…Nigeria’s fiscal regime unnecessarily complex — expert
By Michael Eboh
The Federal Government has been cautioned against placing too much emphasis on its immediate need to grow its revenue in the planned review of the fiscal regime in the proposed Petroleum Industry Bill (PIB).
Speaking at a webinar, an advocacy workshop on ‘Elements of Fiscal Regimes and Impact on Competitiveness,’ Energy Research Fellow at the Surrey Energy Economics Centre, University of Surrey, Dr. Carole Nakhle, however, commended the Federal Government, stating that the country was on the right path in terms of moving with the long awaited reforms of its petroleum fiscal regime.
Nakhle, who is also Chief Executive Officer of Crystol Energy and acts as Special Parliamentary Adviser on Energy and Middle Eastern Issues in the House of Lords, stated that the delays in the passage of the PIB over the years, and related intense debates and controversies had heightened the fiscal and political risks.
She added that the delay in the review of the Nigerian petroleum industry laws had negatively affected investors’ confidence in government policies.
However, she warned that, “Any new fiscal change, however, should take into consideration not only immediate government needs for more revenues but also the prevailing conditions in global oil markets and what other competing provinces are offering.
“It is a delicate act and Nigeria needs to get that balance right if it wants to monetise its significantly remaining potential particularly in deep and ultra-deep water before such assets start to lose their value.”
Presently, Nakhle disclosed that Nigeria’s fiscal regime was unnecessarily complex and a tapestry of different structures and rates, with special focus on royalty, which, in turn, varies with terrains, water depths, oil price and oil and gas production.
She listed the guiding principles of an attractive fiscal regime to include stability, simplicity, progressivity and neutrality.
According to her, a starting point in reviewing Nigeria’s fiscal regime would be to aim for simplification.
She argued that Nigeria’s fiscal regime was unstable and lacked progressivity, adding that the frequency of the fiscal changes proposed and/or implemented strongly suggested a structural weakness in the fiscal regime that prohibits it from adapting to evolving oil industry related conditions, both domestically and internationally.
She stated that a progressive regime can stand the test of time and cope with volatile oil and gas prices.
“With the heavy focus on Royalty and its relatively high rates well above what is typically
found elsewhere and in addition to instruments such as signature and production bonus, the regime is overall regressive. Sliding scale royalty does not secure progressivity
“Location, volume and prices: poor proxy of profitability; linking taxes to oil price will create further instability. The only way Royalty can be made progressive is by linking it to a profitability measure,” she added.
The energy economist said: “A tax system subject to continuous tinkering tends to undermine investors’ confidence. Fiscal stability provides some level of predictability and reliability that assists with reliable expenditure forecasting and budgeting
“A tax regime that is simple to understand, implement and administer, is levied on a well-defined tax base It increases transparency and reduces the administrative burden, for both administrations and the taxpaying businesses.”
In the area of progressivity, she stated that government take should increase as profitability increases; while in neutrality, she noted that a neutral tax should not distort investment decisions, neither should it deter exploitation of a full range of field sizes nor alters project rankings, nor interferes with production decisions.