Calculating operating surplus of government-owned enterprises

Public investment in government-owned enterprises is expected to facilitate the delivery of services, provide public goods as well as yield profits, interest, surplus and dividends arising from the proper management of the investment. Under the Fiscal Responsibility Act, this surplus is termed “operating surplus”. It is the equivalent of dividends in private or publicly quoted companies. Furthermore, there are ministries, departments and agencies that generate income from the nature of the services they render and, as such, are under obligation to remit their operating surplus to government. This discourse reviews the challenges in computing the operating surplus of GOEs and recommendations for the amendment of the FRA to take cognisance of the nature and essential characteristics of all types of GOEs.

The Operating Surplus Calculation Template, devised by the Fiscal Responsibility Commission, in its explanatory notes makes the following remarks about operating surplus: “Operating Surplus is the excess of income over expenditure of the government-owned corporation from the result of their operation over a period of one fiscal year.

The payment to the government is a distribution share of the operating surplus and not a tax or levy. In the private sector, such outfits aim at remunerating their investors with dividends and bonus/script shares. Having been set up with public funds, it is expected that the ‘capital’ injected in the setting up/running costs is remunerated appropriately. The corporations, being government-owned, are exempt from corporate taxation hence the available surplus is for the purpose of payment of the operating surplus and retention of the balance thereof for their use.”

 The foregoing provides a clear picture of the rationale and basis of the demand for operating surplus to be remitted to the treasury for public use.

However, there are different types of GOEs and their classification based on the source of their funding is the most relevant for the calculation of operating surplus due to government. Some GOEs are fully funded from the budget, others are partially funded from the budget while some are self-funded after the government has provided the initial capital setting them up. The extant provisions of the FRA and the amendment in the 2020 Finance Act make no distinctions between these three types of GOEs in the calculation of operating surplus and this is creating some challenges in the implementation of the law. The current law is that cost to revenue ratio shall not exceed 50%. Taking cognisance of the mischief in the existing law, it has become imperative that some amendments be made to ensure a more balanced provision that relates to the nature and funding of the GOEs.

The first amendment should be to tie the calculation of operating surplus to the Operating Surplus Template as devised by the FRC, while retaining in general the 80% rule which should be paid over to the treasury while 20% goes to the reserve fund of the GOE. The second amendment should be to apportion returns from operating surplus in accordance with the nature of funding for the GOE or agency. If the GOE or agency is fully funded through the annual Federal Government’s budget, it should remit 100% of its internally generated revenue into the Consolidated Revenue Fund of the Federal Government as payment on account with respect to its operating surplus.

If the GOE or agency is partially funded from the Consolidated Revenue Fund of the Federal Government, it should limit its annual expenditure within its internally generated revenue to not more than 60% of its gross revenue and remit 40% of its gross revenue quarterly into the consolidated revenue fund of the Federal Government which shall be considered as payment on account with respect to its operating surplus.

However, for a self-funded corporation, it shall limit its annual expenditure within its internally generated revenue to not more than 70 per cent of its gross revenue and remit 30% of its gross revenue quarterly into the Consolidated Revenue Fund of the Federal Government which shall be considered as payment on account with respect to its operating surplus.

But there are GOEs and agencies which may still have excess funds, above their needs which they cannot legitimately use based on these general specifications. There will be the need for the FRC, arising from the review of the operating surplus remittances of a GOE or agency to be equipped with the power to commission operating surplus audits/studies into the finances of GOEs and agencies. This will be done with a view to ascertaining the revenues and actual needs of the GOE benchmarked against very functional and performing GOEs in their class. Furthermore, the amendment proposes that where a corporation’s result is a deficit, the corporation shall be subjected to a forensic audit by the FRC at the end of which the deficit, if confirmed, shall be classified as the corporation’s loss for the fiscal year, without prejudice to any further measures that may be taken regarding the management of the corporation in order to enhance its productivity as may be recommended by the FRC.

When the foregoing reforms are coupled with the transparency proposal of enlisting all GOEs into the Treasury Single Account, it will produce a revenue profile of not less than N2 trillion for the Federal Government. Sanctions should be provided for providing false information to the authorities, withholding information, creative accounting, obstructing the FRC or any other agency that is working to properly calculate operating surplus, etc. The sanctions for offenders should include imprisonment and hefty fines, the equivalent of not less than 25% of the sum being unlawfully withheld. Of course, the wrongly withheld sum should be recovered.