Patricio Mansilla - Zamyn Uud an invitation for PPP in mongolia

This publication was produced for review by the United States Agency for International Development. The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

Economic Policy Reform and

Zamiin Uud Logistics Park An invitation for a Public- Private

Partnership

January 2009 Ulaanbaatar, Mongolia

Project: Mongolia Economic Policy Reform and Competitiveness Project (EPRC) Report Title: Zamiin Uud Logistics Park - An invitation for a Public Private Partnership Main Author: Patricio Mansilla Contract No. 438-C-00-03-00021-00 Submitted by: EPRC Project/Chemonics International Inc., Tavan Bogd Plaza, Second Floor,

Eronhii Said Amar Street. Sukhbaatar District, Ulaanbaatar, Mongolia Telephone and fax: (976-11) 32 13 75 Fax: (976-11) 32 78 25 Contact: Fernando Bertoli, Chief of Party E-mail address: [email protected]

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank

ANTT Terrestrial Transport National Agency-Brazil

BBO Buy-Build-Operate

BDR Bangladesh Rifles

BDO Build-Develop-Operate

BLOT Build-Lease-Operate and Transfer

BOM Bank of Mongolia

BOT Build-Operate-Transfer

BOO Build- Own- Operate

BOOT Build-Own-Operate and Transfer

BROT Build-Rent- Own and Transfer

BSBK Bangladesh Sthala Bandar Kartripaksha

BTO Build-Transfer-Operate

CCPPP Canadian Council for Public Private Partnerships

CDS Credit Default Swap

DBOT Design-Build-Operate-Transfer

DBFO Design-Build-Finance-Operate

DCMF Design-Construct-Manage-Finance

EPRC Economic Reform and Competitiveness Project

FRC Financial Regulatory Commission

GoM Government of Mongolia

IADB Inter American Development Bank

IFC International Finance Corporation

IMF International Monetary Fund

LDO Lease-Develop-Operate

LPDC Logistics Park Development Corporation

LPLA Land Port Los Andes-Chile

MFFA Mongolian Freight Forwarders Association

MIF Multilateral Investment Fund- FOMIN of IADB

MIK Mongolian Mortgage Corporation

MOP Ministry of Public Works-Chile

MNT Mongolian Togrog

PFI Private Finance Initiative

PIMAC Private Management Center-Korea

PICOM Private Infrastructure Committee

PRC People´s Republic of China

PPP Public Private Partnership

PV Partnerships Victoria

SEW Single Electronic Window

UBTZ Ulaanbaatar Railway

UNDP United Nations Development Programme

USD United States Dollar

WAA Wrap around Addition

WBI World Bank Institute

TABLE OF CONTENT ABBREVIATIONS AND ACRONYMS ........................................................................................ i EXECUTIVE SUMMARY ........................................................................................................... i

A. Public Private Partnerships in Mongolia ............................................................................ i B. Zamiin Uud Logistics Park – Public Private Partnership .................................................... ii

SECTION I: UNDERSTANDING PPP FOR A SUCCESSFUL APPLICATION IN MONGOLIA 1 1. Understanding Public Private Partnerships (PPP) ............................................................ 1 2. Main reasons to use PPP ................................................................................................. 2 3. Main PPP models applied in the world.............................................................................. 6

SECTION II: PRESENT AND FUTURE OF PPP IN MONGOLIA ............................................. 9 1. Mongolian experience in PPP projects ............................................................................. 9 2. New Mongolian Government structure: The platform for a PPP Structure ..................... 10 3. Macroeconomic Factors to be considered in a Potential PPP Program in Mongolia ...... 13 4. Mongolian financial market ............................................................................................. 17 5. Foreign investment in Mongolia ...................................................................................... 19 6. Recommendations .......................................................................................................... 21

SECTION III: ZAMIIN UUD LOGISTIC PARK PPP BUSINESS MODEL ............................... 27 1. Main reasons to start the project Zamiin Uud Logistic Park ............................................ 27 2. Objectives ....................................................................................................................... 28 3. Legal framework for the project ....................................................................................... 29 4. Preliminary project description ........................................................................................ 30 5. Investment cost ............................................................................................................... 32 6. Demand .......................................................................................................................... 32 8. Main services and potential revenues ............................................................................. 33 9. Business model ............................................................................................................... 33 10. Corporate Governance ................................................................................................. 35 11. Business regulation ....................................................................................................... 36 12. Financial management .................................................................................................. 36 13. Feasibility studies and public agencies coordination .................................................... 37 14. A comparison with Land Port Los Andes-Chile PPP Project ........................................ 37

ANNEX A: LAND PORT LOS ANDES-CHILE ........................................................................ 43 ANNEX B: ACTIVITIES OF THE CONSULTANCY ................................................................ 53 ANNEX C: EPRC MEETINGS IN ULAANBAATAR ................................................................ 57 ANNEX D: LOWER AND UPPER MIDDLE INCOME COUNTRIES ....................................... 61 ANNEX E: LIST OF WORKSHOP PARTICIPANTS/“LAND PORT LOS ANDES-CHILE AND ZAMIIN UUD LOGISTICS PARK-MONGOLIA: TWO INNOVATIVE PROJECTS .................. 65 ANNEX F: LIST OF WORKSHOP PARTICIPANTS/“INCENTIVES, STRUCTURE AND REGULATION OF PUBLIC PRIVATE PARTNERSHIPS IN MIDDLE INCOME COUNTRIES”. ................................................................................................................................................ 69 ANNEX G: LIST OF THE MULTILATERAL INVESTMENT FUND (MIF) PROJECTS IN PUBLIC-PRIVATE PARTNERSHIPS IN LATIN AMERICA .................................................... 73 ANNEX H: BANGLADESH BOT PROGRAM OF LAND PORTS ............................................ 77

EXECUTIVE SUMMARY

A. Public Private Partnerships in Mongolia

Mongolia’s strong economic performance in the last decade must be sustainable in the long run. One public policy that can contribute to increased economic stability and also attract foreign investment, generate employment, spur economic growth and increase the wealth of Mongolian citizens is to invite the private sector to develop public facilities and services with the public sector.

It is the right moment for Mongolia to consider extending a special invitation to the private sector to contribute funds, expertise and know how to create a new industry that can accelerate the achievement of the current Action Plan and Millennium Development Goals of Mongolia.

Currently, Mongolia has a significant number of projects requiring urgent development principally in transportation, energy, water and sanitation, hospitals and schools. However, the public budget is not sufficient to complete all of these projects within the period set forth by the government in the 2008-2012 Action Plan. There is substantial opportunity for the private sector to bring value added and to complement public funds to build and operate such projects over a long period of time.

International and local investors must recognize in Mongolia a serious group of public agencies and a clear legal system to allow them to comfortably innovate and create business opportunities in public private partnerships (PPP). The field for implementing PPP must be leveled for the private and public sector with a fair share of risks and profits.

In order to have the field leveled for the PPP participation, two important steps needs to be developed in 2009, the design and implementation of the legal framework and the creation of the institutional structure to deal with PPP projects. It is crucial that Mongolian authorities study and understand the successes and failures of PPPs in middle income countries in which the experiences and issues to address may be similar to the challenges facing Mongolia.

To better understand the PPP concept, models and applications, Mongolia can use the expertise of Multilateral Agencies or donors like World Bank, Asian Development Bank, USAID and others, to create a specific PPP support program for Mongolia.

Once the legal and institutional framework is ready, it will be necessary to advance to the next step, which could be the generation of a PPP Program that will select project candidates from a pool of several potential PPP projects. Selected projects must be socioeconomically viable and financially attractive for the private sector. Starting with a group of PPP projects with adequate design and strong feasibility studies is the right way for Mongolia to realize the best value from PPPs for investors and their citizens.

The PPP bidding process in Mongolia must be conducted seriously, ensuring transparency and encouraging competition. Encouraging competition for projects is the best way to simulate ex-ante a competitive market for projects that normally are categorized as monopolies.

Given that the vast majority of PPP projects are considered monopolies, Mongolia must establish a clear regulatory contractual scheme which motivates the private sector to deliver a high level of service associated with fair tariffs and enforcement measures to assure that the user must always be well served.

It is crucial to have the support of the financial world to assure funding for a PPP project. Therefore, it is important for Mongolia to send the appropriate signals to financial institutions and investors to increase the attractiveness and reduce the cost of credit for PPP in Mongolia.

Economic Policy Reform and Competitiveness Project

The recommendation is for the country to pursue macroeconomic and political stability, enabling Mongolia to increase its country risk rating - given by the most important rating agencies - and to change its current condition of a non investment grade country (BB-) to a investment grade country (BBB-).

An imperative public policy is to accelerate the development of dynamic capital markets in Mongolia, increasing the number and size of new institutional investors, available to participate in the PPP financial side. The creation of an industry related to individual capitalization funds where several private companies manage the portfolio of retirement pension funds could be a good opportunity to attract new institutional investors to the capital market system.

Financial institutions and private companies participating in PPP around the world face uncertainty originating from the delay of public agencies in transferring assets and land for the construction and operation of the PPP .Thus, it is recommended for Mongolia to clearly define that land registration and title registration to mitigate future misunderstandings with the private sector.

B. Zamiin Uud Logistics Park – Public Private Partnership

Only few land port projects in the world have the potential to be the bridge for two large countries and economies, Russia and China. This is the case of the Land Port Project Zamiin Uud in Mongolia, which has access to a potential market representing 22% of the total world population (approximately 1,500,000,000 from China and Russia) and a potential 10% of the total world economic production (China and Russia).

A preliminary study prepared by USAID/EPRC1 showed that investing in the Zamiin Uud Logistic Park Project, located on the Mongolian side of the border with China, will bring huge economic net benefits. The economic net benefits will be realized by addressing the lack of adequate infrastructure, which requires cargo (principally imported goods) coming from Northern China in the direction of Russia and Mongolia to wait many hours and in some cases days to unload from the rail or trucks and to load onto the railways for the trip from Zamiin Uud across Mongolia and on to Russia.

The necessity of cargo transshipment in Zamiin Uud is twofold: firstly because of the incompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mm gauge) and Chinese Standard Gauge (1435 mm gauge), and secondly because of the absence of a paved road connecting Mongolia with Russia in the northern side of Mongolia.

In addition, Zamiin Uud urgently requires investment in at least a new 200 m. road-rail transshipment yard located in the north west of the yard adjacent to the railway, mechanized transshipment facilities and equipment to support the process. It is necessary that the new investment plan considers services required for trucks and for all of the people working in this logistics center.

USAID estimates the Economic Internal Rate of Return for this project to be between 18% and 43%. Main economic benefits emerge from savings of vehicle (trucks) operating costs, freight inventory costs and the reduction of the time spent in the transshipment process. Total savings per lorry are estimated in USD 43.74 per day.

The project would solve the lack of a proper road connection to the Russian border, poor maintenance of the vehicle yard, lack of load unitization, use of manual transshipment and

Executive summary Page ii Zamiin Uud Logistics Park – An invitation for a Public-Private

1 Pre-Feasibility Analysis to Establish Logistics Facilities in Zamiin Uud in Mongolia. April, 2008 USAID-EPRC

Partnership


Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership

Executive summary Page iii

shortage of mechanical lifting equipment. Given the project’s considerable social benefits, it is highly recommendable to start the implementation process as soon as possible.

As the Mongolian Government will be working all year on the design of the PPP law and the structure for the main public agencies dealing with PPP, it implies that a Build-Operate-Transfer (BOT) process for Zamiin Uud Logistics Park would take at least two more years. The urgency of this project necessitates the creation of a PPP company with participation from Mongolian Freight Forwarders, UBTZ (Ulanbaatar railway), Mongolian Government (Ministry of Finance and Ministry of Roads, Transportation, Construction and Urban Development) and private shareholders, in lieu of waiting for two more years to begin implementation.

Once the company is created, shareholders will design the feasibility studies to present the project to the financial sector and raise funds to start project construction and operation. The main studies must be the engineering and architectural project and demand and financial study. From these studies the company will understand the estimated investment amount required and the operational and maintenance costs, which will assist in deciding on the appropriate structure for project implementation.

Logistics Park Development Corporation (LPDC) will initially be created to act as a facilities developer and at the same time could offer some non-essential or non-core business services. For example, it is possible to identify a road to rail, road to road operation and in the future rail to rail operations that will require a specialized operator. This operator also could have the responsibility of the warehouse facilities business. Thus, LPDC could prepare a bidding process to choose the best operator and this operator could be selected based on the highest level of fees proposed to the LPDC given a set of adequate and accessible tariffs for the users. This operator also could be in charge of the parking service.

On the other side, LPDC could have another private company working in the commercial services area. LPDC could establish a rental tariff for each m2 and/or collecting a percentage of gross revenues from operations in the commercial services area. Finally, LPDC could start an additional area of business related to several real estate opportunities.

SECTION I: UNDERSTANDING PPP FOR A SUCCESSFUL APPLICATION IN MONGOLIA

1. Understanding Public Private Partnerships (PPP)

The Public Private Partnership (PPP) concept is currently used to describe many types of private participation to develop infrastructure, to deliver services or to assume the risks and benefits of projects on behalf of the public sector and other activities where the private sector could be more efficient than the government.

There is neither a unique definition of Public Private Partnerships nor a unique Model. To illustrate this point, the following definitions are used by different agencies working on PPP.

A. European Union

According to the European Union, a public-private partnership (PPP) is a contractual agreement between the public and the private sectors, whereby the private operator provides services that have traditionally been executed or financed by a public institution. The ultimate goal of PPPs is to obtain more “value for money” than traditional public procurement options would deliver.

Although the ex ante assessment of expected value for money is often extremely complex, in general a PPP can be said to generate value improvements whenever it produces/achieves the following advantages: reduced life-cycle costs, more efficient allocation of risk, faster implementation, improved service quality, and additional revenue.

B. World Bank/PPIAF (Public-Private Infrastructure Advisory Facility)

A public-private partnership (PPP) according to the PPIAF/World Bank web page involves the private sector in aspects of the provision of infrastructure assets of new or existing infrastructure services that have traditionally been provided by the government. However, the World Bank does not have an official definition for PPP.

C. The Canadian Council for Public-Private Partnerships (CCPPP)

The definition used by The Canadian Council for Public-Private Partnerships is the following:

A cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.

The term "public-private partnership" carries a specific meaning in the Canadian context. First, it relates to the provision of public services or public infrastructure. Second, it necessitates the transfer of risk between partners. Arrangements that do not include these two concepts are not technically "public-private partnerships" and do not fall within the scope of the work being done by CCPPP.

The following graph shows the main differences between direct public investment and PPP investment.


Public Investment / PPP Public Investment / PPP Investment Investment

Public AgencyMinistry

Public Company

Public Financing OperationService Delivery

Construction


Public Company

Public Financing OperationService Delivery

Construction

3 potentialcontracts


Public Company

Special PurposeVehicle

ConstructionOperation

ServiceDelivery


Public Company

Special PurposeVehicle

ConstructionOperation

ServiceDelivery


Public Company

Public Financing

Public BudgetMultilateral

Agency LoanDonorsBanks

OperationService Delivery

Construction


Public Company

Public Financing

Public BudgetMultilateral

Agency LoanDonorsBanks

OperationService Delivery

Construction

PublicInvestment

PPP Investment

PPP Contract

2 potential subcontractsFinancial Structure

PrivateFinancing

70%-80% Debt20%-30% Equity

Bridge LoanAnd

RefinancingCapital Market

Bond IssueNational or

International Capital Market

In the case of a Public investment, a Public Agency, a Ministry or a Public Company can sign three separate contracts for specific activities. For example, the public sector can invite the private sector to build a road or to operate a specific service for a given period of time, so the private sector has normally a fix bounded business with a certain level of risk.

One public company could recover costs from the users and normally the financing is a public responsibility coming from the public budget, loans from multilateral agencies, banks loans or financial resources from donors.

In the case of a PPP investment, there are three main differences in comparison with public investment. Firstly the creation of a new company or Special Purpose Vehicle (SPV) with the specific objective to fulfill the rights and obligations established in the PPP contract or in the legal documents that created the company. Thus, it allows the risks faced by the PPP company to be treated separately, not involving the performance of the original firm. Creation of a SPV is very useful for project finance purposes because financial institutions can perform due diligence on the strengths and weaknesses of the PPP company.

Secondly, the PPP contract signed between the public agency and private sector companies will establish the investment, construction, operation and financial responsibilities, so the SPV could sign subcontracts for every activity or otherwise perform any of these activities through the same SPV. Normally, in BOT projects, the SPV signs a subcontract with the construction company and prepares a financial structure through banks, local capital markets or international capital markets.

2. Main reasons to use PPP

There are several reasons for the public sector to invite the private sector to participate in the provision of infrastructure or public services. The most important are the following: Section I Page 2 Zamiin Uud Logistics Park – An invitation for a Public-Private

Partnership


A. Demand

• Excess of demand for the facility, product or service, managed by the public sector.

As a result of a country’s economic growth and therefore the increase in disposable income of citizens, a public facility can face excess of demand. This phenomenon also could be triggered just from the vegetative growth of a population, generating shortage of services or even low quality services.

• Potential increase in demand in the short/medium term for the facility, product or service.

Public authorities and Ministries normally have a planning period where they can review the necessities of investment for the next year of couple of years. In this process they can identify potential increase of demand, which could require expansion of infrastructure or a higher number of products or beter quality of services per unit of demand.

B. Supply/public sector

• Lack of financial resources to increase the level of investments to decrease the excess of demand

Whether or not the public sector recognizes the necessity to improve the capacity of a public service to meet existing demand, the public sector might not have enough financial resources to accomplish the objective.

• Low public sector capacity to increase the level of investments to close excess demand.

In some cases the public sector may have the financial resources to invest in improvements to a service, however, the value added or marginal efficiency can sometimes be too low so it may be beneficial to invite the private sector to participate and generate more value added per MNT invested.

The authorities also can have administrative problems filling the gap in cases where demand is dynamic and requires flexible decisions to adapt the supply of the service.

• Public companies can suffer from absence of commercial orientation In the study “Public Investment and Fiscal Policy” (2004) the International Monetary Fund (IMF) established 9 criteria to evaluate public companies in 8 developing pilot countries commercial enterprises.

The criteria include: managerial independence (pricing and employment policies), relation with the government (subsidies, transfers and regulatory and tax regimes), financial conditions (profitability and creditworthiness) and governance structure (stock listing, outside audits and annual reports) and shareholders rights.

The result of the study was that three out of 115 public companies2, met several criteria to be considered commercially run. It shows that the private participation in those public companies can bring most of the nine criteria considered by the IMF study.

C. User benefits

• Fast way to receive a better and sustainable service in the long run

Zamiin Uud Logistics Park - An invitation for a Public Private Section I Page 3

2 The study considered eight pilot countries and for the commercially run survey were used 6 out of eight countries.

Partnership


Public services are strongly dependent on the public budget. Normally public budgets are adjusted after every new presidential election, which does not assure the stability of a public service or its quality in the long run. Attracting private investment can be considered a “bridge” to enhance stability and avoid the uncertainty of public resources, service and management of the public company or ministries in periods of presidential transitions of power.

• Increased capacity to apply commercial policies and match the level of use with payment.

In a PPP scheme users that do not use a service do not pay for it and those who use more of a service, pay more. PPP companies can apply several commercial policies to encourage usage of services and also to mitigate potential externalities like congestion in the service.

D. Social benefits

• Fast way to achieve Social Responsibility/ Accountability in the allocation of resources

Given that public and private sector interests are different, it is necessary to create regulatory mechanisms through contracts, requests for proposals and others documents to assure that the private sector can earn a fair level of profits and the users can obtain an adequate service at a fair price.

The existence of regulatory documents, regulatory agencies and more than one public agency involved in the PPP program creates accountability for the allocation of public resources.

• Sustainability of the service Shortage, congestion, black out and other problems are all consequences of inefficient services. PPP encourage continuity of services because of the focus on the core of the private sector business and on the regulatory system that needs to be achieved by a PPP company. PPP provides society with enhanced assurance that the service will be available almost all of the time for users.

• Cost recovery PPP is associated with the concept of No Free Lunch. It means that the service has a cost and the citizen must to pay for it. In the regulatory process, the Government can establish certain discounts, subsidies or vouchers for people who need a basic service but cannot afford the total price of the service.

E. Economic growth

• Creation of a new industry, a new formal sector in the economy.

In the last fifteen years Chile, a South American country with a GDP of around USD 150 billion, experience with PPP and new industry has invested around USD 8 billion in ports, airports, railways, roads, dam, jails, sport arena, and urban projects.

The industry in Chile is composed by the most important European companies and also companies coming from Canada and United States.

The following table shows the most important concessionaire/PPP companies in infrastructure according to the Public Works Financing magazine.

Section I Page 4 Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership


PPP Infrastructure Company

Construction/Operation Projects Active Proposals

1. Macquarie (Australia) 51 14 2. ACS Dragados/Iridium (Spain) 45 22

3. Ferrovial/Cintra (Spain) 44 34 4. Sacyr Vallehermoso (Spain) 29 19

5. FCC (Spain) 27 20 6. Abertis/La Caixa (Spain) 24 2 7. Vinci/Cofiroute (France) 21 26 8. Hochtief (Germany) 19 16 9. OHL (Spain) 17 10 10. Cheung Kong Infrastructure (China) 17 4

Source: Public Works Financing

In the case of Peru, a South American country that received the support of USAID to develop a PPP Program in transport infrastructure through the Poverty Reduction Alleviation (PRA) Project managed by Chemonics International the country has created the industry mostly with South American companies coming from Brazil, Ecuador and Peru in the road sector. The following table shows the companies operating in Peru. It does not include Dubai Ports (company from Arabs Emirates United) that adjudicated the Callao Port and OHL (company from Spain) that recently won a road concession in the north of Peru.

Company Gross Profits (Million US$) year 2006

Odebrecht (Brazil) 1.133,9

Andrade y Gutierrez (Brazil) 827,5

Camargo y Correa (Brazil) 808,7

Construtora Queiroz Galvao (Brazil) 699,3

Graña y Montero (Perú) 86,5 Gross Profits

Hidalgo-Hidalgo (Ecuador) N.I

• Foster employment, wealth and economic growth PPP projects have the ability to promote a virtuous cycle generating employment in the different phases of the projects, in several professional and non professional areas and in several geographic locations. Economic growth is promoted by the use of the facilities or services, which generates several crowding in effects in other economic development sectors.

PPP business creates wealth for a country. This wealth is shared between the private sector and the public sector and can be reinvested in the same project assuring the continuity of the service level in long periods of time.

• Encourages private sector financing (institutional investors) and financial markets efficiency

Zamiin Uud Logistics Park - An invitation for a Public Private Section I Page 5 Partnership


Chile has large and successful experience with the participation of the national and international financial system, pension funds and others institutional investors in the PPP system.

Thus, in the last fifteen years and according to the Ministry of Public Works in Chile, the infrastructure PPP projects in Chile have secured financing of around USD 6 billion. Bank loans are responsible for USD1.2 billion, bonds issued in the international capital markets USD 0.9 billion and bonds issued in the local capital markets USD 4 billion.

Chile created the capitalized pension system in the 1980s replacing the old pay as you go system. It allows the money from pension funds of Chilean citizens to be invested in the local capital markets and also in the international capital markets. Pension funds and insurance companies as institutional investors in Chile have also been buying infrastructure bonds.

The Chilean government has been working with rating agencies to get a project shadow rating before launching the tender process. The shadow rating gives the government the opportunity to improve the business and offer the private sector an adequate risk-profit sharing combination.

3. Main PPP models applied in the world3

Every country working in the arena of PPP has several different models to incorporate the private sector in a particular project. We know that there is neither an exact definition for PPP nor a limit to the PPP models applied in the world. We know that the models can move from management, operation and services contracts to full divestiture or privatization. However, the PPP models continue to grow in number and also in the level of innovation in every country.

We could have a sequence of PPP models by municipal level or by country, but it is practically impossible to include in just one definition the broad variety of models that any country could use in several areas of application, ports, airports, roads, water, energy, hospitals, etc.

The different PPP models presented above can be flexibly selected and tailored according to the sector of application. Some areas are better suited for risk transfer to the private party than others, as the different models imply various degrees of control by the public party.

In general, the private sector proved to be a better manager of construction risk and quality standard risk, while regulatory risk is more appropriately borne by the public sector.

The term "privatization" is used in the case of full divestiture or when a specific function is turned over to the private sector and regulatory control remains a public sector responsibility. In Canada "privatization" refers to the furthest point on the PPP spectrum, where most or all assets are held by the private sector. This Canadian definition more closely resembles the terminology used in countries other than the USA.

This section describes the main PPP models applied in the world based on the European Commission (2003) and IMF (2004).

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Service Contracts

BOT DBOT (DBFOT)

BOO

Partial Divestiture

Leasing

Operation and Management

Contracts

PPP

a) Service contracts are agreements between a public agency and the private sector particularly suited for simple, short-term operational requirements. It is a very limited form of PPP, where the private party procures, operates and maintains an asset for a short period of time. Management and investment responsibilities remain with the public sector, which bears the financial risk and residual value risk, but benefits from the technical expertise of the private operator and obtains some cost savings, without transferring control over the quality of outputs. Service contracts are commonly used for toll collection services, for the provision and maintenance of vehicles or other technical activities.

b) Operation and management contracts are agreements in which the responsibility for asset operation and management is passed on to the private sector. The duration is generally short but can normally be extended. The private party is remunerated on a fixed fee basis or on an incentive basis with premiums linked to specific performance targets. The public party still bears the investment risk and the financial risk. This type of contract allows significant efficiency gains and investment in technological sophistication, as the private operator has a strong interest in improving service quality to reduce both overall costs and the demand risk during the operational stage.

c) Leasing agreements. The private party purchases the income streams generated by publicly owned assets in exchange for a fixed lease payment and the obligation to operate and maintain the asset. Since the commercial risk and the demand risk are transferred to the private sector, the private agent has an incentive to achieve operational efficiency. The private party indeed profits only if it manages to reduce operating costs while meeting the designated service level. On the other hand, the public party bears the risks related to construction, capital improvements and financing. Leasing is particularly suited for infrastructures that generate independent revenue streams, as occurs in the case of public transport. Leasing includes Buy-build-operate (BBO) and Lease-develop-operate (LDO).

d) Build-Operate-Transfer (BOT) is an integrated type of partnership in which the private party bears the responsibility of designing, constructing and operating the asset. The combination of these different responsibilities under a single entity fosters greater efficiency gains and removes important maintenance issues from the public budget. Since the ownership of the asset generally remains with the public party, the specification of quality outputs is

Zamiin Uud Logistics Park - An invitation for a Public Private Section I Page 7 Partnership


Section I Page 8 Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership

essential for achieving the desired results. The BOT scheme can be designed in a number of variants (BOOT, BROT, BLOT, and BTO) according to the specific project needs.

e) Design-Build Finance-Operate (DBFO) In this scheme the private partner designs the service or the asset according to the requirements set by the public entity, ensures and finances the construction/implementation of the asset/service following the design phase, and finally operates the facility. At the end of the PPP contract, the service or asset can be granted back to the public sector under the terms of the original PPP agreement; in alternative, the agreement is renegotiated. The most common model is the DBFO concession where the private investor designs, finances, constructs and operates a revenue-generating infrastructure in exchange for the right to collect the revenues for a specified period of time, generally for 25-30 years. Ownership of the asset remains with the public sector. This model is particularly suited for roads, water and waste projects and generally for services where user charges can be applied.

f) Partial divestiture. In this scheme, the asset is partially or entirely sold to the private sector, while the government only maintains a regulatory role aimed at protecting consumers from monopolistic prices and output restrictions. The divestiture can also be partial, if the government maintains the ownership of some portion of the asset to ensure a certain standard of service while transferring a substantial share of overall costs to the private partner.

The following table present a summary of different schemes used as a PPP model

Schemes Modalities Service contracts The private procures, operates and maintains

an asset for a short period of time. The public sector bears financial and management risks.

Operation and management contracts The private sector operates and manages a public owned asset. Revenues for the private party are linked to performance targets. The public sector bears financial and investment risks.

Leasing-type contracts • Buy-Build-Operate (BBO) • Lease-Develop-Operate (LDO) • Wrap-around addition (WAA)

The private sector buys or leases an existing asset from the government, renovates, modernizes, and/or expands it, and then operates the asset, again with no obligation to transfer ownership back to the government.

Build-Operate-Transfer • Build-own-operate-transfer

(BOOT) • Build-rent-own-transfer (BROT) • Build-lease-operate-transfer

(BLOT) • Build-transfer-operate (BTO)

The private sector designs and builds an asset, operates it, and then transfers it to the government when the operating contract ends, or at some other pre-specified time. The private partner may subsequently rent or lease the asset from the government

Design-Build-Finance-Operate (DBFO) • Build-Own-Operate (BOO) • Build-develop-operate (BDO) • Design-Construct-Manage-Finace

(DCMF)

The private sector designs, builds, owns, develops, operates and manages an asset with no obligation to transfer ownership to the government. These are variants of design, build, finance and operate (DBFO) schemes

Source: IMF (2004) and European Commission (2003)

SECTION II: PRESENT AND FUTURE OF PPP IN MONGOLIA

1. Mongolian experience in PPP projects

Mongolia does not have experience in PPP. In the last ten years Mongolia has been trying to prepare some projects in the road, energy and health sectors but it has not done so as part of a PPP program.

Energy in Mongolia is a relevant sector where five coal-fired cogeneration power plants are managed by a central power system, but it is necessary to prepare more projects in urban cities and rural areas that have diesel generators. One interesting project in development is the CHP5 project which anticipates to implement a build, own and operate model for a cogeneration power plant and the modification of the existing sub stations to produce electricity and heat energy for Ulan Bator. The capacity of the plant must be 300 MW for power and 700 Gcal for heat energy. It is estimated that this project will be adjudicated this month after the Mongolian government decides if the proposal submitted by a Chinese corporation is technically and financially acceptable.

Despite lacking experience in PPP, the privatization process completed through international tenders was successful. For example, the Mongolia Privatization Program supported by USAID between 2000 - 2004 utilized a Sealed- Bid Auction4 for the process of privatizing Most Valued Companies. The project also included a public information and investor awareness component. Through Sealed- Bid auction, Mongolia’s State Property Committee sold 47 enterprises raising USD15,4 million for the GoM. The program included the privatization of 4 Most Value Companies, Trade and Development Bank, Agricultural Bank, Mongol Daatgal (insurance company) and NIC JSC (Oil & Gas Distribution), sold at USD 33.38 million with additional committed investments of USD 58 million5.

Currently the GoM is preparing a draft law on a BOT and PPP law that is supposed to be approved by the Parliament this year. Along with the preparation of the law the GoM will need to decide on the best institutional organization for the PPP system.

The new GoM action plan (2008-2012) established the main guidelines to use PPP and it focuses especially on infrastructure and urban planning. The large projects mentioned in the action plan are:

• the international airport Hösig Valley of Töw Province and the roads to connect the airport to Ulan Bator,

• renovation of five hundred buses and two thousand taxis for Ulan Bator, • renovation of the technology and equipment of the Mongolian railroad, • construction of a speed road between Zamiin Uud-Ulan Bator- Altanbulag, Yarant

Howd-Ölgiy-Ulan Bator • New sources of heating and power • Program on development infrastructure in the southern desert region • Terminal facilities and logistics centers in Ulan Bator and regions

Mongolia has around 49.077 kms of roads with only 8% being paved and 92% in bad condition. These statistics represent a huge opportunity to involve the private sector in road development.

4 An bid- auction in which bidders simultaneously submit bids to the auctioneer without knowledge of the amount bid by other participants. Usually, the highest bidder is declared the winner. 5 A Guide to Privatization Tenders. The Mongolian Privatization Experience. USAID/Bearing Point. Zhivko Nenov and Teresa Fabiano. March 2004.

http://www.gametheory.net/dictionary/Auctions/Auction.html


On the other hand, the railways sector is crucial for Mongolian development and it transport of crude oil, timber, wood products, fertilizers and machineries that must cross Russian and Chinese borders with Mongolia. In the last year MFFA and authorities from the GoM started the creation of a Public-Private company to manage the Zamiin Uud Logistics Park. This PPP company could attract private operators to invest in transshipment services, warehouse services and commercial services for the logistics park.

Another opportunity to involve the private sector is the Program on development infrastructure in the southern desert region. According to the Action Plan this Program will allow the opening of mines and new factories. It considers building a new railway, a heating power plant with capacity larger than 300 MW and twin aerial cable to provide 220 kw electricity in Mandalgowi-Tawan Tolgoy. The Program also includes a road between Tawan Tolgoy and Oyuu.

Mongolia has a National Transport and Trade Facilitation Committee that was established in 2007 by a Mongolian Government Resolution. The Committee has 25 members or representatives from relevant Ministries, government agencies and Mongolia’s private sector. The “Transit Mongolia” program includes the following projects that could also be part of a future PPP Program:

- Construction of a secondary railway line - Railway electrification project - Construction of Asian Highway Routes in Mongolia - Facilitation of Transit transport through Mongolian territory - Construction transport and trade logistics and terminals

It is evident that Mongolia has a critical mass of potential projects that could create substantial benefits if implemented through a PPP.

2. New Mongolian Government structure: The platform for a PPP Structure

It is interesting to review the new structure of the GoM to understand under which institutional context the PPP program and its system can be created.

Portfolio Government Coordination Agency

Government Implementation Agency

Prime Minister 1. General Intelligence Office 2. National Development and

Reform Committee 3. Agency for Nuclear Energy 4. State Property Committee 5. Information, Postal,

Communications and Technology Agency

First Deputy Minister 6. Agency for Fair Competition and Customers

7. Standardization and Measurement Agency

1. Agency for Intellectual Property

2. State Registration Office

Deputy Prime Minister 8. General Office of Specialized Inspection

9. National Emergency Management Agency

3. Agency for Children

Chairwoman of 4. Management Academy

Section II Page 10 Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership


Government Cabinet Secretariat

5. Agency for State and Governmental Services

Minister of Foreign Relations

6. Agency for Services of Diplomatic Organizations

7. Foreign Investment and Foreign Trade Agency

Minister of Finance 8. General Customs Office 9. National Taxation

Administration Minister of Justice and Internal Affairs

10. General Police Office 11. General Authority for Border

Protection

10. General archives office 11. General office for the

Implementation of Court Decisions

12. Office of Immigration, Naturalization and Foreign Citizens

Minister of Environment and Tourism

13. Forest Authority 14. Water Authority 15. Agency for Meteorology

and Environment Monitoring

Minister of Defense 12. General Staff of Armed Forces Minister of Education, Culture and Sciences

16. Culture and Arts Committee

Minister of Road, Transport, Construction and Urban Development

17. Civil Aviation Authority 18. Railway Authority 19. Transport Services Center 20. Auto road Agency 21. Administration of Land

Affairs, Geodesy and Cartography

Minister of Social Welfare and Labour

22. General Authority for Social Insurance

23. Labour and Welfare Services Agency

Minister of Food, Agriculture and Light Industries

24. Agency for Small and Medium Enterprises

25. Agency for Veterinary Hospital and Reproduction

Minister of Minerals and Energy

26. Mineral Resources Authority

27. Petroleum Authority 28. Energy Agency

Minister of Health 29. State Committee for Physical Culture and Sports

30. Health Authority

Zamiin Uud Logistics Park - An invitation for a Public Private Partnership

Section II Page 11



In order to establish a public structure for the PPP system in Mongolia, international experience shows several types of possible organizations that can be summarized in at least four models for Middle Income Countries6.

a) Chile: The Ministry of Public Works (MOP) is the competent authority representing the government to prepare all the PPP process, the elaboration of the feasibility studies, the design of the business model, the contract, the adjudication process and also the regulation. Normally the other of Ministries signed an MOU with MOP to bid on their behalf for any infrastructure business. The Chilean system is totally integrated. A similar concept is applied in Mexico, Costa Rica and Colombia under the Secretary of Transport and Communication in Mexico, the Ministry of Public Works in Costa Rica and the Ministry of Transport in Colombia.

b) South Africa: The National Treasury (Ministry of Finance) is the authority with responsibility of PPPs through a special PPP unit. This unit has developed the policy/regulatory framework for PPPs –and has prepared guidelines and manuals on the regulatory requirements (National Treasury PPP Manual and Companion manual on standardized provisions of PPP/agreements). At the same time this unit has established a Project Development Fund to improve the quality of PPP. Kazakhstan also recently has established the same system in which the ministries and local governments submit their projects to the PPP Unit located in the Treasury to start with the feasibility studies and the tender process. In the case of India, the PPP Unit is in the Ministry of Finance but there is also a special PPP centre in regions, for example Gujarat (Gujarat Infrastructure Development Board).

c) Peru: This country has a special agency which deals with PPP projects called PROINVERSION. The agency prepares the feasibility studies with the ministry involved in the concession. PROINVERSION designs the contract and business model until the adjudication process. Once finished WITH its responsibility, the adjudicated project is supervised and controlled by the Ministry of Transport and the regulation agency, OSITRAN. The Peruvian System worked over the concept of special separated agencies, where each public agency is responsible for a stage of the PPP process

d) Brazil: This country is good example for the countries with two levels of administration, Federal and States, both of which can prepare concessions or PPPs. In Brazil Federal concessions have historically been prepared by the ANTT (Terrestrial Transport National Agency). The new PPP Law enacted in December 2004 allows Municipal, State and Federal institutions to prepare PPPs for a period of 35 years. The Federal PPP Program is prepared and managed by the CGP (Comité Gestor de Parceria Público-Privada), a council composed of Ministers of Planning, Finance and the President Chief of Staff. In addition, there is an Executive Secretary in the Ministry of Planning where economic advisors work under the PPP Unit of the Ministry of Planning based in Brazilia. The Russian Federation’s recent experience is close to the Brazilian institutional experience. Russia created the Federal Law No. 115 of July 21, 2005 “On concession Agreements”. Saint Petersburg City also designed a law “On Participation of Saint Petersburg in PPP” dated December 20th, 2006 and amended on April 9th 2008. The authorizing body involved in the process at the federal level are the Government Council in Competitiveness and the Expert Council for PPP of Ministry of Transport. In the case of Saint Petersburg, the City Agency for Strategic Investments is the authorizing body.

6 Annex D Shows the list of Middle Income Countries and Upper Middle Income Countries according to the World Bank classification



Section II Page 13

Finally, a couple of Middle Income Country examples consist of a combination of different authorities participating in PPP programs and multisystems of Units working on PPPs. Such is the case in Bulgaria, Indonesia (National Committee for the Acceleration of Infrastructure Provision Policy (KKPPI) and Ministries), Philippines (BOT Center and others) and Panama.

In the case of High Income Countries, like United Kingdom, Australia and Korea it is normal to use public-private agencies to evaluate and design feasibility studies and participate in tender processes. The agencies are Partnerships UK (51% private and 49% Government), Partnerships Victoria (PV) and Public and Private Management Center (PIMAC).

The most famous model used in high income countries is the United Kingdom model of Private Finance Initiative (PFI) which is also applied in Canada and Australia. The PFI model is characterized by the payment from public sector to the concessionaire to build and operate the infrastructure.

The HM Treasure7 of the UK is the manager of the system designing methodologies and guidelines for project appraisal and approval. Each public agency prepares a project with the support of Partnerships UK which is a public-private institution. Most of the projects in the adjudication process go through a negotiation process to assure that the public sector will have access to the highest quality. The negotiation step is called Invitation to Negotiate. If there is no agreement with the first company selected, the process continues with the second ranking company and so on.

The UK uses a methodology called Public Sector Comparator to estimate Value for Money from a private initiative compared with the same project through public sector.

In the case of Australia, Partnership Victoria (PV) develops policy and guidelines, promotes implementation of best practices and provides specific advice for public institutions, but the PPP projects are developed by each Ministry or Public department. The PV unit is located within the Commercial, Infrastructure & Risk Management Group in the Commercial Division of the Treasury, therefore the Treasury is the institution responsible for developing and controlling the work of PV.

It is recommended to conduct a study to determine the best institutional structure for Mongolia’s PPP system, given the current GoM structure, the type of projects Mongolia is considering to implement and international best practices weighing the strengths and weaknesses of each model.

3. Macroeconomic Factors to be considered in a Potential PPP Program in Mongolia

Every country has macroeconomic strengths and weaknesses that serve as a platform for domestic and international investors once a PPP program is established. Liquidity and depth of the capital markets, economic growth, increase in the wealth of the citizens, prudent fiscal management and country risk are important factors to back a PPP Program.

Mongolia has had positive economic growth over the past six years averaging around 7%. The economy has been prudently managed promoting stability and reducing vulnerability and international risk exposure. It is important to highlight that privatization and fiscal reform have contributed to the existing macroeconomic stability.

Fiscal reform has focused on the new mining law, VAT, personal and income tax laws, intending to provide a clear regulatory frame of reference.

7 Her Majesty´s Treasury



However, the Mongolian economy is still small with around USD 2,200 per capita and a total GDP of around USD 4 billion. The economy is also small in terms of population, which according to the last estimations is close to 3 million inhabitants.

Those two disadvantages small economy and small population could be largely compensated with the fact that Mongolia is the potential bridge for two large countries and economies, Russia and China, both countries represents 22% of the total world population (approximately 1,500,000,000 from China and Russia) and 10% of the total world economic production (China and Russia).

At the same time, Mongolia has large copper and gold deposits in Mongolia in addition to the country’s proximity to Russia and China, the largest countries in the region with high export potential for Mongolia.

In the last couple of years Mongolia has successfully created a special fund for fiscal savings. The Development Fund raises money from the revenues of the mining sector, principally gold and copper, which is the main revenue of the GoM. The resources allocated in the Fund are spent in the following manner: one third for the children and families allowances, one third for capital expenditures and the remaining one third is saved.

However, as a result of the international financial crisis, the price of copper is decreasing affecting Mongolia’s 2009 budget forecast, which estimated the copper price to be 50% higher than the actual current price of copper. These commodities, along with gold and cashmere, suffer from time to time due to the volatilities of their prices, which impact the economy through the flexible exchange rate of MNT.

Unfortunately and although Mongolia is implementing the correct policies to follow the market efficiencies, the Mongolian investment grade over Long Term Foreign Currency given by the rating agency Standard & Poors did not improve and it is still BB- ( non investment grade).

It is important to note that when countries reach a stable investment grade they become more attractive to investors who perceive a country with a stable investment grade as a less risky investment, therefore reducing the opportunity cost of the money invested in the country.

The following table displays a useful comparison of several developing countries, which are interesting to consider in the world of PPP for different reasons.

In our currently competitive world every country desires to send a strong signal to potential investors through the positive evaluation prepared by credit rating agencies like Standard & Poor, Fitch Rating and Moody´s. Ratings and evaluations allow potential investors to make informed choices about countries in which they can invest their money profitably and safely.

The investment grade is the capacity of a country to meet its payments and liabilities. For instance, Chile is a country in Latin America which is a symbol of success in the economic area and political stability. Transparent public policies and strong institutional systems have allowed Chile to reach the highest level of investment grade for a Latin American country, A+.8

The successful case of Chile in PPP occurred in tandem with political and economic stability recognized by the international community with investment grade (BBB). This investment grade coincided with the start up of a PPP program and enhanced the program’s probability of

8 In Latin America just Chile, Peru, Mexico and Brazil have investment grade according to Standard & Poor rating agency.



Section II Page 15

success. In the last fifteen years, Chile has increased three notches from its original ranking underpinning the PPP program.

An example of the positive impact of such established stability was recently displayed when in January 2009 a public Chilean mining company, Codelco, became the first company in Latin America to issue a bond in New York, nevermind this occurred in the midst of a global financial crisis. The bond value was USD 600 million with a term of 10 years. The demand for the bond was twice the original amount expected and the interest rate was 7.5%.

Brazil and Kazakhstan have recently been enjoying a high investment grade rating but these two countries have different experiences in PPP. Brazil also started the Program in the 1990s and Kazakhstan has been working with PPP especially in railways and energy projects in the last decade.

In Mexico’s case, the country faced PPP program design problems in the 1990s and now Mexico can take advantage of this investment grade because it is launching a comprehensive PPP program with the support of the Interamerican Development Bank through a special agency called PIAPPEM.

Finally, the case of Peru is interesting because in the 1990s Peru approved the PPP law but PPP development was slow since the approval of the law. Peru received a BBB- investment grade just 6 months ago, but still managed to attract USD 3 billion in private investment over the last decade, creating confidence among the investors with the assistance of partial credit risk guarantees from multilateral agencies and subsidies for the projects.

As we can see in the table, Mongolia is just one notch below the starting point rating given to Peru in the nineties9, when Peru started its PPP program. For Mongolia to attract investors it will be necessary to create a PPP program that includes special protection for investors assuring return on their long term investments.

Countries Investment Grade (Long Term Foreign Currency)

Chile A+ Malaysia A Mexico BBB+

Thailand BBB+ Kazakhstan BBB-

Brazil BBB- Peru BBB-

Mongolia BB- Philippines BB- Indonesia BB-

Source: Standard & Poor´s

The investment grade of Mongolia will increase if the country is able to:

• Improve the ability to meet debt obligations or improve creditworthiness with strong fiscal policies to reduce the current levels of debt.

• Reduce the sensitivity of the economy to external shocks. Some countries establish specific funds to reduce sensitivity in volatile areas of the economy.

9 Peru had a BB investment grade when this country started the PPP program in th nineties


• Develop the capital markets, generating new financial instruments to deepen capital markets and to create the possibility of lengthening the period of investment in long term domestic bonds. The correct design of a PPP infrastructure program can facilitate the creation of new financial instruments and create the possibility of offering infrastructure bonds over long term periods. Pension system reform allowing the recognition of the individual capitalization system could also help to develop Mongolia’s capital markets.

Although the macroeconomic situation in Mongolia has been improving over the last ten years it is still a small economy and it will be necessary for the private sector and donors to collaborate with the GoM to help the country to achieve the expected economic results in the 2008-2012 Action Plan.

The Action Plan describes some expected economic results for the end of the current GoM. It is possible to achieve some of the results related to areas where the private sector could possibly participate in infrastructure projects and other areas of development as is shown in the table.

Result Measurement Situation at the end 2007 and first half of

2008 Estimated

Achievement by 2012

Supply of electricity Availability to all household

70% 90%

Share of Population supplied with drinking water

Percentage 66% 68%

Amount of GDP per capita

USD 1288.8 USD 5000 USD

Reduction of poverty level

percentage 32.2% 25%

Length of paved auto roads National roads Regional roads

kilometers 2120 6320 285

Reduction in duration of traffic jams

The period of 30- 35 km/h ride from the Eastern crossroad to the western at 12 o´clock in business days

Within 40-45 minutes Within 20 minutes

Source: GoM Action Plan 2008-2012

GoM requires around 33 trillion of MNT to reach the results of the Action Plan. GoM is expecting to contribute 9.4 trillions MNT (30%) and to bring 19.9 trillions MNT (63%) in domestic and international private investment. The GoM is also counting on foreign loans and donors for 2.2 trillion MNT (7%).

Government funds are not enough to achieve the Action Plan results, therefore providing motivation to attract funds to Mongolia. In 2008, the GoM studied the possibility of signing an agreement to create a fund with the Kazakhstani institution Kazyna Capital Management (KCM) JSC. The fund would be initially capitalized with USD 100 million to be used for projects and industries principally in the energy, transport and logistics, financial market, telecommunications, tourism, metal and mining industry (geological exploration for gold,



silver and tungsten) sectors in Mongolia. KCM funds will be allocated mainly to geographic areas where Kazakh people are living in Mongolia.

The exchange rate is an additional macroeconomic issue essential for consideration in PPP contracts. It is crucial to define who will assume exchange rate risk or if this risk can be shared between the public and private sectors. This is particularly important for Mongolia, especially because of the large MNT fluctuations in the first two weeks of January 2009. For example, on December 1, 2008 the exchange rate was MNT 1,210 per 1 USD and in the second week of January it reached MNT 1,400 per 1 USD. The fluctuation is basically a result of the lack of export diversification in the Mongolian economy, speculation and also the financial international crisis, which impacts Mongolia through the exchange rate. Recently in January 2009 the Yuang exchange is also increasing.

In some concessions, the Chilean government utilized an exchange rate guarantee, which works in the following way: the Chilean government established two exchange rate thresholds one for a cap and another for a floor, so the real exchange rate can fluctuate inside of these limits. When the real exchange rate depreciates beyond the cap, the government pays the difference to the concessionaire and the case reverses when exchange rate appreciates.

The system is used under the condition that the concessionaire recognizes the value of the guarantee in reducing the risks of exchange rate and matching debt payments, which are taken in USD and the revenues while the concession is paid in Chilean pesos.

4. Mongolian financial market

A new PPP program must consider the domestic banking system’s capacity to secure the loans necessary for private sector investment in PPP projects. It is also important to understand if the Mongolian Financial System allows institutional investors to participate in buying bonds or securities issued by a PPP company.

This section presents a quick review of Mongolia’s current financial market focusing on real possibilities for the domestic banking system and capital markets to actively participate with long term funds for a new PPP program.

The Mongolian banking system consists of 16 commercial banks and the Bank of Mongolia (BOM) or Central Bank of Mongolia, which supervises banking activities and acts as a Government fiscal intermediary. The BOM also formulates and implements monetary policy, issues currencies and is in charge of managing Mongolia’s foreign currency reserves.

Mongolia also has a Financial Regulatory Commission (FRC) that supervises non bank financial institutions and the capital markets.

The following table shows that the Financial System in Mongolia has 3.425 billion MNT in assets, of which 95.7% is owned by banks, principally foreign banks.

The table also shows the small participation of non bank financial institutions with just 147 billion MNT in assets and the most numerous institutions are the finance companies. It is expected that insurance business will become more dynamic in the future as this sector has only 4 years of existence since the implementation of the Insurance Law in 2004.


Section II Page 17


Mongolia Financial System

Institution Number Assets (bn MNT) % of total shares Banks 16 3,279 95.7 Private 16 3,279 95.7 Domestic 6 967 28.2 Foreign 10 2,312 67.5 State-Owned 0 0 0 Non Bank financial Institutions 379 147 4.3 Insurance companies 15 28 0.8 Life 0 0 0 Non-Life 15 28 0.8 Savings and Credit Cooperatives

192 36 1.0

Finance Companies 137 66 1.9 Securities firms /Brokers Firms 35 16 0.5 Total Financial System 395 3,425 100

Source: IMF, Bank of Mongolia and Financial Regulatory Commission (December 2007)

Given the current situation of Mongolia’s financial system it will be very useful to develop the capital markets in anticipation of the necessities of PPP companies. In this sense, the USAID-funded Economic Policy Reform and Competitiveness (EPRC) Project supported banks in the creation of the Mongolian Mortgage Corporation (MIK) which is the first secondary mortgage market company established by the Bank of Mongolia (BOM) and ten commercial banks (Anod, Golomt, Zoos, Capital, Capitron, Mongol Post, Khaan, Trade and Development, XacBank and Ulaanbaatar City Bank).

Several banks have been facing liquidity limitations to expand mortgage lending. Additionally the current mortgage market is concentrated short term loans and there is a lack of institutional investors. As such, according to its Mission Statement, MIK is going to engage in “the promotion and development of primary and secondary mortgage markets by raising medium to long term funds on domestic and foreign capital markets through a series of capital market tools to create and ensure a smooth functioning of a long-term financing system to promote affordable home ownership and urban development for Mongolia’s people”.

MIK is going to be the main developer of new products for the capital market. It is estimated that the principal products could be:

• Credit Default Swaps (CDS) as a partial synthetic securitization transaction that could be used alone as a separate line of business or as an interim step to full securitization at the initial stage of MIK’s operation.

• Warehousing Facility. MIK will be working with lender customers to purchase mortgage loans, pool and warehouse them until a sufficient volume for securitization is generated.

• Credit-Enhanced Mortgage-Backed Securities (CE-MBS) with Standby Liquidity: MIK will work with lender customers to securitize mortgage loans into MIK CE MBS and to facilitate the purchase of mortgage loans for MIK´s mortgage portfolio.

• Capital Market Transactions: MIK will issue debt securities in the capital markets to attract capital from global investors to finance mortgage lending in Mongolia.

The next step in Mongolia’s capital market is to advance the enactment of an efficient Mortgage and Securitization Law to regulate the main subjects related to securitization It will be a critical step in support of PPP project finance where normally the revenues of the project




Section II Page 19

are the principal asset of the PPP company and they can be securitized in the capital market to obtain the money necessary to invest in the projects.

For example, an urban road PPP project in Chile called Costanera Norte and adjudicated to the Italian company Impregilo, obtained USD 260 million (in local currency equivalent) from Chile’s capital markets, mainly from institutional investors (pension funds and insurance companies). The participation of Monoliners10 was important to obtain triple A rated debt. Ambac assurance was the monoliner for this structure in 85% of the debt (approximately USD 220 million) and the Interamerican Development Bank (IADB) provided a financial guarantee for the remainding 15%.

At the beginning of the PPP program, the Mongolian PPP companies can be funded by the banking system for small projects or by foreign financial institutions. Recently, for example, in Chile a Spanish company, Azvi, has closed a credit with DEPFA Bank (Ireland) and Credit Institute (Spain) for around USD 26 million to build the Land Port Los Andes which will be discussed in the next section.

5. Foreign investment in Mongolia

In the last sixteen years Mongolia has received around USD1.5 billion in foreign investment with the creation of around 6,000 companies from 93 countries. In 2006 foreign investment was around 366 million as a result of tax incentives, property ownership protection and guarantees for investors. Based on the foreign investment Law Mongolia has been active in the last years signing two agreements with around 40 countries, which includes the: “Agreement on Avoidance of Double Taxation” and “ Agreement on Mutual Protection and Promotion of Investment”. Mongolia is also a part of the Washington Convention on Investment Dispute Settlement of 1965 and the Seoul Convention on Investment Insurance of 1985.

EPRC is supporting the GoM in the implementation of a relevant tool, known as the Single Electronic Window (SEW) which, according to Recommendation No. 33 of the United Nations Centre for Trade Facilitation and Electronic business (UN/CEFACT), is described as: a facility that allows parties involved in trade and transport to lodge standardised information and documents with a single entry point to fulfil all import, export and transit-related regulatory requirements. The SEW will improve the information management and the speed to control and inspect cargo at the borders.

With respect to Tax Preferences, the Foreign Investment Law of Mongolia includes the following:

1. A business entity with foreign investment in any of the following areas shall be granted the tax preferences set forth below effective from the date of starting production activities:

i) power and thermal plants and their transmission networks, highways, railways, air cargo and engineering constructions, and basic telecommunications networks shall receive 3 years of tax exemption and 50 % tax relief during the following 5 year period;

ii) mining and processing of mineral resources (except precious metals), oil and coal, metallurgy, chemical production, machinery, and electronic shall receive 5 years of tax exemption and 50% tax relief during the following 5 year period;

10 Monoliners or Monoline Insurance Company guaranteed the repayment of a bond principal and interest when the responsible institution failures to do the timely payments.


2. Should a business entity with foreign investment, which is not referred to in paragraph 1 of this Article, export more than 50% of its production, then it shall be entitled to tax exemption for 3 years and 50% tax relief in the following 5 year period.

3. A business entity with foreign investment which is not referred to in this Article may be granted tax preferences. Decisions in this matter shall be adopted by the State Great Hural on a case by case basis upon the presentation by the Government of Mongolia.

4. Should a foreign investor reinvest income due to it in the same business entity with foreign investment which produced such income, then the taxable income of the concerned business entity shall be subject to a deduction equal to the amount of such reinvestment.

5. If the activities of a business entity with foreign investment covers more than one of the areas referred to in paragraph 1 of this Article, then the tax preferences to be granted to such business entity shall be in respect to the main area of activity.

6. A business entity with foreign investment which is established by purchasing shares and securities which were previously sold by coupons under the Privatization Law of Mongolia shall not be eligible for the preferences set forth in paragraphs 1 and 2 of this Article.

Respect to the Use of Land by Business Entities with Foreign Investment (article 21 of the Tax Law) the law indicates the following:

1. Land shall be used by a business entity with foreign investment on the basis of a lease hold and subject to the conditions and procedures set forth in the land laws of Mongolia.

2. A lease shall contain the terms and duration of use and the measures to ensure the protection and restoration of the environment to its natural state, the amount of annual ground rent, and the liabilities of the lesser and lessee.

3. A lease shall be made under the procedures set forth below: i) a lease for the use of state-owned land by a wholly foreign-owned business entity

shall be made between the Mongolian landowner and the foreign investor and subject to authorization by the respective local Hural of Representatives and its Presidium;

ii) a lease for the use of state-owned land by a business entity with foreign investment to which a Mongolian investor is a participant shall be made between the Mongolian landowner and the head of the business entity concerned and subject to authorization by the respective local Hural of Representatives and its Presidium;

iii) a lease for the use of private freehold land by a business entity with foreign investment to which a Mongolian investor is a participant shall be made between the Mongolian landowner and the head of the business entity with foreign investment and subject to authorization by the competent state authorities.

4. Responsibilities arising from a lease referred to in paragraph 3 (ii), (iii) of this Article which are contracted by the head of the business entity with foreign investment shall be borne by the Mongolian and the foreign investor in proportion to their contributions to the registered capital of the business entity.

5. The duration of any lease shall be determined by the duration of the operations of the business entity with foreign investment. The initial term of a lease shall not exceed 60 years. The lease may be extended once for a period of up to 40 years under the initial conditions of the lease.


http://www.mongolianembassy.us/eng_foreign_policy/the_foreign_investment_law.php�


6. If a business entity with foreign investment is dissolved before the expiration of the lease, then the lease shall be terminated at the same time.

7. Leasehold land may be substituted or taken back for a specific state purpose. Decisions concerning this matter shall rest exclusively with the Government of Mongolia. Compensation for losses suffered by a foreign investor due to such actions shall be effected without delay. The amount of such compensation shall be determined on the basis of value at the time of such substitution or transfer.

8. If leasehold land is used to the detriment of the public health, natural environment or the interests of national security, then the lease shall be cancelled

6. Recommendations

This section includes recommendations to be considered by the appropriate Mongolian authorities in order to establish a successful PPP program in this country.

• Investment climate Mongolia needs put forth the effort in increase the country’s rating to obtain an investment grade. It will attract more foreign and national investment because of the impact of decreasing the long term interest rate as a result of higher confidence in the country.

In order to achieve a better rating, Mongolia needs to protect the macroeconomic stability with sound fiscal and monetary policies and continue encouraging market forces with adequate regulation.

• Legal framework Mongolia needs a comprehensive law on PPP or in concessions (BOT) to foster fair competition between private companies and to correctly establish the rights and obligations of the public and private sectors.

The legal system also needs to specify the public agencies dealing with the PPP process and the main steps of the tender process.

In some PPP laws it is also possible to specify the main bidding mechanism that the public agency will use in the tender process.

It is highly recommended that Mongolia work in a coordinated fashion, perhaps in the formation of a working group, with the main authorities that are going to be involved in the PPP process.

It is clear that the ministries dealing directly with projects and the ministries dealing with foreign investment and budget must to be present for the discussion of the draft Law. This includes the following ministries:

• Minerals and Energy; • Road, Transport, Construction and Urban Development; • Finance • Foreign Relations • Justice

In addition to the aforementioned ministries, participation of the State Property Committee and the Agency of Fair Competition and Customers would be highly desirable.

This working group would need to establish a work plan to deliver the new law before the end of the second quarter 2009.


Section II Page 21


The areas for development under PPPs which the government is considering for inclusion in the Law are the following:

a) Heat, electricity or natural gas transmission and distribution network and energy generating source;

b) Centralized water supply and sewage system, their networks; c) Water facilities; d) Railway and public transportation facilities; e) Auto road and road facilities; f) Airport, civil aircraft and air navigation facilities; g) Waste treatment and disposal facilities; h) Water transports; i) Complexes used to meet general needs of citizens including health, education and

sport; j) Housing units and villages for rent; k) Mining facilities for extraction and processing of all types of minerals and natural gas

except those which are widespread.

• Institutional organization While the PPP Law is discussed between the public authorities and knowing that the Law will need to explain clearly the Ministries or agencies involved in the process, the Ministry of Finance should reserve and allocate financial resources for the public agency that will be working on the PPP program.

Ideally the main projects to be implemented through PPP should also be identified to assist in the selection of the best institutional model for Mongolia. It’s anticipated that the main projects will likely involve the ministries of Minerals and Energy and Road, Transport, Construction and Urban Development.

The initial process of designing the Law, creating the structure and building capacity among the professionals responsible for the projects requires strong leadership to coordinate the different point of views inside of the public sector. It is recommendable to identify a couple of highly prepared professionals that can assume this responsibility in the near term.

• Multilateral agencies and donors participation

Multilateral agencies and donors could contribute to starting the PPP process in Mongolia by hiring consultants and financing study tours and workshops in the PPP area.

Among the several agencies working in the world of PPP, the World Bank Institute and the PPIAF, UNDP, Asia Development Bank and USAID could assist in this process. The Asian Development Bank for example, has been lending to Mongolia around USD 676.54 million since 1991 and 25% of these resources have been allocated to the Transport and Communications sector, 15% in Finance and 14% in energy.

Mongolia could create a Fund were the PPP Agency can receive and manage funds from donors and multilateral agencies. The funds could be donations in support of specific studies or to create the PPP Agency or could be used as loans to be included in the projects or umbrella guarantees to help the PPP project finance.

The extensive experience of donors and multilateral agencies will be extremely important, not only in the start up process but also during project implementation.



It is of interest to highlight a couple of PPP experiences that USAID has implemented with Chemonics International using the approach of Alpha to Omega Technical assistance as a transaction advisor in countries like Peru, South Africa and Philippines

In Peru, Chemonics assisted the Government of Peru by providing investment advisory services for the design, structuring and implementation of a USD 220 million PPP to improve, rehabilitate, operate and maintain 960 kms of highway between Peru’s Pacific port city of Paita and Yurimaguas. USAID-Chemonics also collaborated on the concession of Callao Port, which is the most important port of Peru’s South Pacific coast. This project involved a transaction for around USD 600 million and was adjudicated to Dubai Ports from the United Arab Emirates.

The graphic below shows that USAID/Peru signed a cooperation agreement with the Peruvian Ministry of Economy and Finance and after that prepared a tender to invite private companies to serve as the transaction advisor. In Peru’s case this company, the transaction advisor, was Chemonics International which created a structure to support the government of Peru on technical issues related to PPP contracts.

In South Africa Chemonics and IP3 helped to develop a Public-Private Partnership Unit within the South Africa Department of Finance. The P3 Unit served as an information center for investors, a source of training and promotional activities for infrastructure initiatives, and an organization charged with overseeing the development of policies and procedures for the award of contracts for privately-funded infrastructure projects. As part of the South Africa P3 project, Chemonics helped pioneer a ground-breaking PPP to significantly improve public service delivery at the Albert Luthuli Central Hospital in Durban, South Africa. This PPP secured specialized medical equipment and services as well as certain hospital upgrades and facilities management over a 15-year concession.


Section II Page 23



In the Philippines, USAID created the Build-Operate-Transfer Project. This project helped the Private Sector Participation Center (formerly the Build-Operate-Transfer Center) increase private investment in infrastructure and other services previously supplied by Philippine government agencies. The project provided transaction assistance for infrastructure development projects worth more than USD 250 million.

Recently, the Multilateral Investment Fund (MIF-FOMIN) of the Inter American Development Bank (IADB) created a similar scheme in Mexico, where the PIAPPEM (Program for the Advancement of Public-Private Partnerships in Mexican States) serves as a tool to provide free technical assistance to participating Mexican States to strengthen their respective legal and institutional frameworks to enable the smooth implementation of the PPP model in Mexico, and to build sound technical capacity among government officials involved in the PPP system in Mexican States11

Annex G includes the complete list of projects that MIF is currently supporting in Latin America.

One important alternative to financing PPP through equity participation is the participation of the IFC (International Finance Corporation), which is a member of the World Bank Group and has the responsibility of supporting private sector development through investments.

Currently, the IFC has investments worth USD 57 million in Mongolia, where USD 5.3 million is in equity in the banking sector, quasi equity of USD 18.5 in banking and general manufacturing and USD 15 million in trade credit lines with top Mongolian banks. The following table shows a summary of the IFC investments in Mongolia.

Sector Equity (Million USD)

Quasi Equity (Million USD)

Debt (USD million)

Trade Credit Line

(USD million) Financial Sector 5.3 3.5 17.7 15.5 General Manufacturing

- 15

Total 5.3 18.5 17.7 15.5 Source: IFC-Mongolia (2009)

• Project and business design Once Mongolia establishes the legal framework and the PPP structure, the feasibility study and business model design will be the most important and permanent focal point for investors, citizens, politicians and multilateral agencies. Some preliminary suggestions for the business model design are included in this section.

a) Prequalification process is highly important, because it allows the public agency to have an idea of the number of competitors interested in the PPP process and brings the possibility to know better the bidders through their credentials.

b) Technical Offer includes an estimate of the time expected to be invested in the project and details the company’s interest in winning the right to participate in the PPP. This is useful particularly for those projects where the referential project can be different bidder to bidder.

11 MIF RETROSPECTIVES: Infrastructure and Public Private Partnerships in Latin America and the Caribbean (2008). David Bloomgarden and Asako Maruyama.



Section II Page 25

c) Tender process should mitigate potential negotiation process. A robust tender process that includes the consideration coming from the asymmetric information and game theory concepts need to be applied in this step in order to minimize the negotiation process.

d) The tender process must be deigned considering a clear period where the private sector can make comments or suggestions to the legal tender documents.

e) Penalties and sanctions must be well designed and applied to maintain high performance from private companies operating the concession. For example, in Chile, the authority of PPP, the Ministry of Public Works, applied 173 penalties between 2007 and 2008 for around USD 16 million to 21 concessionaires. Penalties are basically applied because of delay in the accomplishment of contractual agreements or low quality of service.

f) Credibility is normally related to the capacity of the authority to enforce a rule in the long term and to avoid or mitigate discretionary changes that negatively impact the relationship with domestic or foreign investors. In summary, credibility is the quality, capability, or power to elicit confidence. The base of the credibility in the PPP process consist of: openness and transparency of the process, provision of rights and legal interests for investors and users and encouraged competition for the bidding process.

SECTION III: ZAMIIN UUD LOGISTIC PARK PPP BUSINESS MODEL

1. Main reasons to start the project Zamiin Uud Logistic Park

A preliminary study prepared by USAID/EPRC12 showed that investing in the Zamiin Uud Logistic Park Project, located on the Mongolian side of the border with China, will bring huge economic net benefits. The economic net benefits will be realized by addressing the lack of adequate infrastructure, which requires cargo (principally imported goods) coming from Northern China in the direction of Russia and Mongolia to wait many hours and in some cases days to unload from the rail or trucks and to load onto the railways for the trip from Zamiin Uud across Mongolia and on to Russia.

The necessity of cargo transshipment in Zamiin Uud is twofold: firstly because of the incompatibility between the Mongolian Gauge (follows the Russian Wide Gauge of 1520 mm gauge) and Chinese Standard Gauge (1435 mm gauge), and secondly because of the absence of a paved road connecting Mongolia with Russia in the northern side of Mongolia.

In addition, Zamiin Uud urgently requires investment in at least a new 200 m. road-rail transshipment yard located in the north west of the yard adjacent to the railway, mechanized transshipment facilities and equipment to support the process. It is necessary that the new investment plan considers services required for trucks and for all of the people working in this logistics center.

USAID estimates the Economic Internal Rate of Return for this project to be between 18% and 43%. Main economic benefits emerge from savings of vehicle (trucks) operating costs, freight inventory costs and the reduction of the time spent in the transshipment process. Total savings per lorry are estimated in USD 43.74 per day.

The project would solve the lack of a proper road connection to the Russian border, poor maintenance of the vehicle yard, lack of load unitization, use of manual transshipment and shortage of mechanical lifting equipment. Given the project’s considerable social benefits, it is highly recommendable to start the implementation process as soon as possible.

12 Pre-Feasibility Analysis to Establish Logistics Facilities in Zamiin Uud in Mongolia. April, 2008 USAID-EPRC


Existing queue for weigh scale (PRC border in background)

Existing Zamiin Uud customs clearance yard

2. Objectives

The main objectives of the Zamiin Uud Logistics Park project are:

a) Reduce congestion and process time of transshipment b) Reduce freight inventory costs c) Reduce vehicle operation costs

Section III Page 28 Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership


d) Reduce cargo losses e) Contribute efficiently to the Trans Asian integrated Railway connecting Europe with

Asia. As it is shown in the map below

f) Create a logistics zone with different commercial services and a business center g) Protect the investments in the zone under a concept of project development in several

steps for the short, medium and long term h) Private sector participation to accelerate investment and assure adequate management

and efficient delivery of services.

3. Legal framework for the project

The process of creating the new PPP law and the organizational structure for PPP will be started in 2009, but this project must be implemented urgently. As such, it was necessary to identify the existing legal framework that will allow the private sector to participate in this project.

In this regard, the Law of Mongolia on Companies (1999) states in Article 12.5 that the state and its agencies may become a shareholder in the establishment of a company that is created jointly with a foreign legal person; a company that is created through privatization of an enterprise owned by the state or local administration or a state owned company that is established by the reorganization of a state-owned enterprise; or other companies permitted by the Mongolian Law.

In addition, the Law of Mongolia on State and Regional Property (1996) allows the private sector to have ownership and utilization of state owned assets, free of charge, based on concession or leasing contracts, permitted by law.

Finally this law establishes that matters of transferring immovable property as state owned land by a concession contract shall be subject to regulation through a special law.

The Mongolian laws therefore allow the public sector to create a new company with private sector participation. Thus, the idea is that the GoM, Freight Forwarders Association (MFFA) and the Administration of the Ulaanbaatar Railroad (AUBTZ) representing its affiliated joint Mongolian-Russian Government, can create a PPP company with the participation of private shareholders and support from EPRC-USAID on certain advisory and technical issues, principally the project feasibility studies.

Zamiin Uud Logistics Park - An Invitation for a Public Private Partnership

Section III Page 29



With this objective, in the next couple of weeks a Memorandum of Understanding will be signed between MFFA, AUBTZ and EPRC-USAID to start the process of creating a PPP company called LPC (Logistics Park Corporate).

It is expected that this company can invite other specialized private companies to participate and deliver different services in the Logistics Park zone.

4. Preliminary project description13

The project will be located between two to six km north west of Zamiin Uud, in a site of around 400 Ha (4km length by 1km, width), lying between the existing railway and the sealed Regional Road currently under construction (NP2).

It is anticipated that the project will be developed in several phases. At a minimum the project will include the following facilities.

a) Road-rail transshipment yard catering for trains up to 80 wagons long, adjacent to the railway

b) Rail-rail transfer yard to the south east, adjacent to the railway c) Cross dock road-rail consolidation centers for the consolidation of Chinese goods

arriving by train and moving to Russia by rail. d) Road-road consolidation facilities for road trains to Ulanbaatar e) Warehousing facilities f) Logistic services facilities g) Parking Areas to accommodate 300 trucks

• Design principles for the project a) The land adjacent to the railway must be reserved for train assembly sidings, the road –

rail transshipment centre and a future relocated and modernized rail – rail transshipment centre. This arrangement will simplify the rail layout, reduce costs and allow more flexible planning for the remainder of the Logistics Park. This will require a width of approximately 200m from the railway to allow space for turnouts, train assembly sidings and the transshipment facilities.

b) The second principle is to provide a simple “ladder” primary road system using twin four lane spine roads about 400m apart along the length of the Logistics Park, connected by cross roads at about 400m intervals. This ensures maximum flexibility, allowing sites from 16Ha downwards in the central strip to be leased to individual operators. Local roads can be provided as needed to offer smaller development sites.

c) A third principle is to locate the main vehicle service areas between the truck entrance from the road and the transshipment, warehousing and value-added logistics areas.

d) The fourth principle is to separate services such as the motel / restaurant / coffee bar complex and cash and carry center, etc in a second 200m wide landscaped corridor on the side away from the railway and parallel with the road.

13 This section is completely based on the study USAID-EPRC.Zamiin Uud Gateway Logistics Park Pre-Feasibility Analysis. October 2008.



Section III Page 31

The first stage of the road – rail transshipment yard is designed to accommodate trains of up to 40 wagons in length, which requires about 850m of straight line loading length. This is the longest loaded train length which can be handled with the existing locomotives and can be accommodated within the north western quarter of the site.

The initial capacity is based on the forecast for 2014, including traffic to Ulaanbaatar and Russia. This requires approximately 300 trucks (equivalent to 300 wagons) or about double the 2008 volume to be handled each day in the spring peak.

The proposals are based on unitized freight, either loaded in containers in Erlian or in unit loads, such as large cement bags, brick packs, 10ft containers, etc. In order to run the yard efficiently, there must be a regulation requiring all goods either to be unitized already in Erlian or to be unitized at a consolidation center in the Logistics Park.

Currently wagon loading times range up to 12 hours using hand methods and train clearance depends on the slowest wagon. Using unitized methods, a maximum cycle time of six hours

Border

Zamiin Uud

Erlian



should be achievable. Using two overlapping shifts, each 40 wagon line should be able to handle 80 wagons per day, so four lines will be needed.

When 60 wagon trains are introduced, two 20 wagon sets can be loaded on one line and 60 wagon trains assembled using a dedicated shunting locomotive in the train assembly and waiting lines, from where they would be hauled by UBTZ locomotives.

5. Investment cost

As part of the feasibility studies, the engineering study will be essential to define which civil

preliminary by USAID/EPRC to be y between USD 21 and USD 26 million.

nd study be developed to rm.

rmance such as:

oints

works should be included and to define the investment and future operation costs.

The investment costs for the project are estimatedapproximatel

6. Demand

It is recommended that as a part of the feasibility studies, the demaestimate the potential revenues in the short, medium and long te

The demand study would include at least the following issues:

• Total demand for transshipment road-rail divided by kind of cargo • Total demand for transshipment rail-rail divided by kind of cargo. • Total demand for Zamiin Uud Logistics Park divided by kind of cargo • Additional or induced demand derived principally from the capacity improvement of

the Logistics Park which will have a positive impact in productivity and physical indicators of efficiency.

• Forecast quantitative measures of system perfo

a) Waiting time at key operational pb) Average parking time for Lorry c) Utilization of equipment

Mongolian Clearance area (Mixed goods & Passengers)

Rail-Rail Transship

Road-Rail Transship

PRC border building

Neutral zone queue

Customs Scan Homogenous goods



Section III Page 33

d) Warehouse utilization over time

ent Corporation (LPDC) will initially be created to act as a developer

could be selected

the commercial services area. In this

Finally, LPDC could enter into an additional area of business related to several opportunities in real estate.

8. Main services and potential revenues

Logistics Park Developmof the facilities and at the same time could offer some non essential services, which will not be core business functions.

In this sense and as the graph shows, it is possible to identify a road to rail, road to road operation and in the future, rail to rail operation that will require a specialized operator. This operator also could have the responsibility of the warehouse facilities business. Thus, LPDC could prepare a bidding to choose the best operator and this operatorconsidering the highest level of fees to the LPDC given a set of adequate and accessible tariffs for the users. This operator could also be in charge of the parking service.

LPDC could have another private company working inbusiness LPDC could establish a tariff for the rent of each m2 or/and a percentage of gross revenues generated from the commercial services area.

Flow of Revenues

Logistic Park Development Co.

ParkingReal Estate

DevelopmentCommercialServices

Road to RoadOperation Warehouse Rail to Rail

Revenues from theBusiness or fee

Revenues from theBusiness or fee

Tariff for rent m2and % of business

Fee Fee Fee

9. Business model

As mentioned in earlier sections of this document, in 2009 the GoM will be working on the design of the PPP law and on the structure of the main public agencies dealing with PPP. This timeframe implies that a BOT process would take at least two years as it is necessary to establish the legal structure and prepare the bidding process. Given that, public authorities are considering the immediate start of the PPP process, with the creation of the PPP company, there are not to much space for prepare a BOT. However, this report provides two additional

Land

perty Committee and the UBTZ will be representing the

PPP experiences using BOT models for projects with similar aspects. In Annex A, thePort Los Andes of Chile and in Annex H, Bangladesh BOT Program on Land Ports.

This section describes the Business Model proposed for the Zamiin Uud Logistics Park.

Government of Mongolia: Ministry of Finance, Ministry of Roads, Transport, Construction and Urban Development, State Pro



Government of Mongolia in the Logistics Park Development Corporation. GoM will contribute the 400 ha to the LPDC.

Mongolian Freight Forwarders (MFFA): This private association formed by the private

SAID-EPRC will

s: These companies will participate through direct hiring by the

e principal requirements that these

cipally transport companies and owners of cargo (import companies). In

val of the

ts (land and potential ility of

C participation through investment equity as a company shareholder.

A graphic representation of the business model for the project would be the following.

transport companies operating in Zamiin Uud, will be part of the LPDC and will contribute equity.

Private shareholders: Once GoM and MFFA sign the MOU agreements, Uprovide technical assistance on a couple of studies to better understand the business and the conditions for the participation of additional private shareholders in LPDC.

Construction companieLPDC to build specific zones of the project or by the operators that will have the right to manage the concession.

Operation companies: These companies will have a contract with LPDC, normally after a period of bidding, during which the LPDC will establish thcompanies must fulfill to be operators of LPDC. Operation companies will have the eventual day to day relationship with the users of the Logistics Park.

Users: Are prinaddition, Zamiin Uud workers and drivers, will require the commercial services of the Logistics Park.

Regulation agency: Competition regulation and tariff regulation must be established by an independent agency or through the contract with operators of LPDC, with the approAgency for Fair Competition and Customers. LPDC also could be a self-regulated company considering that representatives of the government will be on the board of directors.

Capital markets: Capital Markets in Mongolia are still small, so it’s highly probable that the project will be funded by a combination of equity from shareholders, equity from operators and debt from operators. LPDC also could obtain debt against the asserevenues) for the medium and long term. One feasible alternative is exploring the possibIF



Section III Page 35

Business Model for ZULP Private

Shareholders


Regulatory Agency or

Regulation by contract

Users

Bond Issue

ContributesEquity

Tariff Regulation

Tariffs

Capital Markets

Min.FinanceMin. Road, Transport

SPC-UBTZContributes Land

Payment for services

Coupon Payments (i + p)

MFFA

OperationCompanyServices:Parking

Road-RailRail-Rail

ConsolidationWarehouse

ConstructionCompany

Specific contract

Regulation

ContributesEquity

OperationContract

FeePayment

Dividends Dividends

tability and efficient corporate nd

LPDC will be a public-private company, whose business will be to own, manage, finance and operate Zamiin Uud Logistics Park.

Members of the company

a) The Government of Mongolia b) Mongolian Freight Forwarders c) Private Shareholders

These members could appoint a certain number of individuals to the LPDC Board of Directors, to be defined. Those directors could appoint the President and the Chief Executive Officer. The company could also have an Ethics Officer.

This structure must ensure that stakeholders-shareholders are fully represented and it must adhere to a strict code of conduct and avoid potential conflicts of interest.

In the near term the company can begin working with a small team of professionals (project manager and team) to develop the feasibility studies. Following the feasibility studies, part of the team could join the company’s permanent departments mainly covering three areas:

lanning and Development, Human Resources and Financial.

y depicts the ideas described for LPDC’s corporate governance.

Dividends

10. Corporate Governance

As any company responsible to the citizens and the country for a service of excellence, LPDC should strive to be recognized for its transparency, accoungovernance. The financial information of the company must also be disclosed to anyone abroadly disseminated.

P

The following graph clearl



Corporate Governance

President and Chief Executive Officer


EthicsOfficer

Chief of Planningand

Development

Board of DirectorsMongolian Government

MFFAPrivate Shareholders

Chief FinancialOfficer

Chief of HumanResources

ProjectManager and

Team

This team will start planningthe project and once the President

Is appointed can be part ofthe company

would require the approval

imum levels of tariffs for each service could be determined ex-ante from the creation of LPDC or could be used as a competition variable in the tender process to

f the services of LPDC will be

common and vast alternatives for Corporate Finance. LPDC must the GoM, especially the debt financing.

A scheme used in the Free Zone of Colon in Panama also could be applied in Zamiin Uud to foster the construction of facilities as a part of the agreements with LPDC subcontractors. It is

11. Business regulation

Section 9 established that LPDC has three alternatives of regulation. Firstly, it could be regulated by a new and independent agency. Secondly, regulation could be implemented through the contract between LPDC and operators of LPDC whichof the Agency for Fair Competition and Customers. The last option is that LPDC would be a self-regulated company considering as representatives of the government will be on the board of directors.

Regardless of which alternative the Stakeholders decide on for the regulation structure and management, the principal points that must be clearly established include:

a) Max

choose the private partner, understanding that most omonopolistic.

b) The international benchmark tariff strategy could be very useful once LPDC is in operation.

c) Non discrimination policy and freedom of access to services must be guaranteed to the users respecting the tariff policy.

d) Standards and Perform nce indicators must be established in an Operation Manual for athe LPDC.

12. Financial management

LPDC can choose from the clearly define the rights and obligations over the assets coming fromarrangement for the land and if this asset can be used freely to obtain

It could also be necessary to study if this company will have explicitly established financial caps in terms of debt ratios over the short, medium and long term.



Section III Page 37

the typical leaseback arrangement in which the subcontractor can construct a facility and a certain amount of the cost can be discounted from the monthly amount of fee that the

nce the PPP Corporation is created it is necessary to start the feasibility studies for the immediate c the

nd use rights of the 400 Ha and their boundaries. At the same time it will be important to e

subcontractor must to pay to the LPDC. Thus when the subcontractors transfer the ownership of the new facilities to LPDC, they will have been fully paid by the LPDC through the fee discounts.

13. Feasibility studies and public agencies coordination

Oivil works in the project and to explore the legal and practical issues related to

laadequately coordinate with the Regional Road Development Project working to complete th

ction NP2 (from junction with the existing sealed road to the border).

ccording to EPRC/USAID14 it would be desirable for the project to move the road tersection point IP79 slightly south west to allow more space for the Logistics Park. This udy also suggests an urgent site survey to locate the road alignment and the extension yard r road-rail transshipment.

4. A comparison with Land Port Los Andes-Chile PPP Project

his section will establish the main differences between the Chilean Design-Build-Operate and ransfer (DBOT) project (LPLA) and the Mongolian Joint Venture Company (LPDC).

nnex A presents a detailed description of the Chilean PPP project Land Port Los Andeshich is managed by a Spanish company Azvi.

bjective: In Chile’s case, there is no import and export cargo operating by railway between hile and Argentina, therefore the project focuses on the customs control of import and export argo transported by truck. In Mongolia’s case, the project has the advantage that the train is urrently operating but because of the gauge differences it is necessary to do the transshipmentil to rail and road to rail. The project could also include customs15.

Zamiin Uud/ Mongolia Los Andes/Chile

se

Ainstfo

1

TT

Aw

OCccra

14 Zamiin Uud Gateway Logistics Park Pre-Feasibility Analysis. October 2008. 15 The main restriction is that customs control is close to the border with China, which requires that customs could move from their current location to the new logistics park location.



Project dimension: Evidently the Mongolian project requires more space than the Chilean project, mainly because the Latin American economies (Chile, Argentina, Brazil and Uruguay) as a group represent a smaller geographic product and population than the group (Russia, Mongolia and China). The potential of Zamiind Uud to serve as a hub and an important part of the Trans Asian corridor connecting Asia with Europe justifies the dimension of the project to be developed in phases.

Investment: The investment numbers for both projects are similar, but it is necessary to point out that in Chile’s case it is a sunk investment whereas in the case of Mongolia invesrequire clarification by an engineering study and a Master Plan to determine the s

tment will equence of

quired investments on the horizon.

Demand ary sourc that curr of the an demand, bu e next

s o

Duration of PPP: In the Chilean case the concessionappears that the concession will be for three ye In the

case the idea period to be lo en the characteristics of a joint

and Argent itment to new railway connecting both countries being that it will allow cargo to cross the border by train

nistry of Public for the “Trasandino Railway”. If this bidding process is successful, then the Chilean government must

and Port ionaire nd. The compensation will be calculated by a comparison between average import and export cargo

ents by the new ngolia, risks exist from the status quo of the current situation. In the case of Zamiin Uud if the government

he north section the no in Zamiin Uud could inc i ays system.

he table below shows a summary of the main differences between both projects.

re

: Prelimin es of information show ently demand is just 20%total Chilecouple of years in term

t projections from EPRCf trucks and cargo.

show significant growth over th

has a short timeframe. At this moment it ars from the adjudication date.

Mongolian venture and the broad oppor

is for thetunities for business.

nger giv

Risks: Chile ina have a comm invest in the improvement of the

instead by truck. The Chilean Mi Works is preparing the bidding

compensate the L Los Andes concess because of the low level of dema

moved by truck and the cargo movem train. In the case of Mo

improves t of railway and also rease given the better fac

rth section of road to Russia, the demandlities to transport cargo for the railw

T

Concept Chile (LPLA) - DBOT Mongolia (LPDC) –JV

Objective Customs control of trucks export and import. No railway.

Improve the road-rail and rail-rail transshipment service for imports and re-exported cargo, because of the gauge change. Could include customs.



Section III Page 39

Dimension 24,5 hás 400 hás

Investment US$25 million Between US$21million and US$26 million

Demand (trucks per year) 250,000 54,000 (2008) – 108,000 (2014)

Demand (cargo) 2,5 million of tons 1,6 million tons -3,2 million tons

Period of PPP agreement 20 years 60 years plus 40 years

Main risk Construction of the railway Chile-Argentina

No improvement of the north section of railway No improvement of the north section of road to Russia.

ANNEX A: LAND PORT LOS ANDES-CHILE

ANNEX A: LAND PORT LOS ANDES-CHILE

1. Project description.

The lack of one point of customs control where trucks can receive all services (custom clearance, transshipment, warehouse and commercial services) generates a high level of congestion in Los Andes, the closest and most important Chilean city in the border area with Argentina.

To solve this uncomfortable situation not only for the citizens of Los Andes city but also for the cargo owners, truck drivers and the National Customs of Chile. National Customs signed an agreement with the Ministry of Public Woks, which is the authorized public body in Chile to prepare and apply the public bidding process for a new Land Port outside of Los Andes City.

Santiago

The Ministry of Public Works, using its law and code in concessions, prepared the preliminary studies and terms of reference for the design, construction and operation of Land Port Los Andes, a DBOT project.

The Ministry of Public Works was responsible for ensuring the transfer of land to the concessionaire without any legal problems, regarding either the exploitation of the works and services or with respect to the use and enjoyment of national assets for public or fiscal use.

In this 24,5 hás located in El Sauce, close to Los Andes city and the border between Chile and Argentina called “Paso Los Libertadores”, the concessionaire built administrative buildings for the government agencies working there which are: National Customs Agency, Los Andes Health Service, Agricultural Service and National Police.

In addition, the concessionaire built a customs control zone, commercial services buildings, a parking system and a warehouse. The total investment was USD 25 million and the concession has a duration of 20 years. Currently the concession has completed 2 years of operation since 2006.

The demand for the concession service is calculated by the Chilean authorities at around 700 trucks daily and 250,000 trucks annually. These trucks move approximately 2.5 million tons per year.


Land Port Los Andes

ChileArgentina

Annex A Page 44 Zamiin Uud Logistics Park – An invitation for a Public-Private

The following graph details the flow that trucks must follow inside of the Land Port Los Andes and also the main services offered.

Point 1: Main entrance to the Land Port Los Andes Point 2: Control Point. The concessionaire guards record the license plate, date and hour of entrance for every vehicle. Trucks are also weighed in special electronic scales. Point 3: Parking area. Point 4: Customs platform. Customs National Agency works with the health service and Agriculture Ministry to inspect import and export cargo. Point 5: Administrative Public buildings. Point 6: Warehouse Point 7: Commercial services area.

2. Business Model

This section describes the business model for Land Port Los Andes. The main difference of the average concession in Chile is that in this case the concessionaire was this concession from

required to design the project. Normally the Chilean government transfers the feasibility studies to the bidders, but in this case the technical proposal evaluation included a score for design of the project, given that circulation and flow of cargo and persons in the concession

Partnership


Zamiin Uud Logistics Park - An Invitation for a Public Private Annex A Page 45

in the concession contract. The concessionaire pays USD 80,000 as a contract management fee to MOP for every year the project is under construction. nce the construction is complete and the operation process starts, the concessionaire pays SD 80,000 each year to MOP for the s

ational Customs Service: This agency is responsible for the customs control. National ustoms Service signed a Memorandum of Understanding with MOP to prepare the bidding rocess on their behalf. This agency controls import and export cargo inside of the concession rea.

egional Environmental Office: The concession contract establishes that the concessionaire ust comply with environmental requirements during the three stages of project design,

onstruction and operation. The concessionaire is subject to penalties if it does not respect nvironmental measures.

pecial Purpose Vehicle-Cointer Chile: Azvi is the Spanish company that won the oncession. This company created a SPV under the name Cointer Chile that contributes 20% quity and obtained 80% of the total investment as debt according to the concession contract.

r it Ins tute frSD 800,000 as a cons

hanged to a performance guarantee bond valid for the operation period for USD 600,000 once e operation period started. The SPV signed a fix-sum contract with the construction

ompany transferring the construction risk. The same SPV is responsible for delivering the rvices at the Land Port.

redit Institute of Spain and Depfa Bank: The financial institutions gave a loan to the SPV ompany for a total value of Euro 26 million (970.141 U.F16) through a fixed interest rate.

sers: are basically the cargo owners, customs agents and workers using commercial services the concession area.

area can be thought and managed in a different way depending on the objectives of the companies.

Ministry of Public Works (MOP): MOP is the concession authority in Chile responsible for the complete process of concession, selection and adjudication. MOP contributes land and

ater rights which are established w2OU ame concept.

NCpa

Rmce

SceThe loan was obtained from the C ed ti om Spain and Depfa Bank (Ireland). The oncessionaire submitted to MOP U truction guarantee bond and it was c

cthcse

Cc

Uin

Business Model for LPLA Ministry of

Public Works

Puerto Terrestre Los Andes Cointer Chile Azvi (Spain)

20%Equity-80% Debt

Regional Environmental

Office

Cargo owners(import-export)

Customs Agents

Credit line

Credit Institute of Spain

DEPFA BankIreland

National CustomsService

Payment for Interest payments

Contributes Land and

Water rights

services

servicesServices:Basic non

commercial

Complementary

Commercial

ChileanConstruction

Company

Specific contract

MOU

Inspectioncargo control

Environmental Regulation

ManagementFee

16 U.F means Unidad de Fomento. It is a unit of account that has automatic adjustment by daily chilean inflation.

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der the name Cointer in different areas. In Chile it operates an additional Logistic g areas

3. Corporate Governance of LPLA- SPV

The Spanish company Azvi was the winner of the concession Land Port Los Andes. This company works un

Center in Valparaíso, which was recently adjudicated, in addition to two parkinin Santiago and Temuco. The Airport of Arica also is a concession managed by this company. As the graphic below displays, the company also operates in Spain, Mexico and Brazil.

The Special Purpose Vehicle, Puerto Terrestre Los Andes Sociedad Concesionaria S.A. (PTLA) was created on April 24th, 2005 after the concession was adjudicated to Azvi Chile by the Min orks. This company is controlled by Cointer Chile and it is controlled by

The build, maintain and operate the public civil works under the concession system and operate and deliver the basic commercial services related to the business of the concession in the concession area a

f New Business. als working on this project and around 160 field workers.

groups of services. The first

tioned

istry of Public WAzvi.

objective of the company is to design,

nd in a period of 240 months.

This company is registered under Nº 918 en el Registro de Valores de la Superintendencia de Valores y Seguros.

The Chilean government authorized the company to start the operation on December 7th, 2006.

The company has a board of directors consisting of 5 directors and 4 Chiefs: The Chief Executive Officer, the Chief of Operations, Chief of Management and Chief oThe company has 20 profession

4. Main services and tariffs. A. Main services

The concession Land Port Los Andes has three clearly defined group consists of the basic non commercial services (building maintenance and concession areas maintenance, cleaning service, parking for public transport service and others men

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Zamiin Uud Logistics Park - An Invitation for a Public Private Annex A Page 47

commercial services (parking d others). The last group consists of

area, financial services and all the go transfer, fumigation, spraying, cargo

Basic No Commercial Services Basic Mandatory Commercial Services

The Complementary Services were described before and are basically the following:

• Support of port activities: cargo transfer, fumigation, spraying, cargo incineration, cooling service.

• Financial Services area • Food Court • Others allowed by the legal framework

B. Tariffs

The main revenues for the concession are generated from the warehouse, transshipment and parking. It is important to understand the bidding mechanism established by the Chilean government to more clearly understand the justification for the first tariff presented in the table below as zero.

below). A second group of services consists of basic mandatoryservices, warehouse, transshipment cargo ancomplementary services, mainly including the food court additional activities to support the port (carincineration and cooling services).

PPP Services

Basic No Commercial

Services

ComplementaryServices

Basic

Mandatory Commercial

Services

• Maintenance of vertical and horizontal infrastructure included in the project.

• Cleaning service• Signal System• Restroom Services• Green areas maintenance• Parking for public transport service• Trucks control system • Water Service

• Parking Services• Office Rent for customs agents and Transpor

companies• Communication Services• Public Transport Services• Transshipment of Cargo (load and unload c

export-import)• Warehouse

t

argo,

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As the technical offer established that bidders must submit their project design, which was included in the quantitative evaluation together with the financial offer, according to the following scheme:

Final Score = 0.35 * Technical Offer Score + 0.65* Financial Offer Score In the case of the Financial Score, the score increase as long as the bidders reduce the access tariff to the port. The maximum tariff allowed by truck was USD 17 for access to the Land Port and to use parking for the first 24 hours.

In order to improve the probability of winning the concession, the winner (spanish Company Azvi) offered to charge zero for this tariff, betting on the transshipment (load and unload), warehouse and commercial services.

Therefore the tariffs for parking trucks start just beyond 24 hours.

The process of establishing tariffs followed two principles. The first principle was to fix caps. The second principle was to allow these tariffs to be adjusted according to a benchmark in close markets. For example on transshipment the tariff cannot exceed 10% of the average tariff in a market like Valparaiso sea port or San Antonio sea port.

Service Tariff Access to the Land Port and use of $0 Infrastructure Use of parking beyond 24 hours $1 Time overrun in the use of decks and $4 customs inspection Transshipment (Loading and unloading $200 cargo) Public parking per hour $0,5

Parking monthly $50

Rent offices per m2 $20 Public transportation between land port $1 and Los Andes Warehouse Depending on cargo and time

With regards to risk mitigation for this concession, the Chilean Ministry of Public Works is preparing the bidding for the “Trasandino Railway” which will connect Chile and Argentina. If this project is successful the Chilean government must compensate the Land Port Los Andes concessionaire because of the potential low level of demand.

The compensation will be calculated through a comparison between average imports and exports cargo moved by truck and the cargo movements by the new train.

5. Concession performance

According to the information from the Ministry of Public Works, which is also responsible for the control of the concession’s operation, the results during the year 2008, include:

• Average time for trucks inspection: 16 minutes • Average time for trucks with dangerous cargo: 7 minutes • On average 40% of the total trucks in the Land Port go to the control procedure.

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Annex A Page 49

• 50% of the trucks stay less than 5 hours in the land port • 6% of the trucks stay more than 50 hours. • Average time of trucks in the land port is 14 hours • Land port operates at 94% of the capacity

With respect to the performance of the National Customs Agency, the agency has implemented a full cycle of proceedings and electronic control for the entry and exit operations at Los Andes Land Port (LALP) which is electronically connected to the port terminal system.

According to the Chilean authorities the IMF has highlighted this project as an example of international best practice.

TANCYANNEX B: ACTIVITIES OF THE CONSUL

ANNEX B: ACTIVITIES OF THE CONSULTANCY

The activities developed by the consultant in Ulan Bator-Mongolia were the following:

• Review available project reports on the Zamyn Uud Logistics Center • Conduct meetings and briefings at EPRC and USAID • Interact closely with other EPRC professional resources (e.g., physical planning, legal

and financial experts) working with stakeholders to shape the PPP • Meet with relevant GoM agencies, Parliament Members, and academic institutions

working on PPPs • Conduct inception meetings with representatives of the National Committee on Trade

& Transport Facilitation, the Ministry of Roads, Transport and Urban Development, Mongolian National Customs, the Mongolian Railway Authority, UBTZ (Railways) and the private sector

• Carry out ongoing dialogue with GoM agencies and private sector stakeholders of the Zamyn Uud Logistics Center

• Prepare and deliver workshops and presentations on successful international case studies of PPP structures to finance infrastructure projects

• Prepare draft report discussing potential structures for the Zamyn Uud PPP company structure and recommending for implementation

• Prepare and conduct a public presentation on findings and recommendations on suitable PPP structures for the

• Obtain feed back and prepare a • Debrief EPRC and USAID

Zamyn Uud Logistic Center to all stakeholders final business plan and report

ANNEX C: EPRC MEETINGS IN ULAANBAATAR

ANNEX C: EPRC MEETINGS IN ULAANBAATAR

The following table shows the name of the professionals that had a meeting with our EPRC consultant team.

Day Professional and Institution January 05th EPRC meeting January 06th EPRC meeting January 07th Mr. Kh. Gaanbatar, Vice president, Executive

Director. Mongolian Employer´s Federation Mr. Togmid Dorjkhand, Chairman of Counterpart Steering Committee TSL Project, Deputy Director, Department of Policy and Coordination of Aid and Loans. Ministry of Finance State Property Committee

January 08th MP Mr. Amarjargal (Parliament Representative) Mr. Sambuu Demberel, Chairman & CEO of Mongolian National Chamber of Commerce & Industry, Ulaanbaatar Chamber of Commerce & Industry. Mr. Shane Rosenthal Senior Portfolio Management Specialist Asian Development Bank (ADB)

January 09 Mr. Tumentsogt Tsevegmid, Senior Infrastructure Officer, World Bank Meeting with MFFA executive directors Mr. D. Enkhee, Transgate Mr. D. Enkhbat, Monex Mr. P. Bathuyag, IFFC Mr. Zanashir, FFA Mr. Erhembayar

th

January 12th Ms. Sodov Onon. Ambassador at Large (PPP Workshop Coordinator) Ministry of Foreign Affairs and Trade of Mongolia Mr. Ulziisaikhan Batsaikhan. PPP Workshop Assistant. Ministry of Foreign Affairs and Trade of Mongolia

January 13th EPRC meeting January 14th EPRC meeting January 15th EPRC meeting January 16th Workshop for MFFA January 19th Workshop for Public Authorities, Multilateral

Agencies and Parliament Authorities January 20th Mr. David Lawrence IFC January 21th EPRC Meeting January 22nd PPP Working Parliament Group January 23rd EPRC Meeting

ANNEX D: LOWER AND UPPER MINDD TRIESLE INCOME COUN

ANNEX D: LOWER AND UPPER MIDDLE INCOME COUNTRIES

Lower Middle Income Countries Albania Georgia Namibia Algeria Guatemala Nicaragua Angola Guyana Paraguay Armenia Honduras Peru Azerbaijan India Philippines Bhutan Indonesia Samoa Bolivia Iran, Islamic Rep. Sri Lanka Bosnia and Herzegovina Iraq Sudan Cameroon Jordan Swaziland Cape Verde Kiribati Syrian Arab Republic China Lesotho Thailand Colombia Macedonia, FYR Timor-Leste Congo Rep. Maldives Tonga Djibouti Marshall Islands Tunisia Dominican Republic Micronesia, Fed Sts. Turkmenistan Ecuador Moldova Ukraine Egypt Arab Rep. Mongolia Vanuatu El Salvador Morocco West Bank and Gaza

Upper Middle Income Countries American Samoa Grenada Poland Argentina Jamaica Romania Belarus Kazakhstan Russian Federation Belize Latvia Serbia Botswana Lebanon Seychelles Brazil Libya South Africa Bulgaria Lithuania St. Kitts and Nevis Chile Malaysia St. Lucia Costa Rica Mauritius St. Vincent and the

Grenadines Croatia Mayotte Suriname Cuba Mexico Turkey Dominica Montenegro Uruguay Fiji Palau Venezuela, RB Gabon Panama

ANNEX E: LIST OF WORKSHOP PAC E MIIN UUD LOGISTIC OLIA: TWO INNOVATIVE

PROJECTS

RTICIPANTS/”LAND PORT LOS ANDES-HIL AND ZA S PARK MONG

ANNEX E: LIST OF WORKSHOP PARTICIPANTS/“LAND PORT LOS ANDES-CHILE AND ZAMIIN UUD LOGISTICS PARK-MONGOLIA: TWO INNOVATIVE PROJECTS

No Name Organization/Title 1 T. Zanashir FFA, General Secretary 2 P. Batkhuyag IFFC, director 3 Kh. Bayartsogt FFA, specialist 4 B. Soronzonbaatar SBL Co., Ltd. 5 B. Enkhbat Mongol Express Co., Ltd. 6 Ts. Munkhbaatar BLC Co., Ltd 7 L. Odonchimeg DMP (DTV) 8 D. Enkhee Transgate Co.,Ltd 9 B. Purevchuluun Tuushin Co., Ltd 10 B. Khongorzul MNCCI 11 G. Ochirkhuu Erin International Co., Ltd 12 B. Oyungerel Global Logistics Co., Ltd 13 Ya. Erkhembayar Erin International Co., Ltd 14 D. Unurjargal MNCCI 15 A. Buyanjargal BLC Co., Ltd 16 N. Ariunzaya Transcon Co., Ltd 17 N. Zorigt Tuushin Co., Ltd 18 E. Buyandelger Investment Committee 19 E. Enkhzul Investment Committee 20 B. Khosbat Investment Committee

N T OF WORKSHOP CENTIVES, STRUCTURE D OF PUBLIC PR HIPS IN MIDDLE INCOME

COUNTRIES”

A NEX F: LIS PARTICIPANTS/“INAN REGULATION IVATE PARTNERS

ANNEX F: LIST OF WORKSHOP PARTICIPANTS/“INCENTIVES, STRUCTURE AND REGULATION OF PUBLIC PRIVATE PARTNERSHIPS IN MIDDLE INCOME COUNTRIES”.

No Name Organization

1 A. Batsaikhan Parliament Non-Standing Committee 2 G. Batmunkh Parliament Non-Standing Committee 3 Kh. Gantsog Ministry of Finance 4 Ts. Amartugs Ministry of Social Welfare and Labour 5 Batrenchin Ministry of Mineral Resources and Energy 6 S. Onon Ministry of Foreign Affairs 7 U. Batsaikhan Ministry of Foreign Affairs 8 S. Enkhjin Ministry of Health

9 S. Enkhtuul Ministry of Road, Transport, Construction and Urban Development

10 G. Enkhsaikhan Ministry of Food, Agriculture and Light Industry 11 D. Bailikhuu State Property Commission 12 R. Baasanjav National Statistical Office of Mongolia 13 Ts. Bumhorol Institute for Strategic Studies 14 B. Temuulen NUM/School of Law 15 P. Odgerel NUM/School of Law 16 B. Munkhsoyol Open Society Forum 17 L. Ariunaa Intek Co., Ltd 18 D. Nergui UNDP 19 D. Khurelmaa UN Children's Fund

ANNEX G: LIST OF THE MULTILATERAL INVESTMENT FUND (MIF) PROJECTS IN PUBLIC-PRIVATE PARTNERSHIPS IN LATIN AMERICA

ANNEX G: LIST OF THE MULTILATERAL INVESTMENT FUND (MIF) PROJECTS IN PUBLIC-PRIVATE PARTNERSHIPS IN LATIN AMERICA

Source: MIF RETROSPECTIVES: Infrastructure and Public Private Partnerships in Latin America and the Caribbean (2008). David Bloomgarden and Asako Maruyama.

ANNEX H: BANGLADESH BOT PROGRAM OF LAND PORTS

ANNEX H: BANGLADESH BOT PROGRAM OF LAND PORTS

This annex presents the Program of Land Ports managed by the Bangladesh Government. The Map shows the location of 13 Land Ports in Bangladesh, but Benapole was not included in the

PP program P

Bangladesh created an special committee named Private Infrastructure Committee (PICOM) which prepared a list of land port projects for approval by the Ministry of Shipping and BSBK (Bangladesh Sthala Bandar Kartripaksha). BSBK is a public agency responsible for storage facilities and import cargo handling in land ports to facilitate collection of customs revenues, especially in the imports from India and Myanmar.


Annex H Page 78 Zamiin Uud Logistics Park – An invitation for a Public-Private Partnership

Bangladesh imports around USD 2 billion from India and the daily volume of trade between India and Bangladesh is around USD 184,630.

PICOM’s proposed list of projects was approved by the Ministry of Shipping on April 20th, 2005 and all the projects were estimated to be developed under the PPP system, Build, Operate and Transfer (BOT) for 25 yearsF

17F. BSBK bought the land and leased it to the concessionaire.

The concessionaire collects revenues from services like handling and cargo storage and pays a fixed royalty to BSBK. At the end of 25 years the land port, including all assets, is transferred to BSBK.

In the BOT area also operates Bangladesh Customs (depends on National Board of Revenue) and Bangladesh Rifles (BDR), a state agency responsible for control unauthorized access of illegal and contraband trades.

The experience of Bangladesh has been important because it has the idea of a group of projects into a Program of PPP.

It is possible to describe the main characteristics of the land ports that had been adjudicated to the private sector in the last three years.

1. The Bibirbazar Land Port

This Land Port handles import and exports with the Indian state of Tripura and it is located in Sadar upazila of Comilla district, 200 meters from the border with India. BSBK adjudicated and signed the PPP contract on October 9th 2005 and the land lease agreement on November 27th 2006. The construction stage started in July 2006. The private company is Sheperd Comilla Land Port Limited.

The facilities of the port are: storage space, transshipment facilities, modern handling equipment, space for government regulatory offices (customs and immigration), utilities and spaces for financial institutions.

Currently the project is under construction and it is expected to start operations this year.

2. The Banglabandha Land Port This Land port is located in Panchagar district and is also used by cargo and people going to and coming from Nepal to India. The contract was signed on October 9th 2005 and the land lease agreement was signed on February 25th 2006. The construction period started in October 2006. The name of the SPV is Banglabandha Land Port Limited.

3. The Birol Land Port The Birol Land Port is located in Birol upazila of Dinajpur district, Char Shankar. The concessionaire is Birol Land Port Limited. BSBK signed the concession agreement and the land lease agreement on October 22nd 2006. The construction started in the last quarter semester of 2007.

4. Hili Land Port

This Land Port is the second largest in Bangladesh and it is located in Hakimpur upazila of Dinajpur district. The concessionaire is Panama Hili Port Link Limited. BSBK signed the concession agreement on October 9th 2005 and the lease agreement on January 4th 2006.

The project has been operating since November 2007.

17 Bangladesh follows the Bangladesh Private Sector Infrastructure Guidelines (PSIG).



Annex H Page 79

5. Sonamasjid Land Port Sonamasjid land port is located in Shibganj upazila of Chapai Nawabganj district. The sponsor investors established the Panama Sonamasjid Port Link Limited and BSBK awarded the project to the sponsor and signed concession agreement on October 9th, 2005. The land lease agreement was signed on January 4th, 2006.