The Impact of Internal Revenue Generation on Infrastructural Development. A study of Puntland State, Somalia

This study examines the impact of internal revenue generation on infrastructural development in Puntland State, Somalia, focusing on the period 2019-2022. Puntland's historical reliance on external grants and aid has created a path dependency, hindering the development of alternative revenue streams and economic diversification. The decline in external funding due to the COVID-19 pandemic highlighted this vulnerability, necessitating a shift towards internal revenue generation. This involves diversifying the economy, exploring new revenue sources (agriculture, trade, services), and improving revenue collection methods. The study uses the "Path Dependency" theory to frame this analysis, emphasizing the importance of institutional change and policy interventions to break free from historical patterns. The inadequacy of Puntland's revenue collection mechanisms, including poorly equipped revenue boards, discouraging attitudes among tax officials, inadequate tax assessment and collection processes, and poor road networks, has significantly hampered infrastructural development. The study aims to analyze the relationship between Puntland's IGR and infrastructure development, assessing the effectiveness of revenue utilization for infrastructure improvement and its contribution to economic growth. The study also uses Lagos State, Nigeria as a case study to understand how increased IGR can positively influence infrastructure.

The study draws upon various definitions of revenue, encompassing government funding sources (taxes, borrowing, fees, fines), public and private organization income (sales, services, investments), and state revenue (taxation, asset sales, loan proceeds, investments). It also reviews the current revenue situation in Puntland, highlighting its relative success compared to other Somali states but also noting its underperformance compared to the Federal Government of Somalia and Somaliland in terms of per capita revenue. Taxation forms the dominant source of revenue in Puntland, but this remains insufficient for its infrastructural needs. The study describes the sources of revenue in Puntland, including recurrent revenue (taxation, licenses, fees, fines, economic activities, federation account allocations, VAT allocations) and capital receipts (grants, loans, financial aid). It also explores weaknesses in Puntland's revenue administration: human resource gaps (lack of formal education and training), lack of automation and information systems, manual processes, and inconsistent enforcement of regulations, leading to discretionary power among tax officials.

The study employed a comparative case study approach, analyzing Puntland's experience alongside that of Lagos State, Nigeria. While the paper does not explicitly detail the specific data analysis techniques used, it presents data on Puntland's revenue situation, infrastructure (roads, ports, airports, housing, urban planning), and the impact of low revenue on infrastructure development. For Lagos State, the study describes the strategies implemented to improve revenue generation (taxpayer education, payment process improvements, self-assessment schemes, establishment of new operational units, enforcement measures, collaborations with other ministries, database maintenance). It also analyzes the impact of these strategies on revenue generation and infrastructure development, citing a study showing a positive relationship between IGR and infrastructure investment in various sectors (housing, roads, healthcare, education, security, water resources). The comparison allows for an assessment of the impact of different approaches to revenue generation and their impact on infrastructure.

The study's key findings indicate a significant relationship between revenue generation and infrastructural development in Puntland. Despite improvements in tax collection, Puntland's revenue generation remains low compared to its developmental needs. The analysis of Lagos State's experience demonstrates that strategic revenue enhancement initiatives, including taxpayer education, improved payment processes, and strengthened enforcement, can significantly boost IGR and lead to increased investment in infrastructure. The study highlights the negative impacts of low revenue on various aspects of Puntland's infrastructure: disorganized urban planning, inadequate housing for vulnerable groups, dilapidated roads, under-equipped ports and airports. The case study of Lagos State illustrates that increasing IGR can result in substantial investments in housing and road infrastructure, with cointegration and significant relationships established between IGR and public spending in these sectors. However, the Lagos State case study also reveals that despite significant progress, challenges remain in various infrastructure sectors requiring continued investment.

The study's findings directly address the research question regarding the impact of revenue generation on infrastructure development in Puntland. The evidence suggests that increased IGR is crucial for improving infrastructure and fostering economic growth. The comparison with Lagos State demonstrates the potential for positive change through strategic revenue enhancement measures. The significant correlation found between IGR and infrastructure investment in Lagos State supports the argument for prioritizing revenue generation initiatives in Puntland. However, the study also acknowledges the complexity of the issue and the need for comprehensive strategies involving not only revenue generation but also effective resource allocation and governance.

The study concludes that improving internal revenue generation is critical for enhancing infrastructure development in Puntland State. The Lagos State case study serves as a valuable example of successful revenue enhancement strategies leading to infrastructure improvements. Recommendations include focusing on small-to-medium-sized enterprises, providing social services, motivating staff, reorganizing revenue sources, improving collection processes, fostering public-private partnerships, and implementing monitoring and evaluation mechanisms. Puntland can achieve sustainable development by adopting a holistic approach to revenue generation and infrastructure development.

The study's limitations include the potential for data limitations affecting the accuracy and reliability of the findings due to the specific time-frame analyzed and the constraints in data collection within Puntland, particularly regarding revenue data. The Lagos State case study, while informative, might not be perfectly generalizable to the Puntland context due to differences in institutional capacity, socio-economic conditions, and political environments. The study does not delve into detailed econometric analysis to establish causal relationships beyond correlation.