The coming revenue crisis

There are lots of conflicting signals and statements about the state of the Nigerian economy. One thing however not in dispute is the declining rate of our foreign reserves.

For an import dependent economy, this is a very important measure, as it provides in combination with other factors, an early indication of the likely direction of the exchange rate and local inflation.

At present, the key foreign exchange earner for Nigeria is oil and gas. However, as shown in recent times, there are so many points of leakage.

The key areas of leakage in the public domain include lost production due to vandalisation of hydrocarbon assets, crude theft, and opaque commercial structures such as the crude swaps, strategic alliance agreements with the Nigerian Petroleum Development Company (NPDC) the subsidy regime and subsidy administration.

However, there are two emerging points of leakage which could further add pressure to government’s ability to meet its commitment in the administration of the country.

First, is the issuance of tax holidays to the new emerging oil and gas companies. Expert opinion on the tax holidays indicates that it has no basis in the current tax laws of the country. The key reason being that such holidays are to be granted to Company Income Tax Act (CITA) companies and not to companies or sectors taxed on PPT basis. The application of the law implies that oil revenue streams should not benefit from tax holidays. However, midstream gas revenue, which are currently CITA based, and which are tied to sustaining the multiplier effect of power generation, could be granted such incentives. The revenue implication for the government could be significant since these are incomes that the Independent Oil Companies (IOCs) would have paid into the Federation Account at Petroleum Profit Tax (PPT) rates of 85% but would forego in the next couple of years.

The second point of potential revenue loss could come from the sale of large onshore oil and gas assets to entities with no track record of running or operating complex hydro-carbon assets. It is like a

Manchester United (a great asset) without the skilled hands of Sir Alex Ferguson and his coaching crew, or better still, allowing untrained hands to fly a jet. The key skills in providing an integrated platform for

enhancing and sustaining production is not trivial. In our current world, approving authorities should not endorse the transfer of such key and complex assets to companies lacking in skills and requisite experience. It is like asking the Dutch to let go of their most

strategic asset such as the Groningen field, to trading companies. Aside the additional pressure in terms of loss of revenue, the odds are much higher for inexperienced players to create additional problems in terms of operational accidents such as was seen in the Macondo spill in the Gulf of Mexico, which could lead to significant environmental damage and costs.

In conclusion, there are early warnings as to the impending revenue crisis to the country. There is no better time than now for the managers of our economy to act. Hopefully, this is not akin to asking turkeys to vote for Christmas.