A FAAC-and-Knife Story
How Nigeria's Money Is Shared Every Month
Nigeria runs a Federal system, comprising three (3) tiers of government – Federal (FG), State (SG) and Local (LG). These three tiers share, every month, the monies that flow into a giant joint pot called the Federation Account (FA).
There is of course money that comes directly to the three tiers, that doesn’t go through the FA, but that’s another story for another day.
This post is about the FA—the source of most of the Government money in Nigeria today (only a handful of States earn or have ever earned more from non-FA sources than from the FA)—and how the FA is shared.
Warning: it’s all fairly complicated, this sharing process, so brace yourselves.
FAAC is the Federation Account Allocation Committee, comprising some very powerful people at Federal and State levels, who meet once a month to review the FA and share whatever they find inside it.
FAAC was originally established in the Second Republic, by the Allocation of Revenue (Federation Account, etc.) Act of 1981, assented to by President Shehu Shagari in January 1982. Even as the revenue formula prescribed in that initial Act has changed over the years, FAAC has remained a fixture on the fiscal landscape.
Its primary mandate: “To ensure that allocations made to the States from the Federation Account are promptly and fully paid into the treasury of each State on the basis and terms prescribed by the Allocation of Revenue Act.”
Before we jump into details, it’s useful to know that Nigeria operates on two broad kinds of revenue allocation formulas:
A Vertical Allocation Formula (VAF): which prescribes how revenues are shared among the three tiers of government, i.e. the respective percentages that go to each tier: currently, LGAs get 20.60%; States get 26.72%; FG gets 52.68%
(Where Mineral revenues are concerned—oil, gas, solid minerals—there’s a 13% Derivation principle that is applied prior to the VAF; more on this later).
A Horizontal Allocation Formula (HAF): which prescribes how the revenues allocated to the States and Local Governments (by the VAF) are to be shared among all 36 States and 774 LGAs. So it’s like a more detailed sharing formula that takes off from where the VAF stops, and is focused on States and LGs. Complicated.
FEDERATION ACCOUNT
This is where it starts.
The Revenues that come into the Federation Account (FA) are “federally-collected”, which means it’s the Federal Government and its agencies—like the Federal Inland Revenue Service (FIRS) and the Nigeria Customs Service (NCS) and NNPC Limited (NNPCL)—doing the collecting on behalf of the entire Federation.
All of these Federally-collected Revenues—Oil (Nigeria being an oil-and-gas-rich nation) and Non-Oil (everything else, including Solid Minerals revenues)—go inside this Big Pot that is the Federation Account (FA).
OIL REVENUES
Oil Revenue refers to income from oil-related activities, which would mean crude oil and gas sales/exports, Petroleum Profits Tax (PPT), royalties, profit oil, gas flaring penalties, concessional rentals, etc.
For Oil Revenues, even though all of it is initially captured by the Federation Account, only 87% is actually up for sharing by all 3 tiers, using the VAF.
The balance of 13% is shared exclusively by oil-producing States, on the basis of how much oil they produce; in accordance with something known as the Derivation Principle (in simple English: ‘those from whose land it is produced must specially enjoy from it’)
In recent years, Anambra, Kogi and Lagos have formally joined the list of oil-producing States, and have therefore been benefiting from this Derivation money.
The list of oil-producing Nigerian States will keep growing, as more States join: oil exploration activities have recently kicked off in Bauchi, Gombe, Borno and Nasarawa States.
NON-OIL REVENUES
Non-Oil Revenues are all those earnings from commodities and services and transactions that have nothing to do with oil and gas, e.g.
Companies Income Tax (CIT)
Value Added Tax (VAT)
Capital Gains Tax (CGT)
Customs and Excise Duties
Tertiary Education Tax (EDT)
Solid Mineral Revenues (Royalties, Permits, Penalties, etc) (Derivation applies here as well)
FGN Independent Revenue (income from interest, dividends, rents, sale of national assets, etc.)
Various Levies (including Port Levy, Sugar Levy, Steel Levy, Cement Levy, Electronic Money Transfer Levy, National Information Technology Development Levy (NITDL), etc.
Personal Income Tax (PIT) payable by members of the Armed Forces, Police Force, officers of Nigerian Foreign Service, and non-resident Nigerians. (All other PIT is collected and kept by States)
[A Tax Expert explained to me that VAT, CIT, CGT, GIT, etc are always reported, for FAAC purposes, as Non-Oil Revenues, even when paid by oil companies. Interesting].
KNIVES OUT, PLATES TOO
After these Monies have entered the Federation Account and settled down and made themselves at home, the knives come out (dozens of knives, since every State is represented at FAAC), for the slicing and sharing.
That sharing is done officially at the monthly FAAC Meeting, that holds in Abuja. Sometimes the F in FAAC is for “Fighting”, because, naturally, what is the sharing of big monies without the occasional brouhaha?
So, here’s how the FAAC-and-knife work goes:
First, a variety of “Statutory Transfers, Refunds and Savings” (STRS) are taken out of the Federation Account, like the following:
The various Special Taxes and Levies that are collected by FIRS and Customs on behalf of owners like (too many acronyms, but trust me, they’re all Federal Government Agencies): TETFUND, NITDA, NMDPRA, NSDC, etc.
Joint Venture Cash Calls (NNPCL’s investment commitments to the oil blocks it owns stakes in on behalf of the Federation)
Provisions for Refunds to be made to States or Collecting Agencies, for monies owed them—this happens not infrequently, e.g. where some or all States went unpaid or underpaid for something they were entitled to at some time in the near or distant past, leaving a debt that now has to be settled from current and future FAAC earnings)
Provisions for FGN Independent revenue and other Non-Federation Revenues, like Personal Income Taxes (“PAYE”) from the Armed Forces, Police Force, and the Foreign Service, which belong to the FG, and are remitted to the Federation Account by FIRS
[Note that All other Personal Income Taxes belong to the States; each State, through its Internal Revenue Service, collects Income Tax for the State, on the earnings of its residents. As for Corporate Taxes, those are collected “federally” by FIRS, for sharing by all, using the VAF].
Very importantly, a “Cost of Collection” is also taken out, that goes to the collection agencies (FIRS, NUPRC, Customs); a fixed percentage of what they collected/contributed, as ‘fees’ for the work of collection.
TOTAL DISTRIBUTABLE REVENUE
After all the Statutory Transfers, Refunds and Savings (STRS) and Cost of Collection are taken out, what is left in the Federation Account is called the Total Distributable Revenue (TDR)
From that Total Distributable Revenue, VAT is set aside, for sharing using its own special formula: 15% to the Federal Government (FG), 50% to State Governments (SGs), 35% to Local Governments (LGs). In other words, VAT is not shared using the Vertical Allocation Formula (VAF)
But first, 3% of annual VAT collection is taken out first (a “first line charge”), to fund the new North East Development Commission (NEDC). FIRS and NCS also get their “Cost of Collection” from the VAT Pool. What is left after these deductions—i.e. what is left for sharing between the 3 tiers—is known as “Distributable VAT.”
Also set aside for sharing from Total Distributable Revenue is “Derivation”, the 13% of oil and gas revenue (after the necessary deductions and transfers) that is given exclusively to the oil-producing States for sharing.
(This Derivation Principle also applies to Solid Minerals revenues, collected and contributed to the Federation Account by the Federal Ministry of Mines and Steel Development. 13% of all Solid Mineral earnings is set aside for the States where those solid minerals are mined; before the rest is then shared as part of the pool of money available to the three tiers of Government)
There is also now a FAAC component known as Electronic Money Transfer Levy (EMTL), introduced by the Finance Act, 2020, and which is shared by the 3 Tiers of Government.
The EMTL is being shared using the same formula as VAT (15% FG, 50% SGs, 35% LGs), but the States are already pushing back and arguing that it should be 15% FG and 85% SGs, and that LGs are not meant to benefit from the Levy. Recall what I said about FAAC and fighting.
Sometimes there is a (modest) Exchange Rate Gain (ERG) component, defined as “the difference between budgeted and prevailing exchange rate of Naira to US Dollar”—always a “gain” when it occurs because the prevailing exchange rate is always for some reason higher, not lower, than budgeted.
For the June 2023 FAAC distribution (shared in July), the ERG component was massive—amounting to 320 Billion Naira—owing to the floating of the FX regime by the new Administration, and the corresponding spike in exchange rate. Contrast this with an ERG of 639 million Naira only for the May 2023 FAAC distribution (shared in June).
The ERG is shared using the Vertical Allocation Formula (VAF), after Derivation has been applied.
THE ‘ASTRAS-VADE’
The amount left in the Federation Account, A-fter all the S-tatutory T-ransfers, R-efunds A-nd S-avings, VA-T, D-erivation, E-MTL, and E-xchange Rate Gain, E-tc—let’s call this remnant ASTRAS-VADE (a mouthful, for which I apologise; if you repeat it enough times you’ll get used to it, I assure you)—is then shared between the 3 tiers of Government, using the Vertical Allocation Formula (VAF):
LGs get 20.60%
States get 26.72% (Total for LGs and SGs: 47.32%)
FG gets the rest, 52.68%
In FAAC parlance: ASTRAS-VADE + Derivation = “Distributable Statutory Revenue”.
The Federal Government’s ASTRAS-VADE share of 52.68% goes into multiple accounts, as follows:
FG Consolidated Revenue Fund (CRF): 48.5% of ASTRAS-VADE
FG Development of Natural Resources Fund (DNRF): 1.68% of ASTRAS-VADE
FG Share of Derivation + Ecological Fund (administered by the Federal Government to tackle ecological problems nationwide): 1% of ASTRAS-VADE
FG Stabilization Fund: 0.5% of ASTRAS-VADE — (25% of the Fund is expected to be transferred to Nigeria’s Sovereign Wealth Fund, NSIA, for management and investment.
Federal Capital Territory: 1% of ASTRAS-VADE (comes out of the FG’s 52.68%)
In addition, the FCT gets 1% of the VAT Pool (comes out of the 15% that goes to the FG), as well as the Personal Income Tax from FCT residents.
CONSOLIDATED REVENUE FUND (CRF) OF THE FEDERAL GOVERNMENT
The Consolidated Revenue Fund (CRF) of the Federal Government (this one belongs exclusively to the FG, unlike the Federation Account) also receives, by way of inflows, a portion of revenues generated by Federal Govt agencies – JAMB, NPA, NIMASA, NIPC, NIPOST etc. There’s a 2007 Law that mandates these agencies to annually remit 80% of their annual “Operating Surplus” to the CRF. Only recently has that law been taken somewhat seriously.
The CRF, in addition to the 52.68% of the ASTRAS-VADE it gets, also receives 15% of Distributable VAT + FG Share of EMTL and ERG + Personal Income Taxes from the Military, Police, Foreign Service and non-Resident Nigerians.
It is from the CRF that the Annual Federal Budget is appropriated and funded.
That Annual Federal Budget includes certain statutory provisions i.e. mandatory direct transfers from the CRF to the Federal Legislature (NASS), Federal Judiciary (National Judicial Council), UBEC (2% of CRF), BHCPF (1% of CRF), INEC, etc.
PROPOSED VERTICAL ALLOCATION FORMULA (VAF) AMENDMENTS:
In April 2022, the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC)—a body established by the Nigerian Constitution—proposed a review of the VAF, as follows:
This amendment, if approved by the President, will alter the following:
States from 26.72% to 29.79%; a 3.07% percentage-points (pp) increase
LGAs from 20.6% to 21.04%; 0.44% pp increase
FG’s Consolidated Revenue Fund (CRF) from 48.50% to 45.17%; a 3.33 pp reduction
FG Development of Natural Resources Fund (DNRF) from 1.68% to 1.3%; a 0.38% pp decrease
FCT from 1% to 1.2%; a 0.2% pp increase
FG Stabilization Fund will stay the same at 0.5%; FG Ecological Funds will stay the same at 1.0%
This proposal has not yet received Presidential approval.
TOLU’S TAKEAWAYS:
There has to be a way to make this sharing business easier, less complicated—and just as importantly, far more transparent to the public—than it currently is.
That said, it must be pointed out that there’s a remarkable amount of very useful Nigerian Government financial information out here on the Internet, just chilling. In researching this piece, I found several pdf documents on the websites of the NBS, CBN, NGF, OAGF, and NEITI, detailing in their own ways the workings/ways of FA/FAAC.
The differing perspectives or angles are interesting, reminding me somewhat of the overlapping yet differing angles of the four canonical gospels of Jesus Christ. That said, I think there should be a standardised way of presenting and reporting FA/AC information, down to the terminologies used, the levels of detail, and how the information is structured.
The tradition of publishing what the Federal Government, and each State and Local Government, all receive every month needs to be revived. Detailed FAAC figures should be more readily available to the public, with non-jargon explanations and notes.
States clearly have to do a lot more work to make themselves less dependent on FA, FAAC and the monthly trips to the FCT. This our idea of FAAC Federalism cannot and must not go on forever.
There’s a noticeable pattern (for anyone who’s been paying attention to the NASS) where new Federal Agencies spring up hoping or scheming to carve out yet another percentage of the FA or the CRF (or yet another Special Levy) for themselves, as funding source. It’s very tempting, but unsustainable.
There are a good number of Nigerian fiscal laws that are currently not being obeyed at all, or only obeyed half-heartedly.
ONE LAST THING: A QUIZ
As always, feedback, corrections and insights welcome. Thank you.
I read carefully. Thank you for this rich insight. Indeed incredible.
Thanks tolu for the enlightenment, very interesting take you also outlined