IGR: States Should Go Into Oil And Gas, Solid Minerals

Olusola Adekanola, Executive Chairman, Olusola Adekanola and Co, is a chartered accountant and pioneer revenue consultant in Nigeria. He consulted for 20 states and many local governments in the country, including Lagos State before1999. In this interview with DAVID OGAH he advises states to pay greater attention to the informal sector for tax collection, in order to avoid another bail out.

YOU pioneered private revenue collection for states in Nigeria, what was your experience like then?
WE operated in about 20 states at that time. It was very challenging because it was an innovation. It was the first time tax consultants were intervening in the attempt to support government effort to boost Internally Generated Revenue (IGR). What we brought in that time was some measure of professionalism and assisting to see how vast records and taxpayers information could be compiled. We were helping the board of internal revenue in those states to computerise their register of taxpayers, conduct taxpayers’ enumeration to bring more taxable entities into the tax net. The problem with the internal revenue departments that time was that they didn’t have enough experience to handle revenue issues; they didn’t have enough numbers of staff to be able to cope with the number of taxpayers that are out there. They were also poorly funded. So they had no infrastructure like computers, vehicles, which they needed to move around to monitor tax payers or go about to conduct tax audit on various taxable entities.

Our intervention that time was to allow government address those infrastructural deficiencies. So we helped them to computerise their records. So we came in essentially to expand taxpayers net, bring more taxpayers into the net, computerise their records for faster service delivery and get government to address the various infrastructural problems they had. Having done that, our next approach was to see areas where we could block the various loopholes in their existing process and procedures. So we ended up introducing what we called the direct banking lodgment system, because we discovered that revenue and government funds were being diverted. Some of the workers had their own printed receipts, which they issued to collect money from taxpayers and put the money in their pockets. We suggested and developed a process that allowed taxpayers to pay their tax directly to the bank. This eventually cut off the practice of diversion of taxes, and that was a boost to the inflow of taxes into government coffers. What we did was revolutionary, but there was nothing magical about it.

Some states are in debt because of their poor financial status. They are unable to pay salaries, what do you think has gone wrong?
Everybody knows what went wrong. In the first instance, government has misplaced its priorities, starting from the over bloated recurrent expenditure profile that has characterised government spending since the beginning of the democratic dispensation in 1999. The democratic system is very expensive to operate, but it is no excuse for the outrageous number of political appointees that various governments brought to bear on the system. The Indiscriminate ballooning of the civil service workforce, due to employment of people to pay political price, to seek favour or get their own persons into government. We have a scenario where every tier of government is carrying more than the staff that they require to be able to a decent job.

Secondly, over the years, maybe due to inflation, the minimum wage that is being paid in government has gone up. This is why you have recurrent expenditure gulping 70 to 80 percent revenue of those states. They were able to sustain it when the money they were sharing from the federation account was burgeoning. But over time, as the oil prices started dwindling, and maybe the tax revenue also started failing because the productive sectors that were contributing to tax revenue were getting extinct; a lot of companies were folding up and laying off workers. So money that these companies should contribute for corporate tax was lost, Pay As You Earn (PAYE) that is supposed to be deducted from the salaries of their workers that have been laid off is lost. That is why we are here today.

In most civilised societies, government is run on taxation. We have to prepare ourselves for a day when oil revenue would no longer be there, like we are having it now. It might get worse when we deplete our oil reserves. Because oil is a wasting asset, what ever you have taken cannot be replenished. At a point in time, we will exhaust our oil reserve. So how do we run our government? And we have not developed a reliable and consistent tax paying culture. That is why most states are running helter skelter, to see how they can beef up internal generated revenue to supplement what they are getting from the federation account, which ordinarily should be a bonus for them. But as far as I am concerned, the right strategy is actually to build your expenditure and internally generated revenue profile, then you now know what you get from the federal revenue is like extra money for capital development. That is the most sensible and only way you can sustain governance. This issue of everybody running to Abuja after 30 days to go and share money is not sustainable. At the end of the day, you would discover that a lot of governments; local and state are really not viable if you use that profiling. Apart from Lagos, Delta, Rivers, Akwa Ibom, and a few other states that can generate enough revenue internally, to be able to pay salaries and overhead expenses, all other states are not viable because their internally generated revenue cannot sustain their recurrent expenditure.

How do you expect states to generate sufficient income from tax?
That is why you still have to go back to the basics. There are two ways; the starting point is for you to, at least, exploit the potential of what you have maximally. That means you should bring more people into the tax net, including business organisations in the informal sector that are making huge profit and they are not paying taxes, because the tax net has not closed in on them. The point is for you to do a complete enumeration of taxpayers. It is time consuming because you have to go from street to street, enumerating all the business outfits there, even to the lowest businesses like women roasting corn and barbers’ shops. These are people that are actually generating substantial income and no matter how little it is; you have to get them to make contribution. Government requires every taxable adult to make contribution.

Secondly, you need the intervention of the Federal Government to develop favourable economic climate that will allow more self employed businesses to spring up and give out loans for school leavers to start small businesses. The big companies out there that have folded up, government should find a way to empower the banks to be able to give out soft loans to reactivate these companies to come back into production. By doing that, the government is actually removing itself from the burden of unemployment. When these companies go back to business, they will employ millions of hands that have been laid off. Economic activities will be regenerated and workers that have gone back to work will pay taxes on their salaries and wages, this is how you can, more or less, rekindle the economy and get more people involved in economic activities that will generate taxes.

From your experience, what are the potentials available in states for revenue generation?
The potential is the informal sector. That is the sector that will actually regenerate Nigeria. It is vast and intimidating. It is not something you can do from your desk; it is daunting. That is why they always follow the easier option of going after salary workers and companies, but how many companies are functioning? So you are constricting the process of your expanding the internally generated revenue profile. The solution is to bring the huge informal sector activities within the tax net. If you can’t face that challenge and find a way to address it, then you are just wasting your time about boosting internally generate revenue.

Even as good as Lagos is doing now, it is still not tapping into the informal sector. It is easier with the organised sector because the companies are there, you know their location. If you think they are not paying adequately, you can go there and do tax audit. But for the informal sector, they barely keep record. So you must have an ingenious way to give it to them like a levy. Eventually, they have their Associations and Unions. If you cultivate them, you will be surprised at the volume of revenue that will come in and you can even use them as a collecting agent to pursue their members to conform or comply.

Essentially, the way to encourage the informal sector to keep on paying is to make them feel the impact of your government, because if you go back to collect from them again, they will ask you what you did with the ones they’ve paid; that is usually their response. Within their locality, fix roads, give them water, if they have problems with getting water to flow from their taps, send them tankers to drop water for them; let them feel the impact of the government.

Do you think some states that are rural and dominated by peasant farmers can generate good revenue?
Of course, they can, but they need the bailout first. When they are bailed out, then the governors would have to sit up and think about what is the sustainable work force and salary they can pay. How much can we realise as internally generated revenue at our optimum? How can we contain our recurrent expenditure within that prospect? And from there, you have to take measures, some of them would be very bitter; like asking the workforce you don’t need to go. There are agricultural activities in these states they should generate taxes.

So, if your community or state is agro concentrated, you explore and exploit it. In the old Western region, Awolowo had farm centres, economies were booming in those places. You have to tap into the potentials of your state. Look at areas where you have strong holdings and try to develop that sector

Some people have recommended the restructuring of the federation for states to exploit natural resource available in their domain. Do you agree with them?
We are misunderstanding all these things. Apart from oil, there are no mineral resources that a private or state government cannot go to Abuja and get license to exploit. Many people and maybe the governors don’t know that, whether you talk about gold, limestone, if you go to ministry of solid minerals in Abuja, and you set up a company that you want to exploit it, all you are to pay the Federal Government is royalty. There are no mineral resources that the state or local government, a private person cannot exploit in Nigeria. That is the truth, and all of them are just sitting on these minerals resources. They are not doing anything. There is no law that says a state government cannot go and acquire oil bloc. Nothing stops Bornu or Zamfara states or even Ekiti from applying for oil bloc during the bidding rounds. All you need to do is go in there, get good technical partners to work with you. The same benefit that a private investor is going to get running an oil bloc is the same benefit a local or state government would get. Why are people not discussing about that. This resource control that everyone is talking about, nobody is stopping you from exploiting and enjoying the benefit of the resources that is stationed or located in your state or local government.