Somalia Airport

The Federal Government of Somalia entered into an amended and restated Concession Agreement on the Management and Upgrade of the Aden Abdulle International Airport, Mogadishu with the private sector operator, Favori LLC on 16 May 2019. The African Legal Support Facility (ALSF) supported the federal government with legal advisory services and technical advice during the renegotiation process to enable the government successfully conclude a stronger amended concession agreement. The international law firm of Latham and Watkins LLP and aviation sector specialists, Mott Macdonald were engaged to provide the FGS with specialist legal advice and technical support during the renegotiation process. The renegotiation of the airport concession agreement is a step in the right direction for Somalia in achieving fairer and more balanced commercial agreements that are in the best interest of the nation. The revised agreement also assists the country in meeting some of the structural benchmarks set by the IMF under its Staff Monitoring Program that aims to support Somalia in achieving debt relief. The revised agreement represents a considerable improvement over the initial concession agreement signed with the Contractor and marks a significant step towards best practice on concession contracts. For example some of the key improvements captured in the revised agreement include: • Revenue Transparency: The basis of the payment to the government has been changed from a share of profits to a share of airport gross revenue. This greatly improves the transparency of funds due to the government and correspondingly, the ability of the government to ensure it is paid appropriately. • Clear Commercial Basis: The government’s agreed revenue share has been adjusted from 45% of net profit to 25% of gross revenue. The government share of 25% of gross revenue is based on an analysis of the expected investment and operating costs of the Contractor and an estimate of expected future revenues. The rate of return expected to be generated by the Contractor is broadly in line with what is expected to be required by international operators in a risky operating environment. The government revenue share is expected to result in cash flows to the government that are similar to those being generated under the current agreement. • Investment Plan: Clear, time bound airport development requirements are captured in the revised agreement. • Operating Requirements: A much clearer specification of obligations of the Contractor and the inclusion of a Key Performance Indicator regime will enable the FGS to better ensure the required services are being provided to an appropriate level. • Regulated Charges: the revised agreement includes a category of regulated revenues associated with the core airport services to be provided by the Contractor. The revised agreement further specifies that fees associated with regulated revenues are subject approval of the Somali Civil Aviation Authority. • Taxation: the initial agreement provided a corporate tax exemption for 5 years, which was inappropriate given that such exemptions could only be authorized by the Ministry of Finance. The revised agreement clearly requires the payment of taxes according to prevailing legislation, with the exception of import duty on goods and equipment related to airport development works. However, due to the nascent corporate income tax regime in Somalia and in order to facilitate collection, a provision was inserted to include the value of corporate income tax due to the government in the FGS revenue share. The Government revenue share of 25% was derived on this basis, and funds paid to the Government will therefore be split between tax and non-tax revenue • Monitoring and Reporting: the revised agreement provides clear requirements for the reporting and audit of operational and financial data related to the operation of the airport. The provision of such information will enable the government to determine if it is receiving the appropriate fees from the Contractor and if the Contractor is meeting its obligations. • Capacity Building Training: As part of the support project, the ALSF together with the project legal counsel were able to work closely with senior Somali government officials to enhance their capacity in negotiating complex concessions agreements. This included the provision of a 5-day capacity building workshop for at least 20 senior government officials on negotiating airport concession agreements