On infrastructure development and the TAX CREDIT debate

VICTOR OGIEMWONYI 

Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com 

In the last few years, there has been an ongoing debate about TAX CREDITS or tax waivers granted businesses to make certain investments, whether in starting a manufacturing plant, or in building some public infrastructure that everyone uses. There has been a very strong public push back that wants to discredit the entire idea. But tax credits are an efficient way to allocate and deploy taxes for infrastructure development. 

Yes, tax credits may have been improperly used in a few cases in the past, but many of the ones we know about today were properly done and have merit. 

In one of the bad examples of tax waivers gone wrong, a waiver was granted to a large project to allow for import of iron rods free of clearing taxes because the project was considered a good project and iron rods were needed in plentiful quantities. A clearing tax will make the project unprofitable, and will be a cost burden that can discourage the investor. This was granted in good faith and the project was realised. 

The only bad thing about this was that the government agency which granted the waiver created a loophole that gave no limit in the absolute quantities that the project needed. This loophole, whether genuinely overlooked, or deliberately created, allowed the investor to continue to import iron rods, far in excess of what the project required, without paying clearing taxes for a very long time. The investor imported enough iron rods to make him become a major supplier, making him more money from this activity than the initial project itself. It took a vigilant observer to point this out. But, the loophole created, made billions for the investor. You cannot really blame this on the investor but the government agency that did not do its work. So, apart from a few, like this project, many of the tax credits that have been granted were proper; and most were done on merit and they have achieved their purpose. 

One of the things that make tax credits an efficient instrument is that whoever wants to benefit from the scheme must also be the one to first earn the profits, from which the tax credit will come. It is actually a future tax that may come or may not come to the government. So, those who call this evil, do not understand how it works. If the project is not developed, to start to earn profits, that government can tax, it means there will be no taxes anyway. If the project is developed and becomes successful like the Dangote Cement plants, it pays billions in taxes, creates thousands of jobs and invests even more into the community they serve. The point here is the government cannot earn any tax, unless the project is developed. So, those who shout about the public losing out because of these tax credits and waivers, do not understand the intricacies of it. 

Tax credits and waivers are granted all over the world. This tax incentive is available to anyone who qualifies. Apart from the Dangote Group that is frequently referenced, other large companies, mostly foreign companies, operating in Nigeria, all use these tax holidays and duty waivers. These companies are responsible for creating the large manufacturing and infrastructure developments we see in the country.

Tax credits and Waivers bring efficiency to projects, because only needed, commercially viable projects, and strategic infrastructure, will come on stream. The private sector will ensure their investments are deployed in efficient and effective ways only. White elephant projects that governments usually start and abandon will be minimised. 

The private sector needs to get involved in infrastructure development. Tax credits give them the entry point. The case of Nigeria, with its very huge infrastructure deficit that requires billions in investments, means we will have to wait for a long time to close this gap if we insist on using budget allocations only to do them. No government anywhere in the world can make sufficient budgetary allocations to build all its infrastructure. 

A properly planned partnership with the private sector, using tax credits and waivers, will ensure massive infrastructure development that will be done quickly, efficiently, and effectively. This is what we  require today. Take the recent controversial Lagos-Calabar Coastal highway that has caused an uproar lately. The project, if properly conceived and executed sincerely, will add to the much needed infrastructure to enhance free movement and create huge employment; and it will be a significant addition to the economy. But the question is, will this ever be completed? Where is the government budget to do it? Should the government deploy the scarce resources at its disposal to do this at this time? 

There is no doubt the current government is doing this to show its audacity and “can do attitude”, and towards creating the one trillion dollar economy it has promised Nigerians in this  decade. The only problem is that it could have been done better, if the government just published the intention to do this project and ask the private sector to collaborate. Government can then open bids for the project, throw in incentives like all the land that will be needed and even promise to take on the burden of settling all the compensation for the land to the various states and land owners. It may even add tax credits, waivers and guarantees for foreign investors, to encourage them to come and invest.

The recent reforms in our foreign exchange markets, allowing foreign investors to bring in their money and to take it out when they want is already a major incentive to attract them. The project will happen if investors see it as viable and profitable in the long term. The current proposition is inefficient and ineffective, and may never quite achieve the goals we are being told now they will achieve because of the limitations that the project now faces. It looks hurriedly put together, and it demands serious scrutiny. 

The Dangote example:

Most of the criticisms I have read in the media about tax holidays or tax credits and waivers given to the Dangote Group are misplaced and wrongly directed. They are actually an example of how and what needs to be done. 

Take the cement manufacturing industry that Dangote has built in the last 20 years, now surpassing what the Lafarge Group (the Elephant Cement people) could not do in the 50 years they have been here. Not only has the tax waivers and tax holidays granted Dangote achieved its objectives, it has over achieved in many respects. Today, the Dangote Group employs a large part of our population, pays large taxes and is also a major contributor to our community development in many parts of the country. Nobody now remembers that, before Dangote built this large cement industry, Nigeria was spending more than 50 percent of its foreign earnings in importing cement, which also sometimes creates other problems, like  the frequent port congestion. We now save all that FX demand and even bring in FX from his exports of cement or manufacturing in other countries.

Let us also look at another Dangote Group tax assisted contribution to infrastructure:

The Oworonshoki-Oshodi-Airport Road project

This was constructed under the tax credit scheme. Nigerians can see that it is easily one of the best infrastructure projects that has been done lately, that was  efficiently and effectively carried out, achieving the objective of why tax credits should be granted. 

This will be one good way to accelerate our infrastructure development.

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