Revenue Allocation Formula, State Fiscal Capacity, and Social Infrastructure in Nigeria

This study empirically examines how variations in revenue allocation formula shares and state fiscal capacity interact to determine social infrastructure outcomes across Nigerian states. The current revenue allocation formula distributes Federation Account revenues based on factors including minimum responsibility, population, landmass, and derivation, with the relative weights of these components having significant implications for the development of different states. Using a panel dataset of all 36 states and the FCT over twelve years, the study constructs fiscal capacity indices combining IGR efficiency scores, budget implementation rates, and per capita allocation measures. Social infrastructure outcomes are measured through composite indices built from school enrolment data, hospital bed density, safe water access rates, and road density, sourced from NBS and sector-specific ministries. Fixed-effects panel regression and a principal components approach to index construction are employed. The study expects to find that states with higher fiscal capacity convert revenue allocations into social infrastructure more efficiently, and that derivation-based allocation is positively associated with social outcomes in oil-producing states only when accompanied by robust governance mechanisms. It also anticipates that landmass-weighted allocations, which disproportionately benefit large northern states, show weaker infrastructure conversion ratios. Contributions include the first composite fiscal capacity index correlated with multi-domain social infrastructure outcomes for all Nigerian states. Keywords: revenue allocation, fiscal capacity, social infrastructure, subnational finance, Nigerian federalism.