Driving economic growth through legal innovations
THE ADDRESS BY OLISA AGBAKOBA AT A MEDIA EVENT ON ‘INNOVATING LEGAL TOOLS TO BRING NIGERIA OUT OF ITS REVENUE CRISIS,’ HELD IN LAGOS ON WEDNESDAY, FEBRUARY 9, 2022.
Nigeria is facing enormous economic challenges and needs massive revenue to meet existing obligations. The population is outgrowing the economy and critical steps are necessary to deal with revenue failure. The public sector contributes little in terms of revenue but can contribute a lot in terms of policy enablers –ease of doing business, legal innovations, etc. What follows are legal/policy innovations on how government can generate revenue.
Last year, Nigeria made ₦970.3 Billion from oil, ₦1.6 Trillion from non-oil taxes and ₦2.8Trillion from a cumulative of other sources. In total the country brought in ₦5.5 Trillion in revenue. Out of that ₦5.5 Trillion revenue, ₦4.2 Trillion was spent on servicing (repaying) debts from January to November. What was left after paying debts was ₦1.3 Trillion. If you recall, the 2021 national budget was N13.57 trillion. This meant we had barely N1.3 trillion to run the country and needed an extra ₦12.27 trillion. Where did we get it? Yes, you guessed right – we borrowed.
In 2021 Nigeria spent ₦12.56 trillion – most of which were borrowed money spent on things that do not bring money back (salary, fuel subsidy, etc). The situation is not going to be fundamentally different in 2022. The Federal Government plans to borrow to finance the N6.39 trillion deficits in the 2022 budget. The NNPC has submitted a budget of 3 trillion for fuel subsidy.
If Nigeria was a man who makes ₦100k a month, he borrows ₦5 million every month to pay for the light bill and running of the house. See the picture now? Scary, isn’t it? The Excess Crude oil account (which is like our savings) is almost empty. So not only does this man borrow like a crazy person, he has no SAVINGS for emergencies (like if his boss decides not to pay salary). The rule is we should NEVER borrow more than 40% of our GDP.
We are at 36.9%, 3.2% more and all the alarm bell goes off. Now – imagine if our revenue keeps dropping, and the debt keeps increasing. And one day – voom – 3.2% crossed! Then we will really have a debt problem. Since we currently borrow to pay salary, when the alarm goes off – further borrowing is a disaster: The Government will struggle to pay salary. (This is scary considering that the Government is the biggest employer of labour in Nigeria).
More Taxes will be imposed to raise money, including the tax on Goods which will increase the prices you pay on foreign rice for example. Our currency will get further devalued. Which means things will get even more expensive in the market. The Minister of Finance has done a lot in terms of introducing new revenue streams in the Finance Act but a lot more needs to be done. As we go into another election season, it is important to engage politicians putting themselves forward for elections on how they intend to resolve Nigeria’s revenue crisis.
At OAL we have developed legal proposals that can generate N100 trillion.
Innovative and transformational tools are needed to bring Nigeria out of this revenue crisis. One of the critical tools to achieve this which is often ignored is the law. Law has tools to extract revenue and create jobs. We have developed a proposal to show how law can be a primer of innovation and transformation of the Nigerian economy. The proposal will review critical legislation, policies, and executive orders that can generate N100 trillion and 5 million jobs.
The proposal focuses on a few economic sectors: Trade policy, Maritime, Aviation, Land Administration, Financial Services, Space, Digital Economy, E-commerce, Entertainment, etc and can be extended to other sectors. Below are snippets of our policy and legislative proposals.
Nigeria is a very big country with over 200 million people but is a dumping ground for foreign goods because we have no national trade policy and legislation.It is important to enact legislation that will support the Nigerian Office for trade negotiation (NOTN). To support local produce, the starting point is to enact trade remedies legislation. Trade remedies legislation imposes anti-dumping duties on dumped products.
There is also counter-veiling special duties measures imposed on exports into Nigeria subsidized by a foreign country. The trade remedies legislation will also prohibit imports if it is adjudged that they will cause material injury to local industries, for example by impeding growth. A new trade policy and legislation can generate over N 1 trillion annually including massive jobs creation.
Foreign aircraft dominate the Nigerian airspace and earn well over N1 trillion annually to our exclusion. What is needed is a policy that will generate and lock in income from aviation in Nigeria. Nigeria can generate over I trillion annually by simply passing a Fly Nigeria Bill. A Fly Nigeria Act will ensure that public funds to purchase air tickets must originate and fly on a Nigerian carrier. The Fly Nigeria Act will create an instant market of goods, passengers, and services for our national carrier. Jobs will be created and revenue generated to the advantage of the economy.
This is potentially the largest economic sector outside of hydrocarbons. A recent report by a Dutch consultancy firm, Dynanmar, shows that Nigeria loses about N20 billion daily at the ports, which at an annual value, is about N7.2 trillion annually. Nobody is quite sure about the figures from other sectors – Legal, Banking, and Insurance. In the Oil and Gas industry, for example, all the major legal work (which is well beyond $1 billion in value) by the major IOCs are carried out by foreign retained law firms.
These foreign law firms are engaged in extensive legal support for the IOCs- from advisory to contract drafting, consulting, arbitration, mediation, cross-border litigation, and the various legal relationships arising between the government of Nigeria and the IOCs in relation to oil well disputes, Production Sharing Contracts and legal issues related to NAPIMS. The only connection a handful of Nigerian law firms have with legal services in this industry is when they are subcontracted by foreign law firms to provide data support and advisory on the status of Nigerian Law.
So, generally speaking, the legal services spend, which is revenue generated and accruable, ought to be invested in Nigeria with the relevant multiplier effects, such as job creation and development. In Banking, funds accruable to Nigeria in relation to crude oil production are all domiciled in foreign banks without interest, sometimes for months before remittance to the Central Bank of Nigeria.
No Nigerian bank plays any direct, significant, and pivotal role in the oil and gas industry mainly because Nigeria’s huge financial accruable is sent offshore to banks like Barclays, J.P. Morgan Chase & Co., Morgan Stanley, Credit Suisse Group, etc. Additionally, the Insurance Industry plays a very insignificant and limited role concerning the Maritime Industry in Nigeria. As far as we know, there are no major marine insurance underwriters that cover risks for the over 15,000 foreign vessels in Nigerian cabotage waters.
Noteworthy is the fact that no Nigerian marine insurance company is involved in insurance underwriting in respect of the over 1000 oil rigs in Nigerian waters. Indeed, the oil rigs have formed a cartel of tax avoidance to NIMASA. We currently represent NIMASA in a tax avoidance case brought by oil rig companies against NIMASA; NIMASA has confirmed to us that they do not collect tax from oil rigs.
The revenue attributable from oil rigs is estimated at N2 Trillion yearly, approximately amounting to about 15% of the National Budget. The Shipping sector does not fare any better; no Nigerian vessel carries a drop of Nigerian crude as the freighting of Nigerian crude is firmly in the hands of IOCs. Regrettably, the legal regime as embedded in NIMASA and NNPC legislation seems to support the control of crude oil freighting by foreign vessels.
Available crude oil cargo will support the viability of a National Fleet of Vessels. This process is possible by reviewing and implementing the existing legal framework.
Nigeria is one of the 8 countries that have a continental shelf permitting it to extend its EEZ from 200 miles to a further 150 miles. Nigeria’s coastal waters contain diverse species of fish and other aquatic resources, which contribute to food and economic security.
Recently, the Nigerian House of Representatives noted that the country loses $70 million each year to illegal fishing. This includes loss of license fees, revenue from taxation, and the value that could have been accrued from legitimate fishing by local vessels. Other sources estimate the cost of illegal exploration of our waters as much higher, citing anywhere between $600 million and $800 million each year.
The variation in these figures reveals the difficulties in calculating the costs of clandestine activity. Vessels from China, the European Union, and Belize are notable for illegally exploiting Nigerian waters. Despite varying estimates, all sources agree that the economic losses caused by illegal exploration in Nigeria are high. Unfortunately, Nigeria has failed to enact the Maritime Zones Bill to take into account the huge aquatic resources estimated at N 10 billion and currently exploited.
The financial services sector (which includes lenders, insurers, banks, investment firms, and pension funds) is the artery through which money flows in the economy.However, the Nigerian Financial Services is not operating optimally because many key legislation and institutions do not exist. For example, there is no legislation to compel the banks to give credit to the real sector and consumers and stimulate the economy. Banks are engaged in short-term credit lending. Banking legislation that delivers credit to the economy is needed to support a viable economy. In the United States of America (USA), the Glass – Steagall Act and Frank-Dodd Act focused banks on the proper role to lend to the real sector and consumers, at low-interest rates to stimulate the real sector. The Nigerian banking laws require a major overhaul. Many vital institutions ought to be in place, like the Credit Guarantee Agency, a capitalized Development Bank, and a Prudential Authority like in the UK. These institutions and legislation can inject over N10 trillion worth of credit into the economy.
Nigerian fintech startups raised almost $800 million in 2021. The industry is projected to generate $1 billion in investment and bring in crucial foreign currencies. For the government to benefit the institutional and regulatory frameworks need to be streamlined. The National Assembly should pass holistic, unified legislation for Fintech in Nigeria. The Nigeria Startup Bill may be the silver bullet. The focus should be on creating a business-friendly environment for fintech providers to generate revenue.
Space is the next investment arena. The global space industry has evolved over the years. The first space race was by states – a 20th-century competition between two Cold War adversaries, the Soviet Union (USSR) and the United States of America (USA), to achieve superior spaceflight capability.
The second space race is more complex and multifaceted than the first. It is driven mostly by commercialization and led by emerging economic powers like China, India, the United Arab Emirates, and risk-taking private citizens like Elon Musk, Jeff Bezos, Richard Branson alongside other entrepreneurs and investors.
The global entrants to this race are ushering in next-generation small satellite capabilities with enormous value to commercial and government customers, including organizations in the energy, mining, manufacturing, transportation, finance, agriculture, and communications; thousands of these satellites will be produced and launched in the next decade.
The nations that win this race will gain the 21st-century military edge. Space infrastructure companies received a record $14.5 billion of private investment in 2021. If Nigeria’s space policy and legislation are aligned to the second space race this sector can generate $ 1 Billion.
Nigeria can leverage its status as a multi-billion-dollar tech hub to develop its IT sector and become a global IT services destination. Github, a leading software development platform, recently reported that Nigeria is home to the fastest-growing developer community on its platform. The country has benefited from companies like Andela which brought world-class training and job opportunities to budding Nigerian programmers.
Gebeya is promoting a similar model of training the next generation of African developers. Nigeria’s growing supply of programmers will likely be met with rising demand from the country’s constantly expanding tech hubs. The potential of the business-to-business (B2B) or enterprise software sector is also good news for the country’s ITC sector.
The Federal government recently said the current e-commerce spending in Nigeria has grown to $13billion per annum and is expected to hit $75billion in revenue per annum by 2025. It also said e-commerce grew in Nigeria from 14% in 2019 to 17% in 2020.
Nigeria is well-positioned to benefit from this growth in terms of revenue if legal bottlenecks related to Incorporation, Trademark Security, Copyright Protection, Transaction Issues. Privacy is adequately addressed.
Nigeria’s entertainment industry already plays an important role in the Nigerian economy but its full potential remains untapped. PwC predicts that total industry revenue will rise steadily from $7.7bn in 2021 to $9bn in 2022, $10.7bn in 2023, $12.6bn in 2024 and then $14.8bn in 2025. This steady growth will be largely fuelled by internet access, which is in turn powered by the country’s broadband infrastructure and mobile connectivity. Like digital economy and e-commerce, Nigeria will benefit in terms of revenue if legal bottlenecks related to Incorporation, Trademark Security, Copyright Protection, Transaction Issues. Privacy is adequately addressed.
Although oil receipts are down, our huge gas reserves present opportunities for alternative revenue sources. The success of Nigeria’s LNG has demonstrated that gas revenue is massive but only if exploited. Nigeria can also derive revenue from petrochemicals like methanol which Nigeria currently imports.
But the legal framework must be right. The legal framework relating to hydrocarbons is skewed in favour of foreign companies in the entire value chain. In at least four cases, banking, insurance, shipping, legal service, capital flight is massive.
In relation to shipping alone, it has been suggested that Nigeria loses over 10 Billion Dollars annually. Revenue loss will continue unless the legal framework is amended to domesticate the value chain in hydrocarbons.
It is important to review the legal framework for local content with a view to strengthening implementation and enforcement. It is also very important to address the issue of corruption in the extractive industry.
The continuing lapses and loss to the nation in oil and gas revenue as revealed in the Report by Nigerian Extractive Industries Transparency Initiative, NEITI, which indicates lack of implementation of previous Reports, supports this. Our hydrocarbon resources especially gas could generate $ 30 billion in export earnings and spawn other local industries.
The solid mineral is another sector that has not been adequately harnessed. Nigeria is estimated to have about 34 solid minerals, with every Nigerian state boasting of at least one of these minerals. Still, mining constitutes only 0.2% of GDP.
Mining can generate $ 10 Billion and 5 million Jobs. The Democratic Republic of Congo in 2017 alone saw the sector generate $ 1.68 billion, accounting for 55.16% of the total government revenue and 17.40% of the GDP.
Solid minerals is undoubtedly capable of making a more pronounced impact on the country’s employment rate and generating more revenue for the government however, to derive the highest possible benefit from this sector, a local content policy and legal framework need to be put in place.
Agriculture is one of the largest contributors to Nigeria’s GDP. It is 25% of GDP and has the potential to create massive numbers of new jobs, especially in Northern Nigeria which has very fertile agricultural land. The Central Bank of Nigeria’s Anchor Borrowers programme that made Nigeria self-sufficient in rice production has shown the potential of the Agriculture Sector.
The Central Bank has identified 10 crops to support namely rice, wheat, milk, tomato, fish, cotton, etc. This is a great leap forward for the sector. But our policy on agriculture must move away from subsistence to mechanised agriculture.
The legal framework for land use administration also needs adjustment. Mechanised Agriculture could generate $10billion, create Jobs but also improve National Security by offering employment to our teeming youths exploited for banditry and terrorism.
A recent study shows that the housing inventory of Nigerian property exceeds six trillion dollars. Nigeria has fallow assets estimated at $900 billion in and outside Nigeria (according to PWC), Most of this is dead capital as it cannot be used as collateral.
Creating the proper legal framework to make dead capital fungible (easily transferable) will create an instant credit market and enable Nigerians to borrow on their property.
Digitalization of land registries including introducing a Land Use Administration Act will make the consent process more efficient and give confidence to banks to accept title documents as collateral. This process will release into the economy 6 trillion dollars’ worth of assets currently dead capital.
Inefficient Revenue Collection
Nigeria’s tax collection mechanisms are extremely weak and inefficient. According to the Federal Inland Revenue Services, Nigeria lost over $ 178 Billion to tax evasion by multinationals in 10 years. This can be saved if enforcement institutional and regulatory frameworks are strengthened.
Monies trapped in Ministries, Department, and Agencies
The 2021 Auditor General’s report showed N323.5 Billion is trapped in MDA as unretired advances, payment for services not executed and payment without a voucher. The Judiciary has trapped over N3 Billion. This can be reversed with strong accounting regulations and enforcement.
Looking at all these areas and without any serious study, it shows that we are almost at N100 trillion. But with concerted deep study, it is possible to even exceed the N100 trillion mark. Government should explore new sources of revenue to close the budget deficit and grow the economy. We strongly feel that a special case can be made for laws that can generate revenue and create jobs.