The Office of the Accountant General of the Federation (OAGF) was established for Treasury Management of the federation. It has responsibility for providing comprehensive accounting systems and controls in the ministries, extra ministerial offices and other Arms of Government. The office also has the mandate of collating receipts and reporting on revenues of the Federal Government. This is derived from Sec. 80(1) of the 1999 Constitution which stipulates that, “All revenues or other money raised are received by the Federation (not being revenues or other moneys payable under this constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and from one Consolidated Revenue Fund of the Federation.”
The Accountant- General of the Federation (OAGF) is the Chief Accounting Officer charged with the constitutional role of preparing the nation’s financial statements arising from collection and receipts of income, fees, rentals and taxes and payment out of the Federation Account. Accordingly, Sec. 85 S.5 of the Constitution provides that, “the Auditor-General shall, within ninety days of the receipts of the Accountant-General’s Financial Statement, submit his reports under this section to each House of the National Assembly responsible for public accounts”.
The office of the Accountant-General of the Federation (OAGF) is the executive arm of Government responsible for maintaining records for all revenues and receipts and payments into and out of the Federation Account. The OAGF transaction recording procedures can be depicted in the diagram below:
Figure 1 - OAGF transaction recording process
The OAGF classifies revenue receipts into the Federation account into mineral and non-mineral revenue. Mineral revenues are the oil and gas specific flows which include royalty, PPT, EDT and proceeds from crude and gas sales. Non-mineral revenues are non-sector specific flows which include VAT, WHT and custom/excise duties etc. Deductions of joint venture cash calls and cost of collection to DPR are made from mineral revenue before payments are made to the Federation account.
There are several revenue streams to government from the oil and gas sector. While some revenues are paid to the Federal Government through its agencies, others are paid directly to sub-national entities. Revenues paid directly to the Federal Government include:
- Proceeds from sale of Government Crude Oil and Gas
- Petroleum Profits Tax (PPT)
- Royalty (Oil & Gas)
- Signature Bonuses
- Licenses and Concession Rental
- Gas Flared Penalties
- Companies Income Tax (CIT)
- Education Tax (EDT)
All revenues accruing to the Federal Government (after deductions) end up in the Federation account and forms part of revenue that is utilized in funding the national budget. This also includes revenues received in-kind. All in-kind revenues (profit oil, royalty oil and tax oil) are lifted by the NNPC on behalf of the relevant agencies or the Federation, with proceeds deposited in the relevant accounts.
Other revenue flows to sub-national entities are:
- Niger Delta Development Commission (NDDC) Levy
- Nigerian Content Development and Monitoring Board (NCDMB) payments
- Nigerian Export Supervision Scheme (NESS) fees
These revenues from the sector do not flow into the Federation account. The NDDC levy, NCDMB 1% levy and NESS fess are paid directly to the NDDC, NCDMB and NESS respectively.
The financial flows received by the Government from the covered entities are illustrated below:
Figure 2.0 - Financial flows
The payment flows are received from various agencies (FIRS – taxes, DPR – royalty oil and gas, signature bonuses, concession rentals, gas flare penalty, miscellaneous) and IOC’s. A further description of the figure is stated below:
- Income from domestic crude oil
The income is realized from the sale of unrefined crude allocated for domestic refining. NNPC pays for domestic crude allocated in Naira at a converted export crude price using CBN exchange rate on the day of invoicing. Unrefined crude in excess capacity is sold and proceeds received into NNPC Account.
- Federation crude oil income
The revenue proceeds are from the sale of crude oil and gas by the NNPC to the international oil market. Proceeds are received in United States dollars. This flow is reported by the Central Bank of Nigeria which is the receiving entity since payments are made to it on the instruction of the foreign customer.
- Petroleum profit tax
Petroleum Profit Tax is tax paid on profit generated by companies in the Upstream Sector of the oil industry. Petroleum Profit Tax is regulated by the PPT Acts of 2007. Petroleum producing operators like Joint Venture Companies, Production Sharing Companies and other oil producers are first two statutorily required to prepare an estimate of their income within the first two months and to forward the same to the Federal Inland Revenue Service. The agreed estimate of tax is payable in twelve equal monthly installments.
- Company income tax
Company Income Tax is tax paid on the profit arising from oil and gas operations of companies. Oil and Gas companies pay Company Income Tax in United States dollars, on the profit arising from gas operations.
- Value-added tax
This consumption tax is placed on a product whenever a value is added at a stage of production and at the point of sales. The rate of Value Added Tax is currently five percent (5%). Value Added Tax is paid by all covered entities in local and foreign currencies to the Federation Account with J.P. Morgan Chase Bank Domiciliary account in the Central Bank of Nigeria.
- Withholding tax
Withholding Tax is a government requirement for the payer for an item of income to withhold or deduct tax from the payment, and pay the tax to the relevant government authority, the Federal Inland Revenue Services. Withholding tax is paid by all covered entities in Naira to the State Government and in the USD to the Federation Account with the Central Bank of Nigeria.
- Pay as you earn (PAYE)
A Pay As You Earn Tax (PAYE) is a tax on Income of employees on a monthly basis. The relevant deductions are paid by all covered entities in Naira or Dollar to the State Government in which they operate, as required by the specific State Personal Income Tax Act 2011 as amended.
- Tertiary Education Tax
Education Tax Fund was created by an Act in the year 1993 for the funding of Tertiary Institutions in the Country. The fund is provided through Tertiary Education Tax collected by the Federal Inland Revenue Services (FIRS) in accordance with the Tertiary Education Trust Fund (Establishment, etc.) Act 2011. Tertiary Education Tax is chargeable on the assessable profit of petroleum companies at a rate of two percent (2%). The tax is an allowable deduction in computing an Exploration and Production (E&P) company adjusted profit.
- Petroleum profit tax
This is a regular payment from the oil companies in the Upstream to the Federal Government in return for the right of access to the crude oil. Royalty is a sum of money paid by a holder of a concession to the Federation based on the value of the quantity of oil extracted at the fixed percentage from time to time by the government. Department of Petroleum Resources (DPR) is the government agency that receives royalty payments.
- Signature bonus
This revenue is received at the time Oil Prospecting License is given to an oil company. Payments are made to the Department of Petroleum Resources (DPR) designated account at the Central Bank of Nigeria for the allocation of oil blocks.
- Licenses and Concession Rentals
Oil and Gas companies pay concession rentals as rent on oil blocks for which they have been granted concession. There are two categories of rentals, namely:
- Oil Prospecting Licenses (OPL)
- Oil Mining Lease (OML)
The license is non-exclusive and is granted for a period of one year. It is renewable annually.
- Funding Niger Delta Development Commission
The Niger Delta Development Commission (NDDC) is a Federal Government Agency established in the year 2000. The sole mandate of NDDC is to develop the oil-rich Niger Delta region of Southern Nigeria. In September 2008, the Niger Delta Ministry was created and the NDDC became a parastatal under it. Presently, there is a three percent (3%) Statutory contribution required from upstream companies to the NDDC based on their Annual Budget. The Act establishing the NDDC provides that in addition to monies from the Federal Government, it has to be funded by annual contributions of the total budget of any oil-producing company, operating on-shore and off-shore in the Niger Delta area of the country. Contributions are made in both foreign and local currencies to the commission.
- Funding of Nigerian Content Development and Monitoring Board (NCDMB)
The Nigerian Content Development and Monitoring Board is the Regulatory Agency vested with the responsibility of regulating local content in the oil and gas industry in Nigeria. The Nigeria Oil and Gas Development Act, which applies to all operators in Nigeria’s Oil and Gas Industry, including Exploration, Production and Services Companies, established the Board. The Board is funded by the Federal Government of Nigeria and by statutory contributions of Upstream Companies through remittance of one percent (1%) deductions from any contract awarded to an operator, contractor, sub-contractor, alliance partner or any other entity in any project, operation, and activity in any transactions in the upstream sector of the Industry.
- Cash call
This is a cash advance payment required to be paid by each Joint Venture operating company to meet up with the cash operation requirements of the Joint Venture. The Nigeria National Petroleum Corporation pays on behalf of the Nigerian Government in its Joint Venture Agreement. The payment is made on monthly basis for each of the financial year. This only applies to the Joint Venture between NNPC and the Joint Venture Operators. Payments are made to the Joint Venture Operators both in local and foreign currencies by NNPC on behalf of the Federal Government.
The financial transaction flows are illustrated in the diagram below:
Figure 3.0 - Financial transaction flow
3b. Subnational transfers
Overview of Federation Revenue Distribution, Management & Expenditure
Nigeria is a Federation with three federating units made up of the Federal, State and Local Governments. Federation revenue is therefore owned by the three federating units. Section 162 of the 1999 Constitution of the Federal Republic of Nigeria defines “revenue” as any income or returns accruing to or derived by the Government of the Federation from any source including:
- any receipt, however described, arising from the operation of any law;
- any return, however described, arising from or in respect of any property held by the Government of the Federation;
- any return by way of interest on loans and dividends in respect of shares or interest held by the government of the federation in any company or statutory body
Chapter 162 Section (1) of the 1999 constitution states that “The Federation shall maintain a special account to be called "The Federation Account" into which shall be paid all revenues collected by the government of the Federation, except the proceeds from the Personal Income Tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or Department of Government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja”.
Section (3) of the same chapter further states, “Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the Local Government Councils in each State on such terms and in such manner as may be prescribed by the National Assembly”.
Every month, representatives of the Federal and State Governments hold a Federation Account Allocation Committee (FAAC) meeting. The committee is chaired by the Minister of Finance. At this meeting, revenue generated in the month is distributed among the three tiers of government, other agencies and special saving fund accounts. Revenue is shared in accordance with the vertical formula, as determined by RMAFC and approved by the National Assembly. The formula allocates 52.68%, 26.72% and 20.60% to the Federal, State and Local Governments respectively. The 52.68% to the Federal Government are paid into the Federation Account; while 26.72% and 20.60% accruing to the States and Local Governments are shared among the constituents by applying factors such as equality, population; land mass, IGR and social development. 13% is deducted as a first line charge and is further shared among the oil producing States.
The agencies charged with the assessment, collection and remittance of Federation Revenue from the oil and gas sector are:
- Nigeria National Petroleum Commission (NNPC)
- Department of Petroleum Resources (DPR)
- Federal Inland Revenue Service (FIRS)
For more details on the process of collection of federation revenue, the vertical and horizontal sharing models, see NEITI FASD Report (2007-2011).
The management of the oil and gas Sector is an enormous task. The Nigeria Extractive Industries Transparency Initiative (NEITI) has the responsibility of monitoring and ensuring that all payments due to the Government from all extractive industry companies, including taxes, royalties, dividends, bonuses, penalties, levies and such other income streams from the industry, are duly made. NEITI is also charged with ensuring that all fiscal allocations and statutory disbursements of revenue from Extractive Industry (EI) sources due from the Federation Account to statutory recipients are made and properly accounted for.
The Revenue Allocation Act provides for the distribution of federation funds. Section 1 of the Act provides that, “the amount standing to the credit of the Federation Account, less the sum equivalent to 13% of the revenue accruing to the Federation Account directly from any natural resources as a first-line charge for distribution to the beneficiaries of the derivation funds in accordance with the Constitution is distributed among the Federal and State Governments and the Local Government Councils in each State of the Federation.” The current Revenue Allocation Formula and distribution of Federation Account Revenue among the three tiers of Government are:
Table 1: Revenue Allocation Formula
|Local Government Councils||20.6|
Figure 4: Federation Revenue Vertical Sharing Model
Source: Fiscal Allocation and Statutory Disbursement (FASD) Audit 2007-2011 Summary Report1
Mineral Revenue Shared by FAAC in 2017
The OAGF accounts for all remittances after a credit advice for each vote head has been sent to it by the relevant agency. This advice indicates a successful transfer of collections to the Federation account. From the OAGF records, total remittances to the Federation account (less Joint Venture cash calls and cost of collection to DPR) from mineral revenue for 2017 amounted to N2.914 Trillion while non-mineral revenue (less 4% and 7% collection fees paid to both FIRS and NCS respectively) amounted to N1.767 Trillion. The three-tiers of government also share other income in the form of exchange rate differentials and revenue from the excess crude account where applicable. See the table below for details of mineral revenue collected and shared in 2017.
|Table 2: Mineral Revenue (January - December 2017)|
|Gross (₦)||Deduction (₦)||Net (₦)|
Source: FAAC Committee records 2017
|Table 3: Analysis of Distribution of Mineral Revenue (January - December 2017)|
|Amount for Distribution||2,914,289,899,927.73|
|Derivation (13% Of Mineral Revenue)||13.00%||378,857,686,990.61|
At the end of every month, the Department of Petroleum Resources provides production figures for crude oil and gas per state to the Revenue Mobilization Allocation and Fiscal Commission (RMAFC).
Computing indices is carried out monthly per commodity and takes into consideration the following:
- The allocation of revenue (abolition of dichotomy in the application of derivation) Act, 2004
- Report on familiarization/verification to oil-producing states, 2006
- Report of inter-agency meeting on the attribution of offshore oil wells/fields to littoral states (kano retreat), 2008
- The 86-number oil well granted to Rivers state by the Supreme Court judgment of 18th March 2011 in the case of AG of Rivers state vs. the AG of Akwa Ibom state and the AG of the federation
- The Supreme Court judgment of 10th July 2012 in the case of AG of Cross Rivers state vs. the Ag of Akwa Ibom state and the AG of the federation
- The report of the inter-agency technical committee on the determination of the location of Aje oil wells
In addition, only crude oil and gas production within 200m isobaths water depth is used for the generation of indices and production data are received in arrears, meaning January data is used for April disbursement and so on. When the Commission computes indices for any given month, it has to be approved by all 36 Commissioners (representatives of the 36 states) before it forwards the same to the Office of the Accountant General of the Federation (OAGF) for disbursement.
The 13% derivation fund is deducted from net mineral revenue first before the rest is shared among all states. The oil and gas producing states are paid their 13% derivation allocation based on the actual level of production for each of the producing states. Total Mineral Revenue (net) in the year was N2.914 Trillion, therefore actual 13% derivation disbursement to States in the year was N375.858 Billion. An initial analysis of actual disbursements shows that indices that were generated by the RMAFC from January – December 2017 were largely (99%) the same used for actual disbursements. Officers of the Commission have assured that indices are scrutinized monthly by representatives from States both at the Commission (Commissioners, appointed by the Governors) and at the OAGF (through the FAAC committee which includes the Accountant Generals from all the States) who rely heavily on allocations.
Consequently, we confirm that there was no non-trivial deviation in the allocation of mineral revenue during the year.
See 13% Derivation disbursements) for 13% derivation paid to states in respect of oil and gas for the year 2017 including comparison with indices used for actual disbursement by the OAGF. FAAC Reports for 2017 are available publicly here.
Revenue management and expenditures
The budgeting process of the FGN
The budgeting process of the FGN is initiated by the Ministry of Budget and National Planning (after consultation with the key revenue-generating agencies and key economic agencies) vide a budget call circular to all Ministries, Departments and Agencies of the Federal Government. The call circular is issued and sets out the requirements that must be satisfied in the preparation of the FGN budget proposal. All submissions by the MDAs are then evaluated and consolidated as a draft budget proposal by the Budget Office of the Federation under the supervision of the Ministry of Budget and National Planning. The draft budget proposal along with all supporting documents is then submitted to the President for approval. The President then makes a formal presentation to a joint session of the National Assembly for consideration and appropriation. The two arms of the legislature separately consider and harmonize the draft budget and thereafter approves separately, after which it is presented as the Appropriation Bill to the President for assent. Once the President assents to the Appropriation Bill, it becomes an Act of parliament passed into law. The budgeting circle is shown in the flow diagram in figure 5.0 below:
Figure 5.0 – Simplified Budget Circle
For more on the Budget process, a copy of the 2018 Budget Call Circular and other related details, visit www.budgetoffice.gov.ng