Urhobo Historical Society



David Edevbie
Commisioner For Finance and Economic Planning,
Delta State of Nigeria

Subj: The politics of the 13 per cent derivation principle David Edevbie Commissioner for Finance & Economic Planning, Delta State edevbie@yahoo.co.uk
Date: 05/16/2000 7:51:13 PM Eastern Daylight Time

The unity of our country has always been fragile. A potent threat to our unity and democracy is injustice. Every part of the Nigerian nation feels the pinch of the unjust union. Almost everyone feels marginalised or at least claims to be marginalised but curiously, no one takes responsibility for the marginalisation.

There is one issue however, on which there is complete agreement that the marginalisation and official neglect resulting in the acute under-development of the Niger Delta is real. The neglect of the Niger Delta in spite of its huge contribution to the Nigerian economy is now common knowledge to most enlightened folks. In 1992, the military government of Ibrahim Babangida made an attempt to redress the neglect through the establishment of OMPADEC. Regrettably, OMPADEC performed dismally, leaving only a legacy of abandoned projects and unpaid contracts all over the Niger Delta.

Apparently concerned about the declining security situation in the Niger Delta arising from increased agitation from the oil-producing communities and its consequent threat to the heart of the Nigerian economy, the 1995 Constitutional Conference recommended that in sharing the Federation Account Revenue, 13 per cent should be set aside as derivation revenue to assist the development of oil-producing communities. The intention was very clear - to financially empower the oil-producing states of the Niger Delta to tackle the monumental neglect and degradation of the area given the lack of federal presence and ineffectiveness of federal spending in the area.

In arriving at the 13 per cent compromise rather than the more equitable 50 per cent that was bequeathed to us by our founding fathers, the conferees must have assumed that after taking into account all sectional interests, 13 per cent of the total oil revenue would put a reasonable amount of revenue in the hands of the oil-producing states to assist them in tackling the enormous problems of under-development in the oil-bearing communities. This recommendation was accepted but never implemented. The percentage allocated to derivation remained at a mere 1 per cent of oil revenue. Thus the neglect continued unabated.

Apparently moved by the plight of the Niger Delta people, candidate Olusegun Obasanjo promised to redress the ugly situation through a process of enhanced funding and development. No one doubted him especially as the 13 per cent derivation principle was fortunately enshrined in the 1999 constitution.

Section 162 (2) of the 1999 constitution provides that "The President, upon the receipt of advice from the Revenue Mobilization Allocation and Fiscal Commission, shall table before the National Assembly proposals for revenue allocation from the Federation Account, and in determining the formula, the National Assembly shall take into account, the allocation principles especially those of population, equality of States, internal revenue generation, land mass, terrain as well as population density: Provided that the principle of derivation shall be constantly reflected in any approved formula as being not less than thirteen per cent of the revenue accruing to the Federation Account directly from any natural reources."

In anticipation of a possible delay in the release of a new revenue allocation formula, the drafters of the constitution inserted S.313, which provides that "Pending any Act of the National Assembly for the provision of a system of revenue allocation between the Federation and the States, among the States, between the States and the Local Government Councils and among the Local Government Councils in the States, the system of revenue allocation in existence for the financial year beginning from 1st January, 1998 and ending on 31st December, 1998 shall, subject to the provisions of this Constitution and as from the date when this section comes into force, continue to apply" By subjecting the interim revenue formula determined by S.313 to the provision of the 1999 constitution, the intention was that the minimum 13 per cent provision of S.162 (2) was overriding and should become operative from the day the constitution came into effect.

The prospect of its implementation brought relief and hope to the hitherto deprived and neglected Niger Delta people. They invested their hopes enthusiastically on the promise of democracy. They believed that the Nigerian nation had at last woken up to the grave injustice perpetrated against them for decades. They believed that the conscience of the Nigerian nation had been sufficiently pricked and that there was a new a spirit of justice prevailing in governance.

The first sign of betrayal of the Niger Delta people's trust was the inexplicable delay in implementing the derivation principle. Despite two letters from the Delta State Governor and attempts from similar quarters on the issue, the President conveniently failed to seek legal advice on the critical constitutional issue until April 2000 -a clear ten months into the life of the present civil administration. Belated as the agreement to obey the constitution was, the second betrayal became evident when the President in his infinite wisdom arbitrarily chose January 2000 as the most convenient date to commence the implementation of the Constitutional provision that took effect from May 29, 1999.

Despite loud protest from the Niger Delta people, the President is yet to explain the non-payment of derivation revenue between May 29 1999 and December 31, 1999. In the absence of any meaningful response, the crucial question at the moment is whether the President has the right to choose when to obey or not to obey the constitution. It is my submission that the Federation clearly owes the oil-producing states the derivation related revenue for the period May 29, 2000 to December 31,1999. There is no conceivable reason that can justify the delay in implementing the derivation principle, therefore, this is a debt that must be paid and the sooner the better for our country.

The third betrayal was the introduction of the obnoxious on-shore/offshore dichotomy in oil revenue distribution. Some background to this may be instructive. As part of colonialist imperialist control of our resources, there were deliberate legislative attempts to modify the concept and meaning of land and riparian rights. Successive post-independence governments in Nigeria (mainly military) have amplified these legislative instruments that deny the natural owners of land, rivers and seas of the benefits accruing from the exploitation of their natural bounties.

In 1978, the then military government of General Olusegun Obasanjo passed a decree, which has since become known as the Exclusive Economic Zone Act. The thrust of this decree or act is in S. 2(1) which states that "without prejudice to the Territorial Waters Act, the Petroleum Act or the Sea Fisheries Act, sovereign and exclusive rights with respect to the exploration and exploitation of the natural resources of the sea bed, subsoil and superjacent waters of the Exclusive Zone rest in the Federal Republic of Nigeria and such rights shall be exercisable by the Federal Government or by such minister or agency as the government may from time to time designate in that behalf either generally or in any special case".

This obnoxious decree which was not a product of representative government was given further legal muscle by its recognition by S 44 (3) of the 1999 constitution which states that "Notwithstanding the foregoing provision of this section, the entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly.''

The Federal Government has now presumably interpreted this provision to mean that revenue derivable from offshore production of oil cannot be credited to the states to which that offshore geographically belongs using the Offshore Revenue (Registration of Grants) Act, 1971 Cap. 366 LFN. 1990 as a guide. On the basis of this interpretation, the Federal Government split oil revenue arbitrarily into 60 per cent: 40 per cent as on-shore/off-shore revenue and proceeded to base payment of the minimum 13 per cent derivation revenue from only the 60 per cent. In effect, the Federal Government has merely paid 7.8 per cent of oil revenue as derivation rather than the minimum of 13 per cent enshrined in the Constitution.

Our contention is that the Act used to support this dichotomy is immoral and unjust. Suffice to note that by using a military fiat to declare such territory as Exclusive Economic Zone, what the Federal Government has done is to immorally expropriate the property of some states in much the same way as the so called Decree 52 sought to extend the shoreline of the nations coastal land by 100 metres in land. This was successfully challenged in the Osborne case. The more important question is why was this Act not invoked when the amount set aside for derivation was a mere 1 per cent of oil revenue?

Clearly the invocation of this decree now is a blatant attempt by the Federal Government to reduce the amount of funds flowing to the oil-producing states arising from the implementation of the minimum 13 per cent derivation principle. This manipulation is clearly unjust and an abuse of power. It is an attempt to subvert the spirit of the minimum 13 per cent derivation provision in the 1999 Constitution and an affront on the sensibilities of all the Niger Delta peoples.

The fourth betrayal of the Niger Delta people is the delay by the President in assenting to the Niger Delta Development Commission (NDDC) Bill passed over thirty days ago or alternatively returning same to the National Assembly in accordance with S.58 (4) of the 1999 constitution. By not acting one way or the other as prescribed by constitution, the President is relying on a lacuna which is that the constitution does not say what should happen if the President fails to assent or signify his decision to withhold assent after 30 days. Once again, the President is holding up an opportunity for badly needed funding of the grossly under-developed Niger Delta. Could this be because minority ethnic groups inhabit the area?

The fifth betrayal of the Niger Delta and indeed, of all the other tiers of Government is the manipulation of the Federation Account revenue by the Office of the Accountant General of the Federation. Again it may be instructive to describe exactly how this is perpetrated. S 162 (1) provides that "The Federation shall maintain a special account to be called ''the Federation Account'' into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of Government charged with the responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja."

In addition, S 162 (3) provides that 'Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the local government councils in each state on such terms and in such manner as may be prescribed by the National Assembly." This subsection read jointly with sub-section (2) of the same section shows that the terms and manner mentioned refers to the Revenue Allocation Formula. It follows therefore that any distribution of the Federation Account outside the approved Revenue Allocation Formula is unconstitutional.

The share of the Federal Government from the Federation Account revenue funds the Consolidated Revenue Fund of the Federation in the same way the states funds the Consolidated Revenue Fund of the states. The National Assembly and the State Houses of Assembly pass Appropriation Act/Bills, which show how the Consolidated Revenue Funds of the Federation and of the states would be appropriated respectively. These can be seen in S.80(2-4) and S.120(2-4) respectively of the 1999 constitution. Consequently, any expenditure by the Federal Government outside of the Appropriation Act or of a State Government outside its Appropriation Bill is an unconstitutional Act.

As readers may be aware, the aggregate total external debt stock of the Nigerian nation has been consistently put at over $28 billion. Since 1995, the Federal Government adopted a policy of deducting total external debt obligation from the oil-revenue in the Federation Account before distributing the balance in the agreed formula. This is done without reference to the size of debt and indeed the repayment obligation of each individual beneficiary of the Federation Account revenue.

Following protest from State Governments, the President in his Budget address to the joint session of the National Assembly on Wednesday, 24 November 1999 stated, "External debt service is currently treated as a first line charge on oil revenue. Many states borrowed without considering their ability to repay the loans as and when due. Some have over borrowed while others, particularly the new states are yet to do so. The present arrangement whereby external debt service is treated as a first line charge on oil revenue breeds inequity as States that have not borrowed do not get there fair share of Federation Account revenue. In order to introduce fairness, treatment of the provision of External Debt Service as a first charge will be reviewed. Deduction at source should be made from Statutory Allocations of debtor States. However, in doing so, the amounts to be deducted should be worked out between the States and the Office of the Accountant General of the Federation "

In effect, the President recognized that the deduction of the external debt as a first line charge against oil revenue before distribution to beneficiaries is inequitable and just fell short of pronouncing it unconstitutional which is what it really is. This pronouncement was made in November 1999. At that time, officials of all the States were in Abuja to obtain the details of their external debt stock from the Federal Government. The State Governments were given schedules showing that their aggregate external debt was US $7 billion. What this means is that the balance of Nigeria's external debt stock of over US $28 billion is owed by the Federal
Government. This in effect means that the Federal Government alone owes over 75 per cent of the total external debt.

As at April 2000, five clear months after the President's pronouncement, the Accountant General of the Federation continues to deduct external debt service as a first line charge on the grounds that the Federal Government is still reviewing the practice. A practice that is clearly unconstitutional and as admitted by Mr. President himself, inequitable.

Interestingly, when Mr. President was making the pronouncement, he focused on the inequity between States who owed and those who did not owe. But his advisers failed to inform him that in fact, the worse inequity was being perpetrated by the Federal Government, which receives over 75 per cent of the first line deduction instead of 48.5 per cent that the extant revenue allocation formula allows it. To place the financial implications in proper perspective, in the sharing of March Federation Account revenue, the Accountant General of the Federation deducted N30 billion from oil revenue as external debt service as a first line charge. The benefit to the Federal Government of this practice in March 2000 alone is that it effectively received N22.5 billion instead of N13.4 billion that it should have received had it been deducted from the statutory allocation of each tier of government. In other words, the States and Local Governments jointly lost N9.1 billion in March 2000 alone to the Federal Government through accounting manipulation. Over the years, this and other "Special Accounts" were used by successive military governments to impoverish the States and local government councils.

For the Niger Delta people, it is a worse tragedy because by deducting the entire external debt service from oil revenue as a first line charge in March 2000, they are denied the 13 per cent or at least 7.8 per cent derivation revenue accruing on it in addition to the regular statutory allocation from it. The question is when will the Accountant General of the Federation carry out a simple Presidential directive intended obliquely to comply with the Constitution?

To really appreciate how much this sort of manipulation of the Federation Account revenue has impoverished the States to the benefit of the Federal Government, we can attempt to compute the effect of first line debt service from 1995 when it was started by General Sani Abacha, to 1999. Between 1995 and 1998 the sum of US $2 billion was set aside annually for external debt service and US $1.5 billion in 1999. This amounts to US$9.5 billion out of which the Federal Government received over US$7.1 billion instead of US $4.6 billion it was entitled to. Thus the States and Local Governments within the period lost over US $2.5 billion of revenue to the Federal Government. This translates to approximately N250 billion at current exchange rates. It is little wonder that while the Federal Government under successive administrations since Sani Abacha literally overflowed with revenue, the States and Local Governments were
reduced to paying only salaries and overhead while having no revenue to effect capital development. This also partially explains the mind-boggling sums of money looted at the Federal level. This is the sort of manipulation that the office of the Accountant General of the Federation seeks to sustain and is sustaining almost one year into the life of this new constitutional government.

In Delta State, we find it extremely frustrating that the other States of the federation especially the non-oil producing States do not seem to appreciate that the reason why their revenue allocation from the Federation Account was poor in March 2000 was not because the Federal Government partially implemented the minimum of 13 per cent derivation principle but that the Federal Government uses a multitude of accounting manipulations to expropriate revenues of other tiers of government toitself. In other words, apart from the fact that the 48.5 per cent share of the Federation Account revenue that is due to the Federal Government under the extant revenue allocation formula cannot be justified, the Federal Government in practice, illegally 'corners' over 70 per cent of the entire revenue to the detriment of the other tiers of government. The other States of the federation must appreciate that the enemy is not within.

To compound the betrayal of the people of the Niger Delta and further cause confusion, the Federal Government is reported to have set up a Committee to monitor the utilization of the 7.8 per cent derivation fund it has paid out. If this is indeed true, the intention being clearly to create the impression in the minds of people that it was the fear of possible mismanagement of the oil money that delayed its payment. This is extremely cynical and deceptive, coming from a tier of government that has consistently shown itself as incapable of basic financial discipline. The Niger Delta people must be wary of such seemingly friendly utterances as they are intended to cause conflagration in our region. I am particularly disturbed by the utterances of the President himself in respect of the oil revenue payment, as they seemed calculated to turn the oil-bearing communities and the State's branch of NLC against the State Government.

The President is aware that State Governments in the whole country are poorly funded and most can barely afford to pay the current minimum wage of N3,500 and still carry out any meaningful capital development project. Without any change in the revenue sharing formula to financially empower the States, the Federal Government unilaterally announced a new minimum wage for workers thus creating the condition for labour unrest in virtually all the States. To further emphasize this intention, the President was reported to have thrown a challenge to oil-producing States to pay higher wages than the Federal Government from their enhanced oil revenue as if the intention of the payment of that oil revenue was to address the issue of poor wages for workers. Mr. President must be advised that his unguarded utterances are capable of causing unrest in the oil producing states.

The intention of this paper is to present the true position of the state of finances of State Governments particularly in the Niger Delta for better appreciation of their limitations as opposed to the partial and misleading information being provided by the Federal Government and its agencies. It is also our hope that Nigerians will be better able to address these issues if they are armed with facts.

David Edevbie
Commissioner for Finance & Economic Planning, Delta State