Revenue Generation in Local Government Areas


The first national conference on local government in Nigeria pointed out that “the success or failure and effectiveness or ineffectiveness of local governments must, in final analysis, depend on the financial resources available to the individual local authorities and the way those resources are utilized”.

The third national conference on local government was solely concerned with local government finance and drew up a series of guidelines for the development of local government finance in the coming years. The guideline are mostly for the internal sources of revenue: imposing moderate tax rate on the people, assessing the circulation of money in an area, assessing the financial position and capacity of the people as regards rates, rents etc.

In the light of the above, an attempt to look at the various sources of generating revenue in local governments is a step in the right direction. Hence, revenue can be generated either externally or internally, among the external sources of fund are:

  • Financial transfer, rant – in – aid and
  • Loan


Financial transfer to the local government level comprises funds financed from the principal revenue sources of central or state government. These include funds that are financed from central government principal tax instruments and from central government borrowing. Financial transfer goes by different names in different countries, among which are inter – government transfer or statutory allocation.

In Nigeria, it is called statutory allocation and fifteen (15)% of the federation account is being transfer to local government at present. One reason advanced for transferring fund from the central government budget to the local governments is unwillingness of the central government to vacate some viable revues fields to the local governments, even when such fields are located certain local government areas.

Financial transfer from central government budget to the local government takes different forms. There is straight budgetary vote. Under this, local government are allocated specific sums for specified purpose, which they can incure expenditure within stated limits and the fund remains with the central government. Expenses incurred by local governments are charge to the funds by direct payment to employees, suppliers, and contractors.

According to Allen & Unwin (1960), “this arrangement is not the best because, the central government may delay payment to employees, suppliers. Contract a situation which will affect the morale of these people”. The system may not ensure proper use of the money, because officials at the federal level may collude with suppliers or contractors, there be changing local governments with unnecessary expenditure.

The second type of financial transfer is capitalization. This implies the investment of equity capital by central government in a local government area. The local government is expected to use the funds in embarking on income earning projects. Projects that come under this form of financial transfer are fee-charging utilities like. Portable water, electricity, public transport, and investment in commercial activities. This system is good because, it has the potential of increasing the financial resources of the local government.

The third type of financial transfer takes then form of revenue sharing amongst levels of government within a political system. In Nigeria, the operating revenue allocation formular is 50% to federal government, 30% to state governments and 15% local governments. The remaining 5% is to be kept under the control of the presidency to be used for both amelioration of ecological problems, and so, ease the problem of mineral producing areas.

In the word of lle (1999), “This method of sharing revenue come from the local government areas”. He stated further, that the state governments on their part have been constitutionally required to pay 10% of their internally generated revenues to local government, and that both allocation from the federal government and funds from state government are not made as and when due, will contribute immensely as regards relief of local governments burdens based on revenue generation on allocation basis.

Statutory allocation has some advantages for local governments in Nigeria statutory allocation to Nigeria local governments has enhanced their economics features by extending their efficiency and effectiveness in service provision and maintenance statutory allocation is constitutionally assured and specific, hence, they appear free from control and supervision which specific grants attract. It also increase the commitment of local governments to more revenue generation and their survivals as a distinct third tier of government is guarantee.

However, since statutory allocation to local governments, there has been a gradual decline in the internal revenue efforts of the local governments.

2.2     GRANTS:

Another sources of external funds is through central government grants – aid to local government in Nigeria, the federal government at various times gave grants to local governments for specific purpose. In 1989 and 1990 alone, the federal government at different times gave out a million of naira to each of the local governments to incure expenditure on particular projects which are left to the to their independent judgment, would not have been given any priority in their budgets.

There are many classification of grant – in – aid to local governments. Among them are:

Percentage grants:- This form of grants in usually adopted where it is difficult to define the unit of service, eg water supply and agricultural service. The grants given as a percentage of the total expenditure incurred by the local governments in a given service. The percentage grants aim by promoting improvement in the standard of works and services provided by a local authority, since the federal government has to certify after inspection that the service attracting the percentage grant has been property executed.

Another type of classification is by unit grants. These grants are paid where it is possible to determine the unit of service. The objective of unit grant is to encourage local authorities to increase the number of such units of services provided or employed.

The third type is the equalization grant, which is meant to supplement a local governments resources in general or its revenue from a particular service. It is generally paid to local governments to enable them provide a certain level of social services. According to Oirji John .O. (1996), ‘subsidy in money paid especially by government to reduce the cost of the production of something.

The fourth type of grant is the block grant, which is usually based on population and sometimes on such other factors as need or an acceptable minimum level of services to be provided for each community. Though the grant is not tied to any specific service the central government has used, it is as a means of guaranteeing loans to local governments by commercial banks.

The payment of most grants is conditional on the attainment of a minimum standard of efficiency. This entails that grants are paid after the central government has satisfied itself that the prescribed minimum national standard has be attained. There is no doubt that the objectives behind the giving of grants are laudable for they enable the local government councils, most of which are financially poor, to carry out their assigned functions.

However, most grants appears to be mere declarations of principles, for government has often failed to meet the financial commitments to local government council in this respect. According to Aroh (1999), “Most grants declared to the local government councils are mere ‘political’ statement”. Hence, grants declared and disposed to the local governments as declared, will reduce the constraints on grants as an external source of local government revenue.

2.3     LOANS:

Local government can obtain external funds by way of loans to finance large – scale projects on a medium term basis. The problems and issues involved in loan finance assume wider dimension in Nigeria, where the control of higher level of government over local government become more pronounced to the extent that only little or no financial autonomy is accorded to the latter level. The central government determines the sources, extent, purpose and maximum duration for which borrowing is to be embarked upon by the local governments. Therefore, loan raising at the local government level is not easy, as many hurdles need to be crossed. Local government, usually resort to loan raising to finance short – term cash flow deficit. In the words of Iloh (2000), “receivable loans are among the most liquid assets of a firm or an organization.

Borrowing for this purpose is usually undertaken to meet short – term cash flow deficits necessitated by pattern of revenue drive. This takes the form of bank overdraft, though local government can occasionally seek direct from the public through short-term bills, often one to three months periods.

Local governments sometimes borrow money to finance deficit annual budgets. However, because this practice is always subjected to abuse by the local government, the federal government seldom encourages it. Local government arise loan to purpose plant and equipment whose total costs are too great for them to undertake at a time. Most often, the ban is spread over the estimated life span of the equipments for repayment. Local governments resort to borrowing to finance self – liqurdatiay investments, such investments usually earn direct return on capital covering both debt charges and operating costs. In addition, they raise loan to finance long – term capital development.

The ability of local governments to borrow money is often determined by the amount of collateral possessed in Nigeria, this is likely to be a problem as collateral securities of most local government are scanty. Local governments are also not able to sell bonds as it is done by local government in most developed countries.

Generally, statutory allocation and grants from federal government constitute the major sources of local government revenue externally, in Nigeria.



There are a number of sources of internally generated revenues opened to the local government throughout the nation. In the words of Dr. PMC Okigbo (1989), “internal sources of funds are those sources, which are exploited within the business organizations”. Therefore, internal sources of local government revenue are those sources, which are, exploited with the local government areas, some of the means by which local government raise or source funds internally are itemized below:


The tax payable on income is shared between the state and the federal government councils. Tax payable on income not exceeding N600 accures to the local government councils, while tax on incomes not exceeding N600 and payable by persons not in salaried employment in they of government also act as agent to collect state government tax, in which case, a certain percentage is given to local government as commission. There have been study declines in the revenue generated through personal income tax. An increasing number of taxpayer, earned more than N700 per annum (self employed) or N300 per annum (PAYE) they are therefore, absorbed into the local authority tax net.

As a result of rapid growth in the business activities, more taxpayers become eligible for payment of tax state had experienced a declined in economic activities and had lost a great number of their taxpayers to the more prosperous urban and individual areas as a result of great mobility of labour.



All adult in the Northern states of Nigeria are subjected to the community tax, if they are good health and are not liable to pay income tax. The basic rate is levied on the community according to the needs of a particular local authority and wealth of the villages in relation to that of other villages in the local authority. The per capital income contribution in respect of the tax is agreed with the state government. This form of direct taxation is paid at a flat rate irrespective of whether or not, the taxpayer enjoys, some kinds of services provided by the government. However, certain problems arise in regards to the provision that community tax is payable by adult males “in good health”. According to Jibrilu (1991), “ where adequate evidence of ill health is not insisted upon, there is a danger that a general able – bodied persons may be declared unfit to pay it, at the time of collection, if he happens to suffer slight fever”.

2.7     LOCAL RATES:

Local rates are personal taxes, which are levied by each local government with the approval of the state government for a specific service, either in the entire council areas or for a project in a local community. Local rates are imposed in respect of a variety of services including water, streetlights and for various local projects like community halls, postal agencies and road and bridges.

According to Ile (1999), “Most members of a given local government areas evades or dulge from the payment of local rates because of low income generation, aggressive approach of most rates collectors and because of the weakness of their various local government councils as regards the development of their societies”. He stated further that if most of those difficulties are dealt with or ratified, there will be a positive responses as regards rates payments by the members of a given society or local government areas.

The major problem connected with the imposition of these rates are that of evasion, with some eligible rate payers succeeding in getting their names omitted from the normal roll, with or without the collusion of rate collectors.



Taxes are normally paid by the eligible citizens of any political system as a legal obligation regardless of the extent to which they benefit from the service of the proceeds finance. Fees and charges or user fees, unlike taxes that are paid directly by those who consume a service and are appropriated to meet all or parts of the cost. Some of the users may be residents within the local government areas while others may live outside the local government areas. Private goods, that are exclusive to consumer, are susceptible to fees and charges than public good, which are good that cannot be avoided. An important feature of fees and charges is that, they are not always equal to the cost of providing the goods or services.

Fees and charges are independent of income, unlike taxes, which are based on ability to pay. Paying for public goods and services through fees and charges may be justified in the following ways:

  • Inability to provide the goods or services to all sections of the community at an equal level.
  • A desire to ration the consumption of public goods or services in which scarce resources are used.
  • When public good and services are used for private commercial purposes.

Services in the category of fees and charges the public bus service, abattoir fees, naming and numbering of streets and houses fees etc.

User fee cannot affect all type of public goods and services that are provided by local governments. This is because, it is not technically feasible to make people pay for the protection or the street lighting which they enjoy, hence, some people cannot afford to pay for such services. Fees and charges are very dynamic, so, the strength of these technical constraints cannot be over emphasized. For example, services like street provision, which was considered unchargeable, is now chargeable in most developed countries by means of promoters and other cheap electronic devices.

According to Lawal (1978), He emphasized that there are two main categories of fees and charges. The first category consist of fees and charges that are levied by local governments but fixed by the central government, while the local governments are fee to decide the level of charges within the minimum. Examples are school meal fees, dog license fees, firearms fees and cinema and theathre license fees. The second category comprises fees and charges, which are fused by the local governments themselves, either with or without the consultation of the central government.



Many local authorities derive revenue from the operation of commercial undertakings such as printing press, poultry works, bus services, and the purchase and disposal of metal scraps and of grains. Revenue from this source have been very little, the reason is that, councils all over the country have virtually no active interest on the operation of business undertakings. This situation has arisen from lack of financial and management resources to plan, fund and manage these ventures successfully.

However, because of increasing costs, local governments have found it very difficult to provide funds for investment in commercial undertakings. There is a general shortage of technical and management personnel to plan and manage the commercial undertakings successfully. This is attested to, by the experience of many bus services in Lagos, Ibadan and in the former Midwestern state where there were difficulties of maintaining viability of the undertaking.

The competition from the private sector in place like Lagos and Ibadan also creates its own problems from these government ventures. In the words of Allen & Unwin (1960), “overstaffing and irresponsible budgeting for staff and equipment are glaring examples of a misconception of local governments ventures’”. They later suggested that the correct measure to the above mentioned problem is to avoid overstaffing and irresponsible budgeting for staff and equipment.

These are seen as social services meant to provide as much employment as possible to the people, without regards to the profitability of business being undertaken.



In 1966/1998, customary and Native courts were transferred to the state judicial departments in the former Midwestern states and six Northern states. Before this time, the local authorities were responsible for the maintenance of these courts and their personnel they collect fines and fees with which these courts are maintained. The decision to transfer Native and customary courts to the government judicial departments in all states, excluding Ogun, Oyo, Ondo and Lagos states were to ensure that these law enforcement agencies were not used as oppressive political weapons at the local level. The decision however, had some adverse effects on the finance of local authorities, especially in the Northern states. By this decision, these authorities have lost a source of net revenue. It is also the major constraint to the effectiveness of local authorities in different parts of the country to collect their taxes rates and fees, and to enforce their by – laws, because there is limited police support for the local authorities.

The effect on the financial and general administration on local governments have been so serious that the fifth national conference on local government in Nigeria was compelled to issue the press release in December 1992.

According to Allen & Unwin (1960), “The availability of police to assist local authorities in their enforcement and inspection responsibilities, was another matter of great importance examined by the commissioners. They agreed to approach the federal ministry of internal affairs to see that suitable arrangements could be made for members of the Northern police force to be deployed to local authorities.

From these, it is important that local governments move along with adequate legal baking in their efforts to generate revenue internally. It can be inferred from the above analysis that revenue from internal sources are very little, hence, there is dominance of external financing in the operation of local government.

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