On 25 January 2019, President Muhammadu Buhari signed the Companies Income Tax (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme) Order 2019 (“the Executive Order” or “Order”). The Executive Order 007 was made pursuant to the powers conferred on the President of the Federal Republic of Nigeria (FRN) by the Constitution of the Federal Republic of Nigeria 1999 (as amended) and more specifically, Section 23(2) of the Companies Income Tax Act (CITA).
It is against the foregoing background that this publication seeks to lead the discussion as to whether the Order issued can be said to be the bankable solution for Road Infrastructure development and delivery in Nigeria. Before delving into the focal point of this commentary, it is pertinent to provide a little background on what the Order entails and why it was made.
A. What’s about The Executive Order 007
Executive Order 007 seeks to encourage private companies to fund the construction of major road projects in the six geo-political zones of the country. In return, the companies get a tax credit or deduction equal to the amount invested in such road projects.
B. Why The Executive Order 007?
First, it would appear that the Order was issued against the background that the Federal Government of Nigeria (FGN) has a duty to provide adequate public infrastructure facilities for all citizens and encourage the free mobility of people, goods and services throughout the Federation, for the purpose of promoting national integration and protecting the rights of citizens to engage in legitimate economic activities concerned with the production, distribution and exchange of wealth, goods and services.
Second, the Executive Order is predicated on the recognition that it is the responsibility of the FGN to harness Nigeria’s resources and promote national prosperity and an efficient, dynamic and self-reliant economy, and additionally, to manage and operate the Roads Transportation Sector, as well as the major sectors of the economy.
Third and quite instructive is that the Order stems out from the commitment of the FGN to ensuring that its Roads Transportation Infrastructure Policies are channelled at the promotion of a planned and balanced economic development, in such manner that the material resources of the nation are harnessed and distributed as best as possible to serve the common good.
The above-stated reasons all reveal the seemingly good intentions of the FGN to drive growth in Roads Infrastructure in Nigeria. However, it remains to be seen if and whether these lofty ideals will be fully achieved, implemented or carried out to the letter.
Having x-rayed why the Order was made, we shall now proceed to discuss the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme – which is at the very heart of this publication.
C. Key Issues for Consideration
1. Risk-Adjusted Return on Investment
The FGN’s expectation is that private sector organizations will invest in building roads, and then recover the financing via credits/deductions against Company Income tax. The FGN expects that the ROI should be no more than MPR+2%. No payment from FGN, no reimbursement. The investor simply recovers its cost + MPR + 2% by getting a certificate which allows the offsetting of the total against the company’s income tax obligations. They expect that such certificates can then become tradeable instruments.
The return has no potential for catalyzing roads development in any material way but it could facilitate some CSR-driven initiatives from corporate organizations who are keen to get tax relief for their material CSR activities. An example would be the Apapa roads rehabilitation works that we understand are being undertaken by the Dangote Group, Flour Mills in conjunction with the NPA. The key question is what is a good measure of the risk-adjusted cost of capital for an average company that has the capacity to undertake infrastructure projects. We presume this may be in a range of 35-45% to provide a risk-adjusted equity return in Nigeria today.
2. PPP Structuring
It is also quite interesting to note that the Scheme is expected to be a Public-Private Partnership (PPP) intervention and has the following mandates, wit: (a) enable the FGN to leverage on private sector funding for the construction or refurbishment of Eligible Road Infrastructure projects in Nigeria; (b) focus on the development of Eligible Road Infrastructure projects in an efficient and effective manner that creates value for money through private sector discipline; and (c) guarantee Participants in the Scheme timely and full recovery of funds provided for the construction or refurbishment of Eligible Road Infrastructure projects.
Indeed, the express recognition of PPP arrangements in the Order is a step in the right direction, the same being good news for existing and prospective investors. This is because providing road infrastructure could be highly capital intensive. Hence, one can then understand why it is hoped that the PPP would be allowed to fulfil its mandate, fully achieve and maximise its potentials under the Scheme, without being grossly affected by the seemingly inefficient, bureaucratic and inept strategies that could ordinarily affect government projects in Nigeria.
3. Governance Structure
Under the Order, the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme Management Committee (the Management Committee), chaired by the Minister of Finance as Chairman and the Minister responsible for Works as Deputy Chairman and has the Permanent Secretary of the Federal Ministry of Finance as the Secretary to the Committee, The Management Committee is charged with the responsibility of implementing and administering the Scheme.
While the creation of the Scheme, as well as the composition of the Committee, is very commendable, it remains to be seen if and whether the Management Committee will be allowed to fully actualize its mandates under the Order. There is also the need to put in place, some checks and balances, to forestall corruption and prevent abuse of powers vested in the Committee.
The governance approach using a Committee with members in varying parastatals gives room bureaucracy as well as wide latitude for executive discretion which leads to corruption and unpredictable regulatory consequences. There is also a need for more detailed guidelines issued for the operation of the committee in such a manner that provides independence and sustainability and better still an Independent commission should look at.
4. Project Cost Determination
The tax credit granted pursuant to the Executive Order is to be known as Road Infrastructure Tax Credit. Worth noting is that Participants in the Scheme are entitled to utilize the Project Cost incurred in the construction or refurbishment of Eligible Roads as a credit against Companies Income Tax payable. In addition, Participants are entitled to a single uplift equivalent to the prevailing Central Bank of Nigeria Monetary Policy Rate plus two (2) per cent of the Project Cost.
The foregoing notwithstanding, the Order has not sufficiently addressed the verification of costs as it relates to actual Project Cost. Notwithstanding that the cost is subject to the “wholly, exclusively and reasonably incurred” test, there could still be a problem because the provisions of the Order is no better than the conventional tax provisions on cost determination.
Furthermore, a number of pre-construction cost may include the likes of Right-of-way acquisition, environmental compliance, and other project requirements before the construction period may cause delays and cost overruns during project development. It’s also worthy of note that during the construction period, design changes, unforeseen geological and weather conditions, and the unavailability of materials and labour can cause delays and cost overruns.
There may be a need for the FGN to provide some sort of guarantees associated with right-of-way acquisition assistance, environmental compliance, and other pre-construction activities that may increase the cost of the road project, which may not be in control of the road developer.
5. Issuance of Road Infrastructure Tax Credit Certificate
The Federal Inland Revenue Service (FIRS) is to, upon approval by the Committee of a Participant’s application for Road Infrastructure Tax Credit, issue a Road Infrastructure Tax Credit Certificate (“the Certificate”) to a Participant on an annual basis. Such Certificate is only to be issued upon presentation of the information specified in or required by this Executive Order. The Certificate is to denote the Project Cost incurred by the Participant in the relevant fiscal year as certified by the Committee as it relates to on-going Eligible Road projects are the uplift on the relevant Project Cost. The Certificate is to also denote the Road Infrastructure Tax Credit due to the Participant, which is to be based on the Project Cost as certified and communicated by the Committee.
Notably, the Committee is precluded from approving the issuance of a Road Infrastructure Tax Credit to (a) a person not duly registered and certified by the Committee as a Participant or representative of a Participant in the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme; (b) person not duly registered as a Participant and not designated as a Beneficiary of a Road Infrastructure Tax Credit by a Participant; and (c) Participant or Beneficiary that is unable to provide evidence of certification of the Project Cost by the Committee.
6. Utilization of the Road Infrastructure Tax Credit
Under the Order, that Participants are entitled to utilize the Road Infrastructure Tax Credit against the Companies Income Tax in and from the relevant fiscal year, in which the Project Cost is incurred until it is fully utilized. In this wise, the amount of Road Infrastructure Tax Credit that may be utilized in any year of assessment is limited to fifty (50) per cent of the Companies Income Tax payable by the Participant or Beneficiary for that year of assessment. The only exception is where the Road Infrastructure Tax Credit issued with an Eligible Road in an Economically Disadvantaged Area is mandated to be available for utilization, in any year of assessment, without the fifty (50) per cent limitation. Quite instructively, any un-utilised Road Infrastructure Tax Credit within the year of assessment is to be available to be carried forward by the Participant or Beneficiary to subsequent tax years, until fully utilized.
Participant or Beneficiary may elect to undertake a Disposal of the whole or part of its Road Infrastructure Tax Credit Certificate to a willing buyer on a Relevant Securities Exchange or pursuant to such other approved transaction. The Executive Order mandates that every sale or transfer of the tax credit is to be reported to the Committee which will then de-register the Participant making the disposal and register the new Beneficiary of the Certificate in a register maintained by the Committee. Meanwhile, the Beneficiary is entitled to utilize the Road Infrastructure Tax Credit in any year of assessment upon transfer of such credit.
For the purpose of transferring the Tax Credit, however, a Participant or Beneficiary can register the whole or part of the Road Infrastructure Tax Credit Certificate as a tradable instrument on the Relevant Securities Exchange. Whereas the Relevant Securities Exchange is mandated to maintain a register of every Road Infrastructure Tax Credit Certificate registered and traded on the Exchange.
D. Conclusion and Recommendations
While the Scheme established in the Order is a relatively laudable initiative, it is opined that the Scheme could still benefit more from improved revision taking on board apt recommendations from further engagements with relevant stakeholders, alike and non-alike. Going forward, there is need also for the FGN to exercise great political will in giving effects to this Order. Care must, however, be taken to ensure that the power of the President to amend the Executive Order is not exercised to overreach Participants in the Scheme.
For the purpose of making the lofty aspirations expressed in the Order a reality and not just a ‘paper victory’ for road infrastructure in Nigeria, it is important for both the FGN and companies that will take benefit under the Order, to seek appropriate guidance from seasoned experts with in-depth experience in financial, legal and commercial issues for PPP based Road Infrastructure Developments for the purpose of identifying and managing early enough, project risks that are associated with road development. The above position stems from the understanding of the risks largely associated with private road projects, including but not limited to pre-construction issues, construction matters, revenue and currency, tort liability, political, and financial risks.
In any event, it sure needs no telling that addressing all the possible risks associated with a project of this nature, in a manner satisfactory to debt and equity investors, who are too likely to commit to funding such projects as well as taking care of unforeseen circumstances or uncertainties unprepared for, will go a long in helping to achieve the lofty goals and objectives of the Executive Order.
Download the Original copy of Executive Order 007 for your review. Click Here
Image already added