The Platform With Kalu Aja: Of Crude, Palm And Groundout Oil

 

In 2013 alone, Indonesia made $19b from exporting palm oil, this is more than the entire 2014 budgets of the South East, the South South and Ondo (crude oil states) combined 

 

(South South N1,981t, South East N619b, Ondo N162b)

 

How is this even possible?

 

In 1832, 75% of the global palm oil export came from Nigeria. Between 1961 and 1965 world oil palm production was 1.5 million tons, with Nigeria accounting for 43% of that. Today, Nigeria, ranks behind Malaysia and Indonesia accounting for only 7% of world palm oil production. It’s important to add that Malaysia and Indonesia are also oil producing nations, yes they have crude oil.

 

By 1960, Nigeria was the world largest exporter of shelled groundnuts, with a 40% global market share, today we have 0% market share.

Groundnuts were special to Nigeria, between 1956 and 1967, Groundnuts was one of Nigeria most valuable export crop, and there were groundnut pyramids in Kano, now all gone. To be specific, groundnut exports fell from 502,000 tons in 1961 to 291.000 tons in 1970 to zero by 1980….

 

So why did ground nut pyramid disappear from Nigeria? Sure there was Aflatoxin contamination that affected the groundnut exports. So why the Northern region could not just fumigate and fix the contamination? Why did it just allow exports cease?

 

So two cash crops, Palm oil and Groundnut, grown in the South and North, respectively, in both cases Nigeria was the world leader, today no more. Why has agriculture collapsed? Well everyone says crude oil, but it’s not just crude oil it’s the way we have structured our fiscal federalism. I explain. Below is the progression of fiscal allocation formula.

 

1953 Sir Louis Chick: The penultimate revenue allocation formula for Nigeria was done by Sir Louis Chick. His formula was presented and unanimously agreed at the 1953 constitutional conference in London. It was basic, it read “all mining taxes will be collected federally, distributed based on derivation, same for income taxes”. To be clear, it was income tax, mining rent & royalty to be collected and shared 100% to states based on derivation. Federal government got 0%. The minerals at this time was Tin, Columbite and Coal.

 

Export duties was 50% to state of origin of export, 50% to federal government….

 

1958 Raisman; Commissioner Raisman amended Sir Chick formula. He slashed the 100% derivation to states to 50%…thus Mining rights was now 50% to state of origin by derivation. Of the other 50%…20% was given to the Federal Government and 30% was again pooled into the “Distributable Pool” and shared by all four regions again, in this formula…North 40%, East 31%, West 24%, and Southern Cameroon 5%.

 

Export duties was 100% to state of origin

 

1963 constitution….this followed the 1958 Raisman allocation, in summary it remained, mining rights for oil producing regions 67.4%, Federal Government 20%, non-oil regions 12.6%

 

Export duties maintained at 100% of state of origin

 

1970 Decree no 13, the Military steps in. the states lose fiscal autonomy, maintain derivation. The Distributable pool was gone, the Oil producing states lost 5% of their derivation percentage. The new formula was now…mining rights for oil producing states, 45%, Federal Government 55%

 

1975, Decree 6: the military further reduced derivation to 20%, thus mining rights to oil producing states….20%, Federal Government 80%

 

1977, Aboyade Commission. The Military created the Federation Account. Derivation abolished. Thus mineral rights to oil producing states 0%, Federal Government 100%.

 

Export duties now 0% to state of origin

 

Thus in 13 years, Nigeria went from state share of mineral rights at 67% to 0%, and took states share of export proceeds from 100% to 0%

There remain NO incentive for state government to encourage agriculture. None. States own the land, the produce of the land however went to companies who paid incomes taxes to the FGN, who exported and paid export duty to the FGN. The states were left with nothing. It’s during this period that commercial agriculture crashed in Nigeria. Why bother with agriculture when you won’t get any money?

 

Ok so when the Federal government took the oil and export proceeds money what did they do with it? Well they shared it back to the states and local government according to a formula as below. States got on average 32%, Federal 47%, LGAs 15% (*note there are statutory transfers to Ecology, Agric dev etc **note there is a new submitted revenue formula not yet approved, but it’s not marked different from this.)

 

Export proceeds as at today still remains 0% to states as derivation, company income taxes remain 0% accrued to states as derivation…..This means states do not retain as revenue to their budgets the export duties on cash crops produced in their states.

 

But that not the whole story….

 

That 31% the FGN shares to states, is it shared equally? NO how is it shared? That’s called the Horizontal revenue allocation formula. The key sharing heads are 

1. Equality 45%, 

 

2. Population 25%, 3.

 

3. Land mass 5%…Lets pause here

 

What this means is that just being a state with a high population guarantees any state 65% of the allocation to states….

So understand what happened here, FGN took the mineral and non-oil export earning to an account, retained 47% of that account, then returned 31% to the states but said it will be shared out NOT based on where the income was generated but on “equality” and “population”…

 

Thus all states now focus on their population figure, not agriculture. Any attempt by the National Population Commission to discuss population shifts is met with stiff resistance and with good reason too, Population and “equality” not exports or derivation determine how states receive revenues from the 31% allocation. That why a state can violate the constitution and conduct her own census…it’s that serious.

 

Palm Oil for instance can be farmed in 24 states in Nigeria including Southern Kaduna specifically in Abia, AkwaIbom, Cross River, Rivers, Bayelsa, Imo, Anambra, Ebonyi, Enugu, Delta, Edo, Ondo, Ogun, Osun, Oyo, Ekiti, Benue Kwara, Kogi, Nassarawa, Plateau, Taraba, Adamawa and Kaduna…….but why bother planting palm oil? It’s much easier to lobby the NPC for a high population count.

 

As states in Nigeria started to receive a greater percentage of their income from the federal government, they stopped farming. And you can’t blame them. If groundnuts export revenues still went to Kano 100%, there would still be groundnut pyramids in Kano, but Kano lost the export proceeds funds to FAAC, thus no incentive to plant groundnuts. I suspect even with crude oil, there would be pyramids if Kano state retained the income form groundnuts 100%.

Same for Abia state, as they lost the oil palm export proceeds to FAAC, they then put their eyes squarely on “Abuja”

 

Ok but are we suggesting that we take states away from oil and push them to farming? By giving them 100% of their export proceeds from their agriculture cash crops? YES

To fix agriculture we must fix the incentive process. If states retained even 13% derivation on income taxes and export duties, they would see the incentive to rally attract companies to come to their states and push exports.If we had left the derivation to states at 100%, then every state today would be viable, as it stands in 2014 Nigeria exported N133b worth of Cocoa, that more that the budget of Ekiti in 2014, Nigeria also exported N97b worth of Hides and skin again more than the 2014 budget of Taraba.

The problem with agriculture in Nigeria is not crude oil, but our faulty fiscal federalism (FAAC)….

 

So what to do?

 

In management the principle is you reward what you want to improve, if you want safer drivers you reward drivers with zero car scratches.Same here, states own land not the FGN, return back to the states the fiscal principle of derivation on agricultural exports. That will mean states can see a direct relationship between farming and IGR and this will spur investment in agriculture. Governors will seek out agric investors the same way and vigor they seek out Shoprite.

 

Derivation on agricultures is also fair. All states have land, all states can farm, agriculture is still a major contributor to our GDP growth, and it still employs millions of Nigerians in every state. A fiscal amendment to give states 100% export earning can have two massive impacts

 

In the short term, it makes agriculture attractive in the long term it makes all states fiscally viable.

So increase derivation on agricultural exports from state of origin back to 100%.

 

It’s our problem, we can fix it.