Public Private Partnerships Development

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Policy, Law and Regulatory Analysis for

Public Private Partnerships (PPP) Development in Mongolia

By NARANTSETSEG P.

One. Goal

Main goal of the speech is to analyze PPP policy, law and regulations of Mongolia, to evaluate

and to make recommendation for the intensifying effective PPP development.

Two. Research importance

The PPP development has the great role and effective contributions to develop Infrastructure

sector intensively, which define the development and investment results of the country. So the

creating favorable law and regulatory environment for the PPPs development is necessary for

the investment results, effective risk management and effective debt and equity management.

For that the PPPs law and regulatory analysis and evaluations and monitoring is of great

significance for the countries intensive development.

PPP- is a long-term contract between government and private parties. The effective PPP project

management and stakeholders management is of importance for the long-term results of the

PPP contracts. Also the variety stakeholder’s effective relationship should be managed

effectively for the successful PPP project cycle, so managing complicated issues is necessary

toward project results.

PPPs are complex method of the procuring public services and infrastructure accordance with

their benefits or demand for services by combining main abilities of the public and private

sectors with great importance on Value for Money, efficient risk allocation and delivering high

quality public services.

PPP is a knowledge based process to sign effective concession contracts and to provide

successful implementation of contracts in long term. So PPP contracts are complex and require

a high level of professional skills by officers and they need design concession contract

accurately.

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The public-private partnerships is mechanism for developing, maintaining and operating

infrastructure and other sectors facilities where the responsible governmental entity lacked the

budgetary resources to undertake the expensive capital projects.

The effective risk management is crucial for the successful process and implementation of PPP

programs and projects in long term. The risk identification and risk allocation methodologies are

related to forms of risks (such as fiscal, legislative and regulatory, completion, cost overrun,

operational, design, environmental, supply, exchange rate, political, private partner, stakeholder,

resources and input risk, construction cost, Force Majeure risks, inflation risk, total project value,

distributional risks, Market, demand, volume risks, technology and utilities risks and etc.),

process of risk management and methodologies of risk analysis. The possible main risky issues

are the corruption on part of both government and private partners in PPPs, limited ability of the

government to maintain long-term capabilities, unfavorable outcomes for public partners and

inqualitative service and product (Sandeep Verma, Government Obligations in PPP Contracts).

So the effective risk and guarantee management is a key function for the protecting financers,

investors and high quality public service delivery.

Main role of government is to provide guarantee of process and implementations of the PPPs

programs and projects in long term financing. Government guarantees are a key method to

protect investors and financers for the providing long-term investment and financing. So

valuation, international accounting and financial statement standard, budget rule, guarantee

revenue and returns are necessary.

The well developed infrastructure intensifies countries development and investment. But main

problem of developing countries are inadequate infrastructure. Main challenges of infrastructure

services are not matching demand, low quality, inreliability, limitation of spending to proive

enough infrastructure services, poor planning and coordintation, poor management, weak

analysis, political risks, spending to wrong projects, poor service delivery, high cost, poor

maintenance and low benefits . Also main problems are related to insufficent fund, poor

planning and project selection, Inifficient management and inadequate maintenance. PPPs

help on creating additional sources for funding and financing, improving project and service

delivery, better construction management, improving project selection, improving private sector

analysis and supporting innovation and improving maintenance. PPP value drivers to improve

value for money in infrastructure is risk transfer, whole of life costing, innovation, asset

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utilization, focus service delivery, predictability and transparency of costs and funding,

mobilization of additional funding and accountability.

Three. Analysis for PPP development in Mongolia

a. Infrascope index

The Mongolian PPP development was analyzed by the Infrascope index. Index score

countries on scale 0 to 100. Score 100 represents ideal environment for PPP projects.

According to the Infrascope, ideal environment for PPP projects are created in Australia, UK

and Korea. PPP project environment is created well in India and Japan. Mongolian environment

is not ideal for PPP projects and in the lowest ranking in comparing to the other countries of

Asia-Pacific. Evidently, countries with high index score procure on the using fair and

transparent competitive bidding in wide range. Also all analyzed countries conduct PPP

procurement on the using competitive bidding. (Table 1. Infrascope of Asia-Pacific countries)

In 2012, according to Infrascope index, environment for PPP projects are ideal and mature

in Australia (92.3), UK (89.7) and Korea (71.3). PPP project environment is developed well in

India (64.8) and Japan (63.7). Environment for PPP projects is nascent and is not developed in

Mongolia (23.3) in 2012. Also according to Infrascope index, Mongolia has ranked in lowest

ranking comparing to other Asia‐Pacific countries. Infrascope index is improved in those

countries in 2014 comparing to infrascope index in 2012. In 2014, environment for PPP projects

are ideal and mature in Australia (91.8) and UK (88.1). Infrascope index is improved and PPP

project environment is developed well in Japan (75.8), Korea (78.8), and India (70.3) in 2014.

Moreover, infrascope index is improved in Mongolia in 2014 on comparing to infrascope index of

2012 and environment for PPP projects is emerging in Mongolia (39.7). Evidently, countries with

high index score procure on using fair and transparent competitive bidding in wide range. (Table

2. Comparison of Infrascope)

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Table 1. Infrascope of Asia-Pacific countries

Country Infrascope Bidding process

Australia 92.3 Bidding is transparent and fair, and the government’s policy requires a competitive process, Dispute resolution is handled through expert evaluation or arbitration, in order to avoid expensive and time.

Japan 63.7 Most projects are delivered through competitive tender, and the Civil Code, Antimonopoly Law and the PFI Law support fair and competitive bidding. Dispute-resolution is available through the International Centre for Settlement of Investment Disputes, or the courts.

Korea 71.3 The bidding process is considered fair, and there are no single-bid contracts. There are no PPP-specific dispute-resolution mechanisms, but private mediation firms, as well as the Office of the Ombudsman may offer mediation.

UK 89.7 Bidding is open and fair, and usually conducted via a “competitive dialogue” process; the winner is the bidder adjudged to offer the most economically advantageous proposal, rather than simply the cheapest, in accordance with the Public Contracts Regulations (2006). Disputes are resolved either through direct consultation between the parties, or through the judgment of an expert; if these prove unsatisfactory, arbitration or the courts (which are impartial and efficient) can be used.

Bangladesh 39.2 Policy and Strategy for Public-Private Partnerships provides for a competitive bidding process and oversight, although it remains ambiguous on the question of risk-allocation and compensation. The bidding process has suffered from a lack of transparency, although improvements were made in 2010. The judicial process is also problematic, with a lack of capacity to deal with cases, poor knowledge, and lengthy settlement periods holding up proceedings.

India 64.8 Following a Supreme Court ruling in 2009, the awarding of projects has been subject to the meeting of requirements on transparency and competition. Strategic planning, prefeasibility analysis, financial viability, PPP suitability, and “readiness” must all be demonstrated, leading to a process that is seen as largely fair and predictable, albeit time-consuming. Dispute-resolution takes place through either “amicable settlement” or arbitration; foreign bidders may also make use of international arbitration.

Pakistan 38.8 A relatively small field of bidders also limits competition. Dispute-resolution usually takes place in court; the process is lengthy (although not unfavorable towards private partners), and an Alternative Dispute Resolution Centre was recently established.

Philippines 47.1 The competitive bidding process is well structured; in each case, the procuring agency must create a Prequalification, Bids and Awards Committee (PBAC) composed of relevant experts, to invite, evaluate, and recommend bids. Dispute-resolution, is a weak point, with loopholes in rules leading to ambiguity; disputes are usually left to parties to solve between themselves, although arbitration and the courts are used. The courts themselves are not truly independent, although the situation is improving.

Mongolia 23.3 The new Concession law provides a framework for PPP selection and decision-making, with Article 30 offering options on government support for concessionaires, such as loan guarantees and tax credits. Practice PPP decision-making in Mongolia is weak; regarding previous PPP projects, there is little evidence of cost-benefit analysis or benchmarking having been used.

Source: Evaluating Environment for PPPs in Asia Pacific, The Infrascope: Findings and Methodologies. Economist Intelligence unit, 2011

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Table 2. Comparison of Infrascope

No Country 2012 2014 Difference

1 Australia 92.3 91.8 -0.5

2 UK 89.7 88.1 -1.6

3 Korea 71.3 78.8 7.5

4 India 64.8 70.3 5.5

5 Japan 63.7 75.8 12.1

6 Mongolia 23.3 39.7 16.4

Source: Evaluating the environment for PPPs in Asia-Pacific, The 2014 Infrascope,

Mongolian Infrascope index is improved in 2014 comparing to index of 2012. Infrascope

index includes factors and category indicators such as regulatory framework, institutional

framework, operational maturity, investment climate, financial facilities and subnational

adjustment. So it means that all those infrascope indicators are improved for PPP project

development in Mongolia. (Table 3. Change of Infrascope, Mongolia)

Table 3. Change of Infrascope, Mongolia

No Country 2012 2014 Difference

1 regulatory framework 25 43.8 18.8

2 institutional framework 25 50 25

3 operational maturity 3.1 18.8 15.7

4 investment climate 46.9 59.3 12.4

5 financial facilities 13.9 30.6 16.7

6 subnational adjustment 25 25 0

Source: Evaluating the environment for PPPs in Asia-Pacific, The 2014 Infrascope,

b. Lenders and investors requirements for Legal and regulatory framework

The favorable law, regulatory, institutional and contractual environment should be created

for the ensuring effectiveness of the PPP contract and project cycle in long-term. The certain

matters should be decided for the sufficient PPP legal framework regarding investors and

lenders. The Mongolian state policy on PPPs and concession law was analyzed by criteria

related to necessary requirements for legal and regulatory framework, which are crucial for

lenders and investors. Regulating next questions in acts are important for lenders and investors.

(Table 2. Requirements for PPP legal and regulatory framework)

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Table 2. Requirements for PPP legal and regulatory framework

Deciding questions for PPP Legal framework regarding investors and lenders

State Policy on PPPs, Resolution No 64 Mongolia

2009

Concession law of Mongolia, 2010

1 fair, transparent is the PPP bidding process -√ +√

2 Robust, forward planning program of public sector -√ -√

3 Allocation process to ensure government payments -√ -√

4 Legal capacity of public sector on long-term payment commitments

-√ -√

5 Risk that obligations transfer to body without legal capacity

-√ -√

6 Transition path for harmonizing contract with regulations

-√ -√

7 Certain roles of regulator in supervising and during implementation

-√ -√

8 End-user tariffs and availability tariffs -√ -√

9 Investors right in contract termination -√ -√

10 Government right in contract termination -√ -√

11 Accounting regulation affect to profit distribution -√ -√

12 Restriction and use of qualified expatriate personnel

-√ -√

13 Lender’s right to take over assets management -√ -√

14 Form of government guarantee available for certain risks

-√ -√

15 Handling contract change -√ +√

16 Compensation mechanism -√ +√

17 Bear risk of law change -√ -√

18 Combined procurement of construction, long-term operation and maintenance

-√ -√

Note: -√ provision related to this question is regulated in the legal act of Mongolia. +√ provision related to this question is not regulated in the legal act of Mongolia. Deciding questions related to requirements are defined on the using source: Edward Farquharson and others, How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, 2011

According to the comparative analysis in table 2, advantages and disadvantages for the

creating PPP law and regulations of Mongolia are defined in the next.

Advantages for PPP project according to the approaches for creating PPP law and

regulations of Mongolia.

-Created PPP law and regulatory environment.

-Provision on the PPP bidding process principles is reflected in concession law.

-Provision on compensation mechanism is reflected in concession law.

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-Provision related to right to receive commission in situation of cost increasing and income

reducing is reflected in provision of Concession agreement condition of the concession law.

Disadvantages for PPP project according to the approaches for creating PPP law and

regulations of Mongolia.

-The formula, tariff and price adjustments are not regulated in the concession law in detail.

-Mongolian PPP law and regulatory environment is not regulated according to the international

approaches of PPP methodology.

-Objective of PPP contract management for government and end users is not reflected in PPP

policy and concession law in detail according to the international approaches for PPP contract

management.

-PPP contract management framework: partnership management, service delivery management

and contract administration management is not regulated accurate and detail in PPP policy and

concession law of Mongolia.

-Risk, risk matrix and risk allocation is reflected in the PPP policy and concession law very

limited and uncertain scope.

-Matters related to allocation process to ensure government payments is not reflected in PPP

policy and law.

-Matters related to robust, forward planning program of public sector is not regulated in PPP

policy and law.

-Matters on Legal capacity of public sector on long-term payment commitments are not

regulated in PPP policy and law.

-Risk that obligations transfer to body without legal capacity is not regulated in PPP policy and

law.

-Transition path for harmonizing contract with regulations is not regulated in PPP policy and law.

-Matters related to certain roles of regulator in supervising and during implementation are not

regulated in PPP policy and law.

-End-user tariffs and availability tariffs are not regulated clear in PPP policy and law.

-Government and Investors right in contract termination is not reflected in the PPP policy and

law.

-Matters on accounting regulation affect to profit distribution are not regulated in the PPP policy

and law.

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-Matters on restriction and use of qualified expatriate personnel are not regulated in PPP policy,

law and regulation.

-Matters on Lender’s right to take over assets management are not regulated in PPP policy, law

and regulation.

-Matters on form of government guarantee available for certain risks and bear risk of law

change are not reflected in PPP policy, law and regulation.

-Matters on combined procurement of construction, long-term operation and maintenance is not

regulated certain in PPP policy, law and regulation.

-PPP principles are not implemented in full, in particular transparency and accountability.

c. Risk assessment

The Mongolian situation credit risk enhancement is evaluated by the Banking industry

country risk assessment and government rating according to the Standard & Poor’s rating

service.

1. Banking industry country risk assessment (Source: www.standardandpoors.com, 22-

Mar-2012)

The Standard & Poor’s evaluated the Mongolian banking system according to the BICRA

methodology in 2012. BICRA is scored on scale from 1 to 10, “group 1” lowest risk banking

group, “group 10” highest risk banking group. The BICRA is consisted of two main areas of

analysis—"economic risk" and "industry risk"--on which the Mongolian banking system scores '9'

and '8'. Mongolia has ranked on group '9'. (See picture 1. BICRA comparison, Mongolia)

http://www.standardandpoors.com/

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Picture 1. BICRA comparison, Mongolia

Source: Banking industry country risk assessment from web www.standardandpoors.com, 22-Mar-2012

The Mongolian banking sector strengths and disadvantages were evaluated according to

the Standard and Poor’s analysis. The Mongolian banking sector strengths are defined by the

Controllable economic imbalance, low reliance on external funding and Banks' limited exposure

to innovative, complex, and risky products. Weaknesses of banking sector are defined by the

vulnerabilities in a small, undeveloped, primarily commodity-based, low-income economy;

regulatory framework with weak transparency and disclosure and Aggressive lending and weak

underwriting standards. (Table 3. Strengths and weaknesses of banking industry of Mongolia).


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Table 3. Strengths and weaknesses of banking industry of Mongolia

Strengths Weaknesses

-Controllable economic imbalance with moderate growth records in credit levels and property prices. -Low reliance on external funding in the banking sector. -Banks' limited exposure to innovative, complex, and risky products.

-Vulnerabilities inherent in a small, undeveloped, primarily commodity-based, low-income economy. -Loose regulatory framework with weak transparency and disclosure. -Aggressive lending and weak underwriting standards in the fragile banking system.


The Mongolia is included in the country with high risk according to the Standard and

Poor’s economic risk evaluations in 2012. Economic risks of Mongolia were analyzed by main

factors as economic resilience, economic imbalances, and credit risk in the economy.

Mongolian economic risks score has been ranked on score 9 according to the banking industry

assessment. (Table 4. Economic risks of Mongolia and Table 6. Peer BICRA Scores) The

Standard and Poor’s rated the Mongolian credit rating on BB- and positve in 2015.


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Table 4. Economic risks of Mongolia Form of Risk Risk situation Main factor Reliance

Economic resilience

Very high risk

Economic structure and stability:

-High dependence on mining sector, -Mining sector in GDP about 30%, -Mineral products in export of Mongolia about 80%, -Vulnerability of commodity-based economy -Country's inadequate infrastructure difficulties to the stability of economy.

Macroeconomic policy flexibility

-Weaknesses in macroeconomic policy flexibility. -Country's fiscal policy to be pro-cyclical, which reflects volatility and narrow source of revenues, and the shortfall of basic services in country.

Political risk -Overall political stability of Mongolia is adequate but lack of policy consistency and the electoral cycle increase the risks.

Economic imbalances

High risk Expansionary phase

Mongolian economy remains in an expansionary phase as reflected in the general rise in credit levels and property prices.

Private sector credit growth

-Private sector credit growth because of the country's strong economic growth prospects. -The country's private sector credit growth to double-digit from 2011.

Real estate prices

growth in commercial real estate prices does not suggest significant additional risk of economic imbalances.

Equity prices -high volatility in Mongolia's equity market brings additional risk to the banking system's economic imbalances. -end December 2011, the inflation-adjusted equity index (MSE Top 20) has been extremely volatile.

Current account and external debt position

“-external risks" cause moderate vulnerability with respect to economic imbalances. -The economy's exposure to terms of trade volatility and narrow export profile remains a weakness. -the economy's negative narrow net external debt as export capacity expands somewhat moderates the "external risks".

Credit risk in the economy

Extremely high risk

Private sector debt capacity and leverage

-Private sector credit as "moderately high" relative to income levels based on the forecast of US$2,973 per capital GDP -About 53% private sector credit as a percentage of GDP in 2011.

Lending and underwriting standards

Lending and underwriting standards in Mongolia are "aggressive", as reflected in a high concentration of lending in volatile sectors, contributing to a persistently high level of nonperforming assets.

Payment culture and rule of law.

-Payment culture and rule of law are "very weak". -Mongolia as having a lengthy and ineffective legal process with regards to loan default claims and the recovery of collateral.



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The Mongolia has ranked on the country with high risk according to the Standard and

Poor’s industrial risk evaluations. Industrial risks of Mongolia were analyzed by main factors as

institutional framework, competitive dynamics, and systemwide funding. Mongolian economic

risks score has been ranked on score 8 according to the banking industry assessment. (Table 5.

Industrial risks of Mongolia)

Table 5. Industrial risks of Mongolia Form of Risk Risk situation Main factor Reliance

Institutional framework

Extremely high risk

Banking regulation and supervision

-Banking regulation in Mongolia as more relaxed than international standards. -Regulatory framework is rudimentary and overall banking supervision is more compliance based than risk based.

Regulatory track record

-Regulator has shown forbearance towards the banking sector reflected in the regulator's "weak" track record of imposing adherence to requirements. Strict enforcement is lacking despite weak credit underwriting practices and governance systems in local banks.

Governance and transparency

-The transparency and degrees of disclosure of bank accounts are "weak" on an industry-wide basis, and without standardization. -Disclosure with respect to banks' financials and ownership is weak. -Certain aspects of ownership, management and governance lead to transparency risks. -some banks have strengthened their governance through the participation of minority equity shareholders.

Competitive dynamics

High risk Risk appetite -Risk appetite as "aggressive", -The system's underwriting standard is relatively weak and the banking industry has a higher level of exposure to riskier industries such as mining, agriculture, and property market than less risky industries. -Usage of innovative, complex financial products is limited.

Industry stability

-Banking industry is "at least moderately stable", with a lack of new entrants to materially change the competitive environment in Mongolia's banking system. -The bank margin relatively stable in recent years, despite a certain level of competition from foreign banks on large project lending.

Market distortions

-"Absence of distortions" in Mongolia's banking industry. -No government-owned banks except a small bank currently under receivership. -Regulator's benchmark rate has no influence on the market deposit and loan rate. Non-bank financial institutions are also quite small in size and number compared to banks.

Systemwide funding

high risk Core customer deposits & external funding

The banking industry's core customer deposits have been higher than total domestic loans resulting in no need for net external borrowing.

Domestic debt capital markets

Debt capital market in Mongolia as "narrow and shallow", which weighs on the funding risks facing the domestic banking system. Private-sector debt issue in the domestic capital market is extremely limited compared with the GDP

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of Mongolia, and there is no active capital market for issuance of private-sector debt.

Government role

Government's role as "adequate" given the Mongolian government has a moderately successful track record of providing guarantees and liquidity during periods of market turmoil.


Table 6. Peer BICRA Scores

Mongolia Cambodia Papua New Guinea

BICRA group 9 9 9

Economic risk score 9 9 9

Industry risk score 8 9 8

Government propensity to support

Highly Supportive Support Uncertain Support Uncertain

Sovereign rating BB-/Positive/B B/Stable/B B+/Negative/B

Source: Standard & Poor's Financial Institutions Ratings.


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2. Mongolian government rating for credit enhancement

The Mongolian government rating was analyzed by issuer credit rating and Sovereigns

Rating. The Standard and Poor’s rated Mongolian issuer credit rating on BB- on foreign and local

long-term rating and B foreign and local short-term rating. They rated the Sovereigns Rating of

Mongolia on BB- rating. (See Table 5. Mongolian government rating and Table 6. Sovereigns Rating

of Mongolia)

Table 5. Mongolian government rating

issuer credit rating

Ratings Rating Date

Regulatory Identifiers

Last Credit Rating Action

Foreign Long Term

BB- 13-Dec-2007 EE 19-Dec-2011 Outlook POSITIVE

Foreign Short Term

B 14-Jun-2001 EE

Local Long Term

BB- 13-Dec-2007 EE 19-Dec-2011 Outlook POSITIVE

Local Short Term

B 14-Jun-2001 EE

. Transfer & Convertibility Assessment

Local Long Term

BB 20-Nov-2009


Table 6. Sovereigns Rating of Mongolia

Local Currency Rating

Foreign Currency Rating T&C Assessment

Mongolia BB- BB- BB


The issuer credit rating of the Mongolian Mining Corporation (MMC) was evaluated by the

Standard and Poor’s corporate rating indicators. The Standard and Poor’s rated the MMC on 'B+'

corporate credit rating to the company and a 'B+' issue rating to its proposed senior notes.

According to the Standard and Poor’s evaluations, the MMC's coal sales will grow and profitability

will be sustainable over the next two years. The issuer credit ‘B’ rating is more vulnerable to adverse

business, financial and economic conditions but currently has the capacity to meet financial

commitments. (Table 7. Issuer Credit rating, Mongolian Mining Corporation)

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Table 7. Issuer Credit rating, Mongolian Mining Corporation

Ratings Rating Date

Regulatory Identifiers

Last Credit Rating Action

Foreign Long Term

B+ 14-Mar-2012 EE 14-Mar-2012 Outlook STABLE

Local Long Term

B+ 14-Mar-2012 EE 14-Mar-2012 Outlook STABLE


The Development Bank of Mongolia was evaluated by the Standard & Poor’s foreign

currency issue rating and has rated ‘BB-“. Main role of the development bank is to secure

variety infrastructure including railroad, transportation and energy and industrial projects

financing. ‘BB’ rating expresses the meaning less vulnerable in the near-term but faces major

ongoing uncertainties to adverse business, financial and economic conditions.

Mongolia is country with high risks. So variety risks are possible to have impact to the

PPP project cycle, successful implementation and final results and cost grow of the project in

Mongolia. Risk allocation, risk mitigation and risk management is of importance for the effective

PPP project cycle management in Mongolia. Risk category, risk status and impact should be

defined for the PPP project. The PPP procurement stage should be conducted and managed

effectively for the selecting best and final clear preferred bidder. The negotiation process is one

of main part of the PPP procurement stage, so risks matters should be discussed and

negotiated clearly. The possible risk status is high in Mongolia according to the completion risk,

cost overrun risk, design risk, environmental risk, force majeure risk, operating risk, political risk

and regulatory risk. So the risk mitigation measures should be optimal and correct. (Table 8.

Possible risks for PPP project, Mongolia)

The Standard and Poor’s rated the Mongolian credit rating on BB- and positve in 2015.

Table 8. Possible risks for PPP project, Mongolia

Risks category Brief description Mitigation Possible Risk status

Possible Impact

1 Completion risks Possible delay: -service delivery cannot start in scheduled commence time. -delay, unless greater expenditure is incurred to keep start date. -variations, -uncertain expectation.

-delay insurance -certify completion, -liquidate damages, construction bonds and appropriate security to reach completion,

high high

2 Cost overrun Actual project cost is -fixed price construction high high

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risk exceeded projected project cost during design and construction phase.

contracts. -Contingency provision. -Debt facility and additional equity.

3 Design risk Private party design may not achieve to required output and standardization.

-Clear output specification. -design warranty. -patent and latent defect liability, consultation with institution. -monitoring.

high high

4 Environmental risk

Environmental damage: -from construction and operating activities, -from pre-transfer activities.

-Due diligence by bidders of project site condition. -independent survey of project site. -indemnity for latent pre-transfer environmental pollution. -independent monitoring. -high-tech policy without pollution.

high high

5 Exchange rate risk

Exchange rate fluctuation Hedging instrument medium Medium

6 Force Majeure risks

Occurrence of certain unexpected event beyond of control

Insurance Termination Safety, security

high high

7 Inflation risks Actual inflation rate will exceed the projected inflation rate.

Index linked adjustment to unitary payment.

high high

8 Market, demand, volume risks

Demand for services generated by project may be less than projected.

-Unitary payment type PPP on availability, -Improve demand for services, -Improve quality for services -Right cost policy for market

medium medium

9 Operating risks Any factors impacting on operating requirements of project, including operating expenditure, skills requirement and etc.

-Clear output specification -Penalty regime and monitoring Insurance -Certain operational action and procedure

high high

10 Political risk* -Unforeseeable conduct by institution and other government authority that materially and adversely affect the expected return on equity, debt, service and other results increased cost. -expropriation,

-Limit risk to unforeseeable conduct. -unofficial cost management. -fighting with bribe and creating integrity system. -accountability for political actions and misuse action. -Multilateral investment guarantee convention

high high

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nationalization, privatization of assets illegal ways

implementation. -UN convention against corruption.

11 Regulatory risks Uncertainty and instability of regulations

-To sign long term certain contract and to provide implementation. -limit uncertainty and instability. -indicate cost of loss and reflect in contract.

high high

12 Resource and input risks

Shortage of resources and inputs

-supply contract according to the PPP project requirement and standards. -effective permanent supply management.

low medium

13 Tax rate change risk

Change and instability of tax

Contract and implementation

medium medium

14 Technology risks Negative impact of technology to project output,

-Apply suitable technology. -optimal technology policy, option and implementation. -improve technological requirement and criteria in procurement stage.

medium high

15 Utilities risks -Insufficient utility And delay of project

-Contract -Insurance -emergency facility

medium High

*The resource curse explanation is divided to two classes: economic factor and institutional or political economy factors. Key idea of political economy explanation is defined by the money corrupt. (Source: Martin E. Sandbu, Natural Wealth Accounts: Proposal for Alleviating the Natural Resource Curse. University of Pennsylvania, 2005)

d. Assessment for law and regulations

The creating favorable policy, law, regulatory and contractual environment is necessary

for the successful and efficient PPP project development, investment efficiency and ensuring

greater VFM, better quality service delivery and affordability in long-term. Each country has

specific policy for the successful PPP development. But Mongolia has less experience in PPP

field. The Mongolian Great Hural has approved resolution No. 64 of state policy on PPP in 15

October, 2009 and Concession law in 28 January, 2010. This policy and law regulate the PPP

relation in Mongolia. Concession forms, participating parties, accountability and risk allocation

were regulated and defined in concession law. The accountability according to concession law

of Mongolia is defined by assets responsibility, administrative punishment and discipline

punishment. (Table 9. General Specific of Concession law).

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Table 9. General specific of concession law

1 Approved date of Great hural resolution No. 64 of state policy on PPP:

15 October, 2009

2 Approved date of Concession law of Mongolia:

28 January, 2010

3 Concession form according to concession law of Mongolia:

-Build-operate-transfer BOT, -Build-operate BO, -Build- own-operate BOO, -Build-own-operate-transfer BOOT, -Build-lease-transfer BLT, -Design-Build-Finance-operate DBFO, -Restructure-operate-transfer ROT.

4 Participating parties in PPP according to state policy on PPPs in Mongolia:

a. Participating parties of state organization is the next: -Mongolian Government, -Ministry of Mongolia, -Government Agency, -Citizen Representatives hural of the Capital city and province, -Governor and governor office of the Capital city and province, -Legal entity with state and local property participation. b. Participating parties on behalf of private sector is the next: -company, -cooperative and friendship, -non-government organization, -person.

5 Responsibility: Risk allocation, Concession law, article 31.1-3

1. Concession owner would be responsible for operational risks fully for the implementing concession, which is not indicated in concession contract differently.

2. Responsibility for Force majeure risks are regulated concession contract.

3. Concession owner would be responsible for loss, damage and roles before third parties relying on his/her incorrect operation fully in period for own-operate concession item.

6 Responsibility: for person, who violated law Concession law, article 35.1-3

1. Assets responsibility If Concession contract parties do not implement roles according to the laws and concession contract, then those parities will be responsible for assets according to the signed contract or if this not indicated in concession contract, then the parties should be responsible for assets according to the Citizen law of Mongolia.

2. Administrative punishment and penalty for guilty by judge and state inspector,

3. Discipline punishment according to the state authority law for state official, who violated concession law.

Sources: Concession law of Mongolia, 2010 from ppp.mn

According to the comparison of the international PPP methodology measurements with

Mongolian PPPs policy and concession law specifics, Mongolia has specifics on PPPs policy

and regulation. PPP is regulated by the Commission in Mongolia. Main role of the State

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Property Committee of Mongolia is to conduct work to own, exploit and protect the state

property. (Table 10. Comparison of Mongolia specifics to PPP methodology measurements)

Table 10. Comparison of Mongolia specifics to PPP methodology measurements)

Main measurements

PPP methodology Mongolian specifics

1 Regulation by contract

Formula, price and tariff adjustments must be defined in the contract clearly. Contract monitoring body allows new change to prices and payments.

2 Regulation by commission

Establishment of independent entity on the defined rules: laws, regulations, contracts and licenses. Regulatory commission decides price adjustment during PPP project life.

Main role of the State Property Committee of Mongolia is to conduct work to own, exploit and protect the state property. The PPP and concession department is one of main parts of the organizational structure of the State Property Committee. The Mongolian Great Hural has approved resolution No64 “State policy on PPP” in 15 October 2009 and Concession law in 28 January 2010. Also according to the concession law, the government approved resolution No 103 in 2012 and State Property Committee approved resolution No 153 in 2010.

3 Objective of PPP contract management for government and end users

-to obtain services set worth in output specifications of contract, -to ensure affordability and VFM, -To ensure risks transferred to private sector, -Improvement performance,

Concession agreement condition (provision 21) by concession law: -property ownership move to concession owner, -role and accountability of regulatory organization for concession implementation, -work and service condition, scope, limitation, specific right of concession owner, -right to receive fee for concession owner, pricing and fee set, method to change and control, -move the share auditing portfolio to concession owners and to receive permission, -fee of body for the performing work and service of concession owner, -to form right for bail and financing find of concession owner, -financial support of state to implement concession contract, -Right and role of regulatory organization to support for the receiving license, land and land exploitation, -role and right to exploit land and land subsoil, -right of concession owner to provide permanent condition for work and service and qualitative requirements, -role of concession owner to conduct service for users on even condition, -to establish legal entity and requirement for equity and legal body,

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-right to receive commission in situation of cost increasing and income reducing, -condition to move concession item temporary, -condition to change concession owner, -rule to prepare report, -rule to decide liabilities, -rule to audit contract with conflict of interest, -role and responsibility to issue qualitative confirmation, -controlling, tech transfer and training, -service for continue, -fee for the moving concession item to new owner, -expiry, expand, termination of concession.

4 PPP contract management framework: partnership management

This is concern with structures of accountability and relationships between government and private sector.

Accountability for law violations (article 35): -assets accountability, -administrative punishment and penalty, -discipline punishment.

5 PPP contract management framework: service delivery management

This is systems and procedure designed to manage risk and performance.

Risk allocation (article 31 of concession law) -Concession owner would be responsible for operational risks fully for the implementing concession, which is not indicated in concession contract differently. -Responsibility for Force majeure risks are regulated concession contract. -Concession owner would be responsible for loss, damage and roles before third parties relying on the his/her incorrect operation fully in period for own-operate concession item.

6 PPP contract management framework: contract administration management

This is administrative processes required to ensure all procedures contained in PPP contract and all documentation.

Power of state and local administrative organization on concession: -article 6: power of state organization, -article 7: power of local administrative organization, -article 8: prohibition in organizational and officer’s activity. Control implementation auditing-article 25: -state administrative organization on state property matters and organization on local property matters, -Central state administrative organization responsible for concession item, -other organization and officer, who has right audit on laws.

Four. Recommendation and improving ways

The creating certain and stable policy, law, regulatory and contractual environment is

necessary for the intensive investment and PPP development and effective PPP project cycle

management in Mongolia. Improvement of infrastructure network is importance for intensive

mining development and the long-term investment is necessary for infrastructure intensive

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development. So concession contract specific is defined by the long term investment and long-

term contract duration. In this case the long term concession contract stable implementation

should be provided.

The taking next measures are necessary:

-Provide qualitative services deivery to users.

-Improve personal income, job position and benefit to social development.

-Improve quality of life,

-Provide stable law, regulatory and contractual environment.

Five. Main references:

1. Banking industry country risk assessment from web

www.standardandpoors.com, 22-Mar-2012

2. Concession law of Mongolia

3. Edward Farquharson and others, How to Engage with the Private Sector in

Public-Private Partnerships in Emerging Markets, 2011

4. Evaluating Environment for PPPs in Asia Pacific, The Infrascope: Findings and

Methodologies. Economist Intelligence unit, 2011

5. Source: Evaluating the environment for PPPs in Asia-Pacific, The 2014 Infrascope, 6. Guide to Credit Rating Essentials, Standard & Poor’s from web


7. Martin E. Sandbu, Natural Wealth Accounts: Proposal for Alleviating the Natural

Resource Curse. University of Pennsylvania

8. PPP policy documentation of Mongolia

9. PPP Reference Guide, WBI, 2012

10. Sandeep Verma, Government Obligations in PPP Contracts, Journal of Public

Procurement, Volume 10, No.4, 2010, p.564-567

11. Standard & Poor's Financial Institutions Ratings from web


Note:

‘AAA’ Extremely strong capacity to meet financial commitments. Highest rating

‘AA’ Very strong capacity to meet financial commitments




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‘A’ Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic

conditions and changes in circumstances

‘BBB’ Adequate capacity to meet financial commitments, but more subject to adverse economic

conditions

‘BBB-’ Considered lowest investment grade by market participants

‘BB+’ Considered highest speculative grade by market participants

‘BB’ Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial

and economic conditions

‘B’ More vulnerable to adverse business, financial and economic conditions but currently has the capacity

to meet financial commitments

‘CCC’ Currently vulnerable and dependent on favorable business, financial and economic conditions to

meet financial commitments

‘CC’ Currently highly vulnerable

‘C’ A bankruptcy petition has been filed or similar action taken, but payments of financial commitments

are continued ‘D’ Payments default on financial commitments

Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative

standing within the major rating categories.

Source: Guide to Credit Rating Essentials, Standard & Poor’s

Public Private Partnerships Development

Economy & Finance