Cheta Nwanze, Head of Research, SBM Intelligence

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Subjects of Interest

  • Fiscal Policy
  • Geopolitical Analysis
  • Governance
  • Politics

The disincentive to productivity at the state level 10 May 2017

Recently, Adeola Adenikinju, a Professor at the University of Ibadan's Centre for Econometric and Allied Research (CEAR), gave his inaugural lecture, which brought to the fore one of the structural problems of Nigeria. In the lecture, entitled “Energy and Nigeria's Economic Development: A Troubled But Indispensable Marriage,” Prof. Adenikinju talked about how the country's fiscal dependence on oil revenues has come at great cost.
He said between 1993 and 2015, a period spanning 22 years, the federal, state and local governments, shared a total of ₦105.1 trillion. At the average exchange rate of the naira against the US dollar over the time period (₦120 to $1, as per, that means successive governments shared $846 billion in that period. And we have not much to show for the huge revenue.

This brings up a number of questions and subsidiary questions. Within this long continuum of questions is the one about why the federating units are not being productive. And this is the aspect that is of interest to me in this article. The answer to this question has both historical and contemporary components. The historical component deals with the 'when things fell apart,' and the contemporary has to do with 'what should happen now.'

The groundnut pyramids

Today, Nigeria hardly exports shelled groundnuts. But as of independence in 1960, the country was the world's largest exporter of shelled groundnuts, with 40% global market share. As a matter of fact, between 1956 and 1967, groundnuts were among Nigeria's most valuable export crops; the other being palm oil. Nigeria was famous for Kano's groundnut pyramids –  an outmoded economy, far removed from the memory of three generations of Kano residents.

As per the former Minister of Agriculture and Rural Development, Akinwumi Adesina, now President of African Development Bank, Nigeria's groundnut exports fell from 502,000 tonnes in 1961 to 291,000 tonnes in 1970. By 1980, groundnut (or peanut) exports fell to zero. Some of the reasons for this development were droughts, and the prevalence of a crop disease known as the groundnut rosette virus (GRV), as well as contamination by aflatoxin in the 1970s. Aflatoxins are a family of toxins produced by certain fungi, including Aspergillus flavus and Aspergillus parasiticus found on some agricultural crops. According to the United States government's National Cancer Institute, these toxins are associated with an increased risk of liver cancer. (It is also important to note that oil palm production was not affected by these factors, yet we stopped producing it to export volumes.)  

So, what happened that by 1980, twenty years after we were the global leader in exporting these two crops, we dropped from those top positions? Why did the groundnut pyramids disappear from Nigeria? Why did we virtually stop producing the oil palm?

Retrogressive decrees

The decline of Nigeria's agricultural exports can be traced to a progression of self-defeating legislations/decrees that removed most, if not all, of the incentives from our sub-national units to be productive. The rise of the extractive industries, especially crude oil, led to the decline of agricultural production as the federal government gradually took over the revenue distribution framework.

As at 1953, when Anthony Enahoro pushed the motion in parliament for Nigeria's political independence, revenues from selling mining rights went to the federating units in their totality. However, when it came to exporting the products of mining, the federal government, and the host regions shared the proceeds from the associated export duties equally. This revenue sharing formula was approved by the 1953 Chick's Commission. But it all changed three years later, following the discovery of oil at Oloibiri. By the time the Raisman Commission sat in 1958, a new concept, namely derivation, was introduced.

So, the new sharing formula prescribed 50% of mining rights proceeds to go to the host regions (at this time, mining still included oil since they were all extractive activities). As for the proceeds of export duties from mining, the host regions now received all of it.  

The 1964 Binns Commission ratified the new order put forward in the 1963 Constitution, which allocated revenue from mining rights as: 67.4% for the oil producing regions, 12.6% for non-oil producing regions, and 20% for the federal government. Export duties still belonged solely to the host regions. By the time the Dina Commission sat in 1966, Nigeria was on war footing, and the Petroleum Act promulgated as Decree No. 51 of 1969 basically gave the federal government control of what would become our most significant economic resource – which is oil. Although, it must be pointed out that it was a wartime decree, thus it was understandable.

The problem is that after the war, Decree 51, 1969 was not rescinded; it still operates till this day. And following the oil boom of the early 1970s, the Aboyade Committee sat in 1977 and enshrined federal control over all natural resources in Nigeria. The Land Use Act, 1978, made all of this a fait accompli.

What did the Aboyade Committee do? It created the Federation Account Allocation Committee, abolished derivation as a principle of determining resource control and management, and removed all rights to oil resources from the oil producing states. From that moment, the Federal Government of Nigeria got 100% of the revenue from oil production, and began sharing the revenue to what was then nineteen states.

In thirteen years, between 1964 and 1977, Nigeria had moved from having its states or sub-national governments get 67% of proceeds from the minerals derived from their communities, to 0%. This affected everything, including the country's first love, agriculture. As a result, the incentives for states to encourage agriculture, or any other export oriented economic activity for that matter, was removed. Why should they encourage something that they would make no profit, or derive any significant benefit, from?

For instance, with the outbreak of aflatoxin in 1978, the Kano State government had no incentive to fight the impact of the contamination on groundnut crops since the groundnut merchants in Kano were now paying all their income taxes to the federal government, and the farmers and everyone else along the value chain were paying export duties to Lagos (at the time the national capital). In short, the state government had no demonstrable say in what economic value to retain for itself and its people.

The way forward

We now have a situation where taxes on national economic activity – company income tax, value added tax and other charges – are sucked up by Abuja, and only distributed among the states and local governments essentially at the pleasure of the federal government. I would love to talk about the lack of equity in the original sharing regime, which eventually led to the reintroduction of "derivation" (the 13% derivation fund that the oil producing states routinely tout as an accomplishment), but that is outside the scope of this piece.

The point is that Nigeria, as it is currently set up, is not designed to encourage sub-national units to be productive. Rather, it discourages innovation, leading the states to simply wait until money comes at the end of each month. Civil service workers in the states go through the motions while waiting for the dopamine-boosting pay-cheques from the central government on the 22nd of every calendar month. And, like we all know, salaried workers tend to be motivated to do, at best, a little above the barest minimum.

Any serious conversation about government reform, the war against corruption, fighting poverty, dealing with the multiple security threats currently afflicting the country and creating wealth and prosperity for Nigeria's 180-odd million people logically should start with reviewing the current revenue sharing formula.

The country must return to an incentive-based system that places primary responsibility on the states to drive economic activities in their jurisdictions. Until we do this, expecting any other results from the federating units is an exercise in futility – an exercise we have been on but has clearly not worked since 1969.