By
Nze David N. Ugwu
Nigeria’s long-running debate over fiscal federalism and resource control has moved from lecture halls and academic journals into the courts, the National Assembly and the daily life of governors and citizens. From the Supreme Court’s 2024 rulings on local-government finances to renewed calls for a higher derivation formula for oil-producing states, the question is no longer whether Nigeria
should be restructured — it is whether the 36 states and the Federal Capital Territory are institutionally, administratively and politically ready to shoulder true autonomy. This analysis unpacks the fiscal mechanics at play, the promise and perils of resource control, the political economy driving governors’ positions, and what genuine devolution would require.
What’s at stake: the fiscal anatomy of Nigerian federalism
At the heart of the debate is money — who raises it, who keeps it, and who spends it. Nigeria’s intergovernmental transfers are dominated by receipts from the Federation Account, which the Federation Account Allocation Committee (FAAC) distributes monthly among federal, state and local governments. In recent months (2025), FAAC disbursements have been unusually large, reflecting recovery in oil receipts and other revenues; official distributions published by the Office of the Accountant General show significant sums flowing to states and LGAs in early 2025. These monthly transfers remain the single largest source of recurrent revenues for many states, and the pattern of dependency shapes governors’ political calculations on autonomy and restructuring.
Two realities follow from that dependency. First, any shift that reduces FAAC transfers to states (for example, a radical reallocation of oil revenues to oil-producing communities or to more local control) would expose the weak revenue bases of many states. Second, states that insist they want “true autonomy” must be ready to generate their own sustainable Own-Source Revenues (OSR) and to manage expenditures that have been historically subsidized by federal transfers.
Governors’ calculus: why many publicly call for autonomy while privately hedging
Nigeria’s governors are a heterogeneous group. Some, especially from oil-producing states, push for greater resource control and higher derivation percentages; others fear ceding powers to local councils or losing access to federal largesse. The Supreme Court’s July 2024 affirmation of financial autonomy for the 774 local government areas (LGA) — which mandates that allocations intended for LGAs be remitted directly rather than passing through state treasuries — is a vivid example of policy change that has generated unease among governors who have relied on control over LGA funds for patronage and administrative flexibility. The fallout has been immediate: states scrambled to hold local elections and to craft administrative arrangements that preserve influence without breaching the court order’s letter.
The political logic is clear. Governors want the public posture of pushing for “devolution” and “restructuring” because it plays well with regional constituencies and civil society groups; but the practical implications — less financial discretion, diminished patronage networks, and stricter fiscal accountability — can make autonomy politically costly. Consequently, many governors support selective reforms (e.g., more local government independence) while resisting structural changes that would undermine their control of resources.
Resource control and the derivation debate: the numbers and the narratives
The derivation principle — the share of resource revenue that accrues to the producing area — has been a political fulcrum since the 1960s. Proposals to raise the statutory minimum derivation from the current floor (often cited at not less than 13 percent in legislative debates) to as high as 50 percent have gained traction in the House of Representatives and among some regional actors. Bills and bills’ sponsors have rekindled discussions about fairness, environmental remediation, and local development. Critics counter that a 50 percent derivation would hollow out the Federation Account and worsen redistributive inequities across non-producing states.
Any upward revision of derivation would have predictable winners and losers: oil-producing states and local communities would gain immediate fiscal capacity, while middle-belt and northern states (many with weak own-source bases) would lose out on transfers that currently support their recurrent budgets. Nigeria’s current fiscal architecture — widely criticized for concentrating revenue-raising at the federal level and expenditure responsibilities at subnational levels — means that raising derivation without building compensatory revenue mechanisms for non-producing states risks creating deep fiscal stress and political backlash.
Institutional readiness: do states have the systems and governance to handle more autonomy?
Autonomy is not just legal; it is administrative. When the federal government or courts devolve responsibility or remittance lines change, states must have transparent budget systems, robust tax administrations, disciplined procurement, and anti-corruption safeguards. Evidence from across Nigeria suggests uneven capacity. Some states — often those with better OSR, private-sector linkages, and reformist governors — have made progress on revenue modernization, digitization of payments, and financial transparency. Many others remain dependent on FAAC and ad hoc federal interventions to meet payrolls and fund recurrent obligations.
Academic and policy research emphasizes that devolved fiscal powers work only when accompanied by expenditure rationalization and accountability measures. In short, you can give money to a state, but if governance is weak and leakages high, additional resources will not translate into better public services. Scholarly reviews and policy papers in recent years underscore this point and call for capacity-building packages to accompany any major fiscal reallocation.
Political economy: why the debate keeps returning to the center
Beyond technicalities, the debate over restructuring is a story of interest groups. Oil companies and national institutions have incentives to maintain predictable fiscal flows; middle-class and urban constituencies worry about the equity implications of resource capture by local elites; labour unions and public servants fear that abrupt changes could destabilize wages and pensions; and governors — who straddle electoral politics and service delivery — must weigh electoral risks against reformist rhetoric.
The National Assembly’s intermittent flirtation with changing the derivation formula is as much political theatre as policy. Bills proposing substantial changes in revenue sharing spark intense negotiation — and sometimes suspicion that proposals are vehicles for sectional advantage rather than holistic nation-building. The challenge is to craft reforms that reconcile local demands for justice with the macro-fiscal stability that underpins national unity.
The local government autonomy ruling (what it changed — and what it didn’t)
The Supreme Court judgment on LGA financial autonomy in July 2024 provides a useful microcosm. Legally, it clarified that funds allocated to local governments belong directly to those councils and should not be routed through state governments for appropriation. Practically, the ruling produced mixed outcomes:
- It strengthened the legal claim of LGAs to financial independence (a win for grassroots democracy).
- Several states responded by hurriedly conducting local elections, partly to cement political influence in the new legal environment, while others sought administrative workarounds to keep control over service delivery.
- The ruling exposed gaps in states’ capacity to ensure LGAs spend funds effectively — some local councils lacked trained finance officers, procurement systems and transparent reporting channels.
The episode illustrates the two-track reality of reform: courts and legislatures can change formal rules quickly, but the slower work of institution-building — training personnel, digitizing fiscal flows, establishing audit regimes — is what determines whether autonomy delivers better governance.
The oil sector, leakages and why resource governance matters
Resource control discussions cannot ignore the disturbing trend of revenue leakages associated with opaque contracts, unchecked deductions and regulatory gaps. Recent analyses of the petroleum fiscal architecture have pointed to statutory leakages and opaque deductions that reduce net inflows to the Federation Account. While some proposed technical fixes (including amendments to the Petroleum Industry Act and stronger regulatory oversight) are under discussion, the problem is constitutional and administrative as well as commercial. If resource control simply hands more wealth to regions or state authorities without fixing the upstream governance of contracts and deductions, the nation risks multiplying corruption opportunities rather than alleviating inequity. High-quality reforms therefore need to combine revenue reallocation with transparency reforms in oil contracts, auditing and stronger regulatory independence.
What would “true autonomy” look like — and what interim steps can make it viable?
“True autonomy” for states would entail a package of reforms, not a single policy tweak:
- Gradual fiscal devolution tied to capacity building. Any increase in state fiscal powers should be phased and conditional on improvements in revenue administration, procurement, and public financial management.
- Diversification of state revenue bases. States must aggressively expand OSR through property taxes, modernized PAYE, tourism levies and business permitting; federal support for revenue modernization (technical assistance, grants) will be necessary.
- A social-protection and equalization mechanism. To protect poorer states and ensure national cohesion, an explicit equalization fund or transition transfers should be designed so that the short-term losers from derivation or other changes are cushioned.
- Transparency and anti-leakage measures at the national level. Without closing off statutory leakages from oil receipts and making contract payments transparent, any redistribution will be undermined.
- Strengthening local governments. The LGA judgment was a start; the next step is to professionalize local finance, auditing and procurement so LGAs can manage funds accountably.
- Clear constitutional amendments and implementation roadmaps. The political debates must translate into precise constitutional language, not aspirational slogans.
These steps point to an implementation pathway that balances justice and sustainability.
Risks and unintended consequences
Policymakers must be realistic about downside scenarios. Rapid moves to a high-derivation regime without compensatory fiscal arrangements would imperil macroeconomic stability. Decentralization without accountability could empower predatory local elites. And any change that is perceived as zero-sum could deepen regional tensions. A failed rollout — where new resources flow into states but services don’t improve — would fuel cynicism and could reverse democratic gains.
How to make federalism work for Nigerians
For governors, federal authorities and civil society to move from argument to action, the following pragmatic recommendations are essential:
- Design a phased Fiscal Devolution Compact: A multi-year agreement between the federation and the states that sequences powers, transfers and capacity benchmarks.
- Set up an independent Transition & Capacity Unit: Located within the Ministry of Finance or a jointly governed body to support states with revenue modernization, procurement reform and audit readiness.
- Establish an Equalization and Stabilization Facility: To smooth the transitional fiscal effects on non-producing states while protecting national macro stability.
- Mandate transparency for petroleum receipts and deductions: Publish all oil sector deductions, contracts and the net remittances to the Federation Account in near-real time.
- Strengthen local accountability mechanisms: Roll out a standard chart of accounts for LGAs, with digital cash transfers and public dashboards to track LGA spending.
- Engage citizens and civic groups: Any durable reform requires public buy-in; robust civic oversight can deter capture and ensure reforms translate into service improvements.
Conclusion: readiness is as much political as technical
The conversation about states’ right to autonomy and resource control is not merely about revenue formulas or constitutional language. It is a test of Nigerian statecraft: can the federation design reforms that are fair, fiscally responsible and administratively feasible? Governors are right to press for more say over the resources that flow through their territories, but such demands must be matched by honest plans for revenue diversification, administrative reform and accountability. Without that, calls for “true autonomy” risk becoming slogans rather than blueprints for better governance.
If Nigeria’s leaders — at federal, state and local levels — can pair redistribution with institutional strengthening, the country can move toward a more resilient federal compact. If not, the recurrent cycles of agitation and partial reform will continue: loud debates with limited gains for ordinary citizens. In the end, the test of reform will not be the rhetoric of autonomy, but whether Nigerian families see more consistent electricity, safer roads, better schools and health centres — a simple yardstick that no constitutional clause can substitute.
Nze David N. Ugwu is the Managing Consultant of Knowledge Research Consult. He could be reached at [email protected] or !2348037269333.
