Memos to GMB: No 2 – Revenue

After my initial memo to you on ways to cauterize the life threatening hemorrhage of government income through corruption and inefficiency I feel the next most fundamental issue is how to raise the government Revenue that will make everything else possible for even the good book says that money answereth all evil and our backwardness in virtually every index of modern life will require copious amounts of money to fix.

One of the convergence criteria of the ECOWAS Monetary Cooperation Program (EMCP) is the stipulation that Taxes should constitute no less than 20% of total GDP. In the last 15 years only three countries, Gambia, Cape Verde and Ghana, have, intermittently, met this critical benchmark. Ghana, for example, fell below 20% when it rebased its GDP recently. Nigeria never got beyond the low teens but even this poor performance has further worsened to a Tax to GDP ratio of 6.1% after the much hyped rebasing of the GDP in 2014. We must bear in mind that crude oil, by far currently the biggest contributor of Taxes to Nigeria, is Taxed at 85% (87% when we add in Royalty) and this should ensure that Nigeria easily outperforms the 20% benchmark set by ECOWAS yet we don’t even get halfway! This abysmal record cannot stand if we intend to pursue an aggressive program of socioeconomic rebirth. Below are steps that, if pursued diligently, should at least triple the percentage of GDP that accrues to Nigerian governments as Taxes.

The most blatant hemorrhaging of Revenue and Taxes is in the oil and gas sector where losses happen at every stage from the production facilities and pipelines, where bunkering drains about 20% of what is rightfully Nigeria’s, to NNPC’s often criminal handling of the national patrimony not just in the way it dissipates Revenue unlawfully but also in the delinquent way it discharges its regulatory roles viz licensing, bloc auctions, subsidy management etc. Considering your stints as Federal Commissioner for the Petroleum ministry and Head of State and the pertinent experiences of close allies like Professor Tam David-West and Emir Sanusi Lamido Sanusi, I believe it would be immodest of me to think I can add anything to what you know about this sector and how you plan to sort out the mess.

One of the widest segments of the tax net is the Pay As You Earn (PAYE) window through which employers of labour deduct appropriate taxes from the salaries of their employees and remit same to the coffers of relevant, mostly state, authorities within 30 days. This process requires minimum effort from government and should ordinarily work flawlessly apart from minor misunderstandings over limited grey areas especially as the Personal Income Tax (PIT) law in Nigeria is straightforward and has little room for misinterpretation.

Unfortunately this simple and elegant device that should work even more smoothly than the Value Added Tax system has been corrupted by most employers in the nation. Apart from blue-chip foreign companies and a severe minority of local employers, other corporates, which act as agents of the state by determining and deducting the right amount of PIT from emoluments paid to their employees for onward transmission to relevant governments, have corrupted the process. This perversion of a vital tax channel starts from the way salary packages are structured by local banks, insurance companies, manufacturers and the like. Often, when I take a look at employment contracts of friends and relatives, I find that the Basic component of the pay is as low as 10 while the rest of the emolument is described as allowances ranging from Transport and Housing to Dressing, Lunch and Diesel. How an employer decides to structure its pay package isn’t of much interest to us but the purpose behind this lopsided structure is criminal and vitally important to Fiscal authorities.

Such companies deliberately misinterpret the old PIT Act, that allowed up to N210,000 in various allowances to be excluded from taxation, to now exclude as much as 90% of the total emoluments of their employees from taxation. This willful law breaking is compounded when they ignore the fact that the amended PIT Act, that has been in effect since mid-2011, has eliminated the exclusion of allowances from taxation and now all emoluments, in cash or in kind (e.g. official car, quarters, driver), are subject to tax. This egregious abuse of the tax code leads to governments, mostly state, losing more than half the revenue that should accrue from this vital income stream. It also leads to well-paid bankers and others falling into poverty when they are retrenched or retired as their gratuities and pension are calculated on the back of their Basic pay but that is a well-deserved own goal that shouldn’t delay us here. What matters to the public is the size of the loss to state coffers and what is keeping governments, even in states that employ tax consultants, from stopping such a blatant scam. All that needs to be done is for a few well-known corporations to be made examples of and their fellow travelers will promptly cough out the stolen taxes.

When she last resumed national duty, the outgoing Finance Minister, Mrs Ngozi Okonjo-Iweala, declared rampant import duty waivers as one of the most significant drains on national revenue. She promised that she would ensure their strict limitation under her watch and said that any waivers given in future would be offered to entire industrial sectors and not individuals who just happened to be close to those in power. Many believed that a Daniel had come to judgment and things would change but all hopes were dashed as duty waivers have run at hundreds of billions of naira annually in the last five years without any clear benefit in the area of industrialization or any other public good while the usual suspects continue to corner the bulk of the benefit. Blocking this drain pipe once and for all will not just accrue billions of dollars to the national kitty but will ensure a level playing field for business people.

Fuel subsidies do not just cost us trillions of naira annually but they often are without any enabling budgetary allocation and notoriously deliver phantom cargos of refined products. Then we have the perverse incentive offered to the Nigerian National Petroleum Corporation (NNPC) to not revive the four refineries under its care since dubious gains accrue from the import program. We should not only eliminate all subsidies on petroleum products but should move to the level where all crude oil produced in Nigeria must be refined and, ideally, sold regionally and further afield through Nigerian downstream oil companies the way Mr Dangote intends to do with the excess (to domestic demand) production from his 650,000 barrels a day prospective refinery.

Not only should crude oil not be exported without value added but Nigerian gas should be purposed primarily towards generating electricity until national and regional power demand is satiated. Currently the more than 2bscf amount of gas being fed to the Nigeria Liquefied Natural Gas (NLNG) company daily could generate well in excess of 10,000MW of new power. Even if the NNPC’ missing $14b dividends from NLNG over the last decade had been received into the federation account that would still be incomparable to quadrupling power supply, moving away from a diesel powered economy and really kick starting the industrial revolution that will absorb all the spare human capacity roaming our streets idly. Indeed $14b doesn’t even cover the cost of importing diesel and petrol for generating power in Nigeria since the first NLNG plant went on stream. The focus should be gas for power and chemicals and not gas for export. Our proven gas reserves of 187tscf, if used at 20bscf per day to generate circa 100,000MW, which is around what an efficiently industrialized Nigeria would need, would last less than 25 years. This is hardly enough for the long term industrial sustenance of a nation projected to top 700m souls by the end of this century. The world doesn’t need 700m farmers but we can hope to become the world’s last big workshop after India has supplanted the Chinese in that role. The Bonny NLNG plant must be the last LNG export plant we build if we are not to strangulate a great industrial future while it is yet aborning.

Nigeria boasts of more than 10m motorized vehicles on its decrepit roads with road construction and maintenance being one of our most significant budgetary lines but we have failed to match the Taxes generated from these vehicles with the cost of building and maintaining the roads they ply. Nigeria’s annual vehicle license renewal fee is among the lowest in the world at less than $10 thus raising barely enough to build one new road per year. This rate should be raised to at least $100 per vehicle per year in the first instance and raised ultimately to rates comparable to what obtains in Europe and the US, which are hundreds of dollars per year, if we expect to have the funds for building world class road infrastructure.

A related funding issue is the general lack of Taxation of transport sector workers and entrepreneurs in Nigeria despite the enormous public resource required to keep the sector ticking. While governments fail to effectively Tax the sector it is a notorious fact that transport workers and employers ‘unions’ collect thousands of naira per day from every vehicle that plies Nigeria’s roads and waterways. In some states there is a veneer of public sanction and acting as government agents covering the whole affair but even in such domains, Lagos being an example, the bulk of the billions generated ends up in private pockets to fund extravagant lifestyles of union leaders, pad the pockets of government officials elected or otherwise, constitute the main reason why transport union elections are almost always do-or-die affairs and weld the union leaders to the interest of the enabling state governors for whom they essentially constitute a private army. An indication of the scale of funds garnered from our motor parks and roads on a daily basis is the recent case of the NUTRW chieftain who was accused of diverting N7.4b of NUTRW funds to his personal use. The BBC in its documentary ‘Law and Disorder in Lagos’ showcased how bags and bags of raw cash were moved around like farm produce and the lavish lifestyles of union officials the cash funded. This is a cash stream that should be formalized and harnessed by the state governments. Every commercial vehicle on Nigerian roads should be Taxed on a daily basis at standardized rates through credible and transparent structures. To avoid creating a significant pool of unemployed ruffians overnight, the NUTRW structure can be used to collect the revenue but with clear benchmarks, based on the number of licensed commercial vehicles, established to ensure there are no leakages beyond the fraction allowed to the union as commission for acting as government revenue agents. This repurposing of a social blight at one stroke cleanses our motor parks and brings millions of transport workers and employers into the Tax net. The revenue from this and the increased vehicle license fees should be enough to cover the bulk of the budget for transport infrastructure going forward and, when taxes on fuel are eventually added to the mix, the transport sector should be entirely self-funding, even generating a ‘surplus’ for the rest of the economy.

Lagos state has one of the most structured processes for valuing and taxing real estate via its annual Land Use Charge (LUC) but this critical Revenue pipeline has severe demerits as currently operated. Foundationally we find that properties are generally valued at less than 20% actual market rates and this is in a state like Lagos where the property market is the most liquid which makes accurate valuation relatively easy. To compound the undervaluation of properties, we find that the LUC rate for even properties occupied by 3rd parties is just 0.394% in 2015. This rate is less than a third of what obtains in the United States with the 2007 average stated at 1.38% by the New York Times http://www.nytimes.com/2007/04/10/business/11leonhardt-avgproptaxrates.html?_r=0. If all states in the country properly and regularly value properties and peg LUC at even half US rates this Revenue stream can be easily quintupled.

For about a decade a key blocker of the economic integration of the Economic Community of West African States (ECOWAS) has been the relatively low Value Added Tax (VAT) rate in Nigeria when compared with other ECOWAS states. Nigeria charges VAT at 5% while other ECOWAS states charge VAT at 10% or more. This has stalled the open borders program as the low VAT rate is seen as conferring undue advantage on made in Nigeria goods. Beyond trade and regional integration though is the very significant Revenue that is lost to our governments. The incoming government must go beyond talking about a doubling of VAT rates to actually doing so. In addition to at least doubling rates, the distribution of the VAT proceeds needs to be rejigged so it more faithfully reflects the actual consumption patterns in the country instead of population being such a dominant factor in allocating the income.

For five decades Nigerian government coffers have been filled largely by hydrocarbon Revenue and it now takes a significant mental effort to recollect how the country was run before oil began dominating our economy. The good news is that those economic spheres, largely agricultural, that built the foundation of this nation are still in existence. The bad news is that four decades of neglect have marginalized them in all aspects ranging from employment generation to Revenue generation. In the short term agriculture cannot but be a part of the answer particularly in employing the idle hands that currently turn to robbery, kidnapping, bunkering, terrorism and the other ills that have brought Nigeria to its current state of near anomie. Large scale agriculture has long been a pastime for our retired generals with General Olusegun Obasanjo being the most prominent farmer-general with well over 10m chicken being conscripted and discharged from his army annually. Lately Mr Aliko Dangote has acquired the itch for large scale farming with his fruits, sugar and tomato ventures. Each venture, on the back of the billions he can afford to throw at it, requires well over 10,000 square kilometers (100,000 hectares) of arable land. In our already choked nation this is too much land to hand over to any individual especially when we note that such large tracts are typically transferred by government fiat to mega farmers without adequate compensation to the thousands of families deprived of what is often their sole significant assets. This is the path to more disgruntled rural hordes finding salvation in the messages of messianic religious leaders who promise to lead them to paradise once the nation-state is dismantled. If we hope to deprive Boko Haram, MEND and their like of the cannon fodder they cannot operate without, we must industrialize agriculture in a more equitable and socially sustainable way. Dangote for example can achieve the same large scale production not by acquiring the land and employing the erstwhile landowners as labourers but by applying out grower programs which have sustained some of the largest agro based enterprises like the British American Tobacco company (BAT) over the years. It is gratifying to note that this is the approaching Dangote is using for the tomato venture but it must go beyond an initiative emanating from the goodness of the big farmer’s heart to state policy enshrined in our laws.

Beyond large scale farming we can help current farmers to prosper and bring in fresh blood by actually delivering all that governments and agriculture ministers have claimed they delivered in the last few decades. The reality is that very little of those talking points are actually visible on ground and I should know as a farmer. One particularly striking point for me over the last 15 years that I have owned a farm is the constant barrage of offers to sell farmland to me by landowners on every side of my farm. Almost every acre around me is fallow while the few plots under cultivation are being used by tenant farmers. The main trade of landowners in my particular area is to give out land to sand diggers who pay about N60,000 per acre to despoil the land. Without tractors to hire, improved seedlings to plant, fertilizer to apply, extension workers to teach or roads and power to make farms accessible and habitable agriculture has been turned into a pastime for the truly desperate or deep pocketed. If the missing ingredients are provided this sector can yet again employ the bulk of our people and provide significant government revenue and foreign exchange earnings.

At the end of the day, no matter how much Revenue government raises, if there is no discipline in spending there will never be enough money. The size of government at all levels must be reduced. Indeed the number of government levels should be reassessed. Do we really need 57 local governments for the 3,577 square kilometers that make up Lagos state? Would we need a government for every 63 square kilometers in Lagos if each LASG ministry did its job well instead of just filling its Alausa secretariat with do-nothing, bribe-seeking drones? I had the unpleasant duty of visiting the Lagos Land Ministry last year to collect a decade overdue Certificate of Ownership – C of O after having resisted an invitation to pay an N800,000 bribe for the C of O seven years earlier (for land purchased from the state government!). We went through two offices and met about six officers with none doing anything productive. One had a couple of kids at his desk playing games on his computer, another was playing videos on his computer, a 3rd was gossiping etc. If they were just experiencing a lull in activities that would have been maybe understandable but, when we made enquiries about our reason for being there, we soon discovered that it was more of shirking the tasks that were on ground as none of the first five officers we engaged was willing to lift a finger to earn his pay. At that encounter and every encounter in virtually every government office in Nigeria it is obvious that there are more people than tasks which counter intuitively results in nothing being done as each person pushes the little that needs to be done to the next desk.

There must be a rigorous examination of government employment needs IN OFFICES. While we need more policemen, soldiers, agriculture extension officers, rural health workers, rural teacher, sanitary inspectors, traffic wardens, waste management officers etc we do not need more benchwarmers which only justify the building of ever more grandiose government secretariats which are sometimes the only significant achievements of state governments. We must right size and refocus the civil service if the Revenue raised will not forever be spent almost exclusively on Recurrent expenditure while our infrastructure remain firmly stuck in the 19th century. The Steve Oransaye panel report on the Restructuring and Rationalisation of parastatals, commissions and agencies should be unearthed and implemented as faithfully as current realities permit. We really do not need and cannot afford thousands of government boards to which members must be appointed and paid to do next to nothing. General Mohammed Buhari has said repeatedly that he intends to run an ‘efficient’ government. Such a government must be lean at all levels with even non APC led state governments expected to take a cue from Aso Rock once the gains are obvious to all.

Nigeria can be great again and has been blessed with the resources required to run the greatest catchup race ever but we shall need discipline and clear focus not only in garnering those resources but in using them if we are not to waste this last great opportunity and end up as the largest failed state of the 21st century.

Abraham Abiodun Idowu

April 28th 2015

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