By. Suleyman A. Ndanusa PhD OON
The exchange of ideas is often the most valuable outcome of public policy debates. One thoughtful contribution invites another, assumptions are tested, perspectives become sharper and, occasionally, the discussion reveals a larger issue than the one that first brought participants together. I believe our recent conversation on the funding of Nigeria’s revenue institutions has reached precisely that point.
My initial intervention questioned the generosity of the statutory cost of collection percentages retained by the Nigeria Revenue Service, the Nigeria Customs Service and the Nigerian Upstream Petroleum Regulatory Commission. The argument was straightforward. At a time when Nigeria faces pressing fiscal demands, every opportunity should be explored to increase the resources flowing into the Federation Account without imposing additional taxes or increasing public debt. If the present retention rates are higher than operational realities require, then reviewing them is both economically sensible and fiscally responsible.
Professor Uche Uwaleke’s thoughtful response enriched the discussion considerably. While agreeing that Nigeria urgently requires greater fiscal space, he argued that the more enduring issue is not merely the percentage retained but the framework through which revenue institutions are funded. His proposal for a hybrid model that combines needs-based budgeting with carefully designed performance incentives deserves serious consideration because it shifts attention from the arithmetic of percentages to the architecture of public finance.
Yet, as I reflected further on his intervention, it became clear that the debate itself had quietly evolved. We are no longer discussing only whether the statutory percentages should be reduced. We are now confronted with a more fundamental question. Should the funding of public revenue institutions continue to depend principally on an automatic percentage of the revenues they collect?
That question deserves careful examination because it goes to the heart of modern public financial management.
A reduction in the existing percentages may well provide immediate fiscal relief. However, a lower percentage remains a percentage. It reduces today’s burden without altering the principle that institutional funding should automatically expand as revenue collections grow. If revenues were to double over the next decade because of stronger economic growth, digitalisation, improved compliance or inflation, should the operating budgets of the collecting agencies also double automatically? Conversely, if revenues temporarily decline during an economic downturn, should the institutions responsible for restoring those revenues simultaneously experience an automatic reduction in their operational resources? Neither proposition sits comfortably with sound principles of public administration.
The underlying assumption of percentage-based funding is that the cost of administering a revenue system should broadly rise in proportion to the amount of revenue collected. Modern experience suggests otherwise. Revenue administration involves significant fixed investments in technology, information systems, taxpayer databases, border infrastructure, professional expertise and compliance frameworks. Once these foundations have been established, improvements in technology and administrative processes should allow additional revenue to be collected at progressively lower marginal cost. Productivity gains ought therefore to benefit the public treasury rather than automatically increasing institutional funding.
International experience is instructive. Across the OECD and in many of the world’s better-performing revenue administrations, the prevailing practice is to separate institutional funding from institutional performance. In the United Kingdom, HM Revenue & Customs receives its budget through parliamentary appropriations approved by HM Treasury. In the United States, Congress appropriates the operating budget of the Internal Revenue Service. Similar arrangements exist in Canada, Australia, Singapore and South Africa, where annual funding reflects assessed operational requirements rather than a predetermined share of tax collections. In each of these jurisdictions, the cost of collection is carefully measured and publicly reported, but it serves as an indicator of administrative efficiency rather than the mechanism by which the institution finances itself. This distinction is not merely procedural. It reflects an important principle of public financial management: expenditure should be determined by what an institution reasonably requires to discharge its statutory responsibilities, while efficiency should be judged by how effectively those resources are utilised.
The OECD’s Tax Administration 2025 reinforces this approach. Across the jurisdictions it surveys, cost of collection is treated as a comparative performance measure that assists governments in evaluating administrative efficiency. It is not presented as the basis upon which revenue authorities acquire an automatic entitlement to a share of the revenues they administer. The distinction may appear technical, but its implications are profound. One concept measures efficiency; the other determines institutional funding. They should not be confused.
Viewed from this perspective, Nigeria’s present debate acquires a different character. The real issue is no longer whether the applicable percentage should be reduced from one level to another. The more important question is whether percentage-based funding has outlived its usefulness altogether.
This is not an argument for weakening revenue institutions. On the contrary, effective revenue administration is indispensable to Nigeria’s fiscal future. Institutions responsible for mobilising public revenue must be adequately funded, professionally managed and sufficiently independent to discharge their responsibilities without operational uncertainty. But adequacy of funding does not require automatic entitlement. It requires objective assessment, predictable financing and transparent accountability.
The distinction is both practical and important. A modern funding framework would begin by determining what it reasonably costs to administer Nigeria’s revenue system. That assessment should reflect statutory responsibilities, technological requirements, enforcement obligations, taxpayer services, digital transformation and medium-term institutional priorities. Funding should then be appropriated accordingly, with additional incentives linked to measurable improvements in compliance, efficiency, taxpayer service, reduction of leakages and prudent financial management rather than simply the gross volume of revenue collected.
Such an approach preserves operational capacity while strengthening fiscal discipline. It also accommodates the immediate concern that inspired the original discussion. If government considers it necessary to reduce the existing statutory percentages in order to increase the resources available for national development, that adjustment can still be undertaken. The important point, however, is that it should form part of a deliberate transition towards a funding model that aligns institutional financing with assessed need rather than automatic entitlement. Otherwise, today’s solution merely postpones tomorrow’s debate.
Perhaps that is where this conversation has unexpectedly led us. The issue before Nigeria is no longer simply the cost of collection. It is the cost of administration. One is an indicator of efficiency; the other is a question of public expenditure policy. The first tells us how well revenue institutions are performing. The second determines how they ought to be funded.
That distinction may ultimately prove to be the most important contribution of this debate. If it encourages policymakers to move beyond adjusting percentages and towards modernising the funding philosophy itself, then the discussion will have achieved something far more significant than any of us originally anticipated.
Suleyman A. Ndanusa, PhD, OON, is an economist, lawyer, strategic studies scholar, and public policy thinker and practitioner with extensive experience in financial markets, regulation, governance, national Security and development.
