Time to End Cost of Collection for Federal Agencies

Postscript by Waziri Adio

Over time, there has been some subdued debate about the appropriateness of rewarding some federal agencies with a portion of the revenues that they collect on behalf of the Federation. The commission received by these agencies is called the cost of collection. It is deducted at the monthly meeting of the Federation Accounts Allocation Committee (FAAC) before federally-collected revenues are shared to the three tiers of government and other statutory recipients.

The three federal agencies that charge costs of collection on Federation’s revenue are: the Nigeria Customs Service (NCS), which receives 7% of customs levies and duties; the Federal Inland Revenue Service (FIRS), which gets 4% of non-oil taxes; and the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which receives 4% of royalties, signature bonus, fines and other oil and gas revenues.

The state governments, and some commentators, have been objecting, on and off, to the practice of paying commissions to these super agencies or to the staggering amounts paid as commissions. On their part, the agencies have not only been justifying the practice but have also been asking for higher percentages. The Federal Government (FG), which is an indirect beneficiary of this practice, hardly gets into this debate. Recently, however, a presidential committee floated the idea of reducing the number of agencies collecting revenue for the Federation to one and slashing the cost of collection to 1% or less.

The proposal by the committee might seem radical, but it is not far-reaching enough. The concept of cost of collection might have been well intended and might have served a useful purpose in the past, but there is ample evidence now that it is an approach that is significantly broken in practice. It is problematic and flawed, enabling graft, waste and misallocation of scarce resources. It cannot be fixed with a mere tinkering on the margins. It needs to end.

Granting costs of collection to government agencies is not a universal concept. It has also not always been part of Nigeria’s revenue collection and disbursement practice. The Department of Petroleum Resources, DPR, the precursor of NUPRC, started earning 4% cost of collection only nine years ago, courtesy of a 2014 presidential fiat. Even FIRS got the status via its 2007 establishment act, which charged the National Assembly with the responsibility of determining the percentage.

Cost of collection was invented just a few decades ago to address some challenges. These included: the need to have an easy mechanism for reimbursing the agencies for the reasonable costs they incur in collecting revenues on behalf of the Federation; the need to motivate the agencies to provide optimal services to the Federation; and the need to ensure that the agencies have adequate and predictable resources for their operations.

These are legitimate considerations, still. It is difficult to argue against the imperatives of reimbursing reasonable costs, incentivising performance and ensuring adequate provisioning. But in trying to address some challenges, we ended up creating a host of others because we didn’t think deeply about the different ways in which things could play out or we didn’t spend enough time reflecting about unintended consequences; and if we did, we failed to erect adequate safeguards or install effective circuit-breakers. Some checks exist on paper, but they are too flimsy. And the benefits that have accrued to the three agencies, especially in the last five years, are not compensated for by the distortions and dislocations that the practice has engendered. We shall return to this shortly.

A recent report by Agora Policy (a think tank which I lead) puts on stark display the incongruities of the cost-of-collection approach. Titled “Why Nigeria’s Cost-of-Collection Approach is no Longer Tenable,” the report can be accessed here: https://agorapolicy.org/research/policy-platform/163-why-nigerias-cost-of-collection-approach-is-no-longer-tenable.html.

According to the report, the cost of collection for January 2024 was as follows: N43.35 billion to FIRS; N18.68 billion to NUPRC; and N16.27 billion to Customs. (January 2024 was picked because it is the most recent month for which the National Bureau of Statistics, NBS, has disaggregated data on FAAC disbursements.) The analysis shows that no state government received a gross allocation as much as what FIRS got as cost of collection for the month. (Gross allocation, not net allocation, was used for the analysis because it is the total amount due to the entities before deductions are made and comprises statutory allocation and VAT.)

Delta State, the state with the highest gross allocation in January 2024, received N39.59 billion. This indicates that FIRS, the agency with the highest cost of collection, not only received a higher amount than any of the 36 states of the Federation but also got 109.49% of what the state with the highest gross allocation received. (It must be noted that January 2024 is not an outlier in this sense, as what FIRS received in June and July 2023 was 138.73% and 142.66% respectively of Delta State got in those months, and Delta State was still the state with the highest gross allocation in those months).

In January 2024, only five states each received gross allocations more than NUPRC’s N18.68 billion cost of collection: Akwa Ibom, Bayelsa, Delta, Lagos and Rivers. Remarkably also, 31 states each received less than the N16.27 billion that Customs got as cost of collection for the month. Customs got the least cost of collection of the three agencies, and the amount it got was higher than what each of 31 states received as gross allocation for the month.

But the real mind-blowing part is that the amount received by the three federal agencies in January 2024 was higher than what each of four zones of the Federation got as gross allocation for the month. According to the report by Agora Policy, the total cost of collection received by FIRS, NUPRC and NCS in January 2024 was N78.30 billion while the allocations to the geopolitical zones were as follows: South-East (five states), N47.75 billion; North-Central (six states), N55.58 billion; North-East (six states), N56.60 billion; North-West (seven states), N76.09 billion; South-West (six states), N86.60 billion; and South-South (six states), N141.85 billion.

Put in a different way, this means that the N78.30 billion cost of collection received by the three agencies as a percentage of the gross allocations to the geo-political zones translated to: 163.98% of the allocation to the South-East; 140.88% of allocation to the North-Central; 138.84% of the allocation to the North-East; 102.90% of the allocation to the North-West; 90.42% of the allocation to the South-West; and 55.20% of the allocation to the South-South. As stated by Agora Policy, “The South-South and South-West got more than what the three agencies received only on account of 13% derivation for the oil producing states and the allocation of N21.28bn as the net allocation to Lagos State for Value Added Tax (VAT).”

It is difficult to find a good-conscience justification for why just three federal agencies will receive commissions from the Federation higher than the gross allocations to each of four geopolitical zones with five to seven states and millions of citizens to cater for. It may be worth remembering that these are just three agencies of the Federal Government, and not ministries or even separate arms of government. This should erase any doubt about how absurd the cost-of-collection principle has become.

The agencies and their advocates have argued that the Super Three are simply being rewarded for their contributions to the Federation—that the agencies are receiving more in commission because they are bringing in more money to the Federation. This sounds like a decent argument, but it is not. There is something fundamentally wrong with each of the agencies getting more money from the Federation than most of the states or with the three agencies combined getting more money from the Federation than each of four zones. There is no way of spinning this that it will come anywhere near right for agents to be receiving more money than their principals.

Also, there is something that doesn’t smell right about federal agencies being conceived as or turned into commission agents. These are government agencies, not private contractors or consultants. They are collecting revenues as part of their mandates, not to turn a profit. So, the idea of giving them a fixed percentage for doing their work is out of place. Surely, there should be a way of incentivising optimal performance without creating mega agencies that are better resourced than states or zones, and without flooding them with excess money which they will always find a way of expending or may be used as slush funds.

In many instances, all that these agencies do is to undertake assessments and reconciliations based on parameters already set in law. It is difficult to justify the costs incurred in, for example, getting oil and gas companies to pay royalties and signature bonuses. Additionally, increases in revenues collected (and the cost of collection charged) are not necessarily related to effort. Some revenues indexed to foreign currencies will go up just because of the massive depreciation of the Naira, not because the agencies have necessarily put in more efforts. A good example is that revenues from import duties will likely go up because of the increase in Customs’ exchange rate even when cargo traffic might have declined. So, the agencies will keep trumpeting how they have increased Federation revenue and will get windfalls due to monetary policy, which is out of their remit.

The report by Agora Policy interrogates the claim on higher commission based on higher revenues.  It examines publicly available data on FAAC disbursements for a five-year period (February 2019 to January 2024). Its analysis shows that while revenues have indeed increased significantly, the cost of collection has increased at a higher clip.  

The report states as follows: “In February 2019, the gross FAAC revenue was N619.86 billion and the total cost of collection was N13.58 billion, or 2.19% of the gross allocation. In January 2024, the gross revenue was N2.07 trillion while the three agencies received N78.30 billion, or 3.79% of it. On the face of it, the absolute value of the cost of collection is merely rising with gross revenues. But this is not exactly so: while the gross revenues between February 2019 and January 2024 increased by 234%, the cost of collection for the same period increased by 477%.

“So, the cost of collection has increased in more than corresponding proportion than the gross revenue has. If the cost of collection had remained at the 2.19% level of February 2019, the sum of N45.33 billion (instead of N78.30 billion) would have been due to the agencies as the cost of collection in January 2024. This means that the agencies would have received 42.11% less than they did this January.”

The report went on to show how the changes in the structure of FAAC revenues in the last five years have been to the advantage of the three agencies at the expense of the three tiers of government, the six zones and the 36 states. According to the report, none of the 36 states in February 2019 had gross allocation lower than the N3.19 billion received NUPRC, the agency with the lowest cost of collection at the time; and all the zones received higher than the total cost of collection of N13.58 billion (which was just 60.54% of what the South-East received and 18.30% of what the South-South got, the zones with the lowest and highest respectively; compared to 163.98% and 55.20% respectively of January 2024).

Also, the total cost of collection as a percentage of FG’s gross allocation rose from 5.27% in February 2019 to 19.22% in January 2024. For the same period, the cost of collection jumped from 7.99% to 20.63% of the gross allocation to the 36 states; and from 10.63% to 28.16% of the gross allocations to 774 LGAs. Without a doubt, the cost of collection has increased not only in terms of absolute number but also in percentage. Revenue distribution is a zero-sum, meaning that the more the agencies receive, the less that is available for the owners of revenues, individually and collectively, to share and to fulfil their obligations.

The issues with the cost of collection are beyond the inversion of the relationship between supposed agents and their principals. The issues are well documented, including in my two-part series on super agencies. The cost-of-collection approach to funding these agencies creates all sorts of distortions, distracts some of the agencies from their core duties, and encourages wasteful spending even at a time we can least afford such.

The 2024 budget of 62 Government Owned Enterprises is a homage to this out-of-tune extravagance. NUPRC budgeted to spend N229.82 billion in 2024 which is almost double its total expenditure of N117.74 billion in 2023, according to its 2023 annual report. If NUPRC has had to stick with its 2023 expenditure or be allocated a little bit more, it is inconceivable that it would have planned to spend N19.51 billion on its head office or N50.43 billion on welfare packages (apart from personnel of N65.21 billion) or N71.09 billion for sequestered projects under its capital budget.

The 2024 approved budget for FIRS is N446.34 billion. In 2021, the total expenditure for the same FIRS was N171.22 billion, which is slightly lower than the N171.29 billion that it plans to spend on personnel alone this year. Within three years, the budget of FIRS will increase by 160.68% because the cost of collection is treated as earned income, and because when money is available it has to be spent, a perfect illustration of a variant of the Parkinson Law about expenses rising to meet income or available fund. It is also well known that these agencies become centres of patronage and rent, and are treated as super special by authorisers and those with oversight responsibilities over them.

A government really keen on cutting costs can easily save between N250 billion to N500 billion in the budgets of just these three agencies, if it gives them a standing order to budget in tune with the difficult period the country is passing through. The money could be saved or could be repurposed for more pressing needs. Everything has an opportunity cost. The money being frittered away in the super agencies on offices, cars, furniture, trainings, travels, staff welfare, jobs and contracts is the money not available to be spent elsewhere, especially on basic necessities like hospitals, classrooms, and even potable water (imagine people dying of cholera at this time and age and in places like Lagos).

It is important to say that I believe that these agencies are carrying out important responsibilities for the Federation and that they should be adequately funded to do their jobs well. However, it is the Federal Government, and not its agencies, that should be entitled to an agreed and a capped refund of the cost it incurs in collecting revenue on behalf of the Federation. And it is the FG that should fund these agencies and its other agencies well, based on justifiable and reasonable needs, not on commissions that they can spend as they wish.

The FG can give these agencies performance-based bonuses in addition to their needs-based appropriation anytime they exceed difficult targets. To ensure predictable funding, the FG can treat the budgetary allocations of these agencies as a first-line charge, as it is done for the National Assembly and the judiciary. But the perverse incentives and the distortions embedded in the cost-of-collection approach need to be addressed. And that can’t be done with some cosmetic tinkering. The challenge, however, is whether the administration sees the untenable status quo as an urgent problem to be solved or as an opportunity to take advantage of.  

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