PUBLIC SECTOR ACCOUNTING

AND FINANCE

AGBI BAYODE MSC. MBA. ACA. ACIT.

AGBI BAYODE MSC.MBA.ACA.ACIT 1
FEDERATION FINANCE
AND
REVENUE ALLOCATION

AGBI BAYODE MSC.MBA.ACA.ACIT 2

 OUTLINE
1. Federalism 4. Revenue allocation
2. Understanding federalism a) Component of revenue
allocation
a) Share of problem
b) Share of power 5. Revenue Mobilization and
Fiscal Commission
3. Fiscal federalism
a) Scope
b) Principle

AGBI BAYODE MSC.MBA.ACA.ACIT 3

AGBI BAYODE MSC.MBA.ACA.ACIT 4
 FEDERALISM
FEDERALISM IS A SYSTEM BASED UPON DEMOCRATIC RULES AND INSTITUTIONS
IN WHICH THE POWER TO GOVERN IS SHARED BETWEEN FEDERAL, STATE
GOVERNMENTS AND LOCAL GOVERNMENT AREAS

AGBI BAYODE MSC.MBA.ACA.ACIT 5

 UNDERSTANDING FEDERALISM

WHICH LEVEL OF
WHICH LEVEL OF
GOVERNMENT IS BEST
GOVERNMENT IS BEST
ABLE TO FUND
ABLE TO SOLVE
SOLUTIONS TO THE
PROBLEM ?
PROBLEM ?

AGBI BAYODE MSC.MBA.ACA.ACIT 6

 CONSTITUTION : SHARE OF POWER

LOCAL
FEDERAL STATE GOVERNMENT

•Primary •Cemeteries
•Defence, •Antiquities and •Adult and and Burial
•Shipping , Monument, Vocational grounds
•Federal Roads, •Electricity Education •Home for
•Aviation , •Industrial •Health destitute and
•Railway’ •Commercial & Services infirm
•Post Agricultural •Developme •Market
•Telecommunication development nt of •Sewage and
•Police and other •University Agriculture refuse
Security services, •Post Primary •Non Disposal
•Mines and Minerals education Mineral •Street
•Social Security , •Health resources cleaning and
•Insurance , •Social welfare street
•National parks and lightning
•National statistics •Drains

AGBI BAYODE MSC.MBA.ACA.ACIT 7

AGBI BAYODE MSC.MBA.ACA.ACIT 8
 FISCAL FEDERALISM
Fiscal federalism deals with the division of governmental functions and
financial relations among levels of government .

It is the study of how competencies (expenditure side) and fiscal

instruments (revenue side) are allocated across different (vertical) layers
of the administration.

An important part of its subject matter is the system of transfer

payments or grants by which a central government shares its revenues
with lower levels of government also called REVENUE ALLOCATION

AGBI BAYODE MSC.MBA.ACA.ACIT 9

 PRINCIPLES OF FISCAL FEDERALISM
Why fiscal federalism?

The principles that guide intergovernmental fiscal relations include:

(a) The Principle of Diversity: The federal system must have the ability to accommodate a
large variety of diversities. Hence, the fiscal system must provide scope for variety and
differences to supply federal , state and local public goods.

(b) The Principle of Equivalence: Based on the geographical incidence of different public
goods, allocative efficiency requires the equalization of locational advantages arising from
inter-jurisdictional differences with a combination of taxes and public goods and services.

(c) The Principle of Centralized Stabilization: This requires the use of fiscal instruments for
achieving macroeconomic objectives of growth, stabilization and full employment by
residents of different geopolitical units; this requirement controls for what is often referred
to as “central city exploitation thesis”.
AGBI BAYODE MSC.MBA.ACA.ACIT 10
 PRINCIPLES OF FISCAL FEDERALISM
Why fiscal federalism?
(d) Minimum Provision of Essential Goods and Services: This ensures that fiscal
federalism guarantees all citizens, irrespective of where they reside, the minimum
provision of certain basic public goods and services.

(e) Principle of Fiscal Equalization: In order to ensure a minimum level of public goods and
services same degree of fiscal equalization is required. This is as a result of differences in
resource endowment.

(f) The Efficiency Principle: This principle implies that efficiency must be applied in the
allocation of resources. In addition, each level of government should maximize its internal
revenue earnings at minimum tax efforts.

(g) The Principle of Derivation: The component units of a system should be able to control
some of its own resources as they desire.
AGBI BAYODE MSC.MBA.ACA.ACIT 11
REVENUE ALLOCATION

AGBI BAYODE MSC.MBA.ACA.ACIT 12

 REVENUE ALLOCATION

Revenue Allocations is the system of transfer payments

or grants by which a central government shares its
revenues with lower levels of government

AGBI BAYODE MSC.MBA.ACA.ACIT 13

 COMPONENT OF REVENUE ALLOCATION

A. Vertical allocation
This allocation gives the percentage allocated to each of the three tiers of government
that is : Federal , State and Local government . This allocation percentage is applied
vertically to the total volume of disbursable revenue in the federation account at a
particular point in time .

B. Horizontal allocation
The revenue allocated to States and local government respectively is further shared
amongst the 36 states including the FCT and the 774 Local government using the
Horizontal allocation basis as agreed from time to time .

C. Special allocation
The special allocation are allocation which follows special allocation principles. It is
usually first line of charge to Federation account. For example the Derivation allocation to
oil producing states , collection allocation to Nigeria Custom service and Federal inland
revenue service . AGBI BAYODE MSC.MBA.ACA.ACIT 14
 VERTICAL ALLOCATION

The most recent vertical revenue allocation formula is

Federal Government : 52.68%

State Government : 26.72%

Local Government : 20.60 %

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 HORIZONTAL ALLOCATION
BASIS %
Equality 40 %
Population 30 %
Landmass 10 %
IGR 10 %
Social Development 10 %

Social Development Ratio

Education 4.0
Health 3.0
Water 3.0
AGBI BAYODE MSC.MBA.ACA.ACIT 16
 SPECIAL ALLOCATION
Derivation to the 11 Oil 13%
producing states

States 60%
Local govt 30% 50% Quantum of production , 20% Equality,
20% Population and 10% Self help projects
Community 10% According to the State Assembly approval

Special allocation to collecting

agencies
Custom service 7%
Federal inland revenue Service 4%

AGBI BAYODE MSC.MBA.ACA.ACIT 17

 VAT ALLOCATION

VERTICAL ALLOCATION
FEDERAL GOVERNMENT 40%
STATE GOVERNMENT 35%
LOCAL GOVERNMENT 25%

HORIZONTAL ALLOCATION
DERIVATION 20%
EQUALITY 50%
POPULATION 30%

AGBI BAYODE MSC.MBA.ACA.ACIT 18

 REVENUE ALLOCATION AND FISCAL COMMISSION
The Revenue Mobilization Allocation and Fiscal Commission shall comprise the following member:
A. a Chairman; and
B. one member from each State of the Federation and the Federal Capital Territory, Abuja who in the opinion of the President are
persons of unquestionable integrity with requisite qualifications and experience

The Commission derives its power and constitutional functions from paragraph 32 of Part 1 of the third Schedule to the 1999
Constitution of Federal Republic of Nigeria . The Commission has been vested , constitutionally , with powers and responsibilities
to :

a) Monitor the accruals into and disbursement of revenue from the Federation Account ;

b) Review from time to time , the revenue allocation formulae and principles in operation to ensure conformity with changing
realities : provided that any revenue formula which has been accepted by an act of the National Assembly shall remain in force
for a period of not less than five years from the date of commencement of the Act ;

c) Advise the Federal , State and Local Government on Fiscal efficiency and methods by which their revenue is to be increased ;

d) Determine the remuneration appropriate to political office holders , including the President, Vice- President , Governors,
Deputy Governor , Ministers, Commissioners, Special Advisers, Legislators and the holders of offices mentioned in Section 84
and 124 of the Constitution and

e) Discharge such other function as conferred on the Commission by the constitution or any Act of the National Assembly .
AGBI BAYODE MSC.MBA.ACA.ACIT 19
 CLASS WORK
Eboda State is one of the 30 States in Olakoma Federation . The Federation has a population of 120 Million people
with 700 Local Government Councils and a Land Mass of 300,000 sq Kilometres.

Eboda State has a Population of 12 Million , 25 Local government Councils and Land Mass of 30, 000 Sq Kilometres .

The following transactions took place in the Office of the Accountant General of Olakoma Federation during the year
ended 31 December 2014

s/n Description N’Million s/n

1 Crude Oil Sale 350,000 11 Import Duties 255,000
2 Domestic Oil receipts 445,000 12 Export duties 125,000
3 Miscellaneous oil receipts 105,000 13 Excise duties 320,000
4 Royalty on Crude oil 101,000 14 Custom penalty charge 115,000
5 Royalty on gas 95,000 15 Custom fees account 120,000
6 Rental on oil field 87,000 16 Common external tariff levy 100,000
7 Gas flared penalty 77,000 17 Court fees 30,000
8 Petroleum profit tax 650,000 18 PAYE of armed forces 55,000
9 Company income tax 500,000 19 7% Port levy 25,000
10 Other non oil taxes 225,000 20 Value Added Tax (VAT) 700,000
AGBI BAYODE MSC.MBA.ACA.ACIT 20
OTHER INFORMATIONS:
1. The Olakoma Customs Service is entitled to 7% cost of collection on all revenue collected while the
Federal Inland Revenue Service is entitled to 4% on Non –Oil revenue
2. The sharing formula for the Federation Account and VAT is stated as follows:
Federation Account VAT
Federation government 52.68% 15%
State government 26.72% 50%
Local government 20.60% 35%

3. 13% Derivation is paid to Oil producing States and its based on Oil and gas related income
4. The sharing ratio in 2 above is based on the following criteria :
State Local government
Equity 40% 40%
Population 30% 30%
Land Mass 20% 20%
Internally generated revenue effort 10% 10%
AGBI BAYODE MSC.MBA.ACA.ACIT 21
 OTHER INFORMATION CONTINUE
5. The total internally generated revenue effort of the 30 States and 700 Local Government Council
amounted to N500 Billion and N300 Billion , respectively
6. The total internally generated revenue effort of the Eboda State and 25 Local Governments amounted
to N50 Billion and N20 Billion , respectively Eboda State is not one of the oil producing States.
7. All revenues due to all Local Governments in each State is paid to the State Joint Local Government
Account . This account is entitled to 10% of the internally Generated Revenue (IGR) of the State.

REGUIRED:
a) State the difference between Federation Account and Consolidated Revenue Account
b) Calculate
I. Olakoma Customs Service cost of collection
II. Federal Inland Revenue Service cost of collection
III. 13% derivation paid to oil producing States
c) Calculate the amount to be credited to :
I. Consolidated Revenue Fund of Olakoma Federal Government
II. Eboda State Consolidated Revenue Fund Account
III. State Joint Local Government Account

ICAN PSAF NOV 2014 AGBI BAYODE MSC.MBA.ACA.ACIT 22