Improvement on Legal and Procedural PPP system in Mongolia

10- 11 KSP with Mongolia Kang-Soo Kim (KDI)

February 17, 2011

Table of Contents

1. Introduction 2. Infrastructure in Mongolia 3. PublicPublic-Private Partnerships System in Mongolia 4. Assessment of Mongolian PPPs 5. Policy Recommendations

1. Introduction

Mongolian government has made effort to increase capital spending in power, transport and communication over the recent years. years
However Mongolian fiscal resources have not been sufficient to provide the requisite investment to supply adequate infrastructure.

Mongolian government is facing challenges of how to increase the investment of infrastructure.

A new model to provide the investment that is needed to modernize Mongolias infrastructure is required.

1. Introduction
Mongolian government has identified that PublicPublic-Private Partnerships (PPP) as the key instrument to attract much needed private investment for the development of infrastructure. This chapter draws policy lessons and recommendations for Mongolia from Koreas experiences on PPP infrastructure development.
Key policy recommendations are organized into following points:
Complement and strengthen legal and institutional framework Build transparent and competitive procurement process Attract private participants through incentives and risk sharing mechanism Establish adequate fiscal capacity Build capacity of SPC and provide training for public sector officials Need readjustment of pricing policy Implement pilot PPP projects with support of international advice
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2. Infrastructure in Mongolia
Current Status

Current infrastructure capacities do not allow Mongolia to provide sufficient and quality basic public services.
Only 67% of population has access to power (electricity) and 35% to water. Only 3.5% of road is paved and existing ones need capital repair. Railway network capacity does not match the growing export-import cargo flows. Air transport has constraints on tourism development, public perception of poor air safety, and underdeveloped domestic airport system.

World Economic Forum (WEF) Global Competitiveness Report 20102010 -2011 ranks
Mongolia 137 out of 139 countries ranked on the quality of overall infrastructure. Overall Infrastructure: 137 Roads: 138, Railroad: 69, Port: 112, Air Transport: 129, Electricity Supply: 111
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2. Infrastructure in Mongolia

The infrastructure status is expected to get worse when the major mines start production of minerals.
Jobs that are created in the mine areas with most of the employees coming from other regions will lead to more burden on water, sanitation, electricity and heating supply in the southern regions. More road and, in particular, railway construction are needed to transport multimillion tons of the minerals for internal use and exports to Russia and China.

2. Infrastructure in Mongolia
Investment in Infrastructure

Investments in infrastructure reached a record level in 2007 at 19% of total government expenditures (10% of GDP) from 13% (4% of GDP) in 2001~2006.
Over 1995-2005, loans, grants, private investment and the governments investments in infrastructure have averaged US$128mn per year, including grants 20.3% and loans 68.7%, with government and private resources providing the rest.

Total investments needed equal to an annual investment of about 15% of GDP over the coming years.
Assuming that infrastructure investment needs are estimated at US$427mn per year, existing financing sources leave a gap of US$300mn per year.

2. Infrastructure in Mongolia
Government Proposed Investment Program for Transport, 2008-2015
Project Roads Millennium road Western Mongolia North-South Road Other north-south road Completion of UB-PRC road Southern road to Altai Bridge maintenance Road maintenance Subtotal Roads Railways New parallel railway Other railway extensions Mining railways Rail maintenance Subtotal Railways Aviation New international airport Upgrading domestic airports Expansion of the navigation system Subtotal Aviation Urban Roads to aimags in UB Interchanges for outer by pass Traffic management in UB Subtotal Urban Total transport infrastructure investment 100 5 1 10 2 1 2,945 1 4 1 300 40 10 350 1100 500 300 1100 1100 500 300 55 600 800 1100 300 225 120 160 220 60 27 16 24 627 Length/Units Total Cost (million US dollars)

Source: Public-Private Infrastructure Advisory Facility. Foundation for Sustainable Development: Rethinking the Delivery of Infrastructure Services in Mongolia. World Bank. June 2007.

2. Infrastructure in Mongolia

Shortage in Financing Infrastructure and PPPs

The mismatch between available financial resources and proposed investments suggests that plans will have to be combined with
Effective use of budget spending (PFS) A greater role for private investments (PPP)

Mongolian government, realizing the role for private investment for infrastructure, has made effort to structure legal and regulatory framework for PPP.

3. PPP System in Mongolia

Legal Framework

State Policy on PPP: approved by Parliament in October 2009 Law on Concessions: January 28, 2010
Related regulations and guidelines are still under document processing

Concession Types
Build-Operate-Transfer (BOT) Build-Transfer (BT) Build-Own-Operate (BOO) Build-Own-Operate-Transfer (BOOT) Build-Lease-Transfer (BLT) Design-Build-Finance-Operate (DBFO) Renovate-Operate-Transfer (ROT)
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3. PPP System in Mongolia

Concession Eligible Facility Types Social sector
Health Education Art Science Others
(according to the State Policy on PPP)

Infrastructure
Energy, rechargeable energy Heat transmission and distribution network Information and Communication Water supply, waste water treatment Public transportation Roads Building Others

Environment
Ecology Waste management

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3. PPP System in Mongolia

Institutional Responsibility for PPP
Organizations Responsibility
approve and revise the list of state property concession items, decide on granting the concession and authorize the State Property Committee (SPC) to enter into an agreement of concession, report annually to the Economic Standing Committee of parliament on the implementation of the legislation on concession, other power stipulated in the legislation, adopt the regulations on the detailed procedures for tender, sample documents and criteria for the evaluation proposals. prepare and submit to the government a draft list of concession items for state-owned property, research and prepare proposals for inclusion in the list of concession items, announce publicly the list of concession items (solicited project list), provide methodological and expert assistance to other to other related to gaining and implementing concessions, establish and maintain the national centralized registry and database on concessions,
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Government

Authorized entity: State Property Committee (SPC), Governor of city, Governor of Provinces (aimag)

3. PPP System in Mongolia

Organizations Responsibility
adopt legally binding norms when specifically to do by legislation, devise the documents of the tender specified in Article 11 of Concession Law jointly with the relevant state administrative institution, announce the tender, organize and evaluate it, enter, with the concessionaire and other entities, into a concession agreements as contracts of the concessionaire to obtain financing, other powers specified in the legislation, provide professional and methodological assistance to relevant local authorities regarding concession, adopt regulations on the methodology to prepare the cost - benefit analysis for a concession item. LM and NDIC jointly submit to the SPC a proposal for a concession item prepared in accordance with Article 10.3 of Concession Law with the cost and benefit analysis, give related opinion of their respective matter for the local property concession items proposed by the governors of provinces and the capital city.

(cont.)

Line Ministries (LM), National Development and Innovation Committee (NDIC)

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3. PPP System in Mongolia

Organizations

Responsibility
grant permission and licenses required for the implementation of a concession, determine prices and tariffs, adopt and enforce rules and regulations pertaining to the concession item or services rendering by it.

Regulatory Authority

Ministry of Finance

give opinion for finalize the draft list of concession items to SPC.

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3. PPP System in Mongolia

Performance Procedure of PPP Project

1. Designation of Project (concession item)

(can be prepared by both government organization and private sector )

2. List of Concession Items

(drafted by SPC and approved by government )

3. Selection of executive company

(organized by SPC)

4. Concession agreement
(drafted by SPC and approved by government)

5. Project Implementation
(preformed by selected executive company )

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3. PPP System in Mongolia

Project Initiation

Both the government and private company can initiate PPP projects
(1) Solicited Projects
A solicited project is included project into the List of Concession Items which is approved by the Government.

(2) Unsolicited Projects

An unsolicited project is a proposed project by private sector.

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3. PPP System in Mongolia

Procurement Steps of a Solicited Project
SPC Announcement of tender Submission of the proposal to participate in the tender SPC Evaluation and selection of the tender participants Provision of the tender documents to the participants Submission of project proposals SPC Evaluation and compilation of the list of qualified participants Negotiation with the qualified participants of the terms of the agreement from private sector to SPC Step 1. Selection of participants (one stage)

from SPC to private sector from private sector to SPC Step 2. Selection of the project

from SPC to private sector Step 3. Negotiation

Government

Contract award 17

3. PPP System in Mongolia

Procurement Steps of a Solicited Project
Same as one stage tender Request to submit an initial proposal on the issues specified in Article 13.7 of the Law Submission of project proposals SPC Finalize the tender documents Provision of the tender documents to the participants Submission of Project Proposals SPC Evaluation and compilation of the list of qualified participants (two stages)

Step 1. Selection of participants from SPC to private sector from private sector to SPC Step 2.1. Selection of the project from SPC to private sector

from private sector to SPC Step 2.2. Selection of the project

Same as one stage tender Same as one stage tender 18

Step 3. Negotiation

3. PPP System in Mongolia

Procurement Steps of an Unsolicited Project
Submission of the proposal to conclude a concession agreement together with the costbenefit analysis Opinions for project proposal Decision, whether to recommend to include the proposals in the list of concession items Add to the list of concession items Announcement of tender Submission of project proposals Evaluation and selection of the list of qualified participants Negotiation with the qualified participants of the terms of the agreement Contract award 19 private sector to SPC Line Ministry, NDIC, Ministry of Finance SPC Government SPC private sector to SPC SPC between SPC and private sector Government 19

4. Assessment of Mongolian PPPs

A significant progress for PPP has been made with the establishment of its legal framework.
The Law on Concessions has been prepared by the Government and ratified by the Parliament on January 28, 2010 after the approval of Governments Policy on PPP in late 2009. PPP unit was established within the SPC by the Prime Ministers order No.31 dated April 2010.

Nevertheless, as the program is now only emerging and the first PPP transactions are being prepared, refinements and amendments that address any gap in the framework need to be further developed.
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4. Assessment of Mongolian PPPs

Comparison

Priorities and Advantages Given to PPP Projects

Korean PPP Act
PPP Act prevails over other related acts (Article 3(1)), giving the project authorization and permission necessary to obtain in other related Acts Matters such as authorization and permission are considered to have been granted (Articles 21(4), 22(3))
Facilitate implementation of project

Mongolian Concession Law

Relevant license is granted to the concessionaire as soon as possible upon the conclusion of the concession agreement (Article 29.2)
Certain priorities in relation to other laws and granting of relevant permissions may need to be given to concession projects to facilitate and expedite the implementation

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4. Assessment of Mongolian PPPs

Institutional Arrangements: Players of the System(1)
Ministry of Strategy and Finance(MOSF)

Korean PPP

Manage PPP Act, Enforcement Decree, and Basic Plan for PPP; Responsible for budgeting, preparing and implementing PPP investment plans Establish major PPP policies; Establish and modify Basic Plan for PPP; Designate and cancel large PPP project ; Designate concessionaire of large PPP projects (total project cost with KRW 200 billion or above)

Ministry of Finance

Mongolian Concession

Give opinion to finalize draft list of concession items to SPC Submit to SPC proposal for concession item with the cost and benefit analysis; Give related opinion of their respective matter Grant permission and licenses ; Determine prices and tariffs; Adopt and enforce rules and regulations pertaining to the concession item or services rendering by it.

Line Ministries and NDIC

PPP Review Committee(PRC)

Regulatory Authority

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4. Assessment of Mongolian PPPs

Institutional Arrangements: Players of the System(2)
Public and Private Infrastructure Investment Management Center(PIMAC)
Support formulation of the Basic Plan; Assess feasibility and value for money, formulate request for proposals, evaluate project proposals, negotiate with potential concessionaires, etc.; Promote foreign investment in PPPs; Develop and operate capacity-building programs for public sector practitioners; Conduct policy research Develop implementation guidelines for efficient and consistent implementation of PPP projects.

Korean PPP

State Property Committee(SPC)

Research and prepare proposals

Mongolian Concession

Prepare and submit to the government draft list of concession items; Announce publicly the list of concession items;

Devise documents of the tender, and announce the tender, organize and evaluate it; Enter into concession agreements as contracts of the concessionaire to obtain financing;

Provide professional and methodological assistance to relevant local authorities regarding concession; Adopt regulations on the methodology to prepare the cost - benefit analysis for a concession item.

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4. Assessment of Mongolian PPPs

Weaknesses

Institutional Arrangements
Fiscal Discipline: Need for a central government ministry responsible for managing the Concession Law with power to regulate fiscal expenditure.
the Ministry of Finance only seems to play minimal role in the procedure.

Decision-Making Institution Need for an entity that deliberates matters concerning the establishment of major concession project-related policies and key decisions in the process of implementing large scale concession projects.
In Korea the PPP Review Committee (PRC) mandated with such functionality is organized and managed by the MOSF
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4. Assessment of Mongolian PPPs

Procurement Process for Unsolicited Projects
The procurement process for unsolicited projects should be designed to secure or enhance value for money BTL projects shall not be implemented as an unsolicited project (Article 9, Korean PPP Act)

Korean PPP

Mongolian and foreign legal entities may submit an unsolicited project proposal to conclude a concession agreement (Article 18, Mongolian Concession Law)

Mongolian Concession

BTL projects can operate irrespective of user fee, and project risk involved for BTL method is relatively low. If the private sector has an option to pursue BTL projects as unsolicited from the government, it could be over-motivated, resulting in reckless proposals of projects.

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4. Assessment of Mongolian PPPs

Measures for Financial Support and Risk Sharing
Korean PPP
Types Financial Support

Subsidy

(1) Construction Subsidy (2) Compensation for Base Cost Infrastructure Credit Guarantee Special Taxation, Corporate Tax, Local Tax, Exception from Charges Guidelines for Early Termination

Guarantee System Tax Incentives Early Termination

Mongolian Concession
Issue a loan guarantee

Article 30. Financial support from the state

Provide a portion of the financing for the concession Provide insurance

Provide tax exemptions and waivers in accordance with the relevant laws Issue a guarantee for the minimum amount of the concessionaires revenues under the concession agreement.
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4. Assessment of Mongolian PPPs

Fiscal Risk Management by Setting Limits to Govt Payment

Concession types that involve government payment may be exposed to government fiscal risk. Legal mechanism that sets limit to such payment needs to be explicitly indicated, as to identify, control, and mitigate unexpected fiscal risk that may involve in the process of payment during the concession period.
Korea sets a safeguard ceiling on government payment where annul government payment is less than 2 % of total government budget expenditure. Korean government has to submit the aggregate ceiling to the National Assembly, thereby limiting the amount of BTL project to be conducted in the following year.

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5. Policy Recommendations

Complement and Strengthen Legal and Institutional Framework

The newly ratified Law on Concessions will no doubt be facing challenges of legal loopholes that allow circumvention or avoidance of some of the most critical regulatory stages.
Specific guidance for tendering, contracting, risk sharing and conflict resolution must be adopted. Interplay among the budget ministry, the line ministries and PPP unit within SPC for regulating fiscal expenditure needed to be defined more specifically.

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5. Policy Recommendations

Build Transparent and Competitive Procurement Process

There is a need for standard documents for bidding that clearly and comprehensively address reimbursement issue of proposal preparation cost of unsuccessful proponents. Simplified required documents for proposal would act as guidance to the possible concessionaires. Clear access to information on the content of the project proposal, standard concession agreement, government support and guarantees should be opened to the public.

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5. Policy Recommendations
Attract Private Participants through Incentives and Risk Sharing Mechanism
Government support to induce private sectors active participation
Construction Subsidy, Infrastructure Credit Guarantee via Infrastructure Credit Guarantee Fund, Tax Incentives, Early Termination Payment

Establish Adequate Fiscal Capacity

Government needs financial capacity and policy analysis not to bypass expenditure controls
Report publicly on the guarantees that are given and the maximum liability of the government, and guarantees should be disclosed and incorporated into mediummedium-term

Fiscal management
Aggregate fiscal commitment should be limited to a sustainable level for maintaining fiscal soundness and stability

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5. Policy Recommendations

Build Capacity of SPC and Provide Training for Public Sector Officials
As advisory and project facilitating entity, staffs of State Property Committee require knowledge and expertise in the relevant field.
Through active cooperation with foreign advanced PPP units, it may build inward capacity to be, in the future, disseminated to other ministries and local government officials in charge of concession projects through training and education sessions.

MOU between Korean MOSF and KDI will act as vehicle to promote knowledge transfer between SPC and Korea on PPPs through cooperation and exchange of information.

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5. Policy Recommendations
Need Readjustment Readjustment of Pricing Policy
Ensure level playing field for private providers based on costcost-based tariffs
Set independently regulated cost recovery or market based tariffs followed by a gradual introduction of transport pricing reform

Implement Pilot PPP Projects with Support of International Advice

Due to lack of capacity of relevant institution and of proper guidelines, absence of experience and shortage of knowledge on PPP implementation, and as an attempt at minimizing trials and errors,
Pilot PPP projects with support of international transaction advice are recommended.

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Thank you...

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