Nearly every quarter, the National Bureau of Statistics (NBS) releases its report on internally generated revenue (IGR) by states.
The data more than any other thing is an indicator of the health of a state’s economy and therefore should get the attention of any growth startup seeking to expand.
“The amount of IGR a state makes should tell a growth startup something about the state,” Chuba Ezekwesili, co-founder and partner at Future Africa told BusinessDay. “What they do with that information from a strategic point of view is highly dependent on their intention, which might be to focus operations on an economically active environment or establish themselves physically in a business-friendly environment.”
The NBS released the IGR report for the first three quarters of 2019 on Thursday. The top five states with the least IGR for the three quarters include Yobe (N3.34 billion); Gombe (N4.24 billion); Taraba (N4.72 billion); Ebonyi (N5.64 billion) and Kebbi State (N5.9 billion).
Leading the top five best performers table are Lagos State (297 billion); Rivers State (107 billion); FCT (N55 billion); Ogun State (N52.8 billion); and Delta (N49 billion).
While Lagos as the state with the largest IGR isn’t a surprise, it also shows why the state host the most tech hubs and start-ups as well as account for 90 percent of the total investments that have gone to Nigerian start-ups.
“There is a reason why Lagos attracts lots of startups,” Collins Onuegbu, vice chairman of Signal Alliance told BusinessDay. “The IGR numbers in Lagos is a reflection of the level of economic activity and the services that the state can accommodate.”
On the other hand, poor IGR numbers send the wrong signal to investors.
Adedeji Olowe, CEO of Trium Networks, list some of the things that could be wrong with a state that has small IGR.
“A state with poor IGR wouldn’t be well managed,” he says.
Other problems could be bad roads, high level of insecurity, no respect for the rule of law, corrupt officials (money generated is small, so they are poorly paid or delayed) and businesses would be frustrated as they would need to bribe every step of the way.
So any startup that wants to go to such a state needs to determine the size of the opportunity for its business in the state.
Ezekwesili also makes the important point that the IGR is but one factor and using it as a proxy for pulling the trigger could be ill-advised.
He explains that the amount of IGR a state generates is highly dependent on its revenue source.
“A state like Lagos could have a high IGR that’s driven by industrialization or the service economy, which indicates a development pattern that’s favorable to startups. In this case, such a state economy reveals the economic opportunity and the potential presence of a market for the startup. A state capable of building an efficient tax institution is also likely to have the capability to build out other institutions necessary to the growth of startups.
“However, this isn’t guaranteed. In the other scenario, a South-South state could have a high IGR that’s entirely comprised of earnings from oil-related revenue, but have little in terms of actual development, which shows in a high rate of unemployment,” he said.
There are clearer metrics for startups to focus on. The metrics include the potential market that exists in a state and how business-friendly a state is in terms of its tax rules, infrastructure, policies and quality of life for its employees.
“Sadly, we will continue to see several services offered by startups being limited to Lagos and a few other states in Nigeria; Abuja, Port Harcourt mostly,” Onuegbu said.
To be fair, states like Kaduna, Oyo and Ekiti with IGR at N28.1 billion, N20 billion, and N8.3 billion respectively, have shown promise in creating an enabling environment that accommodates small businesses. This is already paying off in the growing number of tech hubs and startups springing up in Kaduna and Ekiti.