CONTENTS Preface ........................................................................................................................................................................................................ i Abbreviations.......................................................................................................................................................................................... iii Executive Summary............................................................................................................................................................................. iv I. Introduction....................................................................................................................................................................................... 1 Role of the FGC ................................................................................................................................................................................ 1 Purpose of the Financial Governance Report.................................................................................................................. 2 2. Financial Governance Risks During the Political Transition, July 2021 to May 2022................... 3 Electoral delays................................................................................................................................................................................... 3 Acute budget pressures................................................................................................................................................................ 5 Reform delays...................................................................................................................................................................................... 9 Poor contracting practices ......................................................................................................................................................... 11 3. Priorities for the Incoming Administration................................................................................................................ 14 Continuation of Economic and financial reforms........................................................................................................... 14 Commitment to due process in procurement and concessions........................................................................... 15 TABLES Table 1: Budget support disbursements to FGS, 2019–22 (US$ millions)............................................................... 5 Table 2: Domestic revenues and government spending, 2014–21 (US$ millions)............................................ 6 FIGURES Figure 1: FGS revenues and expenditures, 2014 – 2021 (US$ millions).................................................................... 6 Figure 2: FGS monthly revenues and expenditures, 2021 – 2022 (US$ millions) ............................................... 8 Figure 3: FGS transfers to FMS and BRA, 2018 – 2021 (US$ millions)......................................................................... 8 BOXES Box 1: FGC advisory notes and contract reviews 2021-22............................................................................................... 4 Box 2: IMF ECF programme implementation and achievement of debt relief.................................................... 7 ANNEX Annex A: Progress against FGR 2021 priorities....................................................................................................................... 17 Annex B: Contracts and concessions reviewed by the FGC since 2014 ................................................................. 18 Annex C: List of bills and agreements returned by parliament following the expiry of its term............... 21 PREFACE The 2022 Financial Governance Report (FGR) is the sixth annual report of the Financial Governance Committee (FGC). It presents the collective view of FGC members on developments in financial governance in Somalia over the past year, and priorities for the year ahead. Previous FGRs are available on the FGC website.1 Work by the FGC Secretariat in producing this report is gratefully acknowledged. 1 See website for further information: https://mof.gov.so/the-ministry/financial- governance-committee FINANCIAL GOVERNANCE REPORT 2022 ii FINANCIAL GOVERNANCE REPORT 2022 ABBREVIATIONS AML/CFT Anti-Money Laundering / Combating the Financing of Terrorism ATM Automated Teller Machine BRA Banadir Regional Administration CBS Central Bank of Somalia ECF Enhanced Credit Facility EU European Union FGC Financial Governance Committee FGR Financial Governance Report FGS Federal Government of Somalia FMS Federal Member States HIPC Highly Indebted Poor Countries IMCC Inter-Ministerial Concessions Committee IMF International Monetary Fund MoF Ministry of Finance MPMR Ministry of Petroleum and Mineral Resources NISA National Intelligence and Security Agency OAG Office of the Auditor General PSA Production Sharing Agreement RCRF Recurrent Cost and Reform Financing RfP Request for Proposals SDR Special Drawing Rights SNA Somali National Army SoBS Somalia Bureau of Standards SOMCAS Somali Customs Automated System US$ United States Dollar iii FINANCIAL GOVERNANCE REPORT 2022 EXECUTIVE SUMMARY The Financial Governance Committee (FGC) provides the Federal Government of Somalia (FGS) with a forum for dialogue and confidential advice on sensitive financial governance issues. The FGC’s role is purely advisory; it does not have executive powers. By agreement with the FGS, the FGC reviews all concession agreements and all procurement contracts above US$5 million in value. The annual Financial Governance Report (FGR) reviews progress on issues that have been discussed by the FGC during the past year. Financial governance risks during the political transition Somalia was due to hold elections by February 2021. The timetable was subject to repeated slippages because of disagreement among the FGS, the FMS, and opposition parties over the electoral model and process. New members of the eleventh Parliament were eventually sworn in during April 2022, and a new President was elected in May 2022 for a four-year term. The uncertainty created by the extended period of political transition greatly increased financial governance risks during 2021 and into 2022. The FGC monitored these risks closely and provided regular advice to the FGS on how to mitigate them. Acute budget pressures Major sources of budget support were put on hold once the February 2021 electoral deadlines was missed. The substantial drop in inflows created acute financial pressure for the FGS, which did not have enough revenue to pay salaries and operational expenses. Domestic revenues supported less than fifty percent of total government spending in 2021 and the FGS faced an average monthly funding deficit of US$8 million. The Ministry of Finance (MoF) was forced to find alternative sources of financing to continue paying salaries and security sector rations on time, and to avoid accumulating arrears in accordance the IMF programme requirements. It had no recourse to external borrowing, and limited scope to cut expenditures given the dominance of the wage bill in total spending. Initially the MoF utilised unspent budget support funds from 2020 and drew down funding from a buffer account. It then took out a temporary loan from the Central Bank of Somalia (CBS), as permitted by the CBS Act. An unexpected windfall from the global iv FINANCIAL GOVERNANCE REPORT 2022 allocation of IMF Special Drawing Rights (SDRs) in August 2021 helped alleviate the fiscal pressure. The SDRs were used to repay the MoF’s loan from CBS and interest charges on World Bank debts, after which the remainder was divided equally between the MoF and CBS. This provided FGS with just enough funding to cover the monthly deficit until the second quarter of 2022. Despite these actions, non-salary funding to FGS institutions was highly constrained in 2021 and early 2022. FGS funding to the FMS and Banadir Regional Administration (BRA) was also severely curtailed, with the drop in funding was particularly acute for the newer FMS, who have limited own- source revenues. The squeeze on operational funding for FGS institutions and transfers to the FMS will likely continue for the remainder of 2022. The incoming FGS administration will need to reach an early understanding with major budget support donors to enable the resumption of budget support funding, otherwise it will be unable to pay FGS salaries on time or in full within a few months. Reform delays Implementation of some elements of the FGS’s economic reform programme continued despite the political uncertainty. The Office of the Auditor General (OAG) completed a statutory audit of the FGS’s 2020 financial statements, compliance audits of 24 FGS institutions, and two special audits. The CBS made progress on financial sector reforms, including licensing of mobile money providers, implementation of the National Payment System, and development of the Somali Payment Switch. The MoF made progress on customs reforms through development of a Customs Automated System (SOMCAS), and continued to work to enhance revenue mobilisation in the telecommunications sector. Other important reforms have been put on hold, however. Consultations on proposed revisions to the Federal Constitution have stalled since early 2020. More than 20 draft FGS laws were returned to the Cabinet following the expiry of the parliamentary term, including important financial governance laws such as the Extractives Industries Income Tax (EIIT) Bill and the Targeted Financial Sanctions Bill. Electoral delays have tested the limits of the legal framework for financial governance. The FGS was not able to present the 2022 budget for appropriation before the start of the v FINANCIAL GOVERNANCE REPORT 2022 financial year, because the Parliament’s term had expired. The PFM Act does not contain provisions for continued expenditure after ninety days beyond the past financial year. The Cabinet therefore approved a budget for the second quarter of the year and the President approved it by decree. The delays have highlighted that greater legal clarity on transition provisions would be valuable. These include the circumstances under which the departing administration may make new contractual commitments or new personnel appointments. Electoral delays have also put successful implementation of the IMF programme at risk, as the Oil and gas licensing has been the most problematic IMF was not able to complete a programme review and unpredictable area of government contracting by May 17, 2022. The IMF Board granted a one-off during the transition period. In November 2021, the three-month extension to the review deadline. If Ministry of Petroleum and Mineral Resources (MPMR) the programme is not reviewed by August 17, 2022, submitted a model oil and gas Production Sharing it will automatically terminate. Termination would Agreement (Model PSA) to the Inter-Ministerial delay agreement on budget support financing, Concessions Committee (IMCC) for approval, in line thereby aggravating current budget pressures, with Somali legal requirements. The Model PSA is and would also substantially delay the timeline for intended to support the conduct of an oil and gas achieving debt relief. licensing round. In February 2022, before MPMR had started the licensing round, the Minister of Petroleum Poor contracting practices unexpectedly announced the direct award of seven The protracted electoral transition heightened the oil and gas PSAs to Coastline Exploration. risk of a deterioration in government contracting practices. To mitigate the risk of FGS institutions The Model PSA establishes a relatively low petroleum seeking improperly to push through contract awards royalty rate of five percent. The profit share ratios before the change in administration, the President between government and the contractor are not issued a decree prohibiting all FGS institutions from fixed, and contractors are required to propose ratios signing agreements with international companies as a part of their licensing round bids. Obtaining until after the elections. competitive profit share ratios is necessary to ensure that the FGS receives an adequate overall The FGC nonetheless became aware of several return from petroleum production. The FGC has not attempts by FGS institutions to award concession received copies of the Coastline PSAs from MPMR. contracts on a non-competitive basis without It has therefore been unable to assess whether the following the requirements of the Procurement commercial terms, which have not benefited from Act. The Ministry of Ports proposed to award a ship competition, protect the financial interests of the FGS. registration and certification concession that was poorly specified and had not been subject to any Although the Petroleum Act gives the Minister of tender process. The Ministry of Commerce attempted Petroleum the authority to sign PSAs, the process to award a concession for import conformity of tendering, negotiating, and awarding PSAs must assessment services on a sole-source basis. Legal be consistent with all other applicable laws. MPMR opinions issued by the State Attorney General’s did not request IMCC authorisation to conduct Office appeared to endorse these actions, even direct negotiations with Coastline, as required by though the office does not have powers under the the Procurement Act. Nor did it share an evaluation Procurement Act to waive its provisions. Following report recommending the award of each PSA with interventions by the MoF and the OAG, it appears the IMCC after contract negotiation. that neither contract proceeded to signature. vi FINANCIAL GOVERNANCE REPORT 2022 The President and the Prime Minister rejected the Commitment to due process in procurement Coastline awards, on the basis that they were and concessions unauthorised and did not follow the required legal It is important that the incoming leadership makes process. The Auditor General also concluded that a clear and early commitment to due process in a number of required procedures had not been awarding public procurement and concession followed. The Ministry of Foreign Affairs sent formal contracts. All FGS ministers and institutions should notification to Coastline Exploration that the FGS be made aware of this requirement by the Prime considers the awards null and void. Coastline has Minister. The MoF should issue a circular explaining since indicated that it considers the contracts to the tendering and oversight procedures that apply be valid. to public procurement and concessions. Priorities for the incoming administration The incoming administration is advised to continue the current practice of requiring FGS institutions to work with the MoF’s Procurement Department when conducting high-value procurement and when developing concession contracts. The incoming administration should also demonstrate its commitment to competitive procurement by immediately launching new tenders for security sector rations and fuel contracts. The new administration will need to pay special attention to oil and gas contracting. The MPMR and the Somalia Petroleum Authority (SPA) should prepare a transparent and competitive licensing round for oil and gas awards that meets all applicable Continuation of economic and financial reforms FGS legal requirements. SPA should only enter into negotiations for direct oil and gas awards after the The incoming administration needs to reach licensing round is complete, and only in cases where immediate agreement with the IMF on the terms direct negotiations have been authorised as per of the continuing ECF programme. Amongst other FGS’s legal framework, including the Procurement things, this will mean that FGS will need to agree Act. The incoming administration will need to targets for domestic revenue and the fiscal balance, examine the seven PSA awards to Coastline and and will need to avoid incurring any debts or deal with any potential legal dispute arising from accumulation arrears. Satisfactory implementation of the IMF programme is a pre-condition for budget their nullification. support disbursement by major donors. Finally, the new administration should seek to Accordingly, MoF will need to focus strongly on prevent repetition of the problems encountered mobilising revenues and prioritising key areas of during the recent transition by developing a expenditure. The new administration must resist detailed definition of the ‘routine duties’ that political pressure either to ease revenue reforms or may be conducted by a caretaker government, to accommodate new expenditure priorities at the as well as clear rules for contracting in the pre- expense of existing obligations. It must also avoid electoral period. any non-essential expansion of the salary base. vii FINANCIAL GOVERNANCE REPORT 2022 viii FINANCIAL GOVERNANCE REPORT 2022 I. INTRODUCTION Role of the FGC The FGC meets on a regular basis3 and provides advice to the FGS through a combination The Financial Governance Committee (FGC) was of dialogue, written advisory notes, and established in early 2014 by mutual agreement commissioned technical assistance. The existence between the Federal Government of Somalia (FGS) of the FGC provides the international community and the international community. Its purpose with assurance that the FGS is receiving is to provide the FGS with a forum for dialogue confidential expert advice on financial governance and confidential advice on sensitive financial policy issues and major contracts. Their general governance issues. The FGC’s role is purely advisory; expectation is that the FGS will give the FGC’s it does not have executive powers. By agreement advice serious consideration and will seek to with the FGS, however, it reviews all FGS concession implement it unless there is a compelling reason agreements and all FGS procurement contracts not to do so. The FGC’s continued functioning has above US$5 million in value.2 been a safeguard measure in the budget support agreement between the FGS and the European Union (EU). 2 Concession agreements grant an interest in a public asset to a private entity for a specified period in return for a fee, royalty, or other consideration, whereas procurement contracts govern the purchase of public goods, works, and services. 3 The FGC has held 54 meetings since 2014. 1 FINANCIAL GOVERNANCE REPORT 2022 The FGC is chaired by the Minister of Finance, and Purpose of the Financial Governance Report other FGS members include the Governor of the Central Bank of Somalia (CBS) and representatives The FGC’s annual Financial Governance Report of the President and the Prime Minister.4 Other FGS (FGR) reviews progress on issues that have been officials may attend FGC meetings by invitation. discussed by the FGC during the previous year. International members of the FGC include It does not attempt to provide a comprehensive representatives of the International Monetary Fund report on all economic and financial governance (IMF), African Development Bank, World Bank, and issues in Somalia, beyond those discussed within bilateral development partners (including the EU). the FGC. The FGR sometimes includes an additional The FGC receives expert support from a dedicated ‘spotlight’ chapter that goes into greater depth on Concessions Adviser and an FGC Secretariat. Funding a specific financial governance issue of concern to for FGC operations is provided by the World Bank5 and the FGC, identifying lessons over a multiyear time the EU. period, persistent barriers to progress, and potential reform priorities.7 FGC discussions are confidential, but meeting summaries are published on the Ministry of Finance Since 2022 is a transition year following the country’s (MoF) website following each meeting.6 Individual extended timeline for elections and political FGC advisory notes may be made available to other changeover, the 2022 FGR covers the period from July stakeholders at the discretion of the FGC Chair. The 2021 to the end of the current FGS administration, FGC’s international members periodically brief the rather than a fixed twelve-month period. Chapter international community on the FGC’s work and any II focuses on the financial governance risks that emerging issues. have emerged during the political transition and reflects on lessons learned. Chapter III identifies The FGC was initially established for a two-year major financial governance priorities that require period. Its mandate has subsequently been renewed early attention and action from the incoming on an annual basis, subject to mutual agreement administration. Annex A provides an overview between the FGS and the international community. of progress made in implementing the priorities The continuation of the FGC after the end of the identified in the 2021 FGR. Annex B provides details current FGS administration will need to be agreed on all contracts and concessions reviewed by the between the incoming administration and the FGC since 2014. Annex C provides a list of the draft international community. laws sent back to Cabinet by the Parliament on the expiry of the parliamentary term. 4 The Chair of the Budget Committee of the Lower House of Parliament and the State Attorney General (Garyaqaanka Guud) are also nominated members of the FGC, but have not attended meetings in recent years. 5 World Bank funding to the FGC is provided through the Multi Partner Fund, which is funded by the EU, Finland, Germany (KfW ), Denmark, Norway, Sweden (Swedish International Development Cooperation), the United Kingdom, Italy, Switzerland (Swiss Agency for Development Cooperation), the United States (United States Agency for International Development), and the World Bank. 6 See website for further information: Financial Governance Reports | Ministry of Finance - Somalia (mof.gov.so) 7 The 2020 FGR included a spotlight chapter on FGS procurement and concessions, while the 2021 FGR included a spotlight chapter on improving sector alignment with financial governance reforms. 2 FINANCIAL GOVERNANCE REPORT 2022 2. FINANCIAL GOVERNANCE RISKS DURING THE POLITICAL TRANSITION, JULY 2021 TO MAY 2022 Electoral delays Commission indicated that preparing elections by universal suffrage would take more than twelve Somalia was due to hold elections in advance of months,9 implying that a term extension would be the expiry of the federal administration’s four-year required to complete the electoral process. term on February 8, 2021. However, the timetable for the electoral process was subject to repeated These timelines led to significant political tensions slippages. Delays were initially caused by a lack of between the President and several Federal Member consensus over the electoral model. In February States (FMS), and a fall-out between the President 2020, President Mohamed Abdullahi Mohamed and his Prime Minister, Hassan Kheyre, who (Farmajo) signed an electoral law that paved the subsequently resigned after a no-confidence vote way for elections by universal suffrage. The law was by Parliament in July 2020. The President appointed criticised, however, for lacking detail on issues such a new Prime Minister, Mohamed Roble, in August as the definition of constituencies and the number 2020, and mandated him to resolve the electoral of seats to be allocated to each constituency.8 The impasse. In September 2020, the FGS reached an Chairman of the National Independent Electoral agreement in principle with the Federal Member 8 Heritage Institute for Policy Studies. 2020. “Expanded Participation Model: Alternative for Somalia’s 2020 One-Person One-Vote Plan.” Policy Brief (May 2020) Available at: https://heritageinstitute.org/expanded-participation-model-alternative-for-somalias-2020-one-person-one-vote-plan/ (accessed April 19, 2022). 9 Africanews. 2020. “Impossible to hold 2020 polls - Somalia elections boss.” June 27. 3 FINANCIAL GOVERNANCE REPORT 2022 States (FMS) that elections would be held on an delays in organising elections for the Lower House at indirect basis rather than by universal suffrage,10 and FMS level, new members of the eleventh Parliament that they would be completed by February 2021. were finally sworn in on April 14, 2022. Presidential However, owing to a lack of agreement between elections were held on May 15, 2022, twenty months the FGS, the FMS, and opposition parties over the after the initial electoral agreement between FGS and way in which indirect elections would be managed, the FMS in September 2020. Hassan Sheikh Mohamud elections were not held in advance of the expiry of was elected as President for a four-year term. the administration’s four-year term in February 2021. The administration therefore continued in office. The uncertainty created by the extended period of political transition significantly increased financial In April 2021, the President endorsed a proposal by a governance risks during 2021 and into 2022. The group of lawmakers to extend his term by two years FGC identified the emergence of three main risks: to enable preparations for elections by universal • Acute budget pressures; suffrage. This proposal was met with widespread • Reform delays; and opposition and created a political rift between • Poor contracting practices. the President and the Prime Minister, Mohamed Roble. The lawmakers reversed their proposal at the The FGC monitored these risks closely and provided request of the President, allowing for the resumption regular advice to the FGS on how to mitigate them. of indirect elections. However, implementation Its advice focused particularly on preventing non- continued to be delayed by political disagreements. compliant contract awards. Formal FGC outputs In October 2021, the President and the Prime Minister included advisory notes and contract reviews agreed to speed up the electoral process in order to (Box 1). The main challenges and developments conclude elections by December 2021. As a result of linked to each of these risks are discussed below. BOX 1 FGC advisory notes and contract reviews 2021-22 International delegates to the FGC prepared 8 advisory notes for discussion at the 2 FGC meetings held between July 2021 and May 2022. • Lessons learned from the 2021 security sector rations and fuel tenders (July 2021) • Updated details on Somali Bureau of Standards Request for Proposals (July 2021) • Somalia Civil Aviation Authority proposal to expand the scope of the draft tender for collection of unpaid air navigation charges to include development and management of a new entry permit system (November 2021) • Somali Bureau of Standards Request for Proposals (RfP) and Draft Contract Revised Version: 14 October 2021 (November 2021) • Review of the November 2021 Approved Petroleum Model Production Sharing Agreement and next steps for Oil and Gas Licensing (December 2021) • Review of draft RfP and Contract for the provision of import conformity assessment services (Revised version, 18 November 2021) (December 2021) • Review of the draft contract for a proposed concession agreement for statutory certification and registration services for maritime vessels (December 2021) • Next steps for the Tendering, Negotiation, and Award of Production Sharing Agreements in the Petroleum Sector (March 2022) 10 Somalia’s indirect electoral process involves the selection of 54 members of the Upper House (Senate) and 275 members of the Lower House (House of the People). Seats are assigned on a clan/sub-clan basis, and clan elders endorse the nomination of candidates competing for each seat. Lower House candidates are selected by an electoral college of 101 voters, while Senate members are voted in by the legislatures of their respective FMS. Once all Lower and Upper House representatives have been elected, they convene to select the Speakers of their respective Houses. The Speakers then arrange a bicameral process for the election of the President. 4 FINANCIAL GOVERNANCE REPORT 2022 Acute budget pressures primarily from the World Bank’s Recurrent Cost and Reform Financing (RCRF) facility and supplemented by US$2.5 million from the Turkish government (Table 1). Budget support inflows in the first three months of 2022 amounted to US$6.3 million. The substantial drop in budget support inflows in 2021 and the first three months of 2022 created acute financial pressure for the FGS, which did not have enough revenue to pay salaries and operational expenses. FGS domestic revenues increased by 170 percent between 2014 and 2021, but FGS salary expenditures grew by 220 percent over the same period. By 2020, the FGS was reliant on budget support funding to pay salaries in full and to cover core operational expenditures. The increase in FGS The FGS received record levels of budget support in salary expenditures was due in part to a pay increase 2020, amounting to US$180 million and accounting for awarded to security sector personnel following the 60 percent of all on-budget donor support that year. completion of a biometric registration exercise. The This support enabled the FGS to offset the revenue establishment of multiple new semi-autonomous impact of the COVID-19 pandemic in 2020 and to agencies also contributed to an expansion in the size provide additional financing to the FMS.11 Once the of government.12 The FGS’s payroll system has not 2020 electoral deadlines were missed, however, major kept pace with the expansion in salary expenditures, sources of budget support (from the EU and World and approximately a third of salary expenditures are Bank) were put on hold. As a result, budget support not reflected in the payroll. inflows in 2021 amounted to just US$38.4 million, TABLE 1 Budget support disbursements to FGS, 2019–22 (US$ millions) 2022 (to end Provider country/agency 2019 2020 2021 March) Turkey 15.0 15.0 2.5 Algeria 0.1 Qatar 21.3 European Union 29.1 7.7 World Bank – RCRF 23.3 30.4 35.9 6.3 World Bank – DPO 100.4 African Development Bank 26.2 Total 88.8 179.7 38.4 6.3 Source: MoF. 11 The FGS transferred US$23 million to the five FMS and Banadir Regional Administration (BRA) in September 2020 to help mitigate the impact of COVID-19 on their own revenue bases. This allocation was funded by budget support financing from the World Bank. 12 This issue is covered in greater depth in the 2021 FGR spotlight chapter on improving sectoral alignment with financial governance reforms. The chapter noted that the FGS’s 2021 budget included allocations for 18 independent agencies (US$29 million, 11 percent of FGS revenues), with a further 16 new agencies in the pipeline. 5 FINANCIAL GOVERNANCE REPORT 2022 TABLE 2 Domestic revenues and government spending, 2014–21 (US$ millions) 2014 2015 2016 2017 2018 2019 2020 2021 Domestic revenues 84.3 114.3 112.7 142.6 183.4 229.7 211.2 229.6 FGS salary expenditures 77.2 55.4 55.1 124.6 142.4 162.4 227.0 250 FGS total expenditures 151.1 135.5 171.1 245.4 286.1 315.5 494.7 473.8 Domestic revenues as a % 109% 206% 204% 114% 129% 141% 93% 92% of salary expenditures Domestic revenues as a % 56% 84% 66% 58% 64% 73% 43% 48% of total expenditures Source: MoF. In 2021, FGS salary expenditures exceeded domestic Failure to pay salaries on time or to meet other revenue collections by US$20 million, even though contractual obligations would also jeopardise the domestic revenues had to some extent recovered implementation of the FGS’s programme with the from the economic impacts of COVID-19. Overall, IMF and delay attainment of debt relief. Under the domestic revenues supported less than 50 percent terms of the IMF Enhanced Credit Facility (ECF) of total government spending in 2021 (Table 2, programme, which commenced in March 2020, Figure 1) and the FGS faced an average monthly the FGS has committed not to accrue expenditure funding deficit of US$8 million. arrears. If the FGS accrues arrears by failing to pay salaries on time,13 or by failing to meet other The MoF has been acutely aware of the critical contractual obligations such as payments for the importance of paying FGS salaries and core delivery of security sector rations and fuel, the operational expenses on time. Security sector IMF programme is at risk of being declared ‘off personnel account for just over 50 percent of total track.’ If the programme goes off track, then FGS salary spending. Failure to pay security sector salaries progress towards achieving external debt relief could have an immediate negative impact on the will be delayed by at least two years. Satisfactory security situation in Somalia. Continued payment implementation of the three-year ECF programme of security sector fuel and rations suppliers is also is a Completion Point requirement for Highly a key priority given their importance for security Indebted Poor Country (HIPC) debt relief (Box 2). sector operations. Figure 1: FGS revenues and expenditures, 2014–21 (US$ millions) 600 500 400 US$ millions 300 200 100 0 2014 2015 2016 2017 2018 2019 2020 2021 Donor Project Support Donor Budget Support Domestic Revenues Salary Expenditures Total FGS Expenditures Source: MoF 13 “On time” is defined as within 90 days of the obligation falling due. 6 FINANCIAL GOVERNANCE REPORT 2022 BOX 2 IMF ECF programme implementation and achievement of debt relief To qualify for the HIPC Completion Point, the FGS needs to achieve a number of reform-related ‘triggers.’ These triggers include: “continued maintenance of macroeconomic stability as evidenced by a broadly satisfactory implementation of the Extended Credit Facility (ECF) supported program.” In general, the FGS is making good progress toward meeting the HIPC triggers,a and reaching the Completion Point in the first half of 2023 appears to be a reasonable objective. The trigger on macroeconomic stability could be missed, however, if the FGS fails to meet ECF programme benchmarks (such as paying salaries and other contractual obligations on time) or if the programme automatically lapses (for example, if a programme review is not conducted within the time frames required by the IMF). Under IMF rules, ECF programme performance must be reviewed successfully every 18 months. The FGS’s last formal ECF programme review was completed on November 18, 2020, meaning that another programme review needed to be approved by the IMF Board by May 17, 2022, to avoid programme termination. The FGS was unable to complete a review by May 17, 2022 given the political transition. However, it requested the IMF Board to grant a one-time three-month extension to the review deadline (that is, until August 17, 2022). The IMF Board grants extensions in cases where it appears “imminent” that the authorities and the IMF will reach an understanding on targets and measures to put the ECF- supported programme back on track within the term of the arrangement. An extension was granted on the 9th of May 2022. If the FGS’s current ECF program goes off track or lapses, the HIPC Completion Point would have to wait until the country has satisfactorily implemented a new IMF-supported program. This would take time to negotiate and approve, and FGS would need to demonstrate a strong track record in implementing a new program. These delays could push the Completion Point to 2024–25 at the earliest. This would in turn delay the FGS’s renewed access to international finance. a The full list of triggers is set out in Somalia : Second Review Under the Staff-Monitored Program and Request for Three-Year Arrangements Under the Extended Credit and The Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Somalia (imf.org) Given the situation, the MoF needed to find Initially, the MoF funded the monthly deficit by alternative sources of financing to compensate utilising unspent budget support funds from 2020 for the reduction in budget support beginning and by drawing down funding previously set aside in 2021, so that the FGS could continue to pay for in a buffer account. In total, funds from these two salaries and security sector rations on time and to sources amounted to US$20 million and supported avoid accumulating arrears in order to keep the IMF FGS spending until June 2021. The MoF then took programme on track. It had to do so in a context out a temporary loan of US$22 million from the in which it had no recourse to external borrowing CBS, as permitted by the CBS Act, which enables and limited scope to cut expenditures, given the the CBS to make direct advances to the FGS for the dominance of the wage bill in total spending. purpose of offsetting fluctuations between budget revenue receipts and government payments.14 The The FGS’s total deficit was US$96 million in 2021 and FGS is required to pay interest on each advance, at a US$15.9 million in the first three months of 2022 market interest rate determined by the CBS. The total (Figure 2). The MoF continued to pay FGS salaries amount of advances outstanding at any time may and other contractual obligations throughout 2021, not exceed 15 percent of the FGS’s gross recurrent and into the first few months of 2022, through a revenue (excluding grants) in the previous year. series of short-term measures. 14 CBS Act, Article 29. 7 FINANCIAL GOVERNANCE REPORT 2022 Figure 2: FGS monthly revenues and expenditures, 2021–22 (US$ millions) 70 60 50 40 30 US$ millions 20 10 0 -10 -20 -30 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Donor Grants Domestic Revenue Salaries Total Expenditures De cit Source: MoF The CBS funds enabled the MoF to continue expenditures. Of that total, US$75 million was for covering the deficit until September 2021. At funding salaries and operational costs, and US$3 this point, the MoF faced the prospect failing to million was earmarked for donor-funded projects. In continue paying FGS salaries in full. The IMF’s global 2021, transfers dropped to US$44 million, equivalent allocation of Special Drawing Rights (SDR) in August to 9 percent of total FGS expenditures. Of that 2021 provided a lifeline. Somalia’s SDR allocation amount, US$34 million was for funding salaries and amounted to US$223 million. A portion of the funds operational costs, and US$10 million was earmarked was used to repay the MoF’s loan from CBS and to for donor-funded projects. The drop in funding for pay the interest charges on World Bank debts. The salaries and operational costs was felt most acutely remaining funds, amounting to US$180 million, were by the newer FMS, who have limited own-source divided equally between the MoF and CBS, providing revenues. The FGS continued to share a portion of the MoF with sufficient funds to cover the monthly monthly customs revenues with BRA. deficit until sometime in the second quarter of 2022. SDRs allocated to CBS were not drawn, but meant to The squeeze on operational funding for FGS be part of reserve building for the CBS. institutions and transfers to the FMS will continue for the remainder of 2022. There is also a risk that Owing to FGS budget pressures, non-salary funding that FGS will not have sufficient funding to pay to FGS institutions was highly constrained and FGS salaries on time. The MoF can arrange for another funding to the FMS was severely curtailed (Figure temporary advance from CBS, but this would not 3). In 2020, FGS transfers to the FMS and the Banadir cover the budget deficit until the end of the year, Regional Administration (BRA) amounted to US$78 and would need to be repaid within 3 months. It million and accounted for 16 percent of total FGS will be imperative for the new FGS administration Figure 3: FGS transfers to FMS and BRA, 2018 – 2021 (US$ millions) 80 70 60 50 US$ millions 40 30 20 10 - 2017 2018 2019 2020 2021 BRA Galmudug South West Hirshabelle Jubaland Puntland Source: MoF 8 FINANCIAL GOVERNANCE REPORT 2022 to reach an early understanding with major budget the Somali Payment Switch during 2022, which support donors to enable the resumption of budget will further facilitate the effectiveness of the support funding. Central to that understanding will banking system by supporting automated teller be a renewed commitment by the FGS to financial machine (ATM), debit card, and bank-to- mobile- governance reforms and to the IMF ECF programme wallet transactions. The CBS continued to issue upon which budget support disbursements are annual and quarterly economic reports18. It also based. Unless the FGS reaches such agreements with finalised its 2020 financial statements and, for the its international partners, the new administration will first time, received a clean audit opinion. be unable to pay FGS salaries on time or in full within ● The MoF continues to make progress on customs a few months. reforms. It has developed a Customs Automated System (SOMCAS) that enables electronic Reform delays processing and reconciliation of import documentation and the computation of taxes due using an ad valorem tariff. System piloting began at Mogadishu Port and Airport in February 2022, as a precursor to full implementation in the second half of the year. Piloting is expected to commence in Puntland and Jubaland in the second half of 2022, followed by adoption in early 2023, supporting progress towards the HIPC Completion Point trigger: “adopt and apply a single import duty tariff schedule at all ports.” ● The MoF is working to enhance revenue mobilization in the telecommunications sector. It is working with the National Communications Some elements of the FGS’s economic reform Authority to develop a spectrum fee schedule for programme continued to be implemented despite telecom operators so that the collection of fees the political uncertainty caused by protracted can commence in early 2023. electoral delays. Notably: Other important reforms have been put on hold, ● The Office of the Auditor General (OAG) however. In particular: completed a statutory audit of the FGS’s 2020 ● Consultations on proposed revisions to the financial statements, compliance audits of 24 Constitution have stalled. In January 2020, the FGS institutions,15 and two special audits on Parliamentary Oversight Committee endorsed a fisheries and on the use of COVID-19 funds. draft version of the revised Federal Constitution These reports were submitted to Parliament and prepared by the Independent Constitutional made available online in November 2021.16 The Review Commission. Among other things, the FGS has now met the HIPC Completion Point draft proposed revisions to the fiscal chapter requirement to publish at least two successive to align it with primary legislation. In addition, years of audited financial accounts. it proposed the establishment of a Revenue ● The CBS has continued to make strong progress Sharing Commission responsible for making on financial sector reforms. Three mobile money recommendations on the fair and equitable providers have been licensed since the start distribution of resources between the FGS and the of 2021.17 All 13 licensed commercial banks FMS, including revenues from natural resources. are now connected to the National Payment Consultations on the draft commenced with System, enabling them to transact with each the FMS in March 2020 but have not progressed other electronically. Work is ongoing to launch since then. 15 The compliance audits also covered the BRA and three FGS diplomatic missions. 16 See http://oag.gov.so/audit-reports/ 17 Hormuud Telecom received a licence in February 2021, Somtel in June 2021 and Somlink in March 2022. 18 See http://centralbank.gov.so 9 FINANCIAL GOVERNANCE REPORT 2022 ● Important financial governance laws have not Electoral delays have also highlighted a number of succeeded in passing through Parliament. More issues where legal clarity on transition provisions than 20 draft laws were returned to the Cabinet would be valuable. These include the circumstances following the expiry of the parliamentary under which the departing administration may term (Annex 3). These include the Extractives make new contractual commitments, or make new Industries Income Tax Bill, enactment of which personnel appointments. is a HIPC Completion Point requirement, and the Targeted Financial Sanctions Bill, enactment of Electoral delays have also put successful which is an IMF programme benchmark. implementation of the FGS’s IMF programme at risk, as explained in Box 2. The IMF was not able to Electoral delays have tested the limits of existing complete a programme review by the statutory financial governance legislation to cope with deadline of May 17, 2022 because programme protracted transitions. The FGS was not able to commitments for the coming reviews need to present the 2022 budget to the Lower House be endorsed by the administration which will be for appropriation before the start of the financial responsible for implementing them. The IMF Board year on January 1, 2022, because the Parliament’s granted a one-off three-month extension to the term had expired. The PFM Act provides a basis for review deadline, meaning that the programme will government expenditure if Parliament has failed to now automatically terminate if the review is not approve the budget before the start of the financial completed by August 17, 2022. Termination would year; FGS may continue spending on the basis of the previous year’s approved budget for a period of 90 delay agreement on budget support financing, which days.19 The 90-day period has now elapsed, however, for most donors is contingent on an IMF programme and the PFM Act does not contain provisions for being in place, thereby aggravating current budget continued expenditure after the end of this period. pressures. It would also substantially delay the In March 2022, in order to provide a continued basis timeline for achieving debt relief (and thus allowing for government spending, the Cabinet approved a again for much needed foreign-financed domestic budget for the second quarter of the year equivalent investment), as satisfactory implementation of a to the budget for the first quarter. The President three-year programme is a HIPC Completion Point approved the budget by decree to enable spending requirement. to continue from April to June 2022. 19 PFM Act, Article 22. 10 FINANCIAL GOVERNANCE REPORT 2022 parties in return for a share of resulting revenues. Poor contracting practices The FGC only had an opportunity to review these contracts after they had been awarded. The incoming administration took early action to review and cancel some of them, although others continue to be effective.22 Since 2017, the FGS has made progress in improving its contracting practices, largely through increased MoF enforcement of the requirements of the 2016 Procurement Act, which applies to the award of all government contracts, including both procurement and concessions. Different tendering and oversight procedures apply to each of these processes. Major achievements include the competitive tendering of Background security sector rations contracts23 and the renegotiation of the port and airport management concessions.24 The FGC has advised the FGS on contracting practices since early 2014. The FGC’s advice in this area encompasses high-value public procurement However, many FGS institutions have limited capacity contracts (through which the FGS purchases goods, to meet Procurement Act requirements. They often works, and services from a private sector entity) and all underestimate the time it takes to develop a tender concession contracts (under which the FGS contracts process and lack the capacity to develop clear contract a private sector entity to manage a government asset specifications. They have a limited understanding of or service in return for a share of its value).20 the tendering and approval processes for concession contracts, which are subject to the oversight of the There have historically been major shortcomings in Inter-Ministerial Concessions Committee (IMCC). In the FGS’s contracting practices. Until 2016, contracts some cases, FGS institutions resist the applicability of were awarded without competition, usually after Procurement Act requirements to concession awards a firm had approached an FGS institution with an and circumvent the role of the IMCC. unsolicited proposal. Contract documents generally lacked clear specifications, adequate performance Attempts to award contracts without following standards, and key provisions such as termination due process during the transition clauses. As a consequence, the FGS received poor The protracted electoral transition heightened the risk value for money, had limited power to enforce of a deterioration in government contracting practices. contracts, and faced the risk of contract disputes. To mitigate the risk of FGS institutions seeking to Moreover, a lack of transparency in contract awards avoid Procurement Act requirements in order to fuelled allegations of corruption.21 push through contract awards before the change in administration, the President issued a decree on In the period running up to the 2017 elections, several August 7, 2021 prohibiting all FGS institutions from FGS institutions awarded concession contracts on a signing agreements with international companies sole-source basis without following due process. The until after the elections.25 His decree was similar to contracts outsourced government services to third that issued by his predecessor President Hassan 20 Article 108 of the Procurement Act defines as a concession as the grant of an interest in a public asset by the government or its agency to a private sector entity for a specified period, during which the asset may be operated, managed, utilized, or improved by the private sector entity, which pays fees or royalties under the condition that the government retains its overall interest in the asset and that the asset will revert to the government agency at a determined time. 21 Kaunin Ronan. 2017. “Somalia: Overview of corruption and anti-corruption.” U4 Helpdesk Answer. Chr. Michelsen Institute. Available at: https://www. alnap.org/system/files/content/resource/files/main/somalia-overview-corruption-and-anticorruption.pdf (accessed April 19, 2022). 22 Concessions for road tax, property transfer tax, and vehicle licensing were cancelled. Contracts for visa issuance and airport taxi services are still in effect. 23 Competitive tenders were held in 2019 and 2021. 24 The revised airport concession agreement was signed in 2019, and the revised port agreement was signed in 2020. Both agreements reflect good international practice. 25 Villa Somalia on Twitter: “H.E President @M_Farmaajo issues a Presidential decree barring all government institutions from signing any form of agreements involving our republic and other countries, institutions, and international companies until after the conclusion of elections.” Available at https://t.co/Pm1p9WnPKY (accessed April 20, 2022). 11 FINANCIAL GOVERNANCE REPORT 2022 Sheikh on September 1, 2016, which prohibited FGS services on a sole-source basis, disregarding institutions from entering into new contracts during several months of effort by the Somalia Bureau the election period. of Standards (SoBS) to prepare a competitive tender that complied with Procurement Act On August 8, 2021, however, Prime Minister Roble requirements. The award notice lacked any instructed all FGS institutions to carry out their specification of services or contract terms. normal duties as part of a caretaker government, in accordance with Article 103 of the Provisional Following interventions by the MoF and the Auditor Constitution.26 Article 103 enables a caretaker General’s Office, it is believed that neither contract government to carry out ‘routine duties,’ but it does proceeded to signature. The SoBS has continued not define what activities constitute ‘routine duties.’ preparing a competitive tender process for import conformity assessment services, which it intends to From September 2021 on, the FGC became aware issue once the new administration is in place. of several attempts by FGS institutions to award concession contracts on a non-competitive Contested award of seven oil and gas contracts basis without following the requirements of the Oil and gas licensing has been the most problematic Procurement Act. Legal opinions issued by the and unpredictable area of government contracting State Attorney General’s Office appeared to endorse during the transition period. The FGS can expect to these actions, even though the office does not have earn revenue from petroleum production in two powers under the Procurement Act to waive its main ways: by requiring the contractor to make an provisions. The contracts in question suffered from annual royalty payment, and by receiving a share various shortcomings, for example: of the contractor’s profit. Over the past few years, ● The Ministry of Ports proposed to award a the Ministry of Petroleum and Mineral Resources ship registration (‘flagging’) and certification (MPMR) has been developing a model oil and gas concession that was poorly specified and had not Production Sharing Agreement (PSA) for use in an oil been subject to any tender process. It also lacked and gas licensing round. In November 2021, following adequate supporting legislation, as the FGS has lengthy discussions between MPMR and MoF on the not yet updated the Maritime Legal Framework royalty rate, the IMCC finally approved the Model PSA, for Somalia. sending a positive signal that MPMR was preparing to ● The Ministry of Commerce attempted to award conduct an oil and gas licensing round in line with a concession for import conformity assessment Somali legal requirements. 26 Abdulkadir Khalif. 2021. “Somalia: PM Roble Contradicts President Farmaajo as Rift Grows.” AllAfrica.com, August 9. Available at: https://allafrica.com/ stories/202108100103.html (accessed April 20, 2022). 27 Somalia: PM Roble Contradicts President Farmaajo as Rift Grows - allAfrica.com 12 FINANCIAL GOVERNANCE REPORT 2022 The Model PSA establishes a relatively low royalty rate direct negotiations with Coastline, as required by the of 5 percent. Profit share ratios are not fixed. Instead, Procurement Act, nor did it share an evaluation report contractors will be required to submit their proposed recommending the award of each PSA with the IMCC profit share ratios as a part of their bid during any after contract negotiation.29 Instead, MPMR relied licensing round. The more competitive the licensing solely on the provisions of the Petroleum Act to make round, the higher the profit share ratio FGS can expect the awards, even though the concessions section of to achieve. Given the relatively low royalty rate in the the Procurement Act explicitly applies to oil and gas Model PSA, competitive profit share ratios are necessary concessions.30 The FGC had previously commissioned to ensure that the FGS receives an adequate overall independent legal advice that determined that the return from petroleum production. Petroleum Act and the Procurement Act can and should be read together to govern the award of PSAs In February 2022, the Minister of Petroleum in Somalia.31 unexpectedly announced the direct award of seven oil and gas PSAs to Coastline Exploration. These awards The President and the Prime Minister swiftly rejected took place before MPMR had commenced the oil and the Coastline awards, on the basis that they were gas licensing round. The FGC had previously advised unauthorised and did not follow the required legal that direct negotiations should only be conducted process.32,33 The President noted that they contravened after an oil and gas licensing round has taken place, so his decree of August 7, 2021. that direct negotiations are supported by information from the licensing round to guide profit share ratio At the request of the Prime Minister, the Auditor General’s negotiations. It is not in the FGS’s best interests to agree Office conducted a rapid review and concluded that profit share ratios in direct negotiations before it has a the signature of the awards had violated various laws clear understanding of prevailing market rates; there is and decrees, including the Prime Minister’s Decree No. a risk that the profit shares agreed may be unnecessarily 047/2018, the Procurement Act, and the Petroleum Act.34 favourable to the contractor. The FGC has not received The Prime Minister’s Decree sets out a procedure for copies of the Coastline PSAs from MPMR. It has therefore Cabinet clearance of all agreements with international been unable to assess whether their commercial terms, companies, while both the Procurement Act and the which have not benefited from competition, protect Petroleum Act establish specific procedures for direct the financial interests of the FGS. negotiation of PSAs. The Auditor General concluded that none of these procedures had been followed. The Petroleum Act gives the Minister of Petroleum the authority to sign PSAs.28 However the process The Ministry of Foreign Affairs sent formal notification to of tendering, negotiating, and awarding PSAs still Coastline Exploration that the FGS considers the awards needs to be consistent with all other applicable laws. null and void. However, Coastline has subsequently MPMR did not request IMCC authorisation to conduct indicated that it believes the contracts to be valid. 28 Petroleum Act: Article 24.1. 29 The IMCC approved the Model PSA to be used in a competitive licensing round in November 2021. However, approval of the Model PSA does not substitute for approval of the specific PSA to be used as a basis for negotiations with individual companies. 30 Procurement Act, Article 110.1 (b) (viii). 31 FGC Advisory Note 2021/003. 32 Villa Somalia on Twitter: “The Presidency FGS hereby declares nullification of Petroleum pact signed by the Minister on behalf of FGS. The deal contravenes Presidential Decree 7/8/2021 which bans the inking of deals during elections so as to protect public resources from exploitation during the elections.” Available at: https://t.co/ATcFqUCw6g (accessed April 20, 2022). 33 Mohamed Hussein Roble on Twitter: “The alleged production sharing agreement purportedly signed by the Minister of Petroleum with a foreign entity regarding Somali oil reserves is illegal, unacceptable since it wasn’t done through legal avenues. I will take all appropriate measures to protect our national resources.” Available at: https://twitter.com/MohamedHRoble/status/1495092094309916677?s=20&t=lt0N-_2hjTWqSV5wsxVXBA (accessed April 20, 2022). 34 SAI Somalia on Twitter: “Lifaaqa hoose ka dheeho war-saxaafadeed uu Xafiiska Hantidhawrka Guud ee Qaranka kasoo saaray heshiiska sharci darrada ah ee Wasaaradda Batroolka ay la gashay shirkadda Coastline Exploration Ltd, isaga oo gal-dacwadeed arrinkan ku aaddan u gudbiyay Xafiiska Xeer- Ilaalinta Guud.” Available at: https://t.co/eZDU3Ypo8a (accessed April 20, 2022). 13 FINANCIAL GOVERNANCE REPORT 2022 3. PRIORITIES FOR THE INCOMING ADMINISTRATION The incoming administration will face multiple immediate agreement with the IMF on the terms financial governance challenges, many of which of the continuing ECF programme and to commit have been exacerbated by the protracted transition to further progress on the economic and financial period. The new government will need to address reforms initiated by the previous government.35 these challenges rapidly to prevent them from Satisfactory performance of an IMF programme undermining the beginning of its term. Two and a credible fiscal framework are essential priorities will require particular attention: conditions for budget support disbursement by ● major donors. Continuation of economic and financial reforms; and ● Commitment to due process in procurement Commitment to the IMF programme is not a one- off undertaking. The new administration will have and concessions to commit to the agreed fiscal framework; meet the floor on CBS net foreign assets; meet the Continuation of economic and ceiling on spending on compensation, goods, and financial reforms services, and contingency; avoid incurring any Without an IMF programme, FGS is unlikely to new debt; and prevent the accumulation of new receive sufficient budget support to close the domestic arrears. Targets for domestic revenue fiscal gap and make timely payment of salaries. The and fiscal balance will need to be met as well. incoming administration therefore needs to reach 35 Including the reforms outlined in the technical discussion on the second and third review of the IMF-supported programme, initiated in February–March 2022). 14 FINANCIAL GOVERNANCE REPORT 2022 The new administration will therefore need to MoF should review the fiscal implications of all maintain a strong focus on mobilising revenues and pending bills prior to their resubmission to ensure prioritising key areas of expenditure. It must resist that the new legislative programme does not lead to political pressure either to ease revenue reforms or an unsustainable increase in FGS’s fiscal costs. to accommodate new expenditure priorities at the expense of existing obligations. It must avoid any Commitment to due process in procurement non-essential expansion of the salary base. Limiting and concessions the establishment of new government agencies will be an important tool to keep government Members of the incoming administration may expenditure in check. not be familiar with the legal requirements for FGS contracting set out in the Procurement Act. To ensure successful implementation of the IMF Experience suggests that some ministers may programme following elections, the incoming want to cancel contracts awarded by the previous President and Prime Minister will need to empower administration without justification, while others the Minister of Financeto oversee revenue may try to award contracts without meeting the collection and execute the budget in compliance requirements of the Procurement Act. Such actions with prevailing laws, and to meet the quantitative would rapidly undermine the reputation of the new benchmarks in the IMF programme. The Office of administration, both domestically and with the the Prime Minister will need to communicate reform international community. commitments to the rest of government and to coordinate cross-government delivery. It is important that the incoming leadership makes a clear and early commitment to due process in The Office of the Prime Minister, MoF, and awarding public procurement and concession international partners will need to conduct outreach contracts. All FGS ministers and institutions should to Parliament to explain the importance of its role in be made aware of this requirement by the Prime passing legislation that is central to reform delivery. Minister. The MoF should issue a circular explaining Submission of draft legislation should be prioritised the tendering and oversight procedures that apply in line with its importance to the reform programme. to public procurement and concessions. 15 FINANCIAL GOVERNANCE REPORT 2022 The incoming administration is advised to continue ● Prepare a transparent and competitive licensing the current practice of requiring FGS institutions to round for oil and gas awards that meets all work with the MoF’s Procurement Department when applicable FGS legal requirements. conducting high-value procurement and when ● Enter into negotiations for direct oil and gas awards developing concession contracts. The risks of a more only after the licensing round is complete, so that decentralised approach to procurement remain direct negotiations are guided by competitive high, owing to weaknesses in developing contract price benchmarks and only in cases where direct specifications and limited awareness of Procurement negotiations have been authorised as per FGS’s Act requirements. It will also be important for legal framework (including the Procurement Act). the incoming administration to demonstrate its commitment to competitive procurement by The incoming administration will also need to immediately launching new tenders for security examine the seven PSA awards to Coastline and deal sector rations and fuel contracts, which have been with any potential legal dispute arising from their on hold during the transition period. nullification. The incoming administration will need to pay Finally, the incoming administration should seek to special attention to oil and gas contracting. It prevent repetition of the problems encountered should require MPMR and the Somalia Petroleum during the recent transition by developing a Authority to: detailed definition of the ‘routine duties’ that may be conducted by a caretaker government, as well as clear rules for contracting in the pre-electoral period. 16 FINANCIAL GOVERNANCE REPORT 2022 Annex A: Progress against FGR 2021 priorities FGR 2021 priorities Progress July 2021 – May 2022 Sustainability of the fiscal position and consolidation of fiscal reforms The OAG has continued to exercise its oversight • Strengthen revenue collection from key sectors where receipts are falling substantially below function, and MoF has continued to work on revenue policy expectations and/or regional benchmarks. Those sectors or items include telecom reforms in key sectors such as telecoms. There has operators, airline overflight fees, and khat imports. been no progress on developing a constitutional mechanism or transparent formula for resource • Adopt a policy on the establishment of new semi-autonomous government agencies and sharing, or on taking steps to limit agency creation. systematically review the fiscal implications and affordability of new draft laws. Steps to bring financial support to FGS institutions • Make progress in bringing external financial support to FGS institutions on-budget and on- from United Nations agencies on-budget and on- treasury, in line with the PFM Act. treasury have been put on hold, pending the approval • Implement existing legal, regulatory, and procedural reforms, translating reforms ‘on paper’ into of the 2022 Budget. routine practice. • Strengthen the MoF policy function to improve its effectiveness in engaging on cross-cutting and strategic priorities, including use of country systems, rational agency creation, and HIPC completion. • Encourage the development of a constitutional mechanism and transparent formula-based transfer system to ensure equitable allocation of resources, consistent with delivering a minimum standard of public services. • Encourage further acceptance and strengthening of the OAG’s independent oversight function to improve accountability and transparency in public resource management. Transparency and due process in natural resource revenue management No progress. • Ensure that oil and gas contracting complies with the Somali legal framework and commitments to international partners. • Monitor tuna licensing revenue distribution to the FMS in line with prevailing agreements. Central bank governance and financial sector development Three mobile money providers have been licensed • Continued CBS implementation of its restructuring plan. since the start of 2021.36,37 CBS signed an MoU with the National Communications Authority in 2021 to enhance • Continued CBS rollout of the National Payment and Settlement System. cooperation on regulating mobile money service • Continued CBS progress in licensing and regulating mobile money service providers and providers. All 13 licensed commercial banks are now improving coordination with the National Communications Authority on licensing. connected to the National Payment System, enabling • Continued CBS progress in addressing the structural obstacles to inward money transfers, them to transact with each other electronically. Work is including correspondent banking relationships, and the operational and legal framework for anti- ongoing to launch the Somali Payment Switch during money laundering and combating the financing of terrorism (AML/CFT). 2022, which will further facilitate the effectiveness of • Progress towards the first phase of currency reform, centred on a ‘currency exchange project’ to the banking system by supporting ATM, debit card, and remove counterfeit banknotes from circulation. bank-to- mobile-wallet transactions. CBS finalised its 2020 financial statements and received a clean audit opinion for the first time. CBS’s 2021 financial statements have been prepared and are due to audited in the 2nd quarter of 2022. Debt management strategy development Work due to commence in the second half of 2022. • MoF to develop a formal debt strategy to manage the risk exposure embedded in the debt portfolio and to minimise the cost of debt servicing. Compliance and value for money in public procurement and concessions MoF has prevented non-compliant award of • Maintain a firm commitment to compliance through application and enforcement of the concessions contracts (import conformity assessment, provisions of the Procurement Act and associated procurement regulations across the FGS. ship registration and certification). It has been unable to proceed with re-tendering security sector rations • Deepen awareness and understanding across FGS institutions of due process in public and fuel contracts, due to the electoral transition. procurement and concessions. Temporary supply arrangements have been put in • Maintain annual competitive tendering of personnel rations contracts in the justice and place pending the launch of new tenders once the security sectors, including the Somali National Army (SNA), the Somali Police Force, the Prisons new administration is in place. A Procurement Portal Service, and the National Intelligence and Security Agency (NISA). has been developed to enhance transparency in FGS • Establish (where needed) and strengthen the capacity of FGS oversight bodies and their contracting, and will be finalised in 2022. accompanying technical units. • Monitor the implementation of renegotiated concessions to ensure that concessionaires fulfil their obligations, that the FGS achieves the expected fiscal gains/returns, and that the FGS is not in breach of its own obligations. • Encourage improvements in the technical knowledge and capacity of print, radio, and television media to promote greater transparency and public awareness of value for money in public procurement and concessions. 36 Hormuud Telecom received a licence in February 2021, Somtel in June 2021, and Somlink in March 2022. 37 Hormuud Telecom received a licence in February 2021, Somtel in June 2021 and Somlink in March 2022 17 FINANCIAL GOVERNANCE REPORT 2022 Annex B: Contracts and concessions reviewed by the FGC since 2014 # FGS institution Contract Contractor Contract type FGC formal review Status 1 Central Bank of Land lease and Riverside Holding Concession 2016, 2018 Contract signed but not Somalia redevelopment implemented 2 Central Bank of Asset recovery Shulman, Rogers, Concession Not reviewed Cancelled Somalia Gandal, Pordy & Ecker PA 3 Commerce and Import/export Proje Gözetim Concession 2015, 2016 Incorporated FGC Industry quality assurance Mühendislik (PGM recommendations; contract was Project) signed but not implemented 4 Defence SNA Rations AGETCO Procurement Sole source supply arrangements that were discontinued following recommendation that security sector rations contracts should be competitively awarded 5 Defence SNA Rations AGETCO Procurement 2017 Competitively awarded; subsequently cancelled 6 Defence SNA Rations Kasram Procurement 2017 Contract irregularly awarded; annulled shortly prior to conclusion 7 Defence SNA Rations – Lot 1 Scandinavian Procurement 2019 Competitively awarded; concluded Trading 8 Defence SNA Rations – Lot 2 East Africa Trading Procurement 2019 Competitively awarded; concluded 9 Defence SNA Rations – Lot 1 United Group of Procurement 2021 Competitively awarded; Companies operational 10 Defence SNA Rations – Lot 2 Scandinavian Procurement 2021 Competitively awarded; Trading operational 11 Defence Supply of 6 marine AMO Shipping Procurement 2014 Contract was signed; subject to an patrol boats Company Ltd. arbitration claim 12 Defence Equipping and Atlantic Marine and Procurement Not reviewed Contract was signed; subject to an training Coast Guard Offshore Group arbitration claim 13 Defence Logistics SKA Unclear 2018 Status unknown; FGC recommended nullification 14 Education Textbooks Beder Printing Concession 2018 Operational (new amendment House signed in August 2020); FGC recommended it should be renegotiated and/or cancelled 15 Education Certificates Security Printing Concession 2019 Contract signed; status unknown; Press FGC recommended nullification 16 Finance Collection of property M&T Solutions Ltd. Concession 2016 Cancelled transfer registration tax 17 Finance Collection of road tax Smart General Concession 2016 Cancelled Service Ltd. 18 Finance Khat tax collection on The ADCO Group of Concession 2015 Cancelled behalf of FGS Companies 19 Fisheries and Protecting, licensing, Somalia-FishGuard Concession 2014 Did not proceed Marine Resources and promoting policy Ltd. and institutional development of fisheries sector 20 Galmudug Regional Oil production Petro Quest Africa Concession 2014 Did not proceed Government sharing agreement (CN) 18 FINANCIAL GOVERNANCE REPORT 2022 # FGS institution Contract Contractor Contract type FGC formal review Status 21 Somali Police Force Police rations Perkins Logistics Procurement 2016 Partially incorporated FGC recommendations; contract now concluded 22 Somali Police Force Police rations Muna Transport Procurement 2019 Competitively awarded; concluded 23 Somali Police Force Police rations Hanad Construction Procurement 2021 Competitively awarded; & General Trading operational 24 Immigration Visas Empire Tech Concession 2018 Operational; FGC recommended it Directorate Solutions Ltd. should be cancelled or revised 25 Immigration Passport Production Ebtkaraat Smart Concession 2018 Operational (two-year extension Directorate System signed in 2021); 26 Immigration Passport Production Concession 2020 Tender was cancelled, new tender Directorate Tender Documents process recommended 27 NISA NISA rations Horn logistics Procurement 2016 Partially incorporated FGC recommendations: contract has now concluded 28 NISA NISA rations Express logistics Procurement 2019 Competitively awarded; should have concluded in 2020, but still operational 29 Ministry of Internal Scanning services for M&T Solutions Ltd Concession 2016 Contract was signed but not Security Mogadishu port implemented 30 Justice Prisons rations Bakhaari Logistics Procurement 2018 FGC comments were not addressed; contract now concluded 31 Justice Prisons rations Bakhaari Logistics Procurement 2021 Competitively awarded; operational 32 Petroleum and Model terms Model Oil and Gas Concession 2016, 2019, 2021 Approved by IMCC Mineral Resources for petroleum Production Sharing exploration, Agreement development, and production 33 Petroleum and Seismic data analysis Mubadala Oil Concession 2014 Agreement expired Mineral Resources and Gas Holding Company LLC (CN) 34 Petroleum and Seismic exploration Soma Oil and Gas Concession 2014 Contract believed to have been Mineral Resources Exploration Limited concluded; did not incorporate FGC recommendations 35 Petroleum and Geospatial analysis CGG Data Services Concession 2014, 2015, 2016 Operational; incorporated FGC Mineral Resources AG/Robertson recommendations GeoSpec International Ltd. 36 Petroleum and Collation, analysis, Spectrum ASA Concession 2015 Operational; incorporated FGC Mineral Resources and marketing of recommendations petroleum data 37 Petroleum and Acquisition, TGS-NOPEC Concession 2014 Did not proceed Mineral Resources processing, and Geophysical marketing of Company ASA geophysical data 38 Presidency Rations Regional Suppliers Procurement 2018 Status unknown Company Ltd. 39 Ports and Shipping Management of port Albayrak Turizm Concession 2014; 2020 Operational; renegotiated operations Inşaat Ticaret A.Ş. agreement signed 2020 40 Ports and Shipping Harbour, fishing Great Horn Concession 2014 Did not proceed port, and related Development infrastructure Company developments 19 FINANCIAL GOVERNANCE REPORT 2022 # FGS institution Contract Contractor Contract type FGC formal review Status 41 Ports and Shipping Lease and concession Mogadishu Port Concession 2014 Did not proceed for operating Container Terminal Mogadishu port and Simatech container terminal International 42 Ports and Shipping Management and Mogadishu Concession 2016 Requires resolution following operation of a International Port the renegotiation of the port container yard and and Simatech management contract with freight station at International Al Bayrak Mogadishu dry port 43 Posts and Telecoms Telecoms gateway VBH Holdings SPA Concession 2016 Did not proceed 44 Power and Water Electricity generation Polaris Energy SDN Concession 2015 Did not proceed BHD 45 Transport and Airport operations Favori LLC Concession 2014, 2019 Operational; renegotiated Aviation agreement signed May 2019 46 Transport and Vehicle licensing Modern Technology Concession 2016 Cancelled Aviation Ltd. 47 Transport and Airport taxi shuttle Sahel Concession 2017 Operational; FGC recommended it Aviation service should be renegotiated 48 Transport and Airport hotel Sat Service LLC Concession 2018 Interim agreement Aviation signed with FGS in early 2020; full contract needs to be developed 49- Information, 6 leases for Various Concession 2019 Status unclear; FGC recommended 54 Culture, and development they should be cancelled or Tourism of property in revised Mogadishu 55 Transport and Overflight arrears TBD Procurement NA Tender being prepared Aviation debt collection services 56 Somali Bureau of Consignment TBD Procurement 2021 Draft contract reviewed; Tender Standards Based Conformity being prepared Assessment Program 57 Ministry of Ports Certification and TBD Concession 2021 Draft contract; FGC recommended and Maritime Registration Services that award of contract should not Transport for Maritime Vessels proceed 20 FINANCIAL GOVERNANCE REPORT 2022 Annex C: List of bills and agreements returned by Parliament following the expiry of its term • Environmental Management Bill • Agreement Establishing East Africa Standby Forces • Agreement Establishing East and Southern Africa Free Trade Area • Patent Registration Bill • Membership Agreement of the Somali Federal Republic to the Common Market for Eastern and Southern Africa (COMESA) • Somali Police Force Bill • Targeted Financial Sanctions Bill • Extractive Industry Income Tax Bill • Civil Service Bill • Civil Servant Retirement and Pension Bill • Gun Control Bill • Sexual Offences Bill • Roads Bill • Load and Vehicle Limits Bill • Medicines Bill • Anti-Piracy and Kidnapping Amendment Bill • National Defence Bill • Agreement between Somalia and Turkey on Cooperation, Promotion and Protection of Investments • Investment and Investor Protection Bill • Investor Promotion Agency Bill • Refugee Bill • NGO Bill • Immigration Agency Bill • 2018 Fiscal Year Close of Accounts 21