Tax Credit, Catalyst For Road Infrastructure Financing


tax credits

In assessing the importance of effective road network, there is need to consider its role in the movement of large volumes of human capital to and from their places of work. Students and teachers must attend schools. Citizens must attend social events. Farmers must go to farms and markets where they can buy other products and services.

In essence, the extension and condition of road network is not only closely related to Economic development, but vital to its agenda. Nigeria, like every other country seeks innovative ways to drive economic growth and development. Hence, concepts like Public Private Partnership (PPP), Privatization, concessioning, Tax Credit, and various others are applied to engender economic growth.

It therefore follows that any of these concepts could be applied to roads, considered Nigeria’s biggest public capital asset. Government is aware of its multiplier effect on any economy.

Unfortunately, over the years, implementation of road infrastructure projects has been dwarfed by a lot of challenges, especially from the budgetary point of view, procurement processes and funding.

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) echoed this when in its communique number 123 of March 25 and 26, it expressed worry over the federal government’s (FG’s) procurement process which encourages wasteful spending and embezzlement.

“The Committee urged the need to closely monitor the public procurement process in order to improve efficiency in public resource management,” the communiqué read in part.

In the same way, after careful assessment of gaps in infrastructure funding, the Council for the Regulation of Engineering practice in Nigeria (COREN), in 2016, disclosed that Nigeria requires about N3 trillion yearly, to address the massive road infrastructure deficit in the country.

COREN President, Mr. Kasim Ali, stated this in Abuja at the public hearing organized by the House of Representatives Committee on Works.

He said the current institutional framework for the management and funding of roads in Nigeria was outdated, inappropriate and needed to be reformed. So, on behalf of COREN, he stressed the need for sustainable funding mechanism of road projects in the country for improved autonomy in road management.

Supporting COREN’s position, Mr. Jonathan Juma, Acting Director General, National Institute for Policy and Strategic Studies (NIPSS), in his submission, said that $2 billion (over N600bn) was required by the Federal Government to kick-start massive rehabilitation of roads.

Going by this projection alone, it means that the budgetary allocation of N2.031 trillion for entire capital expenditure in the 2019 federal government budget is not enough to make provision for such massive rehabilitation as envisaged by the NIPSS Ag . DG. It is even less than the N2.140trillion proposed for just debt servicing.

President Buhari himself acknowledged that there have been revenue shortfalls that have hampered government’s efforts to fully fund critical projects.

According to the Infrastructure Concession Regulatory Commission, Nigeria has about 195,000 km of road network out of which about 32,000 km are federal roads and 31,000 km are state roads. In total, only about 60,000 km is paved leaving 135,000 km of road untarred. A large proportion of the paved roads are in bad conditions due to poor maintenance, which lends credence to the idea of massive rehabilitation.

Again, going by the poor budget implementation regime in Nigeria, corruption and inability to reduce the cost of governance, half of this capital expenditure cannot be achieved, not to talk of doing justice to road infrastructure.

A herd of analysts like Ali are of the view that Tax Credit could be one of such sustainable funding mechanisms of road projects because it will go a long way in overcoming the funding and implementation challenges.

In an interview with the Nigerian Tribune, Pascal Odibo, group country director, Jeff & O’Brien Africa, explains how government can finance infrastructure development using tax credit which strategy he believes can also eliminate corrupt tendencies rife in the  public sector project implementation.  Tax credit according to him, is not a new concept in mature economies like Europe, America, Asia among others.

But this concept is just seeping into people’s consciousness in developing economies like Nigeria because of the search for alternative means of funding growth. Emerging markets according to him, are getting hungry for alternative means of funding the architecture of growth.

The Jeff & O’Brien country director explained that tax credit is suitable for companies that have been paying huge taxes for past years.

“Based on that history/record, they can approach tax authorities with a projection of what would be paid to the government as tax in the next 5, 10 or 20 years. This money can be used today to build roads and this brings value for money. It is like paying tax in advance.  If it is widespread, Nigeria will turn to a construction site, says Odibo.

Yet,  not much attention has been paid to the concept of tax credit until president Muhammadu Buhari on 25 January 2019 signed a 10-page Executive Order No. 007 known as the “Companies Income Tax (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme) Order, 2019.”

The Executive Order 00 7 of 2019 on Tax Credit Scheme is designed to develop and deliver Public Private Partnerships with notable investors so as to close the road infrastructure gap in the transportation sector.

Records show that the N100billion (One Hundred Billion Naira) raised by the Debt Management Office through the Sukuk issuance in September 2017 has been fully deployed by the Ministry of Power, Works and Housing for 25 critical economic road projects located across each of the six Geo-political Zones.

Despite these and funding arrangements from the Nigeria Sovereign Investment Authority, the Nigeria Liquefied Natural Gas Dividend Account, the Federal Budget, as well as counterpart funds from China Exim, China Development Banks, and other development partners road infrastructure gaps still exists.

President Buhari agreed that the country’s reliance on annual budgetary allocations to fund roads development has been disappointing, given that “our budget proposals have not always been passed in an expeditious manner by the National Assembly.”

One of the canons of taxation as theorized by Adam Smith is equity. Under this canon, he stated that the subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.

Tax credit as a way of “supporting the government,” aligns with this cannon, which in other words, says the broadest shoulders must bear the heaviest burden.

This perhaps, is why  Buhari assured during the signing ceremony that, “Through this Scheme, companies that are willing and able to spend their own funds on constructing roads to their factories or farms, will recover their construction costs by paying reduced taxes, over a period of time. We shall ensure complete transparency in these set-offs.”

Fighting corruption

Nigeria is strewn with infrastructure projects that are abandoned and going nowhere. In every state, it is not difficult to find roads partly constructed and going nowhere, abandoned housing estates, rail-lines and metros uncompleted for decades, as well as federal government behemoths infested by rodents. These leave no one in doubt that infrastructure projects are conduits for corruption.

Indeed the World Bank, among many other agencies, has always said that it is in investment projects that the major corruption deals go down. And that explains the reason why most government functionaries and big politicians use infrastructure to embezzle public funds.

A State Governor was videoed last year stuffing his many pockets with $5million based on ‘infrastructure’contract award from a singular contractor. Other governors, senators, DG’s of parastatals, ministers and perhaps some presidents directly and through proxies are not left out of infrastructure fraud in Nigeria.

Due to its legal, administrative, and monitoring structure, kickbacks, embezzlement and project abandonments will be difficult under tax credit. Also, due to the risks and reputational damage such corrupt practices would visit on their brand, corporates will try to deliver according to specification.

Accordingly, cost must be obtained through competitive bidding process and must follow set procedures of the Bureau of Public Enterprises for certifying and approving procurement for federal government contracts.

For instance, a Management Committee will be set up to implement and administer the Scheme. Participants and beneficiaries must be registered by the Committee which shall have discretion over costs that may be allowed as part of the Project Cost. This structure is expected to put controls to the phenomena of contract cost inflation. The Committee will apply the set procedures of Ministry of Works in approving project cost and completion timelines.

Through these innovative funding mechanisms, government have been able to address the challenges of project funding, cost variation and completion risks that have plagued the development of the nation’s critical roads infrastructure assets, President Buhari acknowledged.

It is no longer a one-man show whereby the contractor is subjected to the mercy of the governor, minister or DG who will then dictate how much will go to his private pocket and what will be left for  the soliciting contractor to manipulate and apply to that particular road project with no one monitoring.

In addition, there shall be a Memorandum of Understanding (MoU) and contract documents between participants and the Minister of Finance as Chairman of the Committee and completion of each road project shall be between 12 to 48 months.

In his article titled, “Matters arising from the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Order, 2019,”  Taiwo Oyedele, the Head of Tax and Corporate Advisory Services at PwC Nigeria is of the view  that, with the impending new minimum wage bound to put more pressure on funding available for capital spending, this is generally a good idea. He added that it will curb certain fraudulent tendencies like budget padding.

“It should prevent budget padding, reduce contract inflation, cut down political patronage and rent-seeking, ensure timely project completion, reduce abandonment of projects and address sub-standard quality of work.

“It should however be worthwhile for the private sector and not be at excessive cost to the government. As currently drafted, it does not appear attractive except if borrowing cost is eligible as part of project costs. As an incentive, eligible roads could be named after the relevant company,” he suggested.

Besides, Tax credit involves a multi-dimension agency framework. If it is housing the government wants to do, it must get the relevant ministry involved though the ministry of finance may have to structure it. Ministry of budget and planning should be able to capture it in their budget so that subsequently the project doesn’t appear again in the budget among the projects that government has to undertake.

Major beneficiaries

Although, the entire population stands to benefit from efficient road network, key beneficiaries are the poor because it is a people oriented project. Tax players’ money would be seen at work.

But it also makes sense for the rich to understand that it is the poor that will pay. So there is a balancing act here with all, having access to its benefits.

Tax credit can be structured into an instrument says Odibo, such that people that did not owe government much money can buy it. Investors can invest in it. For instance, if somebody wants to build a 40 kilometer road and does not have all the money, he can apply and get the instrument. He can now take it to any company especially those that have a large tax obligation to government and they will to buy it, give him the money and the person will build the road.

“So the individual creates the assets makes some returns, the company gets the credit and the people go about their economic activities on the road. I hope that government will put in the right people to do the calculations and structure such an instrument. It will radicalize overnight, the capacity of government to bring infrastructural development to Nigeria and indeed any emerging market,” Odibo explained.

On terms in the contract, Odibo suggested that if a job like Abuja Kaduna road should be given to an investor, such investor should be made to take another one in Adamawa to enable better spread of the benefits. That way, in next 20 to 30 years, “you will have redrawn development and infrastructure growth. You must find innovative ways of development.”

There are a lot of companies like Dangote Group in Nigeria that should take advantage of tax credit. For instance, Dangote built government’s bad road in two years. Government can decide not to make 100 per cent tax credit but give him 30per cent, 40 per cent, or 50 per cent depending on what is agreed on. In this case, the three people that will benefit are Dangote, the people who now have access to good road, and the government itself.

Then the politician will take the credit that he built this road in his time. So this is a tool for politicians to perform.

“Because corporates have taken up the funding of some of the capital projects, money will be freed into the coffers of government to fund universities, hospitals, and those social amenities that the less privileged people will require. Thus, huge budget for capital projects will be reduced if not entirely out of the budget, and the money otherwise meant for that will be utilized in providing for some other social amenities,” says Oyedele.

The Road Tax Credit is a tradable instrument and may be sold in whole or in part to a willing buyer on a relevant Securities Exchange or such other approved transaction. Every sale or transfer is subject to the approval of the Committee.


Up-scaling standards

In terms of quality of roads and those that will man the committee, two pertinent questions arise: How do you guide against low quality and less commensurate job? What is the skill set required to understand and execute MOUs.

Indeed, for tax credit to be successfully implemented, experts and skilled professionals must be involved because from start, there are mathematical calculations that go in. That is why Odibo believes that there must be stakeholder engagement in the calculation, and structuring of this vehicle for infrastructure procurement.“Demon is in the detail,” he told Nigerin Tribune.

“You need to develop your civil servants with the technical skill to deal with the task. That is where the world is heading. The era where people sit in certain ministries, agencies and departments of government without understanding how things work is over. They need to upscale because they are now monitoring and overseeing corporates that are highly skilled. These companies are leveraging on international resources and access to information. It will be suicidal for civil servants/government functionaries not to be properly skilled in the whole concept,” Odibo warned.

Looking at governance, the Order provides for a Management Committee to be chaired by the Minister of Finance while the Minister for Works will act as the Deputy Chairman.

Other members are drawn from both ministries and other MDAs viz: Trade and Investment; Justice; BPE; FIRS; NIPC; SEC; Infrastructure Concession Regulatory Commission; Budget Office; NBS; NSIA; the Presidency; and any other person as may be deemed necessary by the Minister of Finance.

The ministry of finance may engage consultants to undertake value engineering studies to ensure

value for money. Committee members are to apply the principles and procedures as laid down by their respective MDAs in performing their functions. All these are structured to ensure that standards are not compromised.

Performing the signing ceremony at the presidential villa, Abuja, the President said under the arrangement, 19 eligible road projects are to be undertaken by 6 leading manufacturing and construction firms, located in 11 States, and in each of the six geo-political zones.

In the President’s view, local and international investors, as well as the State Governments, should embrace this roads infrastructure development Scheme. Investors should  submit viable proposals for more road projects, such that, in time, the scope of this initiative will cover all 36 States of the Federation.


Conclusion  and Legal framework

Accompanied by an 11-page Regulation, the Order is made up of First Schedule on the Administration and Operation of the Scheme. The Second Schedule contains a sample Memorandum of Understanding (MoU) for eligible road projects.

It references the powers conferred on the President under Section 23(2) of the Companies Income Tax Act (CITA). The section provides that the President may exempt by order (a) any company or class of companies from all or any of  the provisions of this Act (CITA); or (b) from tax on all or any profits of any company or class of companies from any source, on any ground which appears to it sufficient.

In principle, how much the private sector can invest on roads under this Scheme is limited to about half the annual CIT revenue which has ranged between N600billion and N1trillion in the past 5 years.

The order document explains that the scheme will be in force for a period of 10 years from date of commencement of the Order. Participants in the Scheme shall be entitled to tax credits for the project cost incurred including a single uplift equivalent at the prevailing CBN monetary policy rate plus 2 per cent. According to the Order document, the uplift shall not constitute taxable income in the hands of a participant or beneficiary. Costs incurred on roads under the scheme are not eligible for any other allowances or tax relief.







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