Osun-Turkish Cooperation: Lessons From Concession Agreement Of MKO International Airport

By Inwalomhe Donald The State Government of Osun has signed a concession agreement with All Works of Life (AWOL) International Limited for the completion of the MKO Abiola International Airport, Ido-Osun. The signing of the concession agreement which is to annex the infrastructural development of the state was held at the State secretariat. AWOL International…”
Emmanuel
October 28, 2017 8:40 am

By Inwalomhe Donald

The State Government of Osun has signed a concession agreement with All Works of Life (AWOL) International Limited for the completion of the MKO Abiola International Airport, Ido-Osun. The signing of the concession agreement which is to annex the infrastructural development of the state was held at the State secretariat. AWOL International Limited in partnership with a Turkish company, Biray Group is expected to complete the project within the span of 8 months. It is clear what nations have achieved by allowing private investors to handle businesses as concession enables long term focus to meet the demands of international competition, maintain a customer-focused plan and also free the government from providing subsidies to an unprofitable enterprise. Governor Aregbesola has developed the first policy on airport concession and put in place administrative and legal frameworks in Nigeria that will provide the platform for transparent concession agreement that would be fair to both government and the investor. Osun airport concession will allow for better adjustments to market changes and will often provide more innovative solutions to customers, resulting in improved outcomes for all and create a dynamic workforce.

The Chief Executive Officer, AWOL International Limited, Amb. Nurudeen Ogunlade, said the agreement is of great significance to both the concession and concessionaire. According to him, the airport when completed will open the doors of trade and investment among neighboring states in the southwest as well as add to the state’s economic value globally. Enumerating facilities to be expected at the Corporate Airport, Amb. Ogunlade who heads the concessionaire held that aside the first phase to be completed before the last quarter of 2018, other amenities that befits the location and geographical area of an airport will be facilitated within 2 years. His words “On the completion of the construction of First Phase of the Airport within the period of 8months, it will take off with five aircraft, three passengers helicopter and one cargo by AWOL International Company. To complete the entire establishment of the Airport with 5 Star Hotels including all amenities like Cultural center, Water Park Recreation Center and Garden, Butterfly Museum and Casinos, it will take the period of 2 years.”

“According to the airport’s design, it will facilitate the smooth movement of the people and goods from one point to other and serve as a channel way for tourism, hanger and cargo.” He noted that the concession agreement was not in any way detrimental to the economy of the State as it will run for 30 years before it will be fully handed over to the State government commending the Governor for his efforts in giving the state enviable legacies for the future.

Recently, Nigerian airports failed to meet the safety and security requirements of the US Federal Aviation Administration (FAA) audit for the renewal of Nigeria’s Category 1 safety status. The consequence of the failure is that Nigerian airlines will be barred from flying to the United States of America within the few weeks if the Nigerian Civil Aviation Authority (NCAA) and the Federal Airports Authority of Nigeria, (FAAN) fail to resolve specified challenges of the aviation sector.

Nigeria’s inability to meet the set standard was linked to the problems of lack of operational state-of-the art civil aviation systems, inadequate provision of technical guidance and tools, ineffective surveillance systems, safety concerns, among other issues. The approved concessioning of Osun airport should be used as opportunity to entrench openness and accountability in the management of the airport system in the country. There is no doubt, the panacea to the construction of airport facilities in Osun is concession. This is because the private sector has the resources to invest for the development of critical infrastructures in the aviation sector. Additionally, the private sector is also known to be better than most governments of developing nations in terms of openness and accountability in the deployment, utilization, and management of scarce resources.

“So, concessioning the Osun airport will augur well for the Nigerian people not only in the short-to-medium term but in the long term since the airport will be returned to government after some years. To fast-track the construction of Osun airport, concessioning process will ensure that the benefits inherent in it are maximised, the Osun Government has expressed willingness and determination to address what appears to be an adversarial relationship and trust deficit between the private sector and government.

Ten key lessons for Osun airport concessioning:

Successful Osun airport concessioning wills engage customers as key stakeholders from the outset in establishing the master plans, financial plans and the economic regulation process and then involve them in an ongoing and regular basis through agreed processes and full transparency;

More efficient management is the key to successful concessioning of Osun airport, since cost of capital is almost always high- er in the private sector;

Good governance is more important than transferring ownership to the private sector, in order for concessioning to be in the public interest;

Independent, robust economic regulation will always be necessary to create incentives for efficiency improvements and for sharing these gains with customers, in the private monopolies created by concessioning.

The most successful economic regulation has been where the regulator is also overseen by an independent Competition Commission to prevent too comfortable a relationship between the regulator and the regulated entity;

Economic regulators have sometimes been good at extracting maximum value from existing assets, but have not been good at ensuring cost-effectiveness from new investment;

Mechanisms to incentivise cost efficiency and continuous improvements must be built in from the outset.  CPI- X price cap regulation will create the incentives for efficiency improvement, whereas direct or rate-of-return regulation risks preserving monopoly profits and inefficiencies in the early stages of a concessioning airport.

In order to ensure good quality as well as cost-effective service, it is essential to have in place service level agreements (or similar systems) to ensure that service quality standards are maintained and improved;

Controls must be put in place to prevent unjustified asset revaluations and moves to dual-till accounting, which leave costs common to both aeronautical and commercial services, burdening airlines and their passengers with substantial charge increases;

A new model, for structuring infrastructure providers in the private sector, is emerging, which could in theory better serve customers; a debt-financed private company structure limited by guarantee, accountable to a board of customers and business partners.  In practice this still may not prevent ‘gold-plating’ on investment programmes.  Customer involvement remains essential;

In his remarks, Osun State Governor, Rauf Aregbesola, said the government had wished to embark on the project and deliver at the appropriate time but was hampered by the financial situation of the country. Giving a thorough breakdown of the state of the Airport before the concession arrangement, Ogbeni Aregbesola said the project at inception was financed through “flexible funding” with an appreciable level of the payment to the tune of N3.6bn.

The Governor said like other infrastructural projects, the airport financing method was effectively fashioned out to ensure its completion just as he expressed appreciation to the Turkish Firm for believing in the multi-various merits attached to the Airport if eventually completed.

Aregbesola said “We are doing something that is really extraordinary to take make this state a light bearer of Nigeria. When I began the entire project; the airport, roads, the schools and other social infrastructures I was so sure that if there is no problem with the scheme of income definitely all these project will be completed. The arrangements we put on ground is to ensure effective completion of those project after all we did not use the conventional method of financing our project rather we brought to bear what we called ‘flexible funding’ which we pay the contractor as at when due through bank.”

“However, it was the change of the income scheme that constrained financially which made it impossible for us to continue with the project. But before the fund initiation from our scarce income we have expended on the project the sum of N2,926, 27,948.5 billion. The contractor handling the project has done certified work amounting to N3,667,178,112.15 billion meaning that outstanding for the contractor against the state is the sum of N640, 970,164.10 million and these amounts includes retention of N170, 609, 64.16million.”

Inwalomhe Donald writes from Benin City [email protected]

 

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