Cablegate: Revenue Sharing and Resource Control

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ABUJA 000997

SIPDIS

E.O. 12958: N/A
TAGS: EFIN EPET PGOV PINS NI
SUBJECT: Revenue Sharing and Resource Control

1. (U) In the interests of de-mystifying what is for
everyone, Nigerians included, an extremely convoluted
federal revenue-sharing system, Embassy offers the
following summary explanation to help define the issues at
stake in the resource control lawsuit being heard in the
Nigerian Supreme Court. Familiarity with the broad
outlines of the GON's revenue distribution scheme is also
essential for understanding many of the Federal/State
issues that will arise from the work of the Constitutional
Review Committee. Some of the most contentious
constitutional issues considered by the Committee involve
revenue distribution and resource control.

2. (U) We will present the distribution process in a
linear, outline form and define terms as needed. Naira
values are based on this year's (FY 2001) income
projections provided by the Ministry of Finance to the
National Assembly. Dollar values are based on an exchange
rate of 130 naira/dollar. (Dollar and naira figures in
billions, except where noted. Numbers rounded.)

I. FEDERALLY COLLECTIBLE REVENUES: N2,126 b.
(16.35 b.
USD)
These are gross revenues to the GON which are
divided into Oil and Non-oil Revenues.

A. OIL REVENUE

1. Oil and Gas Revenues (Total): N1,672 b.
(12.8 b.
USD)
Comprised of:
Export Crude: N863 b.
Petroleum Profit tax: N353 b.
Oil Royalties N163 b.
Domestic Crude N241 b.
Upstream Oil/Gas N 30 b.
Rents, oil block sales N 22 b.

2. Less Primary First Line Charges: N497 b.

(3.82 b.USD)
NNPC Joint Venture Cash Calls:N350 b.
Petroleum Product Subsidy: N147 b.

Note: This total is deducted from gross
petroleum receipts only (line 1). Primary
First Line Charges include capital
contributions to the Nigerian National
Petroleum Corporation's (NNPC) Joint Venture
Companies (JVC's) and the national petroleum
product subsidy. Since the GON owns an average
of 57 percent of the JVC's, it contributes that
same percentage to the total of capital
investment in the petroleum sector.

3. Net Oil Revenues: N1175 n.
(After primary first line charges) (9.03 b. USD)

4. DERIVATION: (13% of Net Oil Revenue) N153 b.

(1.18 b. USD)

Note: Derivation is to be paid to the nine oil
producing states, and equals 13 percent of net
oil revenues after primary first line charges.
This payment is intended to compensate states
for environmental degradation due to resource
extraction. Whether to base this 13 percent
figure on total oil production, or onshore
production only, is the crux of the current
dispute between the States and Federal
Government. Whatever the outcome, it is at
this point in the process that derivation is
determined. Offshore production constitutes
roughly 45 percent of total production, with
that portion expected to increase gradually
over the next several years as new offshore
fields come on line and existing onshore fields
are depleted.

5. Net GON Oil Revenues after Derivation: N1022 b.

(7.86 b. USD)

6. Less Secondary First Line Charges: N368 b.

(2.83 b. USD)

Secondary First Line Charges include:
External Debt Service: N150 b.
NNPC Priority Projects: N34 b.
Other Charges: N184 b.

7. Net GON Oil and Gas Revenue N838 b.

(6.44 b. USD)

B. NON-OIL REVENUE

1. Non-oil Revenue (Total): N453 b.

(3.48 b. USD)

VAT N70 b.
Customs Duties N114 b.
Company Income Tax N70 b.
Education Tax N7 b.
Petroleum Products Tax N40 b.
Independent Revenue N60 b.
(Parastatal Profits)
Customs Levies N20 b.
Privatization Proceeds N70 b.
Fertilizer Debt Recovery N2.5 b.
C. FEDERALLY COLLECTIBLE REVENUE
Net oil and non-oil revenue: N1292 b.

(9.93 b. USD)
National Judicial Council: N15??

Note: NJC funding is deducted as a first charge
against federally collectible revenue--net oil
plus non-oil income--which then determines the
level of funding for the Federation Account.
The NJC is responsible for administration of
the State and Federal Courts.

II. FEDERATION ACCOUNT N1277 b.
(Federally Collectible Revenue less NJC funds)(9.82 b. USD)

Note: Some non-oil income items are considered
exclusive Federal Government revenue, and are
deducted from the Federation Account before
arriving at the figure for Federally
Distributable Funds, which are allocated to the
three tiers of government. Exclusive Federal
Government revenue includes all non-oil
revenues listed above except company income
tax, customs duties, and the petroleum products
tax.

A. Federally Distributable Funds: N1047 b.
(less exclusive Federal Govt. revenue) (8.05 b. USD)

1. Federal Govt. Share (48.5%): N508
(3.9 b.
USD)

2. States (24%): N251
(1.93 b.
USD)

3. Local Govt. Areas (20%): N210
(1.6 b.
USD)

4. Special Funds (7.5%): N78 b.
(.6 b. USD)

Special Funds are then apportioned between the
three levels of government according to the
same percentages.

B. Vat Distribution (N70 b.)

1. Federal Govt. share of Vat (15%): N10.5 b.
2. States Share of Vat (50%): N35 b.
3. Local Government Areas (35%): N24.5 b.

C. Niger Delta Development Commission: N17.8 b.

Note: This amount is paid by the GON to the
NDDC. The figure is determined by multiplying
38.61 as a percentage against the overall
revenue figure for the states (IIA2: N251 b.).
This provides N97 b. which is multiplied by
.15 to get the basic allocation for the NDDC:
N14.5 b. (Note: The GON has only been paying
the NDDC at a rate of 10% rather than the 15%
required by the NDDC law. End note.) An
additional 3.3 billion naira is added to this
figure from a separate revenue item, leaving a
total payment to the NDDC of N17.8 b. This
amount is paid to the NDDC by the GON out of
the Federation Account, and essentially is a
taken as a charge against the Federation
Account after applying the revenue sharing
formula.

III. Total Federal/State/LGA Disposable Revenue:

N1370 b.

(10.5 b. USD)

1. Federal Government: N708 b.
(5.44 b.
USD)
(48% of Federation Acct., 10% Vat, Special Funds
distribution + retained revenue)

2. States: N380 b.
(2.92 b.
USD)
(24% of Fed. Acct., VAT and special funds
distribution)

3. Local Government Areas: N282 b.
(2.17 b.
USD)
(20% of Fed. Acct., Vat and Special Funds
distribution)

------------------------
Resource Control Lawsuit
------------------------

3. (U) The foregoing revenue distribution summary is
helpful in understanding what is at stake in the current
lawsuit between the oil-producing states and the Federal
Government. As mentioned above, derivation is a 13%
deduction from net oil revenues after all first charges are
removed, and is intended to compensate oil-producing states
for environmental degradation. It is also intended as a
type of royalty payment to oil-producing states to
partially compensate them for the expropriation of mineral
rights by the Federal Government under the Land Use Decree
Act of 1973, during the military administration of General
Yakubu Gowon.

4. (U) The Federal Government contends that offshore
production should be excluded in determining derivation for
the following reasons: first, the GON argues that offshore
production beyond the three-mile territorial limit is in
the exclusive economic zone of the GON, and states with
maritime boundaries therefore have no claim to special
ownership or administration of those resources. Second, it
contends that offshore production is not deleterious to the
littoral environment--one of the primary justifications for
the derivation payment. Finally, the GON argues that
mineral rights beyond the three-mile territorial limit
never belonged to the states, so both the legal and moral
arguments in favor of compensation based on these resources
are invalid. The states disagree, arguing that the
offshore/onshore dichotomy was introduced by Head of State
General Gowon by military decree in order to help pay the
lingering costs of the Civil War and is unconstitutional.

5. (U) The oil-producing states may have the upper hand on
the purely constitutional issues. Section 162(2) of the
1999 Constitution provides that the National Assembly shall
determine a formula for revenue allocation that takes into
account among other things, population, revenue generation,
landmass:
"Provided that the principle of derivation shall be
constantly reflected in any approved formula as being not
less than 13 percent of the revenue accruing to the
Federation Account directly from any natural resources."

The states are arguing that the introduction of a
distinction between onshore and offshore production is not
based in the plain language of the Constitution, which
would seem to forbid it.

6.(U) Comment: While it is unclear how the Court will
rule, the States may well prevail if the Supreme Court
makes a purely legal judgment based on the language in the
Constitution. In view of the passage, "accruing to the
Federation Account directly from any natural resources,"
the real issue may boil down to whether certain Nigerian
states--by virtue of having maritime boundaries--have a
higher order claim to the 13 percent derivation from
offshore oil than do all states collectively.

7. (U) President Obasanjo unilaterally refused to pay
derivation from May 1999, and only began making partial
payments to the oil-producing states under political
pressure in June 2000. It is encouraging that the Obasanjo
Administration is seeking a legal outcome from the Supreme
Court, rather than continuing to take unilateral action.
However, the issue is a political one, and many observers
expect the Court to seek a way to thrust the question back
into the political arena. A more detailed report on the
issues and background to the resource control lawsuit will
be provided in Septel. End Comment.
JETER

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