Revisiting How Nigeria’s Super Agencies Are Funded
Postscript by Waziri Adio
The road to hell, indeed, is paved with good intentions. To ensure that some strategic parastatals and agencies have adequate and predictable financial resources, the Nigerian government allows some of them to take a portion of the revenue they collect on behalf of the federation or to be assigned a percentage of some key revenue handles or to have the powers to charge fees and fines, most of which they keep.
This has unwittingly created a few super agencies—aptly described as governments within the government. These super agencies are awash with more cash than they actually need and they are largely disposed to capture and profligacy. Most times, some of these organisations prioritise revenue-generation at the expense of more important parts of their mandates or they impose unnecessary costs on businesses, costs that are ultimately passed on to the final consumers, and at the expense of national competitiveness and economic growth. Perverse incentives sit cheek-by-jowl with unintended consequences. In trying to solve a legitimate problem, we have created a myriad of illegitimate others.
This suboptimal and leaky arrangement needs to be revisited for many reasons, especially because of the urgent need to boost public revenue, block revenue leakages, reduce budget deficits and borrowing, and spend public resources more prudently.
In the first category are agencies that are allowed to charge costs of revenue collection. Three agencies fall into this category: the Federal Inland Revenue Service (FIRS), which keeps 4% of non-oil taxes; the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which takes 4% of oil and gas royalties, signature bonus and others; and the Nigeria Customs Service (NCS), which charges 7% of duties, excise, fees and some federation and non-federation levies.
From the recently approved 2024 to 2026 Medium Term Expenditure Framework (MTEF), these three agencies will get the following as costs of collection in 2024 alone: NUPRC will receive N266.24 billion; NCS will earn N277.27 billion; and FIRS will collect N317.58 billion (this is after removing N75 billion for FIRS tax refunds). In 2024, the three super agencies will receive N861.49 billion as against the N528.75 billion kept for them in 2023, an increase of 63%. For context, each of these executive agencies, in 2024, will receive more than the statutory allocations for the National Judicial Council (NJC) and the National Assembly (NAss), two distinct arms of government, which in 2024 have been allocated N165 billion and N197.93 billion respectively.
In 2024, NUPRC is scheduled to receive 134% of the allocation to National Assembly and 161% of NJC’s. Also, the NCS is going to earn 140% of the allocation to the National Assembly and 168% of NJC’s provision. On its part, the FIRS is billed to collect 160% of the funding for National Assembly and 192% of the amount earmarked for the NJC. For context also, these super agencies—NUPRC, NCS and FIRS—are three individual agencies, not even whole ministries in the executive arm. (Some ministries, such as the Ministry of Women Affairs and the Ministry of Tourism, will receive just between N10 billion and N11 billion in 2024, each less than 5% of the allocation to each of the super agencies.)
NNPC Limited is another organisation that can be put in the first category. Following the passage and signing of the Petroleum Industry Act (PIA) in 2021 and NNPCL’s incorporation same year, the national oil company will receive the following for the responsibilities it carries out on behalf the Federation: 30% of the profit oil from Production Sharing Contracts (PSCs) as management fee, 35% of profit oil from Joint Ventures (JVs) for reinvestment, and 20% of the dividends of the federation’s 49% equity in the Nigeria Liquified Natural Gas (NLNG) Limited.
According to the MTEF, NNPC Limited received a total of N191 billion from the federation in 2023. In 2024, the company is scheduled to receive N776.45 billion, an increase of 306%. What NNPCL is expected to receive in 2024 is 393% of the statutory allocation to the National Assembly and 470% of the allocation to NJC. It is still worth reminding ourselves again that the last two are whole arms of government: the legislative and the judicial arms respectively.
For extra context, it might be worth noting that NNPCL’s expected take in 2024 is almost double of 2024 average state budget of N442.17 billion. (According to StatiSense, 36 states have presented a total of N15.918 trillion as budgets for next year, ranging from N159.5 billion in Ekiti State to N2.25 trillion in Lagos State.) Interestingly, NNPCL’s commission is projected to reach N911.4 billion in 2026. Important to bear in mind that the cuts to the company are separate from the federation’s JV contributions and other fiscal deductions (put at N4.49 trillion in 2024 in the 2024 to 2026 MTEF), and are not inclusive of subsidy deductions since petrol subsidy “is gone.”
In the second category are agencies that receive whole or a portion of specific revenue they don’t even collect or generate. In 2024, some of these agencies are scheduled to receive the following amounts: N27.35 billion to the National Information Technology Development Agency; N29.45 billion as 5% sugar levy to the National Sugar Development Council; N121.26 billion as gas flared penalties to the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), this is less NUPRC’s 4% cost of collection from gas flared penalties; and N130.84 billion as 1% of FG’s share of the Federation Account and some portions of other revenue handles to the National Agency for Science and Engineering Infrastructure (NASENI).
Others include: N263.59 billion as 3% of VAT, 10% of Ecology and Derivation and 10% of FAAC allocation for the North East states to the North East Development Commission (NEDC); N324.84 billion as 15% of FAAC allocation to NDDC states to the Niger Delta Development Commission (NDDC); and N672 billion as 2% Education Tax (minus cost of collection by FIRS) to the Tertiary Education Trust Fund (TETFUND).
In the third category of super agencies are those that derive internally generated revenue from fees, levies and fines. According to Section 22 of the Fiscal Responsibility Act 2007, these agencies are expected to keep 20% of their operating surplus (excess of revenue over expenditure) in their general reserve fund and remit the remaining 80% into the Consolidated Revenue Fund (CRF) of the Federal Government. However, the key here is how expansive expenditure can be. The 2020 Finance Act, followed by a Finance Circular of 20 December 2021, disaggregated the revenue-generating agencies and put a cap as follows: organisations fully funded from the budget should remit 100% of their IGR while those partially funded by the government should limit their expenditure to no more than 50% of their IGR and remit the remaining to the CRF, and agencies that are fully self-funding should limit their expenditure to no more than 50% of their IGR, keep 20% of their operating surplus and transmit 80% to CRF.
From the above, it is clear that there have been some attempts to straighten out this last set of super agencies, and that is assuming compliance has been total and uniform. But there is still more work to be done. And for this we should be grateful to Mr. Babatunde Irukera, the CEO of the Federal Competition and Consumer Protection Commission (FCCPC), for his recent rich insight. According to Irukera, FCCPC generated N56 billion as IGR in 2023, 90% of which came from penalties against businesses and companies. Out of the N56 billion, FCCPC generously remitted N22.4 billion to the Federal Government. This has earned him some PR points.
But the difference between income and remittance indicates that the agency retained N33.6 billion or 60% of its IGR. Based on the assumption that FCCPC is now fully self-funding, the N33.6 billion retained was probably arrived at as follows: N28 billion representing 50% of revenue retained to cover expenditure plus 20% or N5.6 billion of the operating surplus of N28 billion also retained. The rub, however, is this: in 2017, according to Irukera, FCCPC received only N1 billion from the FG and raised N154 million as IGR, totalling N1.154 billion. So, in what planet should a public organisation’s revenue go from N1.15 billion to N33.60 billion within six years, an increase of 2,812%?
This naturally leads to why drowning a few government agencies in cash creates more problems than it solves. The first issue is that of perverse incentives. Once agencies are allowed to keep a portion of the revenue they generate, they, rationally, put all their energies on revenue maximation no matter the cost to others and even if this is at the expense of their overall effectiveness. This has led to a situation where the first impulse of regulatory agencies is to impose hefty fines, and with little or no opportunity for redress. The concept of light-touch and growth-enhancing regulation, pronto, goes out of the window. Regulators begin to terrorise, extort and stifle businesses, increasing the cost of doing business in the country and invariably abbreviating consumers’ welfare.
Relatedly, intense focus on revenue crowds out other key mandates of such institutions. For example, trade facilitation and border patrol are important functions of customs services all over the world. But the only thing that NCS has the incentive to focus on and talk about is how much it has contributed to the Federation Account. Also, anti-trust was added to the remit of the former Consumer Protection Commission (CPC) to give it more heft. That’s how FCCPC was born. As redefined, the agency should be undertaking serious studies and taking consequential actions on monopolies and abuse of market power, especially in sectors prone to limited competition on account of natural or structural issues. For example, FCCPC will be more useful to consumers and to the economy by addressing market power in the monopoly-prone cement sector than by beating its chest about how much money it has raked in from imposing fines on businesses and how much it has kept and remitted.
There is something fundamentally wrong about conceiving of regulatory institutions in revenue-generating moulds. Regulation, an important state function designed to address different forms of market failures, suffers under such a warped conception. Some of our regulators also get a cut of the utility rates that they set. This amounts to a conflict of interests. It will be important to decouple financial incentives from regulation. Let regulatory agencies focus strictly on the technical aspects of regulation, without an eye on possible returns.
The second major issue is that these cash-saturated agencies become founts of mind-blowing profligacy and sleazy vehicles for patronage and rent-extraction. A variant of Parkinson’s Law states that expenditure always rises to meet income. In short: more money in this form leads to more expenses, not more sense. And this is exactly what happens to these agencies. Like typical nouveau riches, they splurge their extra cash on frivolities and white elephant projects, including on gleaming headquarters and regional offices, official cars, local and foreign trainings and sundry projects of dubious value. Appointive, supervisory and oversight authorities and current and prospective heads of such agencies see such agencies as juicy postings which must translate to jobs, contracts, and slush funds. The ‘juicy’ agencies are thus usually theatres of internal and external distractions, instability and graft.
In most instances, such agencies easily get special salaries and allowances approved for them, with the usual line that such would be funded from their IGR and thus would be of ‘no financial implication to the Federal Government.’ In short order, the existence and fortunes of super agencies thus create two additional sets of issues: one, a segregated public sector where most civil servants are paid peanuts and where a few earn so much, sometimes even more than those in the private sector; and two, the quest to create more super agencies as every agency and its enablers strive to contrive some IGR or corner a percentage of some revenue handles.
For example, NASENI had a budget of N4.45 billion in 2021. NASENI’s budget ballooned by 900% to N44.5 billion the following year because it got some statutory earmark. That same NASENI is on line to receive N130.84 billion in 2024. Such otherworldly transformation has happened to some other super agencies before our very eyes, including the former Department of Petroleum Resources (DPR), which got a presidential fiat to earn 4% cost of collection of some oil revenue, a largesse that subsequently got formalised as DPR got incarnated into NUPRC via the PIA. That is the third problem: the unending quests by other agencies to get into the super league.
The fourth problem is that of opportunity cost: the sumptuous sums going to and being frittered away in these super agencies and their wannabes are the resources that could have been used to reduce our reliance on borrowing to fund our budget and are resources not available for other parts of the public sector, especially to finance basic public services (including at the subnational levels). There are estimates of trillions that could be more prudently and accountably managed floating around and leaking out of these super agencies.
For the reasons and examples cited above and others, there is an urgent need to reform how these agencies are funded. One option will be to drastically reduce the percentage charged as costs of collection or to cap the absolute amount paid to these agencies. The Finance Act or amendment to the laws of the agencies can easily take care of this. Another option will be to abolish the concept of operating surplus or agencies receiving a fixed percentage of CFR and other revenue handles and to bring all agencies within appropriation and ensure that all expenditure lines are justified based on absolute need and national priority, not on the dodgy principle that money has been earned and can be spent because ‘it has no financial implication for the Federal Government’. And yet another option will be to have a minimally incentivised central revenue-collection agency that is also funded strictly through the budget and based on need.
There won’t be shortage of options to address this issue, if there is the will to tackle it. Do not for one minute assume that political authorisers are not aware of the problem or that these organisations are the way they are by accident.
