Nigeria: How States Can Survive Cash Crunch

LOOKING at the plethora of resources hidden in Nigeria’s underbelly, an outsider, having no prior knowledge of the country’s woes, would be perfectly correct to assume that its citizens are leading the best of lives.

The resource deposits — human and natural, alike — scattered across the country, a blossoming middle class, rapid efforts at industrialisation and the label as Africa’s largest economy, should ordinarily pitch the country as the best Africa has got to offer, in all indices imaginable. But, sadly, this is not the case.

The states, the second arm of government, who go cap in hand to the Federal Government for funds to run their affairs, are the worst hit in Nigeria’s story of unfulfilled potentials. Many critics attribute this to Nigeria’s flawed economic arrangement, which affords the centre too much control over finances and sources for revenue generation. Others contend that the states are not creative in their approach to boosting revenue in their domains, as the laws are expressly clear on how the instrument of tax can be administered to favour the states.

However, without statutory allocations — an arrangement where funds are doled out to states and local governments, monthly — some of these states will run aground, some critics say, too. With much talk about diversification in government corridors, a major strain has been the slow rate at which industrialisation permeates states with relatively low capacity to sustain mega industries, such that the major revenue source, taxation, remains dreadfully low. This has accounted for the poor showing of Internally Generated Revenue (IGR) in most ‘poor’ states in relation to investment-saturated states.

But the real threat — which has dangled ominously since the prophecy of depletion of oil deposits in recent years — has been the fate of these states in the face of dwindling oil sales, a dream, which is now very much a reality with recent happenings in the international oil market.

This is also coming amid calls in government for intensified efforts at tax administration. The government, as part of measures to cushion the impact of dwindling oil prices, decided to increase tax on luxury goods, which it hopes to utilise in augmenting revenue shortfalls. This is one among many requests by government critics who have severally asked that government look inwards in efforts to get out of troubled waters.

A look at the gross summary of statutory revenue allocation and Value Added Tax (VAT) released by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) in March 2013, revealed that apart from Akwa Ibom (N22, 205,383,781); Bayelsa (N13, 350,351,654); Delta (N17, 057,045,907); Rivers (N20, 934,686,737); Kano (N12, 333,095,855) and Lagos (N14, 219,026,551), no other state got up to N10 billion from the Federation Account.

In many of these states, the IGR is regrettably low. For instance, Taraba State, which got less than N10 billion in the year in review, pooled N3, 344, 006, 052 as IGR between January and October, according to records released by the Nigerian Bureau of Statistics (NBS). The state makes roughly N300 million in IGR per month; a paltry 10 percent of its yearly allocation. This explains why any tinkering with the Federation Account allocation causes panic among states.

From NBS statistics, the figures for IGR in selected states in Nigeria are as follow: Akwa-Ibom, 15, 398, 828, 428; Anambra, 8, 731, 599, 912; Bauchi, 4, 937, 242, 875; Bayelsa, 10,500,936,262; Benue, 8,373,720,592; Delta, 50,208,229,986; Edo 18, 899,322,710; Enugu, 20,203,802,864; Katsina, 6,852,511,585; Kebbi, 3,732,343,145 and Kogi, 5,020,349,741. Others are Kwara, 13,838,085,972; Lagos 384,259,410,959; Niger, 4,115,777,679; Ondo, 10,498,697,469; Plateau, 8, 486, 806, 640; Rivers, 87, 914, 415, 268; Taraba, 3, 344, 006, 052; Yobe, 3,072,006,052 and Zamfara 3, 039, 396, 601.

Lagos State leads the pack, with other oil-producing states in tow. The other states are at the mercy of the handouts from the federal government as there is little or no infrastructure in their territories to support robust commerce or engender economic growth. Experts argue that the trend could be reversed only if the states would do the needful by improving the conditions for investments in their domains.

Associate Professor of Economics at the University of Lagos (UNILAG), Olufemi Saibu, who specialises in Public Policy and Finance, believes that the states stand a better chance of surviving Nigeria’s precarious economic situation if they can maximise opportunities in taxation. Insisting that all states in Nigeria have enormous potentials to be self-sustaining, he advises the states to look inward and develop infrastructure that would make them attractive to investments. According to him, the states have the opportunity of improving their revenue from taxation if they can exploit provisions in existing tax laws.

He said: “In Lagos State, people who pay tax shout more about governance than others. This is because they know what it means to pay to get good governance. The case of going to scoop from the national cake does not work in Lagos State. We need to replicate this arrangement in other states, such that the bulk of the finances will come from what the people contribute. Then we’ll get corruption out as we’ll ask for accountability and transparency from people in public offices.

“If one doesn’t work for money, he can’t ask how it is spent. When the inter-state revenue allocation was signed, some percentage was allocated for land mass. Inherently, that makes provision for the North to be perpetually dependent on allocations. That has made them not to explore other options. When you can have free fund, why labour to get so little? Holistically, there is a need for structural change. We need to get creative. For instance, incentives can be given to those who can generate funds internally, like derivations to take a larger percentage. If it is implemented that way, everybody will step up their game.

“The states should be given equal opportunities to explore based on the realities on ground. States that does not have oil cannot be asked to explore oil. Whatever be their advantage, they should leverage on it. If we can strike a balance and take a critical look at things, we can get the best out of the current situation and will discover opportunities.”

A major argument that has risen from the doling out of funds to states has been its impact on lives of residents and how equitably these funds saturate. Experts say that when people contribute to the growth of their communitie,s they tend to demand transparency and accountability, keeping the government on its toes. This model tends to make for a responsive, as against a docile, citizenry, they argue.

Saibu shares this view too. According to him, “The bulk of Nigeria’s revenue goes to the oil-rich southern part of the country. To be clear, we have 13 percent derivation, the Ministry of Niger Delta and Niger Delta Development Commission (NDDC). Take Bayelsa, for instance. They have eight local governments, three senators and a good number of persons in the House of Representatives. They have the same number of representatives as other states. If you take all these together, you can imagine how much federal revenue goes into that state.”

“I’m sure no state in Nigeria can compare to them in terms of in-flow of federal revenue. And even at this, the state is not better off than the Northern part of the country that gets paltry sums. If you consider the per capital income, it is really not reflective of the inflow of funds. They are poor; they live in the creeks and do not live any better, generally. There are one or two billionaires among the elite there; and that’s probably all they have to show for their fat allocations. It is obvious that the federal allocation given to them has not worked. If they make the people in the state committed to the cause through which the state develops, we can believe that they will be interested in how their money is spent. And that is where the need for improved efforts for IGR comes in,” he adds.

There have been calls from different quarters for states to devise methods to boost their IGR profile. The best approach, most say, is to go back to the tax law to domestic existing laws or better still, adopt the Lagos example. Insisting that that the Lagos example was a sure-bet, Saibu avers that states stand the best of chances if they can contract tax consultants with whom they can share cost and ensure efficiency.

He said: “They can adopt the style of Lagos state. They can partly transfer revenue collection to private hands by contracting tax consultants. They should give them something in return as part of cost-sharing. This ensures efficiency because it will be partly taken up by individuals, who know that if they don’t deliver they’ll be out of business.

“The states need to go back to the law books and identify the revenue generating laws that are applicable and feasible in their states. For instance, in states like Oyo, Osun and Ekiti — because I am from the west I can speak about them — It is difficult to engage too much in income tax. This is because of political reasons, of course.

“The states in the controlled opposition were accused that were going to increase their tax before the elections. The other political parties printed pamphlets stating what the people were going to pay as tax, in an effort to discourage the people from voting them into power. This is because they banked on the claim that the state was going to be starved of funds from the federal government, as was the case with Lagos state.

“Other states will have to repackage themselves to be investment-friendly, so that people can come in and invest. Through this, they will build a revenue base, and diversity sources of revenue in the state. This is not done in a day; it requires planning. For the time being though, they can tap from the pool of available tax laws. They should implement the tax laws that Lagos state has implemented. Many of the prospective sources of revenue in states outside Lagos are owned by politicians. And that poses a constraint. In many of the states, most of the hotels are owned by people who were in government before and are looking for sources of revenue.

“They have to look out for those taxes that can be implemented that will not be too obvious to the people. For instance, there is the consumption tax paid in hotels. As long as people are do not see the tax on their pay slips they don’t know they are paying tax. People do not know they are paying VAT.

“There are taxes that can be introduced and people will not know they are paying them. They have to engage tax consultants and also regulatory consultants. This is because they have to look at things critically and how it affects the masses, the middle class and elites. Once the burden is not too much on the masses, the noise will not be much. ”

He argues that the Private-Public Partnerships (PPP) that governments have been relying on to develop infrastructure was flawed, stressing that the best approach was simply to look inward and work on areas where these are sure to have a competitive advantage among their peers.

According to him, “In any system, the best way states get revenue is through tax. They should be concerned more on taxation and how to create an enabling environment for businesses to thrive. The governors shouldn’t be too concerned about running public-private arrangement. This is simply because they won’t do it better than those in the private sector. They need to develop infrastructure to attract investment and then collect tax. They need to first build a tax base.

“If government goes into investments, at the end of the day, all the bureaucracies and evils in the public sector will be transferred to the business. A perfect example is the airport. When you look at the roads to the airport and the airports itself in Lagos, you would see the failings of private-public partnerships. What has changed since the years that tolls have been collected at the toll-gates? And it’s not even the federal government that collects the money; it’s those in the private sector. The services in the airports have been outsourced, but do we have better services? We don’t! Look at what happened with MMA2.”

First published in The Guardian, Nigeria.