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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 8 NO 2, DECEMBER, 2010


FISCAL FEDERALISM AND EQUITY IN THE STATE JOINT LOCAL GOVERNMENTS’ ACCOUNT:  OYO STATE IN FOCUS

 

Fatai Abiodun Atanda

 Department Of Economics & Financial Studies,Fountain University, Osogbo.

and

 A. G. Abiola

Department Of Economics,Obafemi Awolowo University, Ile Ife

 E-mail:atanda2001uk@yahoo.co.uk

 

Abstract

The introduction of state joint local governments’ account implies that the revenues allocated to the Local Government Areas (LGAs) of a state from the Federation Account should be pooled together and shared among the LGAs. But some deductions are usually made before the balances of the pooled revenues are distributed to the 33 LGAs in Oyo State using the principles and formula approved by the state’s House of Assembly. This resulted in allocating revenues to some LGAs more than they were allocated from the Federation Account at the expense of others. This paper examined the issue of equity in the operation of joint account in Nigeria with particular reference to Oyo State. Data for this study were collected through secondary sources and descriptive and inferential statistical methods of analysis tools such as ratios, percentages, bar charts and t-test were used. Results showed that there are discrepancies between the proportions of direct and indirect allocations made to the LGAs during the periods 2003-2007. The comparison of per capita allocations to the LGAs with equal proportions of direct and indirect allocations further showed that the principle of equity was played down upon. The t-test also showed that there is significant difference between the means of per capita direct allocations (PCDA) and per capita indirect allocations (PCIA). It was therefore concluded that the 33 LGAs in Oyo State were not fairly treated because majority (54%) of them were made worse off by the joint account. The paper recommended that the principles and formula used in operating the joint account in Oyo State should be reviewed such that the treatment that can be received by individuals living in the 33 LGAs will almost be the same.

 

Keywords:Allocations, equity, better off, worse off.

 


Introduction

In Nigerian federalism, revenue collection is highly centralized and all revenues collected are paid into the Federation Account with the exception of the Value Added Tax (VAT) and some minor federal revenue referred to as the ‘Federal Government Independent Revenue’. The Federation Account is administered by the National Revenue Mobilization, Allocation and Fiscal Commission (RMAFC) and the revenue in the account and the Value–Added Tax Account are shared by a formula prescribed by the National Assembly among the three tiers of government i.e. federal, states and local governments. At the states level, revenue standing to the credit of a special account called the ‘State Joint Local Governments Account’ is shared by a Committee which comprises of representatives of all LGAs of a state; usually the elected Chairmen using the principles and formula prescribed by the states’ Houses of Assembly.

 

The state joint local governments’ account first appeared in the 1976 Local Governments Reform as recommended by the commission set up for the purpose of improving and standardizing local governments’ administration in Nigeria and the joint account was subsequently provided for in the 1979 Constitution. The alleged abuse of this provision by politicians in the second republic (1979-1983) was a major set back in its use as most state governments whittled down the finances of their LGAs. It was therefore not surprising that with military take-over in the late 1983 and the suspension of the 1979 Constitution, the joint account was abolished.

 

The operation of the joint account later resurfaced in the 1999 Constitution and Section 162 (6) and (8) of the constitution specifically provided for it. The mode of operations of the joint account varies from one state to another and it is imperative to examine how equitable the operations are in the 36 states of the Federation. However, our focus is on Oyo State being one of the states that derive a high percentage of finances from the Federation Account; it’s LGAs inclusive. Hence, the 33 LGAs cannot afford to loose sight of the role indirect allocations (i.e. allocations from the state joint local governments’ account) played in the stock of finances available to them.

 

In Oyo State, the joint account was introduced late 2002 when there were hues and cries by some LGAs over continuous ‘zero allocations’ from the federation account. This situation was caused by higher deductions (mainly salaries of primary schools’ teachers) made on direct allocations to the LGAs, on the one hand, and the lopsidedness of the formulae used by the RMAFC that favoured new LGAs more than the old ones, on the other. The LGAs with large number of primary schools were often left with meager or negative funds after salaries of primary schools’ teachers and other statutory deductions have been made. Hence, the joint account was introduced with the aim of addressing the imbalance.

 

The introduction of the joint account implies that the revenues allocated to LGAs of every state together with the 10 percent of the state’s internally-generated revenue should be pooled together and shared among the LGAs of the state. Before this is done in Oyo State, certain deductions are usually made, namely: contributions to primary education, logistic support by LGAs for security in the state, reservation for capital projects, running cost of the joint account committee and several other deductions on monthly basis and the balance distributed to the 33 LGAs using principles and formula such as Landmass (20%), Population (30%) and Equality (50%) as approved by the state’s House of Assembly (Atanda, 2005). All these caused great discrepancies between the proportions of direct and indirect allocations and the per capital direct (PCDAs) and indirect revenues (PCIAs) allocated to the 33 LGAs over the years.

 

It should be noted that State Governments are not intended to be beneficiaries of the joint account rather; they are trustees of the account. They are required to maintain the account for the benefit of their LGAs by ensuring that the amounts allocated to this third tier of government from the Federation Account are equitably and fairly shared among the LGAs, adhering strictly to the constitutionally-stipulated criteria and process. However, reports across the country indicate that most State Governments are using the joint account contrary to this intention (Okafor, 2010).

 

Consequently, this paper attempts to answer this question: How equitable are revenues standing to the credit of the state joint local governments’ account distributed to the 33 LGAs in Oyo State using the above principles and formula? The objective of this study therefore is to examine the issue of equity in the operation of the state joint local governments’ account in Oyo State during the period 2003-2007. To achieve this objective, this paper examined the proportions of direct and indirect revenue allocations made to the LGAs and the differences therein. This necessary in order to ascertain the extent to which each LGA was made worse or better off with the operation of the joint account. Moreover, a comparative analysis of per capita direct (PCDAs) and indirect allocations (PCIAs) to the LGAs was carried out to specifically reveal the amount in monetary terms of equity or inequity in indirect allocations. The hypothesis that there is no significant difference between the means of PCDAs and PCIAs to the 33 LGAs was also formulated and tested using appropriate technique.

 

Methodology

Secondary data used in this study were collected from sources such as the Federal Ministry of Finance and Central Bank of Nigeria (CBN)’s Annual Report and Statement of Accounts for monthly direct allocations; the Ministry of Local Governments and Chieftaincy Matters, Oyo State for monthly indirect allocations and the National Bureau of Statistics for the 2006 population census figures for the 33 LGAs in Oyo State. The methods of analysis employed were descriptive and inferential and statistical tools such as tables, percentages, ratios, bar charts and t-test were used.

 

 To provide basis for comparison, two sets of data were developed: allocations from the Federation Account (i.e. direct allocations) and allocations from the state joint local governments’ account (i.e. indirect allocations). To address the issue of equity, LGAs that were allocated equal proportions of direct and indirect allocations were compared to show how they were made better or worse off during the periods under review. LGAs are made better off if they received greater proportions of indirect allocations than the proportions of direct allocations, and vice versa. A comparative analysis of PCDAs and the PCIAs specifically revealed the differences in the fiscal treatments that are given to individuals in the LGAs in monetary terms and the comparison in no doubt made the issue of equity in indirect allocations to come to the fore.

 

Analysis

The proportion of the amount of discrepancies to direct allocations was used for comparison because it is considered a more appropriate measure since a LGA with lower discrepancy in monetary term may experience a higher percentage of total discrepancy than the one with higher discrepancy in monetary term. For example, Ibadan North-East LGA experienced the highest total discrepancy in monetary value of N2,836.064 million or 60.4 percent of its total direct allocations whereas, Oorelope LGA suffered a total discrepancy of N1,903.428 million (which is lower than that of Ibadan North-East LGA in monetary terms) or 66.9 (which is greater than the proportion suffered by Ibadan North-East LGA) of its total direct allocations of N3,136.282 million for the period under review.

 

Therefore, Oorelope LGA proportionally suffered higher deductions but lesser deductions in monetary terms than Ibadan North-East LGA. The table further shows that Ibadan North-West LGA that suffered a higher deduction proportionally of 60.2 percent of its total direct allocations or N2, 039.967 million that is far lower than the discrepancy suffered by Ibadan North-East LGA of N2,498.825 million or 55.1 percent of its total direct allocations. This also means that proportionally, Ibadan North-West LGA suffered higher deductions but in monetary terms, lower deductions than Ibadan North-East LGA

 

The data in Table 1 shows that between 2003 and 2007, thirteen (13) LGAs exhibited equal proportion of direct allocations, pair wise. They are Atiba, Oorelope, Oyo East, Atisbo, Saki West, Irepo, Surulere, Iwajowa, Ogbomoso North, Iyamapo, Oriire, Ogbomoso South and Ogo Oluwa. For example, Atiba, Oorelope and Oyo East LGAs received direct allocations of about N3, 139.436million or 3.08 percent each. Although, Atiba and Oyo East were made better off by the operation of the joint account, their allocations were at variance with their population figures; while Atiba had a per capita direct allocation of N18, 659.80, Oyo East had N25, 155.27.On the other hand, Oorelope LGA had a per capita direct allocations of N30, 155.40.

 

Again, Atisbo and Saki West LGAs received equal percentage of direct allocations of N2929.722million or 2.87 percent each. This is also at variance with their population figures because Atisbo LGA has a population figure of 109,965 while Saki West LGA has a population figure of 273,268 resulting in per capita direct allocations of N26, 578.58 for Atisbo LGA and N10, 746.37 for Saki West LGA. During the period, Atisbo LGA was better off with an increase of 0.86 percent or N423.936 million while Saki West LGA was made better off with N290.840million or 0.59 percent of total indirect allocations to all the LGAs in Oyo State. This is because Atisbo LGA received 2.87 percent of total direct allocations but received 3.73 percent of indirect allocations while Saki West LGA received 2.87 per cent of total direct allocations but received 3.46 per cent of total indirect allocations.

 

Moreover, Irepo and Surulere LGAs received equal direct allocations of about N2, 683.516million or 2.63 percent but received N1, 324.917million or 2.63 percent and N1, 178.050million or 2.66 percent of total indirect allocations, respectively. This gives a per capita direct allocation of N22, 120.54 for Irepo LGA and N19, 061.97 for Surulere LGA. But Irepo LGA was made better off by 0.03 percent or N14.885.74million while Surulere LGA was made worse off by 0.28 percent or N138.026million.

 

Iwajowa and Ogbomoso South LGAs received direct allocations of about N2, 630.111million or 2.58 percent each. While Iwajowa LGA was made better off, Ogbomoso South LGA was made worse off during the periods. Kajola and Oriire LGAs also received direct allocations of about N2, 816.568million or 2.76 percent respectively. Both LGAs were made better off during the periods except that Kajola LGA enjoyed a better deal than Oriire LGA and their indirect allocations and per capita direct and indirect allocations differ significantly and are at variance with each other because of their diverse population figures.

 

Also, Ogo Oluwa and Olorunsogo LGAs received equal proportions of direct allocations of 2.85 percent or about N2, 906.159million each. However, their direct allocations per head were N44, 552.29 and N35, 746.68 respectively. Also, while Ogo Oluwa LGA was made better off with 0.46 percent of total indirect allocations of all the LGAs for the periods (about N226.757million), Olorunsogo LGA was made worse off because it received proportional indirect allocations (2.66 percent) lesser than it received direct allocations (2.85 percent).

 

During the periods under review, 17 LGAs were made worse off while 16 were made better off (see Figures 1 and 2). Afijio, Akinyele, Egbeda, Ibadan North, Ibadan North East, Ibadan North West, Ibadan South West, Ibarapa East, Iddo, Itesiwaju, Ogbomoso North, Ogbomoso South, Olorunsogo, Ona Ara, Oorelope, Oyo East and Surulere LGAs were made worse off while Atiba, Atisbo, Ibadan South East, Ibarapa Central, Ibarapa North, Irepo, Iseyin, Iwajowa, Kajola, Lagelu, Ogo Oluwa, Oluyole, Oriire, Oyo West, Saki East and Saki West LGAs were made better off. Ibadan North LGA was highly made worse off while Ifeloju LGA was the least made worse off. Iwajowa and Oyo West LGAs were highly made better off while Saki East LGA was the least made worse off.  Moreover, Iwajowa and Oyo West LGAs benefited most from the principles and formula adopted in operating the joint account in Oyo State over the period of 2003-2007.

 

Comparison of proportions of indirect allocations during the periods further revealed the unfairness in revenue shared in the operation of joint account in Oyo State. Indirect allocations to local governments were such that twelve (12) LGAs received equal indirect allocations, pair wise. These were Ibadan South East, Ibadan South West, Ibarapa East, Oorelope, Ibarapa North, Irepo, Ogbomoso North, Olorunsogo, Itesiwaju, Ogo Oluwa, Lagelu and Surulere LGAs. Ibadan South East LGA with population figure of 266,457 received total indirect allocations of about N2, 067.281 million or 4.16 percent, the same received by Ibadan South West LGA. But Ibadan South West LGA has a population figure of 283, 098 and as such, had N16, 080.03 per head while the former had N15, 659.41 per head but their per capita indirect allocations were N7, 297.84 and N7, 763.20 for Ibadan South West and Ibadan South East LGAs, respectively. Ibadan South East LGA was made better off while Ibadan South West LGA was made worse off.

 

Also, Ibarapa East and Oorelope LGAs received equal proportion of indirect allocations of 2.47 per cent or about N1, 232.643million. Specifically, Ibarapa East LGA with a population figure of 117,182 had a per capita indirect allocation of N10, 517.26, but her per capita direct allocation was however N21, 746.44; Oorelope LGA with population of 104,004 however had a per capita indirect allocation of N11, 853.91. Ibarapa North, Irepo, Ogbomoso North and Olorunsogo LGAs received the same proportion of indirect allocations of about N1, 326.553million but their per capita indirect allocations were at variance to their population figures. In the same vein, they were not fairly treated with the operation of the joint account. This is because despite their equal proportion of indirect allocations, Ibarapa North and Irepo LGAs were both made better off while Ogbomoso North and Olorunsogo LGAs were made worse off during the periods.

 

A critical examination of the periods 2003-2007 further revealed that Itesiwaju and Ogo Oluwa LGAs received equal proportions of indirect allocations of 3.31 per cent or about N1, 649.262million. But due to differences in population figures of these LGAs, their per capita indirect allocations were not the same. Itesiwaju LGA had N12, 977.13 per head while Ogo Oluwa LGA had N25, 236.27 per head. Besides, Itesiwaju LGA was made worse off with N39.436million while Ogo Oluwa LGA was made better off with N226.756million.

 

Though, Lagelu and Surulere LGAs received equal proportions of indirect allocations of N1,174.982 million or 2.35 per cent, their per capita indirect allocations were at variance to their population figures. Lagelu LGA with a population figure of 148,133 had indirect allocation per head of N7, 911.22 as against its per capita direct allocation of N15, 516.06 and Surulere LGA with a population figure of 140,339 had indirect allocation per head of N8, 394.32 as against its per capita direct allocation of N19, 061.97. To further compound the degree of inequity in indirect allocations, Lagelu LGA was made better off with N39.436million while Surulere LGA was made worse off with N138.026million during the same periods.

 

The overall results for the periods 2003-2007 show that 13 LGAs, in groups, got equal percentage direct allocations and analysis of this result on the basis of per capita allocations (direct and indirect) showed that the principle of equity was played down. This is because some LGAs had more indirect allocations than their shares from the federation account while some had less. A comparative analysis of per capita direct and indirect allocations vividly showed this and that LGAs with high population figures loose relative to those with low population figures.

Considering the per capita direct and indirect allocations to the 33 LGAs, none of the LGAs were allocated above the poverty line assuming a daily income of 1.0 U.S. dollars (equivalent of about N54, 500.00 per annum at the rate of N152.50 per dollar); only one LGA received per capital direct allocation of N44, 552.29. The per capita indirect allocations to all the LGAs in Oyo State were far below the poverty line and this means that the people’s welfare in the LGAs was further eroded. Thus, almost all the residents of the 33 LGAs received allocations below the poverty line during the periods.

 

Test of Hypothesis

Ho: There is no significant difference between the means of per capita direct allocations

        (PCDAs) and per capita indirect allocations (PCIAs) to the 33 LGAs.

            The hypothesis was tested using the t-test statistical tool and the analysis showed that the calculated t-score was 14.7132 (p<0.05) while the tabulated t-score was 2.0369 indicating that the null hypothesis should be rejected. This therefore means that there is significant difference between the means of the PCDAs and the PCIAs. The implication of this is that wide discrepancies exist between the PCDAs and the PCIAs of the 33 LGAs.

 

A comparative analysis of LGAs’ per capita direct allocations with their per capita indirect allocations further reinforced our findings in a stronger term. It was discovered that virtually all the LGAs in Oyo State had a lower per capita indirect allocations than their per capita direct allocations. It was also discovered that LGAs with equal direct and indirect allocations do not have equal per capita direct and indirect allocations over the years due to differing population figures of the LGAs. Hence, the differences similarly revealed that individuals residing in the LGAs that received equal direct or indirect allocations are not equally treated fiscally and the assumption that individuals in Oyo State, wherever they are residing receive equal fiscal treatment does not hold.

Summary and conclusion

 This paper examined the issue of equity in the distribution of revenues in the state joint local governments’ account and the results of data analysis showed that there are wide discrepancies between the proportions of direct and indirect allocations to LGAs in Oyo State. It was also found that some LGAs with a smaller discrepancy in monetary term experiences higher worse off than some LGAs with a higher discrepancy and vice versa. On the average, the differences between the proportions of direct and indirect allocations to the 33 LGAs range from -0.89% to +0.88%. This implies that a wide gap exists between the proportions of direct and indirect allocations leaving little finances in the hands of the 33 LGAs for programmes and administration. Also, the comparative analysis of per capital direct (PCDAs) and indirect revenues allocations (PCIAs) showed that wide discrepancies exist.

We therefore concluded that the operation of joint account in Oyo State was not fair and was unjust and the principle of fiscal federalism was not optimally followed. Hence, there is the need to review the principles and formulae used in allocating revenues from the joint account such that redistribution from surplus LGAs to shortage ones will be done in an equitable and fair manner and individuals, no matter where they are residing, can have assurance that they will be fiscally almost equally treated by the 33 LGAs. 

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