CEM REPORT, FINANCE| Nigeria’s revenue-sharing formula is under fire after a report by Agora Policy, a non-governmental organization, revealed that government agencies are collecting exorbitant amounts as “cost of collection,” exceeding allocations to individual states and entire geopolitical zones.
The report, titled “Why Nigeria’s Cost-of-Collection Approach is no Longer Tenable,” details how the Federal Inland Revenue Service (FIRS), Nigerian Upstream Petroleum Regulatory Commission (NUPRC), and Nigeria Customs Service (NCS) received a combined ₦78.3 billion in January 2024 as cost of collection. This staggering figure dwarfs the allocations of even the most resource-rich states.
FIRS Takes Lion’s Share
According to the report, FIRS, the agency responsible for collecting non-oil taxes, took the biggest chunk of the cost-of-collection pie, receiving ₦43.35 billion. This amount is not only significantly higher than what any Nigerian state received from the Federation Account Allocation Committee (FAAC) in January, but it also surpasses the allocation given to Delta State, the highest earner, by a staggering 109.49%.
Customs and NUPRC Not Far Behind
The report further highlights that the NCS, responsible for collecting customs duties and levies, received ₦16.27 billion as cost of collection, exceeding the FAAC allocation of 31 states in January. Meanwhile, NUPRC, the regulator of the upstream petroleum sector, raked in ₦18.65 billion, an amount on par with the combined FAAC allocations of Akwa Ibom, Delta, Bayelsa, Rivers, and Lagos – all major oil-producing states.
Cost of Collection System
The cost-of-collection approach is a relatively new feature of Nigeria’s revenue-sharing system. Under this system, certain federal agencies receive a percentage of the revenue they collect on behalf of the federation. While the initial purpose of this approach might have been to incentivize efficient collection, Agora Policy argues that it has become unsustainable and prone to abuse.
“The cost-of-collection approach might have served a useful purpose at some point. However, recent developments show that it is a flawed idea that needs to be jettisoned. It enables abuse, distortions, distractions and wasteful expenditures. The utility of the approach has been overtaken. It is thus no longer tenable,” Agora Policy states.
Cost of Collection Outpaces Regional Allocations
The report’s analysis goes a step further, revealing that the combined cost of collection for these agencies surpasses the FAAC allocations of all six geopolitical zones in Nigeria for January 2024. The allocations for each zone were as follows:
North-East: ₦56.60 billion
North-Central: ₦55.58 billion
North-West: ₦76.09 billion
South-East: ₦47.75 billion
South-South: ₦141.85 billion (due to derivation for oil-producing states)
South-West: ₦86.60 billion
These figures highlight the significant drain that the current cost-of-collection approach places on national resources. With these hefty deductions, less money is available for critical government functions at the state and local levels, potentially hindering development efforts and exacerbating existing inequalities.
Agora Policy
Agora Policy is a Nigerian think tank and non-profit committed to finding practical solutions to urgent national challenges. We conduct policy research, facilitate frank and purposeful dialogues, and build capacity for governance, policy and advocacy.
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If You Ask Me
The Agora Policy report serves as a wake-up call for the Nigerian government to re-evaluate its revenue-sharing formula. The current system seems to be rewarding collection agencies at the expense of critical national development needs. A more sustainable and equitable approach is essential to ensure that all Nigerians benefit from the nation’s resources.
The report’s findings are likely to spark debates among policymakers, economists, and civil society organizations. Moving forward, a transparent and inclusive discussion is crucial to determine a revised revenue-sharing formula that balances efficiency with fairness and fosters economic growth across the nation.
