States must empower sources of revenue for IGR expansion

Nigerian subnational governments (SNGs) facing the dangerous consequences of the potential collapse of their much-relied-upon revenue sourcing channel, the Federation Account Allocation Committee (FAAC), must rethink their strategy and seriously consider the empowerment of different revenue sources domiciled within their boundaries.

The SNGs in the country, much better known as states, have historically relied on a revenue sharing formula that was created by a country that has come to rely heavily on earnings from crude oil covering for most of its revenues as well as foreign exchange reserve accretion. Although regarded as a federation, Nigeria’s fiscal business has been all but that of a federal structure, with federating units (states and local governments) having to rely on the revenue allocation formula that puts all revenues in a pot and then shares them according to an arrangement many say has made most states and local governments lazy and unable to internally generate revenue for their own use.

But after decades of seeing crude oil pull in big revenues for sharing by all, things have in recent years been looking belly up, marked by falling oil prices and a sea of changes in the global economic, social and political landscape that have seen revenues dwindle. It has also not been helped by domestic challenges, with oil theft on the increase and insecurity compounding a yet-to-be-done-with Covid-19 pandemic that brought the world to a standstill.

To overcome the danger lurking in the face of fiscal shocks and other challenges that have shrunk FAAC distributable revenues, states or SNGs must empower the sources from which they can generate and expand their IGR, Sunnie Omeiza-Michael, director of research and advocacy, Lagos Chamber of Commerce and Industry (LCCI), said at a webinar put together by an IGR advocacy think-tank, The IGR Initiative.

Omeiza-Michael, who holds a doctorate, said the federal government is seriously challenged and that things would become even worse next year with the Nigerian National Petroleum Corporation (NNPC) having taken on a new character as a limited company now unable to send money to the FAAC monthly like it used to do. He said states need to reverse their dependency on the federal government.

“There are revenue challenges at the centre,” he said, adding that the unfolding scenario requires that smart SNGs look carefully at the way they treat the sources through which they generate IGR and look for ways to empower them so they can provide the revenue the states need.

According to Omeiza-Michael, it is the private sector that creates jobs and generates revenues through company income tax (CiT), value added tax (VAT), excise duties, and royalties. They produce the goods and services, collaborate with the government, act as a think-tank to governments and help to shape policy direction by making inputs during budgeting by submitting memos, he said, adding that support for the private sector through the creation of an enabling environment will help states to boost their revenues.

In his paper titled “Subnational Revenue Growth: The Place of the Private Sector”, the LCCI director of research said private sector contributions to government revenue in the country through customs and excise duties (CED) and VAT have consistently increased, reaching N1.3 trillion and N2.04 trillion, respectively, in 2021. He said that although company income tax declined in 2020 as a result of the coronavirus pandemic, it, however, recovered and increased to N1.61 trillion in 2021 from N1.48 trillion in 2020.

For SNGs or states to grow their IGR, Omeiza-Michael said they need to work and partner with the private sector whose activities are responsible for generating the revenues that they seek to grow. He suggested a number of initiatives that the states can put in place in order to make this happen. These include:

Creating the environment for IGR growth by subnational governments, Omeiza-Michael said, requires the coverage of regulatory, policy, digital infrastructure, political stability and infrastructure.

Under regulatory  environment, he identified the issues involved to include taxes, levies and charges, which are subject to multiplication; duplication of agencies in the form of bureaucracy; and enforcement of regulation which often lacks application of best practices.

With regard to the policy environment, he said when it comes to fiscal and monetary policies, there should be certainty, stability, and coordination, especially with regard to inflation, debt crisis, forex liquidity, among others.

Under digital infrastructure, Omeiza-Michael pointed out that regulation of the digital economy requires the application of best practices and automation of processes to achieve success.

For political stability, he advocated sound governance, rule of law, security, job creation, political will for reforms, among others.

Under infrastructure, he said ports should deliver ease of exports; there should be adequate road transport for movement of goods and persons; and electricity to power  manufacturing and other operations.

Omeiza-Michael noted that the absence of infrastructure leads to higher cost of doing business.

“Organised Private Sector (OPS) are those that do business and generate revenue for the government. If they do well, government revenue improves,” he said.

He said the finance minister has already warned of the bleak future ahead when she said there may be no allocation for capital budgets in 2023.

“This is scary and gives a gloomy outlook on the economy,” said Omeiza-Michael.

Such a gloomy picture emphasises the need for states and local governments to improve revenue, he said.

Acknowledging that states also have their own debt burden with Lagos State owing the most, he said, “We don’t say the government should not borrow, but they should borrow from cheaper sources. We need to look at other sources of debt.”

SNGs, he said, must look away from federal allocations; rather, they should empower OPS and carry out reforms to support them. He also noted that foreign direct investments flow into countries with better business environments.

“We see similarities in terms of infrastructure and business ranking and FDI, and this confirms the connection between enabling environment and FDI,” he said.

All the states in the country have resources to boost revenues, but they “must empower the sources of revenues – OPS, SMEs, entrepreneurs, blue chips, etc”, he said.

Omeiza-Michael said the people who are taxed must be empowered to pay this tax, noting that the telecom sector has about 41 taxes across federal, state and local government levels, hence the reversal of the recent five percent communications tax.

“The first response should not be MORE taxes but what the government can do with what they have to empower their sources of revenue,” he stressed.

He said food inflation varies across states, and some states produce more but cannot transport to other places.

“Some states have markets but insufficient supply, e.g., Lagos. We have issues with bad roads that hinder transportation of farm produce to markets and cities. Nothing stops SNGs from having light rail projects for commerce and trade,” he said.

He suggested a number of things states could get involved in to grow their revenues. For instance, he said SNGs should involve the private sector and could apply the NLNG model. They could look at their state-owned enterprises (SOEs) to see if they can be commercialised, he said.

“SNGs can invest in export warehouses for the use of exporters. States should also consider Independent Power Projects. IGR will improve based on power supply, infrastructure, etc.

“The OPS understands its role and is interested in playing that role. SNG must create a stable policy environment. Consult and stay with policy,” Omeiza-Michael said.

He also suggested that SNGs connect food baskets to food markets as well as provide targeted and strategic support for sectors that have high potential to create jobs and generate revenue, such as in agro-processing.