/Escaping the Looming Abyss (II)

Escaping the Looming Abyss (II)

The Ship is sinking fast, so able bodies to the oars – Jude Abaga

 

SKIPPING A FEW STEPS:

The ideal approach while recommending reform should be to support the recommendations with the basis, rationale and implementation methodology. The ‘why and how’, if you will. However, given the dire and ominous situation, I’ll just get straight to the point. Each ‘why & how’ could be a full chapter of a book and would be a tangential distraction at this stage.

This list is by no means comprehensive (important areas like health and agriculture not directly addressed), but is skewed towards what can be done to quickly improve the fiscal situation, which will in turn have cascading benefits to all sectors of the economy and society.

  1. Review, collate and analyse all previous White Paper, Independent Consultant, Panel & Committee reports that have been carried out in the last 20 years on Government reform in Nigeria. Where feasible and possible, go ahead and implement.
    • We love wasting money to reinventing the wheel to look busy, when there is no real will to solve the problem.
    • It is positive that the Oronsaye report is under consideration for implementation. That report leveraged heavily on a previous report from the consulting firms of Afemikhe and Accenture on Government agencies that Mr. Oronsaye instituted while he was Permanent Secretary of the Ministry of Finance, and he received while he was Head of Service of the Federation. Similar reports on need for reform, streamlining and greater efficiency of Government Agencies and Departments has been previously presented by Committees led by ‘Super’ Perm Secs Allinson Ayida and Ahmed Joda.
    • Despite various Customs and Port reforms in the last 15 years, MoverDB reported that shipments to Nigeria are the most expensive in the world from the United States (47 major global ports studied) largely due to corruption, a lack of transparency and inefficiency at the Ports. Terminal charges are double the rates in Tema (Ghana) and Durban, while Transportation of containers out of the Ports is at least 8 times the cost in Ghana or South Africa.

 

  1. A first step to cutting the cost of governance should be to reduce the number of Cabinet level Ministers to between 15 and 18 at the most.
    • Nigeria only has 30+ Ministers (and previously over 40) and presumably Ministries is because there is this supposedly constitutional attempt to have a Minister from every State. No real consideration for the effectiveness of the cabinet.  Retaining the large retinue of Ministers and ‘Advisers’ shows we’re not even ready to acknowledge the scale of the problems we’re dealing with, not to talk about real Governance reforms.
    • Similar cutbacks must be made with electoral ‘representation’ (a rep must represent at least 1 million people & Senate representation per state could be reduced to 2) with accompanying reductions in emoluments and unsupervised budgets for ‘executing projects’ must also happen in the legislature.

 

  1. Scrap the VAT regime immediately and replace it with a General Sales tax of between 1 to 2.5% on goods and services. This will increase revenues generated and compliance level and widen the tax base.  (There should be a special, state based system for the retail of petroleum products).  The VAT regime makes no sense and is not and will never be properly implemented. It is nothing short of robbery by the State on businesses and business owners and it is stifling business growth that is needed to increase the employment rate and possibly save the country from collapse.
    • VAT is meant to be a tax on Gross Margins, or the value added at each stage of the production or distribution cycle, but it is almost always charged on gross sales and revenue, with the tax payer expected to battle to be reimbursed his/her ‘input tax’. It is almost as if the designers were seeking a tax that would violate several principles of taxation as the tax in neither simple nor efficient and could technically encourage rent seeking behaviour.

 

  1. Stop funding the NYSC as the scheme should be self-sustaining and possibly revenue generating.
    • First and foremost, there is a category of graduates is not interested in the scheme and genuinely consider it a waste of time. This group should be made to pay an appropriate exemption fee (N200,000 is much less than the term fee of a private university for instance). These class of graduates pay to redeploy to Lagos or Abuja and hardly participate in the scheme anyway. The fees will go into the funding pool for the program.
    • Also, due to the poor quality of some of the graduates produced by the Universities, a basic entrance test should be required to make sure graduates accepted to the programme have the ability to be useful and possibly make contributions to the schools, communities and corporations where they are posted to serve.
    • We will be left with a smaller but more effective program of willing and able Corpers, and the scheme will be much less of a drain on the public purse.

 

  1. The annual budgetary allocations to all Tertiary institutions and Sports Federations should be stopped immediately. Take off, Special research and Intervention grants grants could continue based on strict criteria.
    • Sports federations should be funded by member subscriptions, Trusts and Endowments.
    • For Education, the focus and effort should be on Basic Education, which is a fundamental human right, and Secondary and Technical education.
      • If done right, the first 12 years of school (15 years if you add Nursery school) will give citizens the ability to function and make an income in any society.
      • The current system where we keep lowering cut off marks (160 over 400 for the last JAMB Admission cycle) to allow a large number of poor candidates into poorly funded and equipped Universities will only keep producing a significant number of poor and unsuitable graduates.
      • Studies have suggested that the benefits of tertiary education accrue more to the individual and not necessarily to the society that educated them, as high-end tertiary skills are also easily mobile across borders. You only need to take a look at the over 5,000 Nigerian trained doctors practicing in the UK, and the over 10,000 Nigerian trained doctors practicing in the US to know that there is some credibility to this. This is not the reason for suggesting a change to the current system of budgetary funding of the Universities and Polytechnics though. The current system does not work, the fiscal system is broken, and quality will never improve if we stick with it.
      • Everyone who wants a tertiary education and is qualified for one should be able to get one regardless of societal standing or family income. The private sector funded Education Tax Fund (ETF) can be used to seed a soft-loan fund to pay the fees and living expenses of University students who cannot afford to do so. Grants and scholarships (not necessarily by the Government) will also be available for exceptional students in targeted areas like STEM or renewable energy.
      • The increased and clearly defined funding will improve the quality (including the pool of lecturers) and infrastructure of the Tertiary institutions putting them in a position to genuinely contribute towards national development.

 

  1. As previously mentioned NNPC should completely leave the all aspects of the petroleum refining and retail business, including and especially, importation. NNPC’s involvement in the sector has only been a tool to stagnate the growth and divert billions of dollars that could have been used for critical infrastructure and development in the country.
    • The current refineries are not national assets, but disastrous cash burning and loss making liabilities in the hands of NNPC and should be sold. If there is resistance to selling, they should be left idle. Anything is better than the current situation. (A sinister idea would a scenario where NNPC retains one & one is concessioned to the loud but unproductive labour movement and a comparative analysis done with the two that sold to private corporations after five years).
    • PPMC should be concessioned to ensure that the over 5,000 KM network of pipelines, along with jetties, pump stations and other infrastructure are well managed. The frequent cases of pipeline and tanker explosions and the lives lost, are clear indications that a lot is wrong in the sector. Past and current managers of NNPC can raise funds (that should not be too difficult) and put in a bid if they are best suited to run these facilities.
    • The Petroleum Support Fund and The Petroleum Equalisation fund need to be scrapped immediately. These are the major tools and mechanisms that have been used to sustain distortions and stifle any opportunity to build a vibrant and productive downstream sector.
    • PPPRA should be severely restricted (a small unit of the Competition and Consumer Protection Agency at best) or completely scrapped. As previously mentioned, the only thing special about refined petroleum products is the access to untraceable funds that will never be accounted for. All the razzmatazz and modalities around the pricing and supply chain are absolutely unnecessary.
    • It has been reported that telecoms reform added as much as 5% to Nigeria’s GDP. Note that the ‘critical’ aspect of this reform was the Government sitting back and collecting about a billion dollars from mostly Nigerian investors to issue telecoms operating licenses. Getting paid to get out of the way of Nigerians in essence.  I am confident that obviously needed reforms (or getting out of the way) in the downstream petroleum sector will have similar impact, and possibly more, on the Nigerian economy.
      • It all begins with the NNPC though. As a Nigeria public official once said, ‘If Nigeria does not kill NNPC, NNPC will kill Nigeria’. The language might be extreme, but the reality is that the rulers of Nigeria over time have become addicted to the free and untraceable fringe benefits that having an NNPC provides. The alternatives before us are quite obvious and the choices made will have quick and deep consequences.

 

  1. Regarding taxes in General beyond the VAT, Nigeria needs to urgently move away from a largely income based model of taxation to a benign but effective activity and asset based model. The income based model is killing companies and stifling entrepreneurship and growth, but an activity and asset based model of taxation is objective, fair and almost impossible to evade.
    • An asset based property tax for instance, will easily fix the horrendous fiscal situation (or revenue generation) of states and at the same time stop the rot, decay, lack of basic amenities and sheer filth that is prevalent in most of our towns and cities’ as shown below. The rates used are suggested, but realistic.
  • Every state should have an objective market value of every building in the state. The Assessment value should be half of the market value. Property (not land use) taxes should be at 0.15% of the assessment value. 0.1% should go to the state government & 0.05% should go to the local street, residents’ or community development associations.  So a building worth N100 million is assessed at N50million and liable annual property taxes of N75,000 in total.
    • The amount paid to the Government will include services like garbage collection, in addition to shoring up the revenue pool of State Governments. The citizens can use the part they control for their specific needs including neighbourhood water (which governments at all levels have proved inept at providing), security, and maybe even cottage power projects.
    • Compliance will be universal because the rates are low, and laws should be enacted to allow a building that is in default of taxes for 3 years be auctioned with the assessed value as the reserve price. The government can then pay the reserve price to the defaulting owner can keep the difference between the auction proceeds and the assessed value.

 

  1. Based on indicative  and comparative global market prices of refined products (tax free, but with liberal profits included at a N400/$1 exchange rate), the price for petrol in a fairly efficient Nigerian market should be about N90 today if the quick reforms identified are effected.
    • With an efficient market, State Governments can impose a tax on Petroleum products as necessary. It will be a fair and productive tax anyway with the wealthy and their multiple SUVs bearing a larger share of the burden. Diesel and Kerosene can be excluded if necessary to alleviate the impact on the poor.
    • The completely bankrupt and dysfunctional method where states depend on FAAC allocations for just about everything will be resolved, and accountability will improve if there can be fiscal and legal separation of powers at the state level.

9)    We need to somehow achieve Legal and Fiscal separation of powers at the State level immediately. We are supposedly an American-style Federal Republic, but fail to apply some of the obviously positive practices and benefits.

  • State Governors, Attorney Generals and Controllers (think of a role overseeing both the Accountant General and the Treasurer or Commissioner of Finance) must stand for election on separate and independent tickets. The candidacies can still be party based.
  • Strict academic and professional requirements should naturally be attached to the legal and financial positions. (CFA, ACA or their international equivalents for the Finance role for instance).
  • Anything short of a legal and fiscal separation of powers at the state level is a continuation of the current system of having emperors and unquestioned rulers with full access to the treasury (except when Godfathers and Puppeteers are in charge and running the show, with similar sad outcomes).
  • Once we can achieve the Legal and Fiscal separation of powers at the state level then the fears of Governors hijacking the much needed State police for rogue and personal campaigns will recede.

 

  1. Additional policing and security structures are urgently needed. The security of lives and property is a basic requirement for normalcy in every society and is core responsibility of all levels of governments.
    • It is something close to insanity to have one federal police command structure for an extremely diverse nation of almost 200 million people. Efforts to supplement the police (Civil Defence for instance) often end up replicating the same methods and weaknesses, with a centralized command and control structure. These organisations see themselves more as another Armed Military force than policing organisations.
    •  The framework to prevent the abuse and rogue use of State Police can be easily put in place, and will include the funding model and the requirements for the constitution of the each State’s Police Management Board.
    • The Federal policing structure should be transitioned into a specialised investigation and intervention unit when necessary.  Separate and joint areas of responsibility can be determined, similar to the existing exclusive and concurrent setup in Nigeria.

 

  1. At the risk of duplicating work that has already been done by Messrs. Oronsaye and Co, we have way too many Ministries, Departments and Agencies, and many of these have no functional or economic benefit to the Nation. Agencies that are duplicating functions with little value added include the NSITF, EFCC and FRSC. Hopefully, rude jokes like the proposed National Carrier and the $500 million loan for NTA can now be simply laughed away.

 

  1. The allocation of forex should only be to tax paying corporations and individuals and should be pro-rated on the amount of income and sales tax paid in the previous fiscal year. There is no need for the near schizophrenic reactions with random controls and forex spending quotas whenever there is some pressure on oil prices and forex supply
  • Way too much easy money is made from arbitrage and ‘round-tripping’ by privileged insiders and rent seekers.. The official custodians of the nations’s forex (CBN) should collaborate with the FIRS on the list of VAT and Income tax payers.
  • Based on the list, and the projected amount available for distribution/sales every year, allocations should be made to the tax payers on a tax paid pro-rated basis. These tax payers should be notified of the amount of forex they are entitled to per period (quarterly or annually)
  • This will limit the wild pressure on official exchange rates and encourage and reward tax payment, while severely limiting forex arbitrage (rond-tripping). It will also make it easier for the CBN operate a managed float if desired.
  • An alternative or supplementary market for forex should be encouraged and developed. This will involve banks, BDCs and other players. A portion of Diaspora remittances, and other export proceeds and non-crude sources can be channelled to this market.

 

There is no vindication in being right about predicting (or more appropriately, forecasting) danger. It is more of a gut-wrenching, almost self-condemning feeling. Could I have done more to warn people?; or would dramatic action like protesting in front of Government offices or the National Assembly get the attention of the decision takers?

The COVID-19 pandemic will be curtailed, and its impact will subside. The world has reached its crude storage capacity, and there will be an uptick in demand at some point. I believe Nigeria will get at least one more window to undertake the much needed reforms listed above and more. The country must very quickly come to a realization that the crude oil it did not work for is meant to be a seed for economic development & not a meal to be greedily gobbled down, crumbs and all.

Maybe then, Nigeria might just have a chance to escape the looming Abyss.

 

Those who cannot remember the past are condemned to repeat it – Jorge Santayana

Brief profile of the author

Jide Olateju

Jide Olateju has had a passion for economic development and poverty reduction in Nigeria since his primary school days. This passion was a driving force behind his Graduate Degree in Development Economics from Yale University, and subsequent work on reform initiatives in Nigeria’s Ministry of Finance.

He has worked with Arthur Andersen, SAC Capital Advisors, and was part of the team that launched Konga Online Shopping, where he served as the first Vice President overseeing Finance, Administration and Human Resources.

He currently provides strategic advice to Technology startups, and supports a work-study mentorship for gifted graduates of public secondary schools in Lagos State.