall be made in direct proportion to the state territorial spread while the remaining 50% shall be made in inverse proportion to the mean annual rain fall in each state headquarters, using the most current 5-year figures. This is the same for all the states.
The 24% allocation to the 36 states and Abuja treated as a State for this purpose is redistributed, using the following criteria:
- 40% was allocated on the equality of all states
- 40% on population
- 15% on social development e.g primary school enrollment and;
- 5% on the internally generated revenue effort.
Now let’s talk about another important body..
Federation Accounts Allocation Committee FAAC
Federation Accounts Allocation Committee FAAC was set up by the Allocation of Revenue (Federation Account), Act, Cap. A15 LFN 2004 to deliberate upon and allocate funds from the Federation Account, to the three tiers of Government.
Not quite long, on May 21, 2019, the FAAC distributed the sum of N616.19bn from the federation account to the three tiers of government as revenue allocation for the month of April.
Composition of the FAAC
The Federal Accounts Allocation Committee are:
- The Federal Minister of Finance – Chairman
- All State Commissioners of Finance – Members
- Two persons to be appointed by the President
- Accountant General of the Federation
- All States Accountant Generals
The Permanent Secretary of the Federal Ministry of Finance or representative as designated by the said Minister, is the Secretary.
The major functions of the FAAC is to ensure that allocation made to the States from the Federation Account are promptly and fully paid into the Treasury of each state, on basis and terms prescribed by law.
Also, FAAC is to report annually to the National Assembly in respect of its functions specified above.
State Joint Local Government Account Allocation Committee
The functions of this committee is to ensure that allocation made to the local government councils from both the Federation Account and the state internally generated revenue are promptly paid into the State Joint Local Government Account and distributed to the local government council in accordance with the provisions of the law.
Composition of the Committee include:
- The Permanent Secretary for local government affiars – chairman
- Chairman of each local government council in the states
- two persons to be appointed by the governor of the state
- two representatives of the Accountant General of the state, and
- the Federal Pay Officer in the state.
Government Revenue Allocation (summary)
To ensure that government revenue reaches the grass root at the local government, the State Joint local Government Account Allocation Committee – SJLGAAC has been put in place.
This committee is set up to ensure equitable distribution of the statutory allocation to local governments from the Federation Account and 10% of the internally generated revenue of the appropriate State Governments are shared to the beneficiaries, in accordance with the 199 Constitution, using the criteria as Equality, Population, Primary School Enrollment and Internally Generated Revenue Data.