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NIGB;RIAN INTERGOVERNIEl'TAL FIMAMCIAL RELATION.SIIIPr;
— FROM ILDEPEtlDENCE TO THE 1966 COUPS D'ETAT

26^-67 )

Walter L. Ness, Jr.



rfce!ve:o
UN 26 1967






Dewey
^Vss. INST, r,,




Introduction

A substantial part of the exercise of political art centers
around the division of the tax burden and allocation of public expend-
iture among the various income groups, occupational classes, geograph-
ical areas, and ethnic groups comprising a nation. Unsatisfactory
performance of this task may lead to pressures for a change in govern-
ment or for a change in the form of government by democratic or violent
means. This paper will examine (1) the financial federal structure of
Nigeria to see what considerations have determined the structure of
public finance in that country and (2) how the use and manipulation of
that structure have affected the expansion of expenditure by the Federal
Government and four Regional Governments of that African nation. Our
primary interest will be in the period of official African rule^ from
Independence as of October 1, I960, to the military coups in 1966»
Nigeria entered nationhood with political power centered in three
political parties, each being preeminent in one regions the Northern
Peoples' Congress in the North, the Action Group in the West and the
National Council of Nigeria and the Cameroons in the East. The dominant
people of each region differed from the major groups of the others in
language, religion, stages of economic and educational development,
degree of centralization in society, etc. Regional leaders were fre-
quently fearful of risking their political fortunes in the naw national
government where relationships and dominance were less assured than in



1752244



their seemingly secure regional fortresses. In addition, in drawing up
a national constitution. Regional Governraents were granted substantial
powers while the Federal Government was weaker than in most other
African nations. The political process that led to Nigerian nationhood
is described in books by Coleman and Schwarz. The revenue system that
developed in Nigeria was, of course, a function of these political forces.
The best description of the evolution of the Nigerian intergovernmental
financial relationships before Independence is given in Okigbo's recent
book.

In the first section of this paper, we shall examine the fiscal
structure which Nigeria had inherited and achieved at the time of
Independence. The structure of the financial relationships between the
Federal and Regional governments was based on the recommendations of the
Raisman Commission and was given in the Nigerian Independence Constitu-
tion, Although the emphasis of this paper will be on the Federal-Regional
relationships, a brief description of the financial relationships of the
Northern Regional government and its Native Authorities will also be
given to illustrate the financial status of local government in Nigeria,



1
James S„ Coleman, Nigeria? Background to Nationalism , University

of California, Berkeley and Los Angeles^ -1958 ; and FoA,0, Schwarz, Jr,,

Nigeria; The Tribes. The Nation, or the Race , M„I.T. Press, Cambridge,

2

Pius N, C, Okigbo^ Nigerian Public Finance „ Northwestern Univer-
sity Press, Evanston, 1965, PP» 5~^9*



QUALITY CONTROL M»„k



Section II will examine the various points at which the financial
structure as established in the Independence Constitution has been ques-
tioned, at which the Constitution left considerable leeway for the work-
ing out of details to the administrative and political processes, and at
which ad hoc arrangements have been necessary. It will be shown that
the points of contention which will be discussed are of sufficient num-
ber and scope to vary the allocation of financial resources among the
governments of the Federation considerably from the distribution set
forth specifically in the Constitution, The importance of the resulting
flexibility in the Nigerian financial system will be commented upon
Section II also will describe the formation and proceedings of the 196^
Fiscal. Review Commission which was established to recommend upon the
appropriateness of the constitutional provisions which allocated certain
revenue sources among the governments. The desirability of such a com-
mission in the Nigerian political context will be considered as will the
Commission's recommendations. Section III will discuss what has happened
to each government's financial position in the post™ Independence period.
Noteworthy trends will be discussed. Finally, Section IV will present a
brief overview of how the Nigerian intergovernmental financial relation-
ships might be vie-wed from a systems approach.



I, The Fiscal Structure at Independence

(l) Federal-Regional Relationships

The fiscal structure which Nigeria possessed upon becoming inde=-
pendent on October 1, I960, had been in force since April„ 1959. It
resulted from the adoption by the Constitutional Conference of the
recommendations of the Raisman Commission, which had been appointed by
the 1957 Constitutional Conference and had submitted its report in June^
19580 While the terms of reference and recommendations of the Com-
mission were accepted by Nigerian representatives to the Constitutional
Conferences, the Commission composition and the majority of Nigerian
government civil service officials with whom the Commission met were

expatriate. It is noteworthy that of the private persons apparently

3
consulted by the Commission, none were Nigerians,

The Raisman Commission was the fourth in a series of postwar

fiscal reports and commissions which adjusted and rationalized a federal

financial structure for colonial Nigeria, The initial Regional

Assemblies established under the Richards Constitution had no power to

raise funds. The need to provide the Regional administrations with

revenue sources which were under Regional control influenced the report



3
Colonial Office, Nigeria; Report of th e Fiscal Commission^ Her

Majesty's Stationery Office, London, 1958, pp. 58-6I,



of Sir Sidney Phillipson to (l) declare, where feasible, Regional
revenue sources and (2) provide block grants to the Regional administra-
tions from national revenues which were allocated on the principle of
derivation. The principle of derivation which is mentioned throughout
the literature on Nigerian financial arrangements may be defined as
meaning that revenue should be allocated among the geographical regions
of the nation according to the incidence of the tax upon the citizens of
the regions. Usually this incidence has been determined in a rudimentary
and partial equilibrium sense, with little or no consideration of second
order effects, such as shifting, or upon the supply of effort. Fortun-
ately, in those areas of incidence theory where our knowledge is least
secure, e.g., the companies' income tax, use of the derivation principle
has not been attempted. In addition, in the case of certain taxes such
as export duties and mining royalties, the principle of derivation as
applied in Nigeria refers to the geographical source of the product
rather than to even the primary incidence of the taxo Derivation can be
applied either by making a revenue source Regional or by assigning a
revenue item collected by the Federal Government to the Regions based on
statistical data concerning the regional derivation of the revenue ,

In 1951 Phillipson and Sir John Hicks comprised a Commission on
Revenue Allocation which added "need" as a criterion for revenue alloca-
tion among the central and Regional governments to the already firmly
established principle of derivation. In this instance, "need" was



sijnply determined by the number of adult male taxpayers in each Region »
Specific-purpose grants to the Regions controlled by the central govern-
ment were also to be used for purposes in the "national interest."

Due to political developments, the Commission of Sir Louis Chick
in 195^' was given terms of reference stressing the use of the principle
of derivation to the "fullest degree compatible with meeting the reason-
able needs of the Centre and each of the Regions c" Chick's findings
under such restrictive terms of reference virtually eliminated the use
uf the concept of "need" in revenue allocation except for discretionary
grants which could be made to regional governments in times of financial
distress.

With this background of a fiscal system based almost solely on
the principle of derivation ^ the aforementioned Raisman Commission acted
under the following terms of reference:



(a) To examine the present division of powers to levy tax-
ation in the Federation of Nigeria and the present system of
allocation of the revenue thereby derived in the light of:

(i) experience of the system to date;
(ii) the allocation of functions between the Governments

in the Federation as agreed at the present Conference ;
(iii) the desirability of securing that the maximum

possible proportion of the income of Regional Gov-
ernments should be within the exclusive power of
those Governments to le-uy and collect p taking into
account considerations of national and inter-
Regional policy;



Opo Cite o Po 1«



(iv) in connection with (iii) above, the special problems
in the field of indirect taxation as a result of the
position of Lagos as Federal territory;

(v) insofar as the independent revenues that can be

secured for the various Governments are insufficient
to provide not only for their immediate needs but
also for a reasonable degree of expansion, and bear-
ing in mind the Federal Government's own further
needs, the desirability of allocating further
Federal revenue in accordance with such arrangements
as will best serve the overall interest of the
Federation as a x^oleo

(b) To consider what fiscal arrangements would be most
appropriate for the Southern Cameroons, including whether
that territory should be treated as a Region for the purposes
of revenue allocation; and to advise on the extent to which
additional financial assistance might be required to meet the
immediate needs of that territory and to provide for a reason-
able degree of expansion; and to indicate the form which this
assistance should take^

(c) To consider the adequacy of present arrangements for
coordination of loan policies, governmental borro^^^ings and
capital issues, having regard to the decision to set up a
Nigerian Central Bahlc and a Nigerian currency at an early
dateo

(d) To malce recommendations on the above matters,

(e) Pending the submission of their final report, to consider
as a matter of urgency the extent (if any) to which, as an
interim measure, the provisions of sections 155 to l63 of

the 195^ Constitution Order should be varied to reflect more
accurately the principles to which they were designed to
give effects

(f) To be empowered, in making their interim report, to
specify the date on which any proposed readjustments should
come into effect.

(g) To submit both interim and final reports to a resumed
Conference .



The task of the Raisman Coimnission can be considered to have been
twofold. First J the Commission had to provide sufficient revenues to
each of the governments to meet each government's financial requirements
according to the criteria which will be discussed below. The amounts
which would be required theoretically would have nothing to do with the
specific revenue sources from which they came. Strict adherence to the
principle of derivation would imply its use for all revenues. Use of
the principle of derivation for only some revenue sources would imply
the use of other allocation criteria as well.

The second task of the commission would be to determine which
level of government was best suited to administer and determine the
rates of the various revenue sources. Criteria which might determine
such decisions are cost, administrative effectiveness, need for national
sovereignty, need for uniformity to promote the freedom of trade, desire
for regional autonomy, etc. The financial results of these two exer-
cises of determining revenue allocation and revenue collection
responsibility would only coincide by chance c In effect, it was found
by the Raisman Commission that the Regional governments required far
more funds than could be provided by the revenue sources which it was
desirable for them to control. Consequently, the Raisman Commission
allocated to the Regions all or fixed portions of various revenue items
for which legislation and administrative responsibility was to remain
with the Federal Government,, Revenue sources for which the Regional



Governments were responsible (not including revenue provided by their
marketing boards) financed only 19 per cent of total regional expendit-
ure in 1960/1 „ The foregoing situation was implicitly preferred to the
other alternatives;

(i) Complete autonomy of Regional and Federal Government
finances which would imply an overabundance of funds for Federal
expenditure responsibilities and an insufficiency for Regional
responsibilities under the recommended division of collection
responsibilities „

(ii) Transferring to the Regional Governments the responsi-
bilities for legislation and administration of revenue sources for
which the Federal Government is better suited „

(iii) Transferring expenditure responsibilities from the
Regional to the Federal Government »

Five principles were primary in determining how revenue sources
were to be allocated among the then existing three regions and the
Southern CameroonSo Below the strengths and failings of these prin-
ciples are discussed s

(i) Continuity o To reduce the financial resources of any gov-
ernment below the level of existing services being provided was felt
likely to cause more harm than to distribute funds so released to other
governments which might have "higher priority" uses for themo Full
acceptance of this principle would tend to force any new allocation of



10



revenue to be made from the growth of revenue sources above present
levels. It also implies a quadratic tjrpe of utility function for each
government wath the marginal utilities of revenue for each government at
the present position being equals thus naving a loss of a unit of
revenue from the initial position of one government more than offsetting
the value of a gain of a unit by another government Adherence to the
principle of continuity would encourage governments to spend as much as
possible before the convening of any new fiscal review commission in
order to bolster its future allocationo

(ii) Derivationo The principle of derivation is related to the
concept of benefit taxation, It is based on the principle that those
who pay the taxes., at least from a geographical or regional point of
vieWs, should receive the benefits o Absolute acceptance of such a con-
cept denies the national government the power to effect inter-regional
redistributions of income


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