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

Guided by Path Dependency theory, the paper argues that Puntland’s historical reliance on external grants and humanitarian aid has created a dependency path that inhibits the emergence of sustainable, diversified domestic revenue sources. The COVID-19 shock exposed vulnerabilities in this revenue base and underscored the need to pivot to internal revenue generation, diversify the economy (agriculture, trade, services), and enact institutional and policy reforms to improve revenue collection and governance. The study positions infrastructure as a key indicator of economic well-being and examines whether, and how effectively, internally generated revenue (IGR) is being channeled to improve land and urban planning, transport, and housing in Puntland. The stated objective is to assess the impact of revenue production on the state’s annual budget and on specific infrastructure sectors (land/urban planning, transport, housing).

The paper synthesizes several strands of literature and background sources: - Revenue concepts: Definitions frame public revenue as the financial resources governments mobilize to fund operations, including taxes, borrowing, fees, fines, proceeds of assets, and investment income (Adams, 2006; Hamid, 2008; Bhatia, 2001; Stephen & Osagie, 1985). - Domestic resource mobilization in Somalia: World Bank and related analyses indicate Somalia’s domestic revenue growth post-2012, dominated by trade taxes, but constrained by weak legal/regulatory frameworks and limited administrative capacity. - Infrastructure concept and evolution: Traces the term’s origins and broadening from public works to essential systems enabling movement, utilities, and services, distinguishing “hard” (physical networks like transport, utilities, public buildings) from “soft” (institutions and systems such as finance, education, health, governance). Infrastructure is widely linked to growth (e.g., Straub, 2008; Henckel & McKibbin, 2010; Brookings Institute). - Somalia/Puntland sector background: Post-conflict destruction of public/private infrastructure; data on roads, ports, and airports highlight severe deficits and administrative gaps (World Bank 2006; FGS/AfDB/EU/UNOPS 2015; various sector assessments). - Lagos State case: Literature on Nigeria’s low tax-to-GDP and Lagos’s reforms since 1999 to expand the tax base, improve administration, transparency, and compliance (Aizenman & Jinjarak, 2008; Aregbeyen & Fasanya, 2013; LIRS reforms; studies by Dopemu, Asaolu & Monday; Ade & Festus, 2020). Evidence links tax/IGR reforms to expanded infrastructure expenditure across multiple sectors.

The study employs a descriptive and comparative approach using secondary data and documentary analysis. It examines Puntland’s revenue situation, infrastructure status, and economic context (with emphasis on 2019–2022) drawing on World Bank reports, federal and state statistics, population and sector assessments, and prior academic and policy literature. It also undertakes a comparative case review of Lagos State, Nigeria, documenting revenue administration reforms and the associated impacts on IGR and infrastructure spending to extract lessons relevant to Puntland. Sectoral snapshots (land/urban planning, housing, transport—roads, ports, airports) provide contextual diagnostics rather than primary data-based econometric testing.

- Revenue levels and structure: Puntland’s per capita revenue (~US$38 in 2018) lags FGS (US$74) and Somaliland (US$53). Taxes dominate Puntland’s revenues (about US$42.4m of US$56.3m in 2018, ~75%). Despite progress, revenue remains insufficient relative to infrastructure needs. - Administrative weaknesses: Significant gaps in tax administration capacity, training, automation, information systems, and process clarity; heavy reliance on manual, paper-based systems; cash handling risks; extensive discretion among tax/customs officials; weak enforcement and oversight foster leakages. - Infrastructure deficits: Somalia’s 21,933 km road network is largely unpaved (13% paved; 83% earth), with 90% of main roads beyond design life; Puntland faces urgent needs for major road rehabilitation and improved inter- and intra-state connectivity. Ports are strategically located but face equipment and operational constraints; piracy incidents fell from 237 (2010) to 15 (2013). Airports are crucial for connectivity given sparse settlement patterns, but sector governance is fragmented and capacity-constrained; demand is outpacing facilities in Puntland (Bossaso, Garowe). - Urban challenges: Disorganized urbanization due to weak land-use planning; IDP settlements in peri-urban areas exacerbate informality and strain services; outdated laws and lack of coherent policies hinder coordinated infrastructure interventions. Housing shortages are acute amid high population growth (~3% annually; fertility 6.26 children per woman), with vulnerable groups disproportionately affected. - Lagos case evidence: Comprehensive tax administration reforms (taxpayer education, e-payments, e-TCC, self-assessment, expanded local offices, sector-focused units, and enforcement) broadened the tax base with annual taxpayer growth rates consistently above 20%. Studies report significant positive relationships (cointegration) between IGR and government expenditures on infrastructure sectors (e.g., housing increases exceeding N24.4 billion during rising IGR; impacts also on roads, health, education, security, water resources), supporting the view that IGR growth enables expanded infrastructure investment. - Overall inference: Revenue generation significantly influences infrastructure development and broader economic growth in Puntland; prioritizing and strengthening domestic revenue mobilization is essential to fund critical infrastructure.

The findings address the core question—whether and how IGR affects infrastructure—by documenting that Puntland’s current domestic revenue base, though improving, remains inadequate to finance the scale of infrastructure needs in transport, housing, and urban systems. Administrative weaknesses depress effective revenue mobilization, limiting budgetary space for capital projects. The Lagos comparison illustrates that targeted reforms to tax policy and, crucially, tax administration (technology, transparency, enforcement, and taxpayer services) can raise IGR, which in turn correlates with higher infrastructure spending across sectors. For Puntland, breaking path dependency on external grants requires institutional reforms, automation, professionalization, and public engagement to grow sustainable domestic revenues. Enhanced IGR is positioned as a prerequisite to systematic infrastructure planning and delivery, improving connectivity, service access, and economic competitiveness.

The study concludes that internal revenue generation is a critical driver of infrastructural development and economic growth in Puntland. While recent efforts (post-2019) have improved revenue collection, administrative costs, capacity constraints, and systemic inefficiencies limit effectiveness. Drawing on lessons from Lagos, the study underscores the need for robust tax administration reforms, technology adoption, transparency, and taxpayer engagement to sustainably expand IGR and finance infrastructure. Recommendations include: - Develop SME-oriented projects in agriculture and industry to broaden the tax base and employment. - Commit revenue to visible, high-quality social and economic services (health, water/sanitation, education, urban amenities) to build trust and compliance. - Invest in staff capacity building and motivation to professionalize revenue administration. - Reassess and reorganize revenue sources (taxes, licenses, fees, fines, grants, aids, loans) and conduct public education to improve compliance. - Modernize collection systems with technology, and strengthen accountability and transparency. - Promote public–private partnerships for infrastructure financing and delivery. - Establish monitoring and evaluation mechanisms to track the impact of IGR on infrastructure outcomes and inform policy adjustments.