Diversifying States' Revenue In Nigeria: Lessons From Successful Models

Introduction

State internally generated revenue is the lifeblood of development and economic growth. It forms the financial bedrock upon which governments build infrastructure, deliver public goods/services, and create opportunities for citizens. In a country like Nigeria, where many states face unique challenges, having steady, diverse and consistent sources of internally generated revenue (IGR) is crucial for achieving sustainable development and ensuring long-term prosperity. While states rely on federal allocations, they also have the autonomy to generate internal revenue to support their own growth initiatives and fiscal endeavors. Thus, it is imperative for state governments to explore and diversify their revenue streams beyond conventional methods, such as income taxes, as no country or state can tax itself to prosperity.

A diversified revenue base can drive innovation, ensure more equitable development, and boost economic efficiency. It will also help reduce vulnerability to fluctuations in single-source revenue models, fostering resilience and a broader foundation for growth. Nigeria, with its vast natural and human resources, has a unique opportunity to build upon successful global models to create a more balanced and sustainable revenue structure at the state level.

Overview of the Current Landscape

The revenue landscape for Nigerian states is heavily skewed towards federal allocations, which constitute the largest share of states' revenue. These allocations, derived primarily from crude oil exports and taxes/VAT, have traditionally provided the bulk of financial resources for state governments. However, fluctuating oil prices and the global shift towards renewable energy have highlighted the need for greater revenue diversification. IGR has grown in importance, with some states making efforts to boost local revenue streams through taxation, levies, and other non-oil sources. Despite these efforts, the IGR of most states remains low in comparison to federal allocations, limiting their financial autonomy and resilience against external economic shocks.

The disparity between federal allocations and IGR has created a dependency that leaves many states vulnerable to shocks from national fiscal policies and global market trends. The National Bureau of Statistics (NBS) reports that over the past three years, only Lagos State, Ogun State, and the Federal Capital Territory (FCT) have consistently generated more IGR than their federal allocations. On the average, the percentages of IGR to the total revenue for these 3 states/FCT are 78%, 66% and 86%, respectively. Conversely, states such as Kebbi, Yobe, and Bayelsa have remained among the lowest performers in terms of IGR. Despite the significant strides made by some states in diversifying their revenue sources, the overall reliance on federal transfers continues to pose a challenge to fiscal independence and sustainable development for many states across the country.

For these states to achieve long-term financial stability, there is a growing need for a shift towards a more balanced and diversified revenue model, where IGR plays a more substantial role in driving economic growth and development at the local level.

Challenges with Diversifying State Revenue

While diversifying state revenue in Nigeria holds significant promise for economic stability and growth, the process is not without its challenges. These obstacles stem from structural issues, governance concerns, and the complex socio-political landscape. Some of the key challenges that these states face when attempting to diversify their revenue source are:

1. Overdependence on Oil Revenues: For decades, Nigeria's economy has relied heavily on oil exports, which constitute a significant portion of federal and state revenues. This dependence has shaped state budgets and development strategies, making it difficult for states to diversify their income. The existing oil revenue-sharing system also limits the ability of some states to explore and implement alternative revenue sources effectively. Hence, there have been calls for a review of the current revenue sharing system.

2. Political and Policy Instability: Political instability, policy inconsistency, and leadership changes can disrupt long-term development plans. In Nigeria, frequent transitions in state and federal leadership often lead to the abandonment of policies aimed at diversifying revenue streams. New administrations may shift focus away from previous initiatives, causing delays or cancellations of key projects. This lack of continuity hinders states' ability to maintain a consistent approach to economic diversification.

3. Low Level of Tax Compliance and Poor Tax Administration: Despite the large informal sector, many states struggle with tax collection due to issues like poor and ineffective tax administration systems, inadequate data management, low compliance, and widespread tax evasion. In addition, skepticism about the relevant government's ability to manage tax revenue, driven by perceptions of corruption and mismanagement, further complicates efforts to reform the tax system.

4. Inadequate Infrastructure: Poor roads, electricity, and transport networks increase business costs, limit sector growth, and discourage investment. Thus, the reliance on the inadequate infrastructure significantly constrains economic activities, resulting in poor service delivery, making it harder for states to diversify away from oil and federal allocations.

5. Environmental and Climatic Challenges: Environmental and climatic challenges pose significant obstacles to revenue diversification in Nigeria. Issues such as flooding, desertification, and unpredictable weather patterns negatively impact sectors like agriculture, which many states rely on for income. These environmental challenges can reduce agricultural output, disrupt livelihood, and hinder the growth of industries that could contribute to alternative revenue sources.

Successful Models and Case Studies

1. Lagos State: Lagos is Nigeria's commercial capital and has become a prime example of effective revenue diversification. While the state still benefits from federal allocations, it has successfully developed several revenue streams, making it a leading model in Nigeria. Key strategies include:

• Tax Reforms: Lagos has invested heavily in the digitization of its tax administration processes. By implementing an efficient online tax system, the state has significantly reduced the cost of tax collection while improving compliance. Through platforms like the Lagos State Internal Revenue Service (LIRS), the government has increased revenue from personal income tax and property taxes.
• Real Estate Development, Infrastructure and Tourism: Lagos has become a hub for real estate investment, with high demand for residential and commercial properties. The state has capitalized on this by implementing policies that enhance access to property rights and attract investors while ensuring that property taxes and levies contribute to its coffers. Key infrastructure projects like the Lekki Free Trade Zone and the Eko Atlantic City have not only boosted employment but also generated substantial revenue streams. The state also leverages its cultural and coastal assets to develop a thriving tourism sector that attracts international visitors and create jobs.
• Technology Hub: Lagos has positioned itself as a tech hub by supporting innovation and start-ups, particularly in fintech, e-commerce, and software development. The state hosts major tech events like the Lagos Tech Expo and has supported initiatives such as "Yaba Silicon Valley" (a tech cluster in the Yaba area).
• Port Operations and Maritime Industry: The Lagos ports (Apapa and Tin Can Island) are some of the busiest in Africa. The state's revenue from port activities, logistics, and trade is significant. Additionally, the state has collaborated with the Federal Government in improving the efficiency of the port operations to boost revenues.

2. Ogun State: Ogun State has capitalized on its natural resources and geographical proximity to Lagos to boost its economy. The state has focused on expanding industries such as agriculture, manufacturing, and real estate development to diversify its revenue base. Key strategies include:

• Ogun State Economic Transformation Project (2020–2025): The Ogun State government's plan is centered around fostering industrial growth, improving infrastructure, and attracting both domestic and foreign investments. The Project Development Objective is to increase the participation of the private sector in the economy of Ogun State, with a focus on improving the business-enabling environment, strengthening agri-food value-chains and upgrading skills.
• Agriculture: Ogun State remains one of Nigeria's leading agricultural producers. The government is focused on modernizing agriculture through agro-processing and value addition. With its proximity to Lagos, Ogun is well-positioned to serve as a major food production and distribution hub, promoting both small-scale and large-scale farming.
• Infrastructure Development: Ogun has established industrial zones and special economic zones to attract both local and foreign investors. By creating a conducive environment for manufacturing and industrial activities, the state has boosted revenue from taxes and levies associated with these industries. The state's strategic position near Lagos also makes it an attractive destination for businesses seeking lower operating costs.

3. California, United States: California, one of the largest and most economically dynamic states in the U.S., offers valuable lessons in diversifying state revenue through technology, innovation, and sustainability. The state has embraced new industries, particularly in the technology and green energy sectors, to reduce its reliance on traditional revenue sources. Some of the primary ways it raises revenue include:

• Technology and Silicon Valley: California's Silicon Valley is a global center for technology and innovation, housing companies that drive much of the state's revenue. By fostering a favorable environment for startups and tech giants, the state has seen significant economic growth through venture capital investment, tech-related tax revenues, and job creation.
• Green Energy Initiatives: California has also become a leader in the transition to renewable energy. The state has implemented policies that support solar/wind, and electric vehicle industries, both of which generate tax revenue. Investments in green energy infrastructure have not only contributed to the state's revenue base but have also attracted new industries and investors focused on sustainability.
• Fuel Taxes and Others: California generates revenue through taxes on gasoline, diesel, and other fuels. These taxes are important for funding transportation infrastructure and are among the highest in the nation. Other revenue streams include property taxes, excise taxes and lottery revenue which could generate billions annually.
• Diversification into Tourism and Entertainment: The entertainment industry, particularly Hollywood, has been a long-standing revenue stream for California. With a growing focus on digital media and content creation, the state has capitalized on this sector by supporting film production incentives and infrastructure. Additionally, California's tourist destinations, including national parks, beaches, and theme parks, contribute substantial revenue through tourism taxes and related industries.

4. Guateng Province, South Africa: Gauteng, South Africa's economic powerhouse, has implemented diverse strategies that have made it a leading example of regional economic development. With its vast industrial base, financial sector, and growing services sector, Gauteng has successfully diversified its revenue streams.

• Increased Compliance/ Revenue Collection: Enhanced revenue collection has allowed Gauteng to drive both economic development and improve living standards. It has also helped the province achieve better financial sustainability, reduce its reliance on national grants, and address the challenges posed by rapid urbanization.

• Public-Private Partnerships (PPPs): Gauteng has engaged in several public-private partnerships (PPPs) for infrastructure and development projects, such as toll roads, public transport systems, and urban development. These partnerships provide funding and support for large-scale projects while also generating revenue through tolls and user fees.

• Investment and Business Activities: Gauteng is an economic powerhouse in South Africa, with a large portion of the country's industrial, financial, and commercial activities concentrated in the province. Tax revenues from businesses, including corporate income taxes, VAT (Value-Added Tax) contributions, and income taxes from individuals, help fund the province.

Recommendations for Diversifying States Internally Generated Revenue

The experiences of Lagos State, Ogun State, California, and Gauteng Province reveal several common strategies that have helped diversify state revenue. These include leveraging technology and digital infrastructure to improve tax collection and increase efficiency, encouraging private sector investment through favorable policies and public-private partnerships, focusing on emerging industries like technology, green energy and blue economy. Other key recommendations include:

• Revitalized Civil Service for Effective Service Delivery: Revitalizing the states' civil service is crucial for diversifying their revenue. By improving tax collection, managing resources effectively, and attracting investment, a stronger civil service can increase internally generated revenue. It also helps reduce corruption, enhance service delivery, and foster economic growth, ensuring states rely less on federal allocations and build sustainable revenue streams.

• Disciplined Borrowing and Improved Accountability: Responsible borrowing funds productive projects that drive economic growth, while effective debt management avoids unsustainable debt. Improved accountability ensures transparency, reducing corruption and building public trust, which encourages higher tax compliance and sustainable revenue generation.

• Improved Property Rights and Ease of Doing Business: Strengthening property rights ensures clear ownership, encouraging investment and increasing land-related taxes. Simplifying business processes and reducing regulatory barriers attract local and foreign businesses, leading to higher tax collections and economic growth. Together, these measures enhance investor confidence, expand the tax base, and contribute to sustainable revenue generation.

• Effective Governance and Fiscal Federalism: Strong governance ensures transparency, accountability, and efficient use of resources, boosting public trust and revenue generation. Fiscal federalism, which allows states more control over their finances, enables tailored policies to improve tax collection and local economic development. These measures will create a more stable and responsive system for generating sustainable revenue at the state level.

• Improved, Technology-Enabled Tax Administration: By digitizing tax collection processes, states can increase efficiency, reduce fraud, and expand tax compliance. Technology makes it easier to track and collect taxes from individuals and businesses, ensuring a broader tax base. This modern approach improves transparency, reduces administrative costs, and enhances overall revenue collection, contributing to financial sustainability for states.

• Increased Focus on Revenue Diversification and Growth: By expanding beyond traditional sources like oil, states can tap into sectors such as solid minerals, agriculture, tourism, and manufacturing. Diversification fosters economic resilience, attracts investment, and creates new revenue streams through taxes and business activities. A broader revenue base ensures sustainable growth and financial stability for states in the long term.

Conclusion

To address the challenges of diversifying states revenue in Nigeria, innovative strategies can be implemented by these states. These strategies aim to reduce the overdependence on oil and stimulate growth in non-oil sectors, improving economic resilience. These innovative approaches that could enhance the diversification of state revenue can be summarized as follows:

• Enhancing the Tax System by embracing technology and developing the capacity of the revenue officials
• Strengthening their institutions to improve governance and service delivery
• Investing in Agriculture and Harnessing the Potential of the Blue and Marine Economy
• Infrastructure Development and Public-Private Partnerships
• Promoting Tourism and Creative Industries
• Prudent Debt Management
• Financial discipline
• Investing in education and training to enhance local human capital and
• Fostering entrepreneurship, innovation and job creation

Above all, it is important that these states are willing to diversify their revenue sources and boost revenue. The presence of willing reformers as Governors and robust institutional framework are critical in this regard.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.