How states can survive as oil revenue declines

Many of the 36 states in Nigeria are on life support as majority of them cannot survive without the monthly Federal Accounts Allocation Committee (FAAC) bazaar, which many economic watchers and experts have described as unsustainable, and should be stopped if the states must become sustainably competitive.    The 2020 Annual States Viability Index (ASVI) […]

Many of the 36 states in Nigeria are on life support as majority of them cannot survive without the monthly Federal Accounts Allocation Committee (FAAC) bazaar, which many economic watchers and experts have described as unsustainable, and should be stopped if the states must become sustainably competitive.  

 The 2020 Annual States Viability Index (ASVI) by the Economic Confidential showed that only five states are considered viable without the federal allocation. The states considered viable by volume of the internally generated revenue (IGR) include Lagos, Rivers, Ogun, Oyo and Anambra. Eight states were categorised as insolvent because their IGR in 2020 were far below 10 per cent of their receipts from the FAAC in the same year.  

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Aggregately, according to the report, “The IGR of the 36 states of the federation totalled N1.3 trillion in 2020, the same figure in 2019. The IGR of Lagos State of N418bn is higher than that of 22 other states put together.”

 

Lagos generated N418bn in 2020, Rivers, N117bn, Ogun raised N50bn (57%); Kaduna State with N50bn, Oyo had N38bn and Anambra generated N28bn.  

The total internally generated revenues of the six most viable states in 2020 at N695bn as computed by the Economic Confidential was more than the entire IGR collected by the remaining 30 states put together, which was less than N600bn.  

The eight states that may not survive without the Federation Account due to their extremely poor internal revenue generation of less than 10 per cent, compared to their federal allocations, are Bayelsa, Jigawa, Katsina and Adamawa. Others include Yobe, Niger, Taraba and Benue.  

Zero remittance from NNPC signals danger  

Meanwhile, in the three months under review, the Nigerian National Petroleum Company (NNPC) Limited contributed nothing to the Federation Account, with under-recovery being the excuse for non-remittance.

The NNPC, at its monthly presentation at the last FAAC meeting, stated that it could not remit any revenue generated into the Federation Account as it paid fuel subsidies. 

From January to March 2022, the NNPC had expended a total of N675.93billion on fuel subsidy payments. 

The NNPC stated that it had also deducted N245.77 billion for petrol under-recovery costs in March. 

In January, February and March 2022, fuel subsidies consumed 210.38bn, N219.78bn and N245.77bn respectively.

The NNPC announced that it would also deduct N671.88bn (under-recovery outstanding) from its remittance to the FAAC for April, which is due to the federal government in May. 

The said amount comprises the previous months’ outstanding and part of the February 2022 value shortfall.

“The estimated value shortfall of N671.89bn (consisting of N519bn for estimated April 2022 recovery, plus N152bn of March 2022) is to be recovered from April 2022 proceed due for sharing at the May 2022 FAAC meeting,” the NNPC stated. 

‘How states can be viable’  

In a presentation on “Enhancing Revenue Collection at the Sub-national level” at a workshop for finance commissioners in Ghana, in 2021, Prof Uche Uwaleke, a former commissioner for finance in Imo State opined that sub-national governments (states and local governments) could be more viable if they tapped into their constitutional revenue sources.

He said states and local governments had powers under the constitution to collect certain types of revenue; and an effective collection of these revenues should make them less dependent on monthly federal allocations.  

He listed some of the taxes state governments could make sufficient revenues from as personal income tax (on residents of the state); capital gains tax (on individuals only); stamp duties (on individuals) only; road taxes like vehicle licences; betting, gaming taxes and business premises and registration levies.  

 Others are development levy (Max of N100 per annum on taxable individuals only); street name registration fees (state capitals only); right of occupancy fees (state capital only); market fees (where the market is financed by state government); and miscellaneous revenues (e.g, rents on property).

Local government councils have the following taxes to collect: tenement rate; shop and kiosks rates; liquor license fees; slaughter slab fees; marriage, birth and death registration fees, and street name registration fees (excluding state capitals).

Others are market/motor park fees (excluding state-owned markets); domestic animal licence fees; bicycle, trucks, canoe, wheelbarrow, carts and canoe fees; right of occupancy fees (excluding state capitals), and cattle tax.

Regrettably, he observed that “most state governments and local councils in Nigeria had not been able to generate revenue sufficient to cater for recurrent spending, let alone capital expenditures, even with these seemingly huge tax revenue opportunities.

Obstacles to efficient tax collection

Prof Uwaleke identified the following as some of the obstacles to efficient tax collections at the sub-national level. These include inadequate data on taxable persons in the state; poorly funded state bureau of statistics, and poorly funded state internal revenue service.

Many do not have functional operational vehicles, internet facilities etc. There is also an undue political interference/lack of autonomy for revenue bodies, as well as lack of coordination between the tax office and other revenue-generating ministries/inadequate application of technology in revenue collection.

Others are “corruption on the part of revenue collectors, who engage in deliberate under-assessment of taxpayers; multiple taxation, which fuels tax invasion; poor taxpayer education. And many do not see the justification for paying taxes when basic infrastructures are not provided.

Also, Mr Adefolarin Olamilekan, an Abuja-based political economist and development researcher noted that the states “have not shown enough interest in IGR accountability and transparency. That’s why many of them wait in line for FAAC disbursement.

Also commenting, Ogbeide E. Benjamin, a tax consultant and former chairman, Chartered Institute of Taxation of Nigeria (CITN), Abuja chapter, said states could grow non-oil revenue. 

“Of course there are other options available to boost states’ internally generated revenue rather than huge dependence on the FAAC.

“But what has been noticed over the years is that whatever is brought to the FAAC for sharing is dwindling by the day.

“States can leverage on the personal income tax act. If it is well driven, more revenues will accrue to states. The states

 

 

 

 

haven’t harnessed this to the fullest,” he said.

He, however, said the states “can improve tax collection by automating tax administration process, continuous training on staff on core areas of operation, quality customer service collaborations with all the ministries, departments and agencies. 

He also said the state government must have the political will to drive change and make operations to be target-driven.

According to him, the ways states can be more fiscally responsible is by really providing social services with taxpayers’  money, and this will build confidence in the taxpayers, thereby encouraging voluntary compliance and ultimately increasing internally generated revenue.

“As a tax consultant I will advise states to provide more social services and infrastructures, thereby fulfilling their social contract. Once there is the political will to do this, Nigerians are good people, they will pay their taxes as at when due and voluntarily, but at present, taxpayers don’t seem to have belief or confidence in the system. Once this confidence is restored, taxpayers will pay taxes and the financial position of states will be greatly improved,” he added.

Revenue collection enhancement measures

Stemming from the above, states can enhance their revenue position by taking a number of steps, especially towards blocking revenue leakages.

First, states are encouraged to leverage the Treasury Single Account (TSA) policy at the federal government level to aggregate revenues. Also, states have been tasked to clean up payroll through biometric capture of civil servants and pensioners and punish those found guilty of diverting government’s money to serve as a deterrent.

There is the need to strengthen the office of state auditor-general, ensure appropriate staffing and training for continuous audits, as well as engage a reputable external auditor to conduct a comprehensive audit of state revenue and expenditure, at least once a year.

States are also advised to embark on massive taxpayer education before tax drives to enhance compliance, and also build capacity in the areas of monitoring and enforcing tax compliance. These are crucial for enhancing IGR

States have also been advised to deploy technology in revenue collection, as well as ensure good governance to encourage voluntary tax compliance consistent with the social contract.

Olamilekan also agrees that “the core thing they need to do is strategically create a system that is robust enough to monitor, checkmate and recover states’ IGR.

Because the state governors are not accountable to anybody, they are not interested in areas that are not interested in creating new revenue sources.

“l believe that if there is a system or platform that brings on board all payments in states, it would go a long way to address the challenge of harnessing revenues,” he said.

Also, they need a lot of sensitisation and advocacy through the media to get the people buy-in on the matter of tax.

Mr Olamilekan also noted that it is expected that state governments must be fiscally responsible and should demonstrate the act of open-door policy in their respective fiscal policy administration and management.

He also noted that it is “imperative that state governments take seriously, the monitoring and evaluation of their fiscal policy in order to leverage on policy review mechanisms. State governments must prioritise development policy in line with their fiscal responsibility. What this means is that IGR must improve for development.”

‘Why revenues keep declining in states’ 

Lack of a conducive environment for investment and enterprises to thrive has remained a big problem in Nigeria as revenues continue to decline in states.

Experts said the fewer the private sector investments in a state, the lower the internally generated revenue it would attract.

“The fewer the businesses present in a state, the lower the internally generated revenue that comes out of it. That tells us why most states are poor while very few are rich because of the presence of the private sector,” Paul Alaje, a senior economist at SPM Professionals noted.

He said states would need to work with private organisations by removing bottlenecks that make it difficult for businessmen and women  to invest.

He said some of the bottlenecks included obnoxious policies within the civil service, which make things very difficult for those who want to do business.

“Also, it is important for state governments to see opportunities that are currently lying before them. I tell you, in telecommunication alone, each state can do nothing less than N5 billion per annum, in addition to what they are doing. The challenge is that most state governors are trying to look for the traditional way of revenue generation. We only hope that future state governments would see this opportunity and take hold of them,” he said.

A former director-general of the Manufacturers Association of Nigeria (MAN), Mr Remi Ogunmefun, said that when the right environment is provided, investors, whether foreign or local, would invest.

He said state governments needed to eliminate corruption by ensuring that people can transact their businesses without shady deals. He added that investors should be able to acquire lands without any problem.

“There should also be power, finance and market. They should also create an environment where there is access to markets, where people can sell their goods. That is the way to do it. When you create such an environment, businesses will come in. When business comes in, they are also employing people and the government will be collecting rates and taxes,” he said.

Lawyers blame skewed constitution, wastage 

Lawyers have identified a faulty revenue allocation formula in the constitution and wastage of available resources as factors affecting the development of states.

Niyi Akintola, a Senior Advocate of Nigeria (SAN), said many states were led by leaders who are both financial and legal illiterates and do find it hard to generate funds for the smooth administration of their states.

He said that as a result of the lack of awareness, the little funds they generate were frittered, to the extent that only Lagos and Rivers states are self-sufficient in the country.

“So, they (states) are spending more than their earnings and living ad hoc lives, apart from the fact that they have been getting more than they deserve,” he said.

He also blamed the constitution for giving too much power to the central government in the area of revenue, maintaining that Nigeria is the only federation in the world where vehicle licence and plate numbers are centralized. 

Similarly, Kehinde Ogunwumiju (SAN) said that of the two main streams of income open to states, taxes such as Value Added Tax (VAT) are still handed over to the federal government for redistribution, while the 13 per cent derivation before the distributable pool applies for minerals found in states.  

He identified lack of transparency in the revenue generated from federal agencies from the states as the main source of rancour between states and the federal government.

On his part, Nnamdi Ahaaiwe, a lawyer, submitted that every state could be self-sufficient with the resources available to it, but they are being hampered by corruption and lack of prudence in the management.

 

By Chris Agabi & Sunday Michael Ogwu, John Chuks Azu (Abuja) & Abiodun Alade (Lagos)