Contending With Voodoo Mathematics?

By

Michael Oluwagbemi

michael.oluwagbemi@gmail.com 

July 26, 2005 

I read Bolaji Aluko’s derivation mathematics with great amusement as well as his original article and the rejoinder by another fellow, with great interest. The contribution of Nigerians in Diaspora especially the rising intelligentsia in the United States to the debate back in Nigeria is quite noteworthy. I wonder when some of them would give up their green card and permanently relocate to Nigeria.

Indeed, while Aluko’s proposition on derivation is a succinct departure from his federalist posture in past articles (which is quite disappointing of an Ekiti man), it does not surprise me. For when push comes to shove, all systems of government proposed by various interest groups is basically because of self interest. I can easily see Professor Aluko in Dikko’s shoe if he was from revenue challenged Zamfara state!

Going straight to the point however, it is easy to see the voodoo behind the minimum 40% derivation threshold of Professor Aluko. Indeed, the manner in which the derivation principle is practiced in Nigeria today is flawed. In my humble opinion, derivation should be applied across board on all revenues accruing to the federal purse including export-import duties, income taxes, consumption taxes and mineral revenues. This would ensure that the unusual disparity in income between mineral and non-mineral producing states today would be narrowed and would turn the state governments to natural tax police since a higher tax compliance rate would ensure greater share of the national income.

Indeed, simple derivation mathematics can be worked out. It is proposed that on receipt of federal purse, revenues should be shared first between the federal and state governments, with the federal government and deductions (including FCT, ecology, judiciary, INEC and ETF) not getting more than 40%. The business of creating and allocating funds to local government should left to state legislators and rightly so. Then, Dikko would be well disposed not only to discuss the disparate income due to derivation now being enjoyed by Niger Delta states but also the mind boggling loot being enjoyed by bare Northern states courtesy of their bloated number of parasitic local governments while denying Lagos a fair shot!

With at least about 60% of revenues left for sharing by state government, 50% should be shared on the basis of where it was derived. Hence if there are 36 states, and 1 billion dollars of revenue after FG has been paid in a month- all states would have a fair share of 0.5 billion dollars based on where the 1 billion plus FG share came from (remember, excluding resources beyond the continental shelf as per supreme court judgment which is the rising portion of federal receipt from oil, since deepwater exploration is the future of our oil and gas industry).

Indeed, in this case states like Zamfara that contribute 0.05% of national revenue would get the equivalent of twenty five thousand dollars while Delta with about twenty percent would get 100 million dollars. But remember Lagos, Oyo and Indeed Kaduna and Kano in this instance would become more competitive since commercial revenues would dilute the share of oil receipts which stands at about 70-80% today.  Indeed, it would encourage everyone to look inwards and rightly so.

In continuation of this formula based on true federalism, all states should share 25% of income equally. This would mean Zamfara is at least assured of 250 million dollars divided by thirty six, or have the option to consolidate with Kebbi into one state and get an increased share of 250 million dollars divided by 35. This would open the door to self survival or consolidation of fragmented states that have become parasites on the federal machine of state.

Furthermore, another 25% should be shared on the basis of population. This point would be very contentious in the context of Nigeria and her history of flawed census. But it is suggested that we should not rely on census as a basis of this formula. Nigeria should deploy her much vaunted space technology to help in this area. It is as simple as announcing a 15 minutes break for all Nigerians in a day and deploying the latest satellite technology to map the entire country once. If everyone stood still or at least in a fixed radius for 15 minutes on the particular day, most satellite technology would be able to accurately predict the population distribution of the country. If we claim to be a progressive nation, technology must be useful to us in solving our problems, Chikena! And indeed, over crowded Lagos, Kaduna, Kano and even Rivers and Delta would benefit from this population aspect. It is the likes of Zamfara that would have a lot to worry about. No wonder Dikko was complaining- Lord have mercy.

Indeed, in all these formulas we have excluded royalties from mineral exploration and from exploration beyond the continental shelf. It is suggested that all royalties, which normally amount to about 1% of national revenue today should be refunded to the local government where it is derived or to the federal government to manage the FCT if it is from exploration zones that are offshore. This would be a way to strengthen local government in the country and encourage them to spearhead mineral developments in their domain and would be our joint contribution to our cement edifice at Abuja anyway! In addition to this, the money from offshore exploration should be shared equally by all government of the federation including the FCT and FG regarded as one government. Hence the revenue from offshore exploration would be divided by 38 to obtain what each state would benefit.

Below is a theoretical calculation of allocation benefits of the Federal Government, Delta State (representing a typical oil state), Lagos (Representing Non-oil but substantial contributor), Plateau (representing a typical state) and Zamfara (representing a virtual non contributor) if the formula above is implemented. Indeed, the underlying assumption is that the revenue being shared is two billion dollars, that 1% of this represents oil royalties and the portion available from offshore exploration is another 16.5% (conveniently based on 14-20% projections of deepwater revenues by International Energy Agency for Nigeria by 2010). Hence only 82.5% of the 2 billion dollars are subjected to the 4:6 split of FG and state governments- this is about 1.67 billion dollars- the FG gets 0.67 and states get 1 billion dollars.

All figures are based in billion dollars

For the sake of simplicity, the chart assumes that Delta state contributes about 15% of national income (based on most recent derivation figures), Lagos about 5%, Plateau about 0.5% which is about the average for most states (since other states excluding Lagos and Oil producing states provide 10% of federal revenue) and, and Zamfara 0.05%, which in any case is abysmal. In reality this distribution is accurate given that oil producing states are responsible for 80-90% of national revenue but this would likely reduce if offshore receipts are eliminated, custom duties and taxes included and royalties excluded. The population figures were based on World Bank estimates.

Perhaps a glance at the final figures obtained would show that this formula is very practical. While Delta and other states would continue to derive benefits of producing oil, states like Lagos, Oyo, Kano and Kaduna would benefit from generating non-oil receipts which would narrow the gap. In fact about 0.45 billion dollars of the assumed 0.5 billion dollars for derivation would be obtained by Lagos, Kano and nine oil producing state which makes it fair. In addition to this, an average state would derive the benefit of mineral royalties since most states contain some minerals and would then do a better job of stopping illegal miners and obtain royalties for such exploration (states like Lagos may not necessarily be bothered by this and that was why it was left blank in the table)

In this table, Plateau was able to compensate for shortfall in revenue from royalties from coal, tin and copper mining (theoretically) and was able to pull her weight in the population column ahead of Delta. Zamfara fell short across board but was not as distant to Plateau and with controlled spending and investments in education and private sector in other sectors would be considerably better positioned for competition in the future. Perhaps, the greatest possible effect of thus kind of formula is the inward shift of capital from indigenes at home and abroad to develop industries their states of origin and assure better future for their people. People like Dangote would then be more favorably disposed to invest in Kano than Lagos and would encourage Easterners to invest in their homeland as well; the same can be said for states like Ekiti and Osun.

States Classification Based on Revenue Profile

Below is a general classification of states based on the revenue profile captured above. States with comparable revenue profile with Delta State are called ‘oil’ and would benefit from this formula immensely. However some states in this category would need to do a little bit more in the future to stay afloat, since the oil resources onshore is continuously being depleted or stopped in favor of offshore exploration. States classified as ‘above’, would be fine without oil receipts because of considerable non-oil revenues from taxes, custom duties and benefits of relatively large urban population. States classified as ‘average’ are comparable with Plateau state and would be sustainable with good economic management and cost cutting especially on civil/public service and social services in favor of private enterprise and small governments. States classified as ‘below’ would need a considerable amount of federal grants to be sustainable, while others may consider outright consolidation and dissolution. In the alternative, these states might become more competitive by emphasizing private investments, mineral exploration (e.g. Ekiti) and support mass migration from urban areas to boost share of revenue due to population. In addition, these states can improve tourism or develop industries with high industrial capacity like petrochemicals, steel or cement that can make them competitive overnight. Indeed states like Taraba and Sokoto are on the fringes of ‘below’ average and are classified as average because of maturity and presence of an overwhelming industry (agriculture for Sokoto and minerals for Taraba)