Agora Policy recommends that these agencies should be funded through direct appropriations by the Federal Government rather than the current cost-of-collection model.
Agora Policy, an Abuja-based policy think tank, has called for a comprehensive overhaul of Nigeria's revenue collection system.
In a report it published on Monday, the policy think tank criticised the current cost-of-collection approach, highlighting its inefficiencies and the disproportionate financial benefits enjoyed by some federal agencies.
The report shows that three key agencies benefit from the cost-of-collection arrangement, namely the Federal Inland Revenue Service (FIRS), which receives 4 per cent of non-oil revenues; the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), which gets four per cent of royalties, rents, and other oil and gas sector revenues; and the Nigeria Customs Service (NCS), which receives seven per cent of customs duties and levies.
These costs are deducted at the monthly meetings of the Federation Accounts Allocation Committee (FAAC) before federally collected revenues are distributed to the three tiers of government and other statutory recipients.
However, Agora Policy argued in its report that while centralising tax and revenue collection is efficient, the current method of compensating federal agencies by giving them a percentage of the collected revenue is problematic.
It said the cost-of-collection approach, although potentially useful in the past, has led to various issues such as abuse, distortions, distractions, and wasteful expenditures.
In January, the policy think tank noted that the Federal Inland Revenue Service (FIRS) received N43.35 billion as a cost of collection, a sum exceeding the allocations received by each of Nigeria's 36 states.
Delta State, which received the highest state allocation that month, got N39.59 billion, the report said, adding that the Nigerian Customs Service received N16.27 billion, more than what 31 states received as gross allocation for the same period.
The report further noted that the three agencies benefiting from the cost-of-collection system collectively received N78.30 billion in January 2024, surpassing the gross FAAC allocations to four of the six geo-political zones in the country.
For instance, it said the North-east received N56.60 billion; North-central N55.58 billion; North-west N76.09 billion, and South-east N47.75 billion. Only the South-south and South-west zones received more, primarily due to the 13 per cent derivation for oil-producing states and a net allocation to Lagos State for Value Added Tax (VAT).
Challenges
The think tank explained that the cost-of-collection arrangement has led to significant disparities and inefficiencies as revenue collection agencies now receive a larger share of funds than many states. This creates a perverse incentive structure that prioritises revenue collection over other essential functions.
This shift, the think tank said, has also diverted scarce resources away from critical developmental needs.
It said the cost-of-collection approach for federal agencies in Nigeria presents a significant challenge because agencies earn higher commissions due to currency depreciation rather than enhanced efficiency.
It said this diverts resources from states and regions by impacting essential services and incentivises agencies to prioritise revenue collection over their primary duties, such as border protection.
According to the report, many agencies now aspire to become revenue-generating entities, leading to distractions from their core mandates and imposing significant costs on the public.
"The cost-of-collection approach to rewarding and funding such agencies might have served a useful purpose at some point," the report said.
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"However, recent developments show that it is a flawed idea. It enables abuse, distortions, distractions and wasteful expenditures."
Recommendations
Agora Policy advised that the three agencies listed as beneficiaries of the cost-of-collection system should be funded through direct appropriations by the federal government rather than the current model.
This approach, it said, would ensure that their budgets are based on verifiable, justifiable needs and tied to expected improvements in performance.
The report recommended that the federal government allocate a minimal percentage for revenue collection efforts and provide performance bonuses to agencies that surpass pre-agreed targets.
The policy think tank posited that while the cost-of-collection approach may have been well-intentioned, it has generated its own set of problems.
