…and falling oil prices to transform their revenue authorities
I. Executive Summary:
There are opportunities in every crisis, the outbreak of COVID-19 exacerbated by depressed oil prices creates an opportunity for Nigerian states to launch an IGR (Internally Generated Revenue) revolution. On the flip side, after struggling to react to the crisis, leading organizations are taking the time to reflect deeply on fundamental changes that have occured and are searching for ways to achieve stronger strategic positions. We believe that internal revenue authorities should be taking similar steps.
States are funded through a combination of money they receive each month from the Federation
Account Allocation Committee (FAAC) and their IGR. Excluding Lagos and FCT, 72% of the states’
2019 revenue came from FAAC. This underscores the need for states to diversify and increase their revenue streams. However, due to a number of factors progress in this regard has been slow.
The nature of the current crisis is exposing many of the underlying infrastructural deficits which require urgent investment (e.g., health care and education) – and which also threaten the states’ abilities to mount adequate responses.
The price of oil has dropped by 40% since January 2020. If, as happened in the past, FAAC decreases in proportion to the price of oil, Nigerian states will face a significant shortfall in 2020.
A noticeable trend is that various sectors of the Nigerian economy are slowly moving away from the status quo of physical interactions and towards digital solutions. While the promise of this shift has long been anticipated, the value has not yet been fully realized. Both organizations and consumers/citizens have been slow to change.
Despite the sobering picture laid out above, COVID-19 has had one very positive impact on
Nigerian society. It has dramatically accelerated the adoption of digital technologies for both personal and commercial uses. Due to the lockdown adoption of digital tools has been accelerated even by people who have been reluctant to make the switch. One example is banks have seen a surge in the use of e-channels – with many now considering ways to rationalize their retail footprints going forward. Again due to the lockdown, organizations have been forced to create work from home policies and figure out how to eliminate friction and remain productive in this new environment. Those who have succeeded in this regard have experienced net productivity gains.
We see an opportunity for Nigerian state internal revenue authorities to leverage the accelerated adoption of digital tools brought on by COVID-19 to facilitate the delivery of much needed services
(e.g., COVID-19 assessment, stimulus payments, contact tracing, etc.), and at the same time to build a platform for ongoing revenue enhancement programs.
States that are able to take advantage of this opportunity will be positioned to initiate an IGR revolution. While there is no one size fits all solution, we have developed a 6–step approach for developing a COVID, Tax, Engagement, Strategy (CTES) aimed at facilitating this revolution:
1. Conduct a realistic fact-based review of the state’s revenue potential
2. Deploy technology-driven solutions to extend needed services to citizens
3. Harness citizen’s data to identify engage addressable revenue segments
4. Reimagine the employee capabilities and modus operandi needed to incorporate and capitalize on cutting edge digital solutions
5. Follow a structured plan to drive an end-to-end digital transformation of the state’s revenue mobilization capability – including specialized applications along the tax value chain
6. Drive internal and external performance management with broad transparency
The situation facing Nigerian states is even starker. Most states have amassed large recurring obligations such as salaries, debt servicing costs, and pension contributions. With a few notable exceptions, Nigerian states do not generate enough revenue to cover their expenses and rely on volatile monthly federal allocations (FAAC), 70% of which comes from proceeds from the sale of oil.
During periods when oil prices drop, allocations shrink and many states are at risk of becoming insolvent. Nigeria’s system of fiscal federalism means that if and when states do go bankrupt, the federal government is responsible for covering their bills.
Oil prices fell by 47% between 2014 and 2015. In 2015, FAAC dropped by a similar proportion
(44%), and as a result, states were left unable to meet recurring obligations – civil servants’ salaries and pensions went unpaid – and were forced to seek bailout funds from the federal government.
Initiated under the administration of Bola Ahmed Tinubu, Lagos was the first state to drive a wide-scale revenue transformation. The transformation was spearheaded by bold moves in 3 key
Highlights of Lagos State IGR Transformation2
The following IGR enhancement playbook builds on the lessons from Lagos and other successful transformation programs. The use of technology and third party expertise (as was the case in
Lagos) can effectively supplement any underdeveloped capabilities and accelerate the process.
Similar approaches have been used recently by states including Ondo, Kaduna, and Akwa Ibom to grow their IGR at faster rates than achieved by their regional peers. Revenue services that incorporate technology are also instructive. For example, according to the World Bank, Togo used technology to shave 57 hours off the tax compliance time.
While the power of digital technology to improve revenue generation is becoming more universally appreciated, widescale digital transformation has been hard to achieve within Nigerian internal revenue authorities. Even within the states that have outperformed their peers, there is still a lot of room for improvement if digital tools are more fully incorporated.
COVID-19 has had a major impact on economic activity in Nigeria. It is unclear what the trajectory of the pandemic will be going forward, or how long the effects will linger, but the initial impact has been enormous. As of June 30th, 2020, the price of oil has dropped by around 40% from 2019 levels.
To address immediate needs, Nigerian policymakers have taken substantial action, but as the number of confirmed cases and deaths continues to rise, it remains unclear if these measures will be enough to contain the fallout.
Nigerian states are not in a much better position today than they were during 2015. If the past is any indication of what is to come, FAAC will drop substantially in 2020. A reduction of more than 40% in
US dollar terms is a conservative estimate. The devaluation of the Naira will provide some support, but we estimate that states could be facing a shortfall of around N 1.4 trillion for the year.
While the status quo in terms of FAAC has clearly been disrupted, broader disruptive trends have been accelerated:
1. Citizens’ (customer’s) behaviors and needs have shifted with the rapid adoption of digital technologies for a wide range of applications. The disproportionate impact of the virus on those over 50, has brought a surge of older, first-time users to digital solutions (e-commerce, digital health, payments, and other online transactions, etc.).
2. Civil servants have been forced to embrace new technologies to complete routine tasks – with work from home orders, even civil servants have had to embrace various remote working protocols and tools, e.g., zoom, and the organizations with which they work, have had to resolve underlying issues including availability of laptops and data connectivity.
3. Weaknesses in citizen services (healthcare, education, etc.) have been exposed – with demand for medical services at the center of the nation’s response to the outbreak the massive gap between supply and demand has become a daily topic of discussion as authorities and their private sector partners scrabble to stand-up isolation centers and increase hospital capacity. Similarly, the disparities of the Nigerian education system are being highlighted due to national school closures.
4. Individuals, families, and businesses are facing mounting financial hardship and anxiety around how to defend themselves against the virus. This is a rare moment in which demand from citizens creates a strong pull for engagement with government agencies in hopes of receiving much needed services and support.
Leaders are finding ways to leverage the trends occasioned by the current crisis to reposition their businesses for long-term strategic success. We see three distinct stages of an organization’s response to COVID-19. By now, most organizations should be starting to put their plans into action.
While responses and plans for the future vary widely across organizations, leaders are unanimous in their view that the crisis has accelerated the shift to a more digital way of life. Successful leaders are taking proactive steps to adapt to the new reality and are positioning their organizations to take advantage of the underlying opportunities accessible during this period.
Through discussions with leading corporate executives, we captured five key messages that describe a prescription for how to succeed in this new environment. Leaders should:
1. Adapt to the way that work has changed — As business restarts, things will likely continue to change, but it is not going to be less digital. Leaders must embrace the changes and use them to enhance the modus operandi and increase productivity/ decrease costs.
2. Listen and respond to customers and other stakeholders — Customer, supplier, and channel/ retail behaviors, needs, and purchasing decisions have changed during this period and will continue to change as the situation evolves. It is important to be first to know what stakeholders want and to deliver solutions to serve unmet needs.
3. Identify and bridge the gaps between existing capabilities and the new reality —
Assess the gap between the capabilities the organization has today and those that are needed going forward.
4. Remain vigilant and prepare for longer-term disruptive trends – Immediate disruption may just be the beginning and longer-term trends could have an even greater impact. In order to take advantage of major shifts, it is critical to track key trends and develop scenarios and for how and when to respond when they are triggered.
5. Reduce all unnecessary costs, but save room for strategic investments — This period should serve as a wake-up call. Leaders cannot afford to squander resources or other opportunities that this crisis presents to drive efficiency. Use data to bridge the gap between perception and reality and enable faster better decisions, allocate capital more efficiently, and reduce all unnecessary costs.
The lessons from financial services firms in general, and banks in particular, should be of utmost interest for internal revenue authorities. The level of maturity of the digital capabilities that banks had in place coming into the crisis has been central to the effectiveness of their responses.
Competitive positioning going forwards will be determined by the extent to which banks are able to continue to increase strength in their digital capabilities, the eventual quality of their risk assets, and the speed at which they are able to reframe their modus operandi to meet the requirements of this new normal.
Impact of COVID-19 on Banks And Their Immediate Response
IV. Covid Tax Engagement Strategy:
Given the sobering perspective set out thus far, it is urgent for Nigerian states to look at how they might transform their revenue mobilization capabilities. In order to take advantage of the rapid move to digital adoption, we propose a 6 step approach to developing a COVID, Tax, Engagement
Strategy aimed at facilitating this revolution:
1. Conduct a realistic fact-based review of the state’s revenue potential
2. Deploy technology-driven solutions to extend needed services to citizens
– Deploy a full range of human-centered design techniques to understand citizens
behaviors and needs (and how they have shifted as a result of the events of 2020)
– Lead the development of technology-driven solutions to deliver valuable services
3. Harness citizen’s data to identify and engage addressable revenue segments
– Identify and engage participants in the informal economy
– Use technology to better assess the tax base and optimize the cost of collection
4. Reimagine the employee capabilities and modus operandi needed to incorporate and capitalize on cutting edge digital solutions
5. Follow a structured plan to drive an end-to-end digital transformation of the state’s revenue mobilization capability – including specialized applications along the tax value chain
6. Drive internal and external performance management with broad transparency
About AACS:
AACS is an international consulting and principal investments firm defined by its purpose which is to “bring the winning edge by inducing you to think out of the box, and driving the construction of the capabilities to bring those thoughts to life“.
Our creed is a way of life that continually pushes you to walk roads less traveled be it in business, public service, community development, medical & scientific research, or global and human relations.
It is also important to note that a one-time disruption is not enough. Our creed demands that we stay prepared, consistently reimagine the possible and constantly strive to improve.
About The Authors:
Dr. Falil Ayo Abina – Ayo is the Chairman of AACS. He has over 25 years of experience in the banking sector rising from a Trainee Officer to the level of an Executive Director, where he led industry-leading teams and projects. Ayo is an acclaimed leader of many groundbreaking developments in the banking sector. He has served on the boards of public-spirited organizations including the Lagos State Security Trust Fund and Oyo State Security Trust Fund.
Lanre Lassise-Phillips – Lanre is an accomplished lawyer with a specialization in tax law. He has successfully litigated cases in the High Court, Federal High Court, and Court of Appeal. He currently serves as Chairman of the Tax Appeal Tribunal Lagos Zone.
Dr. Hatem Samman – Hatem is a leading economist and expert on issues that impact the economic performance of countries and businesses. He is frequently quoted and asked to appear on prominent media outlets including The Financial Times, The BBC, MSNBC, and Emirates 247.
Rafiu A. Abina – Rafiu is the Managing Partner of AACS. He has extensive experience partnering with investors and management teams to achieve results and execute new business opportunities. He has led numerous growth strategy and commercial and operational performance enhancement engagements with consumer-facing businesses in Silicon Valley, the GCC, and West Africa.
If you would like to discuss this report, please contact us at info@aacs.ng
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