Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 54353-MN

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 8 MILLION (US$12 MILLION EQUIVALENT)

INCLUDING SDR 4.8 MILLION (US$7.2 MILLION EQUIVALENT)

IN PILOT CRISIS RESPONSE WINDOW RESOURCES

TO

MONGOLIA

FOR A MULTI-SECTORAL TECHNICAL ASSISTANCE PROJECT

June 9,20 10

Poverty Reduction and Economic Management Department East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

MONGOLIA - GOVERNMENT FISCAL YEAR January 1 - December 3 1

CURRENCY EQUIVALENTS (Exchange Rate Effective as of March 3 1,201 0)

Currency Unit = Mongolian Tugrug US$I.OO = MNT1367

WEIGHTS AND MEASURES Metric System

Vice President: Country Director: Klaus Rohland, EACCF

Sector Director: Vikram Nehru, EASPR Country Manager: Arshad Sayed, EACMF

James W. Adams, EAPVP

Task Team Leader: Rogier van den Brink, EASPR

FOR OFFICIAL USE ONLY

ABBREVIATIONS AND ACRONYMS

AAA ADB Aimag BoM BP CFAA

CMP CPI

CPS CRW DA DCA DPC EBRD ECTAC

EITI

ESF FDI FMM FMSB FRC FSC GAP GFMlS

GDP

GoM GPF HDF IBL

IBRD

IDA IFAD

IFC IF1 IFR IMF ISN ISDS

Analytic and Advisory Services Asian Development Bank Province Bank of Mongolia Bank Procedures Country Financial Accountability Assessment Child Money Program Consumer Price Index

Country Partnership Strategy Crisis Response Window Designated Account Development Credit Agreement Development Policy Credit European Development Bank Economic Capacity and Technical Assistance Project Extractive Industries Transparency Initiative Exogenous Shock Facility Foreign Direct Investment Financial Management Manual Financial Management Sector Board Financial Regulatory Commission Financial Stability Council Governance Assistance Project Government Financial Management Information System Gross Domestic Product

Government of Mongolia Governance Partnership Facility Human Development Fund Integrated Budget Law

International Bank for Reconstruction and Development International Development Association International Fund for Agricultural Development International Finance Corporation International Financial Institution 1nterim.Financial Report International Monetary Fund Interim Strategy Note Integrated Safeguard Data Sheet

JlCA LSWSO MoF MoSWL MP MTAP

MTFF MTR

NDlC NPL OA OP OT PAD PCN

PEMFR

PIC PID PIP PMT PMU PPP PRGF PRSC

PSMFL

QBS QCBS OP ROSC

SBA

SBM SDR

SOE Soum TA TTL USAID WPT

Japan International Cooperation Agency Labor and Social Welfare Services Office Ministry of Finance Ministry of Social Welfare and Labor Member of Parliament Multi-sectoral Technical Assistance Project

Medium-Term Fiscal Framework Mid-Term Review National Development and Innovation Committee Non-performing Loan Operating Account Operations Policy Oyu Tolgoi Project Appraisal Document Project Concept Note

Public Expenditure and Financial Management Review Public Information Center Project Information Document Public Investment Program Proxy-means Test Project Management Unit Public-Private Partnership Poverty Reduction and Growth Facility Poverty Reduction Support Credit

Public Sector and Management of Finance Law Quality-Based Selection Quality and Cost-Based Selection Operations Policy Reports on the Observance of Standards and Codes Stand-By Arrangement

State Bank of Mongolia Special Drawing Rights

Statement of Expenditure District Technical Assistance Task Team Leader United States Agency for International Development Windfall Profit Tax

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

I . A . B . C .

I1 . A . B . C . D .

I11 . A . B . C . D . E . F .

IV . A . B . C . D . E . F . G .

MONGOLIA

MULTI-SECTORAL TECHNICAL ASSISTANCE PROJECT

TABLE OF CONTENTS

STRATEGIC CONTEXT AND RATIONALE .................................................. 1

Rationale for Bank involvement ............................................................................. 2 Higher level objectives to which the project contributes ........................................ 4

PROJECT DESCRIPTION ......................................................... 1 ........................ 4 Lending instrument ................................................................................................. 4 Project development objective and key indicators .................................................. 5 Project components ................................................................................................. 5 Lessons learned and reflected in the project design ................................................ 7

Partnership arrangements., ...................................................................................... 8 Institutional and implementation arrangements ...................................................... 9 Monitoring and evaluation of outcomes/results ...................................................... 9 Sustainability ......................................................................................................... 10 Critical risks and possible controversial aspects ................................................... 10 Credit conditions and covenants ........................................................................... 12

APPRAISAL SUMMARY .................................................................................. 13 Economic and financial analyses .......................................................................... 13 Technical ............................................................................................................... 13 Fiduciary ....................................................... ....................................................... 13

Environment .......................................................................................................... 14 Safeguard policies ................................................................................................. 15

Policy Exceptions and Readiness .......................................................................... 15

Country and sector issues ........................................................................................ 1

IMPLEMENTATION ........................................................................................... 8

. . .

Social ..................................................................................................................... 14

Annexes Annex 1 Country and Sector Background ................................................................................... 16 Annex 2 Major Related Projects Financed by the Bank and/or other Agencies .......................... 33 Annex 3 Results Framework and Monitoring .............................................................................. 34 Annex 4: Detailed Project Description ......................................................................................... 39 Annex 5 : Project Costs ................................................................................................................... 45

Annex 7: Financial Management and Disbursement Arrangements ............................................ 48 Annex 8: Procurement Arrangements ........................................................................................... 59 Annex 9: Economic and Financial Analysis ................................................................................. 62

Annex 11: Project Preparation and Supervision ........................................................................... 66 Annex 12: Documents in the Project File ..................................................................................... 67 Annex 13: Mongolia Joint IMF/World Bank Debt Sustainability Analysis ................................. 68 Annex 14: Mongolia at a Glance .................................................................................................. 72 Annex 15: Key Economic Indicators ............................................................................................ 75 Annex 16: List of References ........................................................ : .............................................. 76

Annex 6: Implementation Arrangements ...................................................................................... 46

Annex 10: Safeguard Policy Issues ............................................................................................... 63

Map IBRD 36948

Figures Figure 1 . Export concentration index* (right axis. bar). copper share in exports in 2007 (left axis.

17 Figure 2 . Changes in GDP growth 2008 to 2009 and non-mining fiscal balance in 2008 ........... 17 line) ...............................................................................................................................................

Figure 3 . Deteriorating fiscal balances ......................................................................................... 17 Figure 4 . Variable current account adjustments ........................................................................... 18

Figure 6: Recent macro-economic developments in Mongolia .................................................... 20 Figure 7 . Capital expenditures have expanded rapidly ................................................................. 24 Figure 8 . Parliament’s additions to the Public Investment Plan ................................................... 25

Figure 5 . Rising CPI inflation ....................................................................................................... 18

Figure 9 . Expenditures on capital repairs have been under-prioritized ........................................ 27 Figure 10 . Implementation arrangements for Multi-Sectoral TA Project ..................................... 47

Tables Table 1 . Selected policy actions through 20 10 and their expected impact ..................................... 2 Table 2 . Critical risks and possible controversial aspects ............................................................. 11 Table 3 . Mongolia selected economic indicators .......................................................................... 19 Table 4 . Eligible expenditures ...................................................................................................... 53

Table 7 . Fiscal financing requirements and sources (IMF) .......................................................... 70

Table 5 . Medium-term baseline projection ................................................................................... 69 Table 6 . Balance of payments outlook .......................................................................................... 69

Boxes Box 1 . How did other copper exporters experience the global downturn? ................................... 17

CREDIT AND PROJECT SUMMARY

Source BORROWEWRECIPIENT

Total: International Development Association (IDA)

MONGOLIA: MULTI-SECTORAL TECHNICAL ASSISTANCE PROJECT

Local Foreign Total 0.0 0.0 0.0 8.0 4.0 12.0 8.0 4.0 12.0

FY 2011 Annual 1 .o Cumulative 1 .O

2012 2013 2014 2015 3.0 3.0 3 .O 2.0 4.0 7.0 10.0 12.0

Project implementation period: Start July 1,2010 End: June 30, 2014 Expected effectiveness date: December 3 1,20 10 ExDected closing date: December 3 1. 2014

[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [XINO [ ]Yes [XINO

[XIYes [ ] No

Does the project depart from the CAS in content or other significant respects? Ref: PAD I. C. Does the project require any exceptions from Ban,k policies? Ref: PAD IK G. Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

Does the project include any critical risks rated “substantial” or “high”? Ref: PAD III.E.

[XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Ref: PAD IK G. Project development objectives Ref: PAD II. C., Teclznical Annex 3 The Project’s development objectives are to support the Recipient’s efforts to enhance its capacity for policy making, regulation, and implementation in the fiscal, social, and financial sectors.

Project description Ref: PAD II.D., Teclinical Annex 4 The Project will provide technical assistance under four components as follows: (a) Enhancing capacity for fiscal management in the Ministry of Finance to better implement a budget that is

fiscallv sustainable and better linked to national. local, and sectoral Driorities.

(b) Strengthening the capacity of the Ministry of Social Welfare and Labor to improve the efficacy of social expenditure by designing and implementing a targeted poverty benefit.

(c) Enhancing capacity of the Bank of Mongolia for maintaining financial sector stability by intensifying supervision and implementing a bank restructuring strategy.

(d) Managing the project. The existing Project Management Unit responsible for both the Governance Assistance Project and Economic Capacity Technical Assistance Project will also provide its services for this TA Project.

Refer to Section I1 C for a complete description of the project components as in the Financing Agreement.

Which safeguard policies are triggered, if any? Ref; PAD IKF., Teeknicnl Annex 10 The Indigenous Peoples OP is triggered; an Indigenous Peoples Plan has been prepared and was disclosed by the Ministry of Social Welfare and Labour.

Significant, non-standard conditions: none. Ref; PAD III. F. Board presentation: none. Effectiveness conditions: These include : (a) Subsidiary Agreement has been executed on behalf of the Recipient and BoM. (b) Project Steering Committee has been established pursuant to Section I.A.l(a) of Schedule 2 to the

Financing Agreement; (c) Technical Working Groups in MoF, MoSWL and the Project Implementing Entity have been established

pursuant to Section I.A.l(c) of Schedule 2 to the Financing Agreement and Section I.A.l(b) of the Scheduk to the Project Agreement, as the case may be; and

(d) Project Implementation Manual and the Financial Management Manual have been prepared and adopted by the Recipient on terms and conditions satisfactory to the Association.

IDA PROJECT DOCUMENT FOR A PROPOSED MULTI-SECTORAL TECHNICAL ASSISTANCE PROJECT

TO MONGOLIA

I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues

1. The global downturn has hit Mongolia hard, most immediately through the collapse of mineral prices, in particular that of copper. Reliance on copper revenues in the budget (with mineral revenues accounting for more than one-third of the total budget revenues), the fiscal shock has been very large, causing the overall government balance to shift from a 2.9 percent of Gross Domestic Product (GDP) surplus in 2007 to a 5.4 percent deficit in 2009. Similarly, the external balance swung from a surplus into a deficit, as export proceeds fell by one quarter (about US$640 million) in 2009. And inflation, which had peaked at 34 percent in August of 2008, fueled by large increases in domestic spending, loose monetary policies and a de facto fixed exchange rate, turned negative for a brief period in the latter half of 2009, as the economy contracted sharply. Real GDP contracted by 1.6 percent in 2009, following growth of 8.9 percent in 2008.

2. The sudden economic downturn exposed the over-reliance of the budget on mineral revenues, causing the fiscal situation to become precarious. The downturn also exposed weaknesses in an overheated banking sector, eventually leading to two systemically important banks being placed into receivership, and a loss of confidence, as demonstrated by declining local currency deposits in late 2008 and early 2009. There has, however, been stabilization in the economic situation since the time of Board approval of the first DPC operation in June 2009.

3. Improving the policy environment is now the overriding priority for the government. Multilateral and bilateral donor activities in the form of budget support, technical assistance, and analytical work provide an important support for the government’s policy agenda. Considerable fiscal adjustment remains necessary over the next couple of years. Donor budget financing can play a crucial role in facilitating the process of fiscal adjustment, helping to protect key expenditures such as social protection and investment programs and limiting recourse to alternative, potentially destabilizing, financing options.

4. This Multi-Sectoral Technical Assistance Project (MTAP) of US$12 million is supporting, and is being processed together with, the second Development Policy Credit (DPC2) of US$30 million, following the US$40 million DPC 1 disbursed in 2009. The two DPCs support policy actions targeted towards the key crisis areas -- fiscal policy and management, social protection, and the financial sector -- as well as the mining sector, which is expected to lead the recovery. A follow-up series of three DPCs is planned to assist in the implementation of the medium-term policy agenda.

5. This MTAP is designed to improve fiscal policy and sustainability in a mineral-based economy, protect the poor and vulnerable, and restore confidence in the financial sector. Project activities include: (i) improving budget preparation and execution to ensure that resources are planned and spent in a sustainable, efficient, and transparent manner; (ii) protecting the poor by

retargeting existing social policies; and (iii) strengthening confidence in the financial sector by implementing best practice action plans for the resolution of the two failed banks and a wider banking sector restructuring strategy.

B. Rationale for Bank involvement

6. Mongolia was one of the East Asian economies hardest hit by the global downturn and has experienced a sharp slowdown in GDP growth for 2009. The slump in copper prices at the end of 2008 severely undermined fiscal revenues, requiring a sharp adjustment to budgeted expenditures to restrain the fiscal deficit. The official unemployment rate is currently low at around 3.3 percent, but surveys suggest that actual figures are much higher at around 12 percent. The adverse impact of the crisis ‘was particularly visible in the informal sector, both in terms of declining real wages and employment, although there has been a slight recovery in recent months. However, extreme winter weather conditions at the end of 2009 have added to the pressures on rural livelihoods and hurt profitability in the agricultural sector. The global downturn also exposed problems in Mongolia’s financial sector which had overheated during the boom years. This culminated in a crisis of depositor confidence in late 2008, triggered by the collapse of the country’s fourth largest bank by asset size at the time.

7. Due to comprehensive and strong policy action on fiscal, monetary, exchange rate and financial policies by the government (Table 1) and an improvement in the external environment, the economy has stabilized. However, risks associated with the financing of the budget deficif

Table 1. Selected policy actions through 2010 and their expected impact

Government policy action Impact Avoid increased inflation stemming from mining boom in Keep flexible exchange rate, and move

from FX auctions to interventions in the inter-bank market.

Fiscal deficit contained to 5 percent of GDP in 2010.

Enact Fiscal Responsibility Law and Organic Budget Law.

Conduct “audits” (special assessments) of commercial banks.

Adopt banking sector restructuring strategy and increase capital requirements. Amend relevant legislation for banking sector. Pass social welfare reform legislation and adopt PMT-based targeting of key social transfer programs.

the coming years by instead allowing the nominal exchange rate to adjust; avoid short-term overshooting of the exchange rate. Together with budget support from development partners, allows fiscal deficit to be financed without increasing inflation and crowding out the private sector. lmprove fiscal management of mining revenues (both short- term volatility, as well as long-term expansion) and commit Parliament to prudent fiscal management. lmprove analysis of current banking sector problems; provide key input into bank-by-bank recapitalization (if necessary) and overall banking sector restructuring strategy. Avoid repeat of overheating of banking sector as mining sector booms on the back of large mining projects.

Improve governance of the banking sector by strengthening the central bank’s intervention powers and sanctions. Ensure fiscal sustainability of social transfers, improve protection of the poor.

Source: Mongolian authorities, World Bank.

2

and the weak balance sheets in the banking sector remain (as evidenced by the failure of a second bank at the end of 2009), and the recovery in economic activity is at an early stage. The outlook, moreover, fundamentally depends on the degree of progress in a small number of major investment projects, in particular the Oyu Tolgoi (OT) investment agreement, and on whether the recovery in copper prices in recent months can be sustained. Any shock could therefore derail this nascent recovery.

8. The rationale behind the Bank’s involvement derives from the specific role the Bank has played in assisting the government in responding to the crisis, and its comparative advantage going forward. First, the Bank’s assistance strategy (as described in the Interim Strategy Note (ISN) of June 2009) exceptionally reallocated two-thirds of the IDA envelope to supporting policy reforms in key areas. International, as well as Mongolian experience, strongly suggests that the success and sustainability of these reforms is enhanced if they are accompanied by technical assistance and targeted capacity-building. This Multi-Sectoral TA Project (MTAP) therefore becomes a key pillar of the Bank’s assistance strategy.

9. Second, the two single-tranche DPCs (US$40 million in FYlO and US$30 million in FY 1 l), representing more than two-thirds of the notional IDA 15 envelope of US$90 million, both supported reforms in four critical areas: improving fiscal sustainability in a mineral-based economy, protecting the poor and vulnerable, restoring confidence in the financial sector, and encouraging transparent and prudent mining investments. Three out these four policy reform areas are covered in this MTAP. The fourth -- covering the mining sector -- is the focus of an already existing mining TA project and is not expected to need additional resources in the next few years.

10. Third, the three policy areas covered by this MTAP benefit from a rich portfolio of past and present Bank Analytic and Advisory (AAA) work. The TA Project draws from the same wealth of resources that was available for the first and second DPC on fiscal policy and management, social protection, and financial sector reform.

1 1. The fiscal policy and management agenda is underpinned by the 2009 World Bank Public Expenditure and Financial Management Review, the 2008 World Bank Governance Assessment Report, the 2008 ROSC Accounting and Auditing Report, a series of studies on improving medium-term program budgeting undertaken under an existing TA project (the ECTAC project), the 2008 IMF report on “Budget Preparation: A Roadmap for Institutional Strengthening”, the 2007 World Bank report “Foundation for Sustainable Development: Rethinking the Delivery of Infrastructure Services in Mongolia”, the ongoing Mongolia Policy Note of Public Investment Planning, and a draft report titled: “Challenges in Public Investment in a Resource Rich Country: A Political Economy Perspective.” These studies highlight the weaknesses in the budget formulation and public investment planning processes in Mongolia, including the political preference for funding new investments over maintaining the existing capital stock, leading to the chronic underfunding of maintenance; the significant discretion of Parliament to add new projects to the public investment plan without a formal appraisal process, including feasibility studies; and the institutional weaknesses and poor procedures throughout the project cycle. All these studies informed the fiscal prior actions on capital budgeting and maintenance. Other analytical work is addressing related issues in the broader agenda on improving fiscal

3

expenditure performance, for example a World Bank report on “Mongolia: Towards a High Performing Civil Service” published in June 2009.

12. Reforms in social protection are buttressed by the following studies: the 2009 World Bank Public Expenditure and Financial Management Review, the “Assessment of the Child Money Program and properties of its targeting methodology,” (Araujo, 2006), and “The making of a Modern Social Assistance System in Mongolia” (Ridao-Can0 and Cristobal, 2007).

13. Financial sector reforms draw on the 2008 World Bank-IMF Financial Sector Assessment Report, and more recent World Bank reviews and assessments of the banking sector and recent developments (undertaken in 2008 and 2009). The data for these studies will be updated but both the medium-term and long-term objectives of the studies that support the policy actions remain unchanged.

14. Finally, the three policy areas selected by this TA also reflect the Bank’s comparative advantage vis-a-vis the other development partners. On the fiscal side, the collaboration with the authorities and the IMF is very strong, and joint teams are working on the key policy issues together. Two existing Bank TA projects proved to be invaluable to support these efforts. The MTAP is designed to allow the Bank to continue its role in this collaboration. Similarly, with respect to social protection, the partnership between the government, the ADB, and the Bank is also strong, with the Bank being asked to help with the design and implementation of a targeted poverty benefit, given its comparative advantage in this area. And thirdly, the Bank is playing a leading role in the multi-donor partnership in the resolution of failed banks and in the design and implementation of the banking sector restructuring. The TA component of an existing project played a critical role in this. The MTAP will ensure the Bank’s continued engagement in these areas.

C. Higher level objectives to which the project contributes

15. Major mineral deposits, including prospects in the Gobi region, when developed, have the potential to significantly increase incomes and government revenues. But the risks of a mineral-dependent economy have also been underscored by deficiencies in Mongolia’s management of the recent boom, which made it more difficult to adjust to the impact of the global downturn. In addition, as in most mineral-rich economies, managing the resource revenues consistently and sustainably, puts a high premium on governance reforms. The adjustments needed will take place over the medium term, and include enhancing government capacities to improve public investment decisions, protect the poor, restructure the banking sector, and resolve key obstacles for mining and infrastructure development.

16. This TA Project supports key elements of the reform agenda in the above areas.

11. PROJECT DESCRIPTION A. Lending instrument

17. This Project will be an IDA Technical Assistance Credit in the amount equivalent to US$12 million. The project duration will be four years. The Project is aligned with the companion DPC2 operation as well as planned to support a Development Policy Credit series, to

4

improve capacity for fiscal policy formulation, social protection, and the management of the financial sector.

18. The operation is co-financed by IDA’S Crisis Response Window (CRW) and follows its guidelines. The CRW’s objective is to mitigate the impact of the global economic crisis and protect core spending on health, education, social safety nets, infrastructure, and agriculture. The TA Project is supporting government efforts of building capacities in the fiscal, social, and financial sectors. In particular, Components 2 and 3 are seeking to mitigate the effects of the crisis. Component 2 is focused on capacity building to mitigate the impact of the global crisis on Mongolia, and especially its impact on the poor. The crisis has also negatively affected the banking sector. Therefore, Component 3 will provide support to build capacities for stabilizing the banking sector, facilitating restructuring, and making the sector more resilient.

B. Project development objective and key indicators

19. Complementing the work of other donors, the Project’s development objectives are to support the Recipient’s efforts to enhance its capacity for policy making, regulation, and implementation in the fiscal, social, and financial sectors.

20. The key performance indicators are by the Closing Date:

(a) the Recipient will prepare and execute national budgets that adhere to the aggregate limits set in the MTFF and are consistent with the fiscal rules specified in the Fiscal Stability Law;

(b) the Recipient shall have established a national committee for accounting and auditing standards vested with the responsibility of ensuring that Mongolia’s accounting and auditing standards are substantially compliant with international financial reporting standards and international standards of auditing;

(c) MoSWL has prepared a poor households database, ,on the basis of the Proxy Means Test survey; and

(d) BOM has: (A) successfully caused the completion of the restructuring of those systemic banks which have failed to meet the adjusted risk-based capital adequacy ratio as of July 3 1 , 201 0; and (B) prepared, adopted and implemented new improved prudential regulations.

C. Project components

21. The Project consists of the following components (see Technical Annex 4 for details):

Part A: Enhancing Capacity for Fiscal Management

(i) Improving budget preparation by: (i) strengthening the institutional capacity and organizational arrangements of MOF and NDIC for strategic planning and policy analysis, in order to ensure the Recipient’s fiscal sustainability and compliance with the

5

Fiscal Stability Law; (ii) aligning the budgeting process to national, sectoral and local priorities, through the adoption of greater decentralization policies, and enhancing transparency and predictability in the apportionment, transfer and management of revenues and expenditures; (iii) improving inter-sectoral coordination; and (iv) improving public investment planning.

(ii) Improving the public financial management by: (i) revising and strengthening the existing legal framework for accounting and auditing; (ii) strengthening MOF’s and the Financial Regulatory Committee’s institutional capacity to ensure ’ compliance with international financial reporting standards and international standards on auditing; and (iii) strengthening MOF’s internal controls by improving its internal auditing capacity; and (iv) improving accounting and auditing professional education and training.

Part B: Supporting Government Efforts to Better Protect the Poor

Designing and piloting the implementation of a social benefit program for the provision of cash transfers to the poor households, including the determination of the amount of the benefits, frequency of transfers and/or any conditions attached thereto, and eventually devising the final structure of a permanent program.

Supporting the piloting and national roll-out of the Proxy Means Test targeting system for determining the eligibility of beneficiaries of the social benefit program, including, inter alia: (i) strengthening MoSWL’s and LSWSO’s capacity to develop and manage a social program beneficiaries database; (ii) developing and implementing a grievance redressal and appeals mechanism for social welfare programs, and a related information and communication campaign; (iii) strengthening the institutional and governance structures of MoSWL, LSWSO, MoECS, and MoH in order to improve their efficiency in the provision of welfare services; and (iv) developing and implementing an information, education and communication strategy regarding social welfare entitlements.

Monitoring and evaluating the cash transfer program performance by setting up a system of program audits and social accountability aimed at enhancing the program’s transparency in the allocation and payment of benefits, and assessing the impact of the reformed welfare system on the Recipient’s poverty rates and human development outcomes

Providing training to MoSWL’s and LSWSO’s staff for the implementation of the social welfare reform system, including the development and distribution of printed materialheference guides therefor, in order to ensure that social benefits are successfully delivered to the poor and vulnerable population.

Part C: Enhancing Capacity for Maintaining the Stability of the Financial Sector

(i) Strengthening the institutional capacity of BOM in order to: (i) finalize the liquidation of assets of the failed banks under the BOM’s receivership; (ii) finalize, adopt and implement a bank restructuring . strategy, including the effective operation and privatization of the State Bank of Mongolia; (iii) develop and implement a corporate debt restructuring in the mining and construction sectors; (iv) carry out targeted forensic audits

6

of financial institutions; and (v) provide on-the-job training to BOM’s staff in the above areas.

(ii) Supporting the implementation of the amended Central Bank Law and the new Banking Law by: (i) developing and adopting new financial reporting regimes for commercial banks; (ii) revising and streamlining existing bank regulations; (iii) strengthening BOM’s off-site supervision capabilities; and (iv) transitioning from a blanket deposit guarantee to a limited deposit insurance regime.

(iii) Strengthening BOM’ s human capital through: (i) developing regular training curricula for financial sector supervisors; and (ii) carrying out study tours and attending and/or hosting conferences and workshops.

Part D: Project Management

(i) Strengthening MOF’ s capacity for Project implementation, monitoring and evaluation, including, inter alia, audit arrangements, reporting requirements, procurement, disbursement and financial management activities.

D. Lessons learned and reflected in the project design

22. A number of important lessons have been learned by the implementation of past Bank projects as well as those of donor partners. The design of this operation draws on, and benefits from, these lessons:

Supporting the main policy areas with appropriate TA is important for the success and sustainability of critical policy reforms. This lesson from experience is drawn from both international, as well as Mongolian experience. For instance, the 2009 DPC benefited greatly from the work that had been undertaken under existing TA projects. The design of this Multi-Sectoral TA Project (MTAP) reflects this lesson. The four critical policy reform areas supported by the Bank each benefit from TA support. The MTAP supports three out of the four areas. The fourth (mining) was only excluded because it already benefited from a relatively recent TA project. If the crisis is to be turned into an opportunity, it is important to build targeted capacity to move from policy actions which quickly responded to the crisis to policy actions which build on the crisis response and constitute a medium-term agenda. In this regard, it is important to gauge from the beginning of an operation the capacity of the borrower or the implementing agency to implement the proposed reforms. The capacity of the borrower was sufficient enough to take the strong, and often painful, policy actions supported by the 2009 DPC when this was required. However, the more complicated reforms that are needed, for instance on social protection, will require developing more capacity. Similarly, as the weaknesses in the banking sector have turned out to be more severe than expected, additional capacity-building for banking sector supervision and restructuring is needed. The MTAP therefore includes targeted capacity building (including training) in each of the policy areas as one of its key activities. Donor coordination is key to avoid overlap and duplication. The intensive coordination necessitated by the crisis of 2009 resulted in a close collaboration between the donors.

7

The TA credit builds on the practical experience gained during this period in terms of joint work and the optimal division of labor in the Mongolian context. The selection of activities supported under this TA reflects that experience and understanding. The design of the MTAP needs to be selective and focused on the critical policy reforms, but flexible enough to accommodate the emerging policy agenda. This is particularly important in the case of Mongolia, where there is no clearly and explicitly defined policy agenda. Ownership is central to the success of the policy reform agenda. To gauge the existing ownership and strengthen it, the preparations for this Project (and the DPC series in general) have benefited from intensive dialogue with government, Parliament, the private sector, and academia. These consultations ranged from successful study tours to Chile and Washington, D.C. by members of Parliament, and targeted conferences and workshops, to increasing the frequency of the Bank’s Economic Updates from quarterly to monthly, seeking regular stakeholder input into these updates, and organizing public dissemination events.

E. Alternatives considered and reasons for rejection

23. An alternative of three single-sector TAs, one each for fiscal policy, social protection, and the banking sector was considered. Each single sector TA would have supported the policy reform in the DPC series. This was rejected in favor of a combined TA to increase efficiency, coordination, and to minimize transaction costs of three projects going to the Board at the same time. 24. A second alternative was to rely on other development partners to provide the technical assistance required. The close collaboration between the development partners during the crisis response provided a clear demonstration of “revealed” comparative advantage. The activities selected for this TA credit reflect the existing division of labor between the development partners and the existing gaps in the existing and planned TA support by other development partners.

’

111. IMPLEMENTATION A. Partnership arrangements

25. IDA’S catalytic platform services played a critical role in the development of the overall support program of the government’s policy reform agenda (balance of payments support, budget support, and technical assistance) by the development partners and its coordination. They included convening two donor meetings in 2009, in addition to the analytical work and advisory services described in Annex 1 (also see Annex 16 for references). This facilitation is a critical aspect of the effective and efficient use of the Crisis Response Window, which co-finances this operation.

26. This TA Project is funded by IDA. However, bilateral, parallel grant funding is being sought to complement this Project. As mentioned above, the partnership arrangements with the IMF on fiscal policy issues, with the ADB on social protection, and with the IMF, the ADB, USAID, and the EBRD on the financial sector, are the result of intensive collaboration and coordination during the crisis period and are reflected in the design of this TA Project. A list of ,

8

major related projects financed by the World Bank and/or other Agencies in these areas is included in Annex 2. B. Institutional and implementation arrangements

27. The MoF will be responsible for implementing the fiscal component, the MoSWL will be responsible for implementing the social protection component, and the Central Bank of Mongolia will be responsible for implementing the financial sector component. The existing Project Management Unit (PMU) responsible for GAP and ECTAC will provide its services for all three components of this TA Project, This is an experienced PMU that will ensure compliance with the Bank procurement, disbursement, and financial management policies and procedures.

28. The Project will be guided by a Project Steering Committee (PSC) and a Project Director. The PSC will be headed by the Deputy Minister of the Ministry of Finance, and comprising the General Director of the Fiscal Policy Department of MoF, the State Secretary of MoSWL, and the First Deputy Governor of the Bank of Mongolia. The PMU will be headed by the State Secretary of MoF as Project Director, assisted by a qualified and experienced Project Manager. The PMU will prepare review reports and critical issues to be discussed by the PSC. The MoF, MoSWL, and the Central Bank each will have Technical Working Groups to finalize terms of reference, technical requirements, and training proposals, and approve contract deliverables as appropriate, for their respective components.

29. The Steering Committee will provide strategic guidance to the Project, and will direct component implementation agencies to: (i) prepare and finalize all terms of references for each component activity; and (ii) report progress with implementation of the activities. The Steering Committee shall meet quarterly to review overall project implementation and take any remedial measures needed to address any issues that the review has highlighted. This review shall be prepared by the PMU. Further, a Steering Committee meeting (actual or virtual) can be called at any time to resolve any emerging issue. The decision to call an actual or virtual meeting shall be made by the Project Director.

30. The MoF, MoSWL, and the Bank of Mongolia will each chair their own Technical Working Groups to manage the day-to-day implementation of their respective components. All daily administrative aspects of the Project would be implemented by the relevant ministries responsible for the individual components of the Project, with technical assistance provided by the Project.

C. Monitoring and evaluation of outcomes/results

31. Each Ministry/Implementation Entity will track the desired outcomes of the Project in accordance with the results framework specified in Annex 3 and report to the Steering Committee on a quarterly basis. Each of the three Technical Working Groups will monitor the project outputs and outcomes of its component. These will be reported to the relevant line managers and to the Project Steering Committee (PSC). The PSC will meet at least quarterly during the implementation and will monitor implementation of the Project through quarterly financial management reports and annual audits and other reports on semi-annual basis. A joint mid-term review will be carried out by the government and the World Bank about two years after

9

the Project becomes effective (FY2011-12). This will provide an in-depth assessment of progress towards desired project outcomes and will recommend measures to reorient the project, if needed, to ensure that it will achieve its objectives. Two months before the Project closing date, the Steering Committee team will prepare and provide to IDA a report on the execution of the project, its costs and the current and future benefits to be derived from it, to be attached to IDA?S Implementation Completion Report (ICR) in accordance with IDA guidelines.

32. A set of indicators defined in Annex 3 will be used to develop a monitoring baseline and for regular project monitoring. These indicators will be supplemented by information from other sources, including an independent assessment, audits of management, staff, facilities, human resource training, and records.

D. Sustainability

33. The government has taken strong policy actions over 2009 which have required bipartisan support and whi?ch demonstrate the currently strong political ownership of the reforms needed to address the impact of the crisis, to promote the recovery, and to put in place an improved policy framework for the medium-term. And the design of this operation has benefited from systematic dialogue with key government officials and representatives of both political parties. In addition, a series of outreach and consultation events to discuss key policy issues, along with the release of the regular economic updates, further helped raise awareness and ownership during project design. Endorsement from the MoF, MoSWL, and Central Bank of Mongolia is also an indicator of strong ownership.

34. Sustainability is further strengthened by the supporting policy framework currently provided by the IMF/ADB/JICA balance of payments and budget support operations to assist the government manage the crisis. A planned series of DPCs would ensure a continuation of such a mutually reinforcing link between policy conditionality and TA.

35. Targeted institutional capacity-building and training to be provided as part of this TA project will also improve the sustainability of the project by further deepening the institutional commitment and implementation capacity to the reform agenda.

36. Finally, this TA Project does not create any additional burden on government finances. On the contrary, the key actions in each of the components are targeted to generating cost- savings and efficiencies.

E. Critical risks and possible controversial aspects

37. Potential risks to the TA Project and the mitigating measures are identified in Table 2.

10

Table 2. Critical risks and possible controversial aspects

Rating of risk Description of risk Risk factors

Rating of residual

risk Mitigation measures

1. Country and/(

Adoption of new Organic Budget Law (IMF conditionality).

11. Strengthening Substantial

111. Social Protect

Prior action of the DPCs, Bank's analytical work and on-going technical assistance highlight this risk and explain the negative consequences. Intensive policy dialogue by all donors.

Sub-National Level Risks As the copper price revives, the perceived threat of imminent crisis recedes, and as the 20 12 elections draw nearer, political commitment to the reform process wanes.

Moderate

Moderate

Parliament does not approve government using a credit to finance TA, but insists on grant financing.

xal Policy and Public Financi; Continued politically motivated investment project selection, and lack of coordination between the Ministry of Finance and the NDIC on public investment planning due to bureaucratic rivalries Continued under- prioritization of capital '

maintenance due to low political visibility of these expenditures. Parliament failing to adopt the Fiscal Stability Law and the Organic Budget Law.

Substantial

Moderate

Management High

Substantial

Substantial

Adoption of prudent fiscal rules and macro management, anchored in a new legal framework (IMF performance criterion).

Agreement on DPC series.

Intensified IFI-supported outreach to policymakers, Parliament, academia, and civil society. Processing of DPC and TA as a package.

Obtaining commitment by other development partners to mobilize parallel financing.

Moderate

Low

Adoption of new social welfare reform law (conditionality of IMF, Failure to approve the

reformed Social Welfare

Lack of cauacitv within the

Ongoing technical assistance from ADB and World Bank.

Ministry oi. Social Welfare and Labor to design and implement the poverty

Moderate

Moderate

11

Failure to approve the Proxy Means Testing methodology by the National Statistical office.

Moderate Substantial DPC2 prior action.

Building up and High A sound and well-implemented maintaining political communication strategy targeted support, and managing various interest groups.

Weak capacity and busy work schedule. for weak capacity

directly at Parliament and the general public and carried out with support of international experts. Use of TA services to compensate

Training supported by the Project.

Substantial

Overall Risk Rating

F. Credit conditions and covenants

Substantial

Moderate

Moderate

Management approval conditions

38. None.

Effectiveness conditions

These include the :

Subsidiary Agreement has been executed on behalf of the Recipient and BoM;

Project Steering Committee has been established pursuant to Section I.A. l(a) of Schedule 2 to the Financing Agreement;

Technical Working Groups in MoF, MoSWL and BoM have been established pursuant to Section I.A.l(c) of Schedule 2 to the Financing Agreement and Section I.A.l(b) of the Schedule to the Project Agreement, as the case may be; and

Project Implementation Manual and the Financial Management Manual have been prepared and adopted by the Recipient on terms and conditions satisfactory to the Association.

Other Covenants 40. These include:

(a) Establishment and maintenance of the PSC and Technical Working Groups in MoF, MoLSW, and BoM, and the maintenance of the PMU established under the GAP within MoF;

(b) Preparation of annual implementation plans; and

12

(c) Screening of social sector activities in accordance with the Indigenous Peoples Planning Framework and the preparation, if necessary, of Indigenous Peoples Plan.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

41. The Project is not amenable to a cost-benefit analysis as the MoF, MoSWL, and Central Bank have hardly any significant cost recovery. The economic benefits from the Project will derive from two main sources. First, improvements in the efficiency of fiscal policy, social protection policy, and banking policy operations and agencies will result in a higher quality of policy formulation. Second, improved capacity will enhance decision-making, at policy, program, and project levels.

, 42. There can be a fiscal impact contributing to a better budgeting process and a potential increase in revenues due to better information and coverage.

B. Technical

43. not finance any works, a technical appraisal was not undertaken.

Since this operation is a technical assistance and capacity building operation, which does

C. Fiduciary

Financial Management Issues

44. The Financial Management team has conducted an assessment of the adequacy of the Project’s financial management system. The assessment, based on guidelines issued by Financial Management Sector Board on March 1, 20 10, has concluded that the Project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FM team’s opinion, the Project will have financial management arrangements acceptable to the Bank and, as part of the overall arrangements that the borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the IDA credit will be used for the purposes for which they are provided. The main financial management risk is that World Bank credit proceeds will not be used for the purposes intended and is a combination of country-, sector-, and project-specific risk factors. Taking into account the risk mitigation measures proposed under the Project, a “moderate” FM risk rating was assigned to the Project at the appraisal stage.

Procurement Issues

45. Procurement for the Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated May 2004 (Revised October 2006); “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 (Revised October 2006), and the provisions stipulated in the Financing Agreement.

13

46. In accordance with the institutional arrangement, the PMU established for the on-going Bank-financed GAP and ECTAC projects would be responsible for project implementation. The procurement function rests with the same PMU. Based on the review of the capacity and experience of the PMU, technical support, and internal clearance procedures in general, the PMU is capable of managing procurement. The overall procurement risk is moderate.

47. An initial 12-month Procurement Plan was prepared and submitted to the Bank for clearance prior to credit negotiation and the format of the procurement monitoring report and procurement filing system was agreed.

48. The Project will be carried out in accordance with the provisions of the World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants, dated October 15, 2006.

D. Social

49. It is expected that the social protection component will lead to improved effectiveness of social services delivery to the population, in particular to the poor and vulnerable, through the implementation of a targeted poverty benefit. The fiscal policy component will improve fiscal sustainability and the efficiency of the public investment program. It would have an indirect, positive social impact. Stabilizing the financial sector would have a positive social impact by improving the access and efficient allocation of financial resources to clients, and minimizing the fiscal costs of future bank bailouts, if any. An Indigenous Peoples Planning Framework has been prepared and disclosed by the Ministry of Social Welfare and Labour to ensure that, within this reform process, the technical assistance provided through this Project will promote the inclusion and support to vulnerable households within indigenous communities.

.

E. Environment

50. The Project focuses on institutional reforms and capacity building of the fiscal policy system, social protection, and financial sector. It does not have any direct environmental impact, and the Project does not include any civil works. The TA will assist the government in designing national, poverty-targeted benefits. The “project area” is the nation, which consists of 30 ethnic groups. The Indigenous Peoples safeguard policy OP/BP 4.10 has been triggered because of a small ethnic group (about 400 Tsaatan reindeer herders) meets the Bank’s definition of “indigenous”. Therefore, an Indigenous Peoples Plan was prepared and disclosed by the Ministry of Social Welfare and Labour, and the Project rated as a Category B.

14

F. Safeguard policies

G. Policy Exceptions and Readiness

5 1. This Project complies with all applicable Bank policies. The Project is entirely consistent with Bank Policy, and no exceptions are requested. The Project meets the region’s readiness criteria because the Recipient has: (i) prepared a Project Implementation Manual (PIM) satisfactory to the Bank; (ii) an already existing satisfactory Financial Management Manual, which is currently being used by the PMU; and (iii) prepared a satisfactory Procurement Plan (PP) for the first 12-month activities. Tasks have been defined and work is on-going on TORS for the planned technical assistance.

15

Annex 1: Country and Sector Background

MONGOLIA: Multi-Sectoral Technical Assistance Project

I. Country Context

1. Mongolia has made tremendous political and economic progress since the transition that started in the 1990s. Five parliamentary elections were held in the period since, and all were deemed free and fair by international observers. Democratic laws and institutions were put in place, an active media developed, and a small, but vocal civil society increasingly engages on the political front. Similarly, in the past two decades, Mongolia has seen considerable success in moving from a centrally-planned to a market-based economy.

2. While Mongolia’s political environment is dynamic and open, this has also brought its own challenges to the process of governing, with three governments holding office in the last few years. A new bi-partisan coalition government was formed in the fall of 2008 following some short-lived disturbances after the June 2008 parliamentary elections. However, presidential elections held in May 2009 proceeded smoothly, with a junior member of the governing coalition defeating the incumbent. The recent political transition when the Prime Minister resigned due to health reasons in October 2009, was also smooth with the new Prime Minister asserting his continued support for the reform agenda. More generally, there is currently significant bi- partisan consensus on, and commitment to, the reform efforts needed to deal with the economic crisis. However, it is unclear how additional political pressures in the run-up to the next round of parliamentary elections, which are due in 201 2, may affect this commitment.

3. Major mineral deposits, including prospects in the Gobi region, when developed, have the potential to increase significantly incomes and government revenues. But the risks of a mineral-dependent economy have also been underscored by deficiencies in Mongolia’s management of the recent boom, which made it more difficult to adjust to the impact of the global downturn. In addition, as in most mineral-rich economies, managing the resource revenues consistently and sustainably, puts a high premium on governance reforms. The adjustments needed will take place over the medium term, and include reforms that protect the poor, maintain critical infrastructure, improve public investment decisions, restructure the banking sector, and resolve key obstacles for mining and infrastructure development.

A. Economic Context and Macroeconomic Outlook

4. Mongolia was one of the East Asian economies hardest hit by the global downturn. The principal transmission channel was the collapse in mineral prices, especially copper, from the middle of 2008. Mongolia’s budget relied heavily on mining revenues (30 percent of revenues in 2008) and, with the Central Bank pursuing a de facto peg of the local currency to the dollar, there was a direct transmission of the falling international copper prices to revenue losses. While the government did save part of its mining windfall during the “boom” years, it had also funded large increases in untargeted social expenditures, wages and salaries, and poorly-screened investment projects. When the “boom” turned into “bust”, the modest fiscal surplus quickly turned into a large deficit which the fiscal savings of the previous years proved insufficient to fund. At the same time, the external current account also swung into a large deficit, and the

16

financial sector, which had been overheating during the boom period, ran into serious problems, with a major bank having to be put under conservatorship. All the major copper producers in the world were affected by the collapse in copper prices, but, because of its particularly weak policy framework, Mongolia's experience was perhaps the most severe (see Box 1). The contrast with Chile is particularly striking: Chile's banking sector was unaffected due to prudent lending policies during the boom years, its exchange rate was flexible (so it absorbed part of the shock), and Chile was able to self-finance a large stimulus package to support its economy by drawing upon fiscal savings made during the boom years under its structural balance rule.

Figure 2. Changes in GDP growth 2008 to 2009 and

% change (GDP decline). % of GDP (balance) ice in 2008

Box 1. How did other copper exporters experience the global downturn?

Figure 3. Deteriorating fiscal balances % of GDP

'he largest copper exporters in the world, in terms of hare of copper to total exports, are Zambia, Chile, longolia (MNG), Papua New Guinea (PNG), and Peru Figure 1). These countries experienced the same global opper price collapse, but the impact on their economies /as different.

, I 1 five countries are facing GDP growth declines in 009, but Peru and Mongolia are facing the largest eclines (Figure 2 ) . All countries are projected to have a scal deficit in 2009. However, Chile and PNG had run irge fiscal surpluses during the boom times up to 2008, rhereas Mongolia and Zambia were already in deficit in 008 (Figure 3). And Mongolia's non-mining fiscal eficit was the largest of all (Figure 2 ) . The current :counts of all countries except PNG were also strongly npacted by the copper price collapse. However, Zambia i d Mongolia saw the largest deteriorations, and :quested external assistancea (Figure 4). CPI inflation 'as the highest in Mongolia since 2007, evidence of the irgest domestic boom, compared to the other four xmtries (Figure 5).

Figure 1 . Export concentration index* (right axis, bar), copper share in exports in 2007 (left axis, line) 1.0 1 . r 60

Nore: * Herfindahl index: sum of squares of % export shares across all commodities (range: 0-1 00).

non-mining fiscal balan

10 .... +... Chile Chile Peru PNG MNG Zambia

~ 1 &..>k*-.c - - - Peru / I I ' 1 I ' I I ' I I ' I I . r \. - +PNG

--I-- MNG \ - Zambia

17

Figure 4. Variable current account adjustments % of GDP

*o--oo--*

54 .......................

- . - . Peru -- +PNG \

-15 A --(-- MNG Zambia

~ -2006 2007 2008

2003 2004 2005 2006 2007 2008

I

Figure 5. Rising CPI inflation YO year-on-year change

--4-- Chile - . - . Peru 25 .. I I

20 ; -- +PNG *MNG / 1 . . .......

Copper export dependence, or a high export concentration, alone does not explain the differences in performance during the crisis. For example, Zambia and Chile are the most dependent on copper exports, but their expected drop in GDP is less than that of Mongolia and Peru. Zambia opened a major new copper mine in late-2008 (the only country to do so). The increase in copper output mitigated the downturn. Zambia also removed the windfall tax on mining to continue to attract new mining investments and prevent :xisting operations from being scaled down prematurely. It also benefited from debt relief as a result of good economic performance. Peru had accumulated sizeable fiscal surpluses for the previous three years, md used the mineral windfall largely by increasing savings and reducing public 'debt. Chile, finally, finds itself in a good position to weather the storm: it benefited from a fiscal rule which limited expenditure juring boom times, inflation targeting, a flexible exchange rate, a copper stabilization fund to help ensure :hat the fluctuations in copper prices do not spillover into the rest of the economy, and adequate access to Foreign financing.

Source: UN Comtrade database, Bank of PNG, IMF Article IV reports, World Bank. ' In response to the crisis, Zambia received a substantial increase in financing of its ongoing IMF poverty reduction program, although ts access to IMF financing is still only around 50 percent of its quota, whereas Mongolia received 300 percent under its SBA. For :ompleteness, Peru has had an IMF Stand-By Arrangement since early 2007, but this is considered precautionary with low access to MF resources, and Peru has not requested any increase in the loan amount.

B. Recent Economic Developments

5. Since the first DPC operation was approved by the Board in June 2009 there has been a substantial stabilization of the macroeconomic situation (see Table 3 and Figure 6). Two factors have contributed to this improvement. First, the government has taken comprehensive and strong policy action on fiscal, monetary, exchange rate and financial policies, supported by international and bilateral budget and balance of payments support, and technical assistance. The government was also able to conclude the major Oyu Tolgoi (OT) mining investment agreement. As a result of the signing of this agreement, positive sentiment has returned to the mining sector, and the overall economic outlook has improved significantly. GDP growth for 2010 is projected to rebound to over 7 percent of GDP, up from a slight decline in 2009 on the back of a huge increase in OT-related infrastructure spending.

~~

See discussion of key measures in Section IV. 1

18

6. Second, recent external sector developments have been supportive due to the sustained recovery in mineral prices and improvement in external demand. For instance, by the start of 2010, copper prices were only about a fifth below their peak in August 2008. Meanwhile, economic growth in China, Mongolia’s main export partner, continues to be strong, fueled by a massive fiscal and monetary stimulus package.

Table 3. Mongolia selected economic indicators

2004 2005 2006 2007 2008 2009 2010f Real GDP growth (percent yoy) 10.6 7.3 8.6 10.2 8.9 -1.6 7.3

10.9 9.6 5.9 14.1 23.2 1.9 7.5

(percent of GDP) -1.9 2.6 8.2 2.8 -4.9 -5.4 -4.0 Total expenditures (percent of GDP) 34.9 27.5 28.4 38.0 41.0 38:3 38.5

Consumer price index (end-period percent yoy change) Overall government balance including grants

Total revenues and grants (percent of GDP) 33.0 30.0 36.6 40.9 36.1 32.9 34.5

1.8 2.5 4.6 5 .O 3 .O 4.9 4.0 Gross FX reserves (months of imports of goods and services) Exchange rate (MNT/US$, eop) 1209 1221 1165 1170 1268 1447

Current account balance (percent of GDP) 1.3 1.3 7.0 6.7 -14.0 -5.6 -11.0

Note: Preliminary numbers for 2009. Source: Bank of Mongolia, IMF, and World Bank staff estimates

7. Together these factors have laid the grounds for a tentative recovery, as evident in the latest Q4 data for 2009. After three successive quarters of contraction, GDP growth in the final quarter came in at 3.9 percent year-on-year (yoy). Industrial production also rebounded at the end of 2009 while the bottoming out of the downturn was reflected in inflation turning positive after briefly dipping into negative territory between August and November 2009. The official unemployment rate stood at 3.3 percent since December 2009, down from 3.7 percent in June, although these numbers likely grossly underestimate actual unemployment levels. Meanwhile, fiscal retrenchment supported by a recovery in mining-related revenues resulted in deficit of 5.4 percent in 2009. This compares favorably with a full-year budget target of around 5.8 percent and is only slightly worse than the outturn in 2008 (see also discussion in Section I1 A. of this Annex).

8. On the external front, the exchange rate has stabilized since April after the central bank abandoned its de facto peg, introduced a transparent bi-weekly foreign exchange auctioning mechanism, and in order to restore confidence in the local currency, raised interest rates in March 2009 to 14 percent from 9.75 percent. This, combined with a narrowing of the trade deficit, has helped the central bank to rebuild reserves which reached record levels of US$1,145 million in December 2009. Reserves have also been boosted by the disbursement of the IMF SBA tranches, the OT prepayment loan, project funding from the International Fund for Agricultural Development (IFAD) and an SME Development Project from Japan, and deposits from commercial banks. The nominal depreciation and falling domestic inflation contributed to a roughly 20 percent fall in the real effective exchange rate over ,2009, unwinding an appreciation of similar magnitude in 2008 which was driven by rising inflation.

21t had initially been forecast in early 2009 that the 2009 budget deficit was heading for 12 percent of GDP if measures to control spending and to compensate for the revenue loss as copper prices fell were not taken.

19

Trade balances have improved significantly as the recovery in external demand and rising commodity prices have helped moderate the rate of contraction of Mongolia's exports. With imports falling faster than exports in 2009, the current account deficit narrowed to 4 percent of GDP in the final quarter of 2009, after peaking at 13 percent in Q1. It was primarily financed by net capital inflows in the financial account. Direct investment by foreign companies (FDI), mainly in the mining sector, also increased substantially over the course of the year, but remains slightly lower than 2008 levels. Net borrowing from abroad by both government and the private sector jumped in 2009, due to the donor disbursement and loans to the commercial banks.

Figure 6: Recent macro-economic developments in Mongolia

Recent external sector developments have been supportive.. . - Growth in China's real industrial value added (RHS)

----- International copper price (LHS)

- International gold price (LHS) Index Jan 2008=100 Change year-on- 140 7 year ; 30%

The exchange rate has stabilized and reserves are accumulating.

Official reserves (LHS) --- .......... Parallel market exchange rate (RHS)

- Official market exchange rate (RHS)

US$ million MNT per US$ 1,200 -

600 -

400 -

0 4 L 1,000

... and the trade deficit is shrinking as import compression exceeds that of exports. - Trade balance (rolling 12-month sum), RHS - Export growth (3-month moving average, 3mma), LHS - - - Import growth (3mma), LHS .

Change year-on-year

120% I \

US$ billion i- 2

l i

-80% 1 i I

-120% J L -2

There are tentative signs of an economic recovery.. .

CPI

+ RealGDP

- - - .......... Core price index

- Real industrial production (3mma) Change year-on-year

40% 1

30%

20%

10%

0%

-10%

-20%

-30%

20

... while the fiscal deficit lras improved reflecting expenditure restraint and a recovecv in mining receipts

Bank deposits have recovered but asset quality is deteriorating and credit availability remains tight. 0 NPLs including principal in arrears excluding Anod - NPLs due to Anod and Zoos (RHS)

and Zoos (RHS) - Fiscal balance excluding net lending (RHS)

- Total revenue and grants (LHS)

- - - Total expenditures (LHS)

..

.......... Deposits nominal value (LHS)

- Loans nominal value (LHS)

Percent of GDP, 12-month rolling sum Index J u n e 2008=100 Share of total loans 45% 1 I O

- 20%

15%

10% 85

30%

-6% -8% -10% 75

Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

Sources: Bank of Mongolia, National Statistical Office, Ministry of Finance, Haver Analytics, World Bank

9. The authorities’ policy response since the beginning of 2009, including liquidity support for banks, a blanket deposit guarantee and a sharp increase in the policy rate, has led to a recovery in the level of deposits. However, weaknesses in the quality of banking sector balance sheets became increasingly apparent during 2009 in turn contributing to a sharp reduction in credit availability. NPLs and loans with principals in arrears currently amount to slightly more than a fifth of total outstanding loans, roughly double the levels in December 2008. Banks’ credit exposures also remain highly concentrated, with the top 50 borrowers by loan size accounting for around 30 percent of total loans at end 2009. Write-downs of loans are increasingly hitting bank capital, with a second bank, Zoos, failing at the end of 2009.3. The availability of credit also declined during the crisis period with banks increasingly choosing to use funds to purchase central bank bills for example, although there are currently signs of a tentative recovery in loan issuance.

10. Real interest rates continue to be extremely high, posing a constraint to the recovery of the private sector. Despite the Bank of Mongolia having cut its official policy rate three times since May 2009 from 14 percent to 10 percent in September, nominal interest rates on both local currency deposits and loans barely fell in 2009. On the deposit side, the search for funds by banks facing liquidity difficulties is likely an important driver of the high rates while the lending rates likely reflected concerns over credit quality, and high funding costs. With inflation falling sharply this has led to a surge in ex post real borrowing costs which rose to above 20 percent. Such high real rates also constrain the room the Bank of Mongolia has to raise rates, if macroeconomic conditions would seem to warrant this.

The first one, the Anod Bank, failed at the end of 2008. Both Zoos and Anod were placed into receivership at the 3

end of 2009.

21

11. Despite the improvement in the economic situation, there remain sizeable risks to the economic and policy outlook, in particular relating to banking sector solvency and to fiscal financing pressures in the next few years before mineral revenues associated with OT start to flow into the budget (around 2014/15). And, given the importance of the OT project to the economy, changes in the scale and timing of its progress would have large implications for macro outcomes in individual years. There is also uncertainty on the extent to which increased OT infrastructure-related investments will have positive spillovers for the domestic economy.

11. Sector Context

A. Fiscal Sector

Background

12. The slump in copper prices at the end of 2008 severely undermined fiscal revenues, requiring a sharp adjustment of budgeted expenditures to restrain the fiscal deficit. The collapse in copper prices at the end of 2008 led to a substantial weakening of Mongolia’s mining sector receipts, which account for roughly 40 percent of corporate income tax and 90 percent of dividend revenues. As part of the fiscal adjustment, the government has sharply reined in spending on infrastructure and goods and services. The budget for 2010, approved by Parliament in November 2009 targets a budget deficit of 5 percent of GDP in 2010, compared with an actual outturn of 5.4 percent in 2009. The budget deficit in the amended budget of April 2010 was 6.4 percent of GDP.

13. The fiscal deficit improved in late 2009 as the decline in revenues stabilized and as spending was curtailed. Overall, the fiscal balance in 2009 came in at MNT 328 billion (around 5.4 percent of GDP) compared with a full-year budget target of MNT 364 billion (around 5.8 percent of projected GDP) and not much worse than the deficit of 5.0 percent in 2008. The revenue intake in 2009 was some 7.5 percent lower than in 2008 in nominal terms mainly reflecting the drop in mining revenues due to the fall in copper prices. However, the recovery in copper prices helped to staunch the decline, with total revenues and grants increasing by 3 1 percent in the fourth quarter of 2009 quarter-on-quarter.

14. With the government also cutting back on spending in order to maintain fiscal sustainability and meet the fiscal deficit targets, total spending was some 5.7 percent lower in 2009 in nominal terms than in 2008. The largest cuts were made to capital expenditure and subsidies. Offsetting these was an increase in wages and salaries, unexpected repair expenditures due to flood damage and spending on containing the spread of swine flu and dzud relief efforts. There were also substantial fiscal costs associated with the blanket guarantee law and the failures in the banking sector.

15. However, significant fiscal financing pressures are expected in the near term. This is because government revenues will come under pressure from the expiration of the WPT in 20 1 1 , with net revenue losses estimated to be in the region of 2 percent of GDP. Bank restructuring costs, expected to be substantial, will also add to government spending. In this regard, it is therefore imperative to agree on the principles and conditions for the use of public funds for

22

possible bank bailout. Finally, with Mongolia rated as a sub-investment credit rating, borrowing on commercial terms is likely to be costly.

16. Given the limited financing options available, the next two to three years will require a continued fiscal effort to bring the budget back to a sustainable path. Over 2010 and 201 1 the availability of IF1 program financing is projected to decline. Increased domestic debt financing could further crowd out the private sector or there may be the risk of inflationary financing. Sustained fiscal effort will therefore be required to reduce further the deficit and avoid potential risks to debt sustainability through increased non-concessional external financing.

Challenges

17. As in the first DPC, the fiscal policy reforms supported under DPC2 focus on two areas: first, improving capital budget planning, and second, protecting the maintenance of key infrastructure.

18. Between 2002 and 2009, Mongolia went through a classic boom-and-bust cycle, exposing the poor fiscal framework in place. During the “boom” years, the budget became increasingly dependent on mining revenues, and the non-mining deficit, i.e. expenditures relative to non-mining revenues, rose substantially. The windfall mining revenues were used to massively increase (poorly planned) capital expenditures and to fund across the board wage increases and untargeted social transfers. When the “bust” came, the budget swung into a large deficit, which would have been impossible to finance without large expenditure cuts and donor assistance.

19. Going forward, the challenges are three-fold: how to insulate the budget from mineral price fluctuations, how to efficiently manage the massive increase in revenues starting in 201 6, and how to improve the efficiency of the locally invested part of the increased revenues.

20. First, the budget needs to be made less dependent on volatile mineral prices. The dependency on volatile mining revenues can be reduced by adopting a so-called “structural balance” rule a la Chile. Under such a rule, the budget ignores actual, current mining revenues, but only allows spending from revenues calculated by using the long-term mineral price projections. During the boom years, the difference between current and long-term revenues will be positive and is saved, so that during the bust, the resulting fiscal deficit can be financed from the savings made during the boom.

21. Second, budget planning and execution needs to prepare for the substantial, structural, increases in revenues when several large mining projects start to generate massive revenues in 2016 and beyond. The objective would be to avoid allowing these revenues to contribute to an overheating of the economy. This implies saving externally, while spending locally only what can be efficiently absorbed, both publicly and privately.

22. Third, the part that is locally invested should raise the productivity of the economy in order to translate the mineral wealth into economic wealth for the nation. There is an extra premium on the efficiency of such productivity-enhancing investments because of the unavoidable appreciation of the currency which will accompany the mining boom.

23

23. These are three distinct challenges, each requiring a different set of reforms. IMF- supported policy reforms focus on the first two issues, supported by World Bank-financed technical assistance. The DPC2 focuses on a key element of the third challenge: improving capital budget planning, including the protection of maintenance of key infrastructure during the fiscal adjustment. This will be supported via capacity building under the Project.

24. Ensuring that public expenditures on investments translate into the creation of productive capital assets is Mongolia’s core development challenge. Aggregate investment, including both public and private investment, has increased from 25 percent of GDP in 2000 to 35-40 percent in 2007-2008. The portion of investments funded from the budget however, has increased rapidly. Financed by the mineral resource boom, nominal public capital expenditures increased seven- fold between 2005 and 2008 from under 90 billion MNT to over 620 billion MNT, and were 11 percent of GDP at their peak in 2007 (Table 7). These increases are only a fraction of what is expected as the new mines in South Gobi go into production, with mineral revenues projected to expand to well over 20 percent of GDP within ten years, more than twice their recent peak in 2008. Clearly, these new revenues, if utilized effectively, offer Mongolia the rare opportunity to achieve long-run sustainable growth and poverty reduction, but they come with the well-known risks associated with the “resource curse”, especially the disruptive political economy dynamics that normally accompany resource extraction and management in general, and discretionary budgetary spending in particular.

Figure 7. Capital expenditures have expanded rapidly “. -.

Capital expenditures funded out of the budget AU

I_--_ . Sources: Annual hudgeu and IM!: projections

25. These risks are high in Mongolia, given the weaknesses in the public investment planning and management system exposed by the recent boom and bust cycle. As recognized in a recent government audit report, investment planning is characterized by weak strategic planning, weak links between the national and sector strategies, ad hoc and politically-driven project selection processes, lack of adequate screening of projects through sound economic rate of return analysis and feasibility studies, unrealistic costing of projects that results in considerable implementation delays, and a failure to operate and maintain assets effectively. These problems have resulted in the low allocative and operational efficiency of investment. Numerous low priority projects are

24

approved, very little attention is paid to capital repair and maintenance, and there is limited project appraisal. For example, in the roads sector, the emphasis is on building an extensive road network connecting remote parts of the country - the Millennium Road linking the east with the west being a prime example - that would attract insufficient traffic to justify the costs rather than on Ulaanbaatar's roads that are in major need of rehabilitation. Similarly, in the electricity sector, the Parliament has emphasized the electrification of remote soum (county) centers, allocating 83 billion MNT to this in 2007, at the cost of not being able to adequately maintain and rehabilitate the existing infrastructure. Furthermore, these upstream problems translate into time and cost overruns during implementation.

26. Weaknesses in the regulatory and institutional system for investment planning are at the heart of these problems. The existing budget legal framework, specified in the Public Sector Management and Finance Law (2003) and the General Budget Law (1992), is not well suited to Mongolia's needs and deviates significantly from international best practice, including failing to specify the need for a fully comprehensive budget, inadequate delineation of responsibilities and authorities between the executive and the legislature, and a lack of attention to modalities and requirements for public investment planning. The framework gives Parliament considerable discretion in amending the budget, allowing it to increase appropriations without being bound by the fiscal limits established in the Medium Term Fiscal Framework. Parliament used this discretion during the copper boom years to significantly increase the size of the PIP'S submitted by the executive during the annual budget preparation, as shown in Figure 8. In 2008, for example, the Parliament increased the PIP approved by the cabinet from 443 billion MNT to 571 billion MNT, replacing and adding numerous projects to the portfolio. Parliament's preference in general has been for smaller projects - an average allocation per project of 540 million MNT for 'building and construction' compared to 625 million MNT in the cabinet- submitted PIP for 2008.

Figure 8. Parliament's additions to the Public Investment Plan

- - 1 - ~ -_________ - --I"---

Public Investment Plans (Billions of MNT) 5 7 1 9

I ! I 8Cabinet

?3 Parliament 127.4 i j nAmended

I I I i I ! 2006 zw7 ZW 2009 .. -

~ L _ I - ^ w " _ * l r v -

Source: Ministry of Finance

27. The Government is attempting to strengthen the legal framework for budgeting. The new draft Integrated Budget Law lays out a new process of budget management, with one of the key

25

elements being to clarify the roles and responsibilities between government and Parliament in the budget process, and outlines a certification process for including projects in the public investment plan. Specifically, the draft law aims to limit parliamentary discretion by requiring that: (a) the approved budget adhere to the aggregate limits set by the Medium Term Fiscal Framework (with these limits in turn derived from the fiscal rules established by the Fiscal Stability Law); (b) all project proposals submitted by line ministries have feasibility studies; and (c) there be a central mechanism for evaluating and selecting proposed projects based on whether or not the proposed project meets a strategic need, and is backed up by the appropriate technical and economic analysis.

28. The first DPC approved in June 2009 focused on this key area of improved project selection as demonstrated by a prior action for the removal of 20 billion MNT worth of projects without feasibility studies from the 2009 PIP. As detailed in the ICR for the first DPC, the March budget revision excluded 34 of these projects, valued at MNT 22.3 billion, i.e. it went beyond the prior action. In the July 2009 budget revision 3 additional such projects (totaling MNT 6 billion) were added, leaving 5 projects valued at MNT 34 billion without feasibility studies in the budget.

29. The Government has also been grossly under-spending on capital maintenance and repair. Due to years of neglect, the state of disrepair in the energy and roads sectors is approaching crisis proportions. The electricity sector has immediate capital repair needs estimated at 170- 180 billion MNT, and 60 percent of the national paved road network is in need of rehabilitation. Against these large needs, the expenditures on capital repairs in the PIPS have been paltry, and declined from 33.6 billion MNT in 2008 to 21.6 billion MNT in 2009, before increasing to 27.7 billion MNT in the 2010 proposal (Figure 9).4 Including the Road Fund, the budgeted figure for 2010 capital repairs approved by Parliament in December 2009 was MNT 28.3 billion. The first DPC aimed to address this issue with the prior action of maintaining the allocation of funds to capital repairs at 12.4 billion in the March revision of the 2009 budget (excluding the Road Fund). The outcome indicator, reviewed in the ICR, was that this budgeted value was realized in the 2009 budget outturn. The outturn value for 2009 of capital repair expenditures was '

MNT 1 1.6 billion.

4This figure for capital repairs includes the Road Fund.

26

Figure 9. Expenditures on capital repairs have been under-prioritized

Trends in capital repairs u -- I

.

Nominal 40

1003 zoo) zms mos 2007 zoo8 xi010 bud. bud. l o ~ - - . __ - - . - - - . . - ~ - .

Note: Road Fund included in capital repairs from 2007-2010. Source Mongolian authorities and World Bank staff.

30. The growth rate of capital repair and maintenance expenditures has been considerably below that of capital expenditures and, as a result, the ratio of repairs to new investments has been declining steadily since 2003 .5 This asymmetry between new investments and maintenance is in part a result of the failure to formally determine the recuri-ent cost obligations of capital investments. Key infrastructure ministries, such as the Ministries of Roads, Transport, and Urban Development, are also not estimating the backlog of maintenance, or the costs for rehabilitating the national paved road network, and therefore an objective measure of the maintenance needs is not available.

Expected Results

3 1. DPC2 is expected to provide support for improvements in the project selection of the PIP. It will also support an increased allocation for maintenance and lay the groundwork for establishing better guidelines for estimating the backlog and recurrent cost needs of capital investments for the key infrastructure sectors. The proposed TA Project will provide technical assistance in support of these efforts.

B. Social Sector

Background

32. The global financial crisis and the ensuing fiscal crisis in Mongolia highlighted the need for the country both to: (i) better protect the poor, and (ii) improve the fiscal sustainability of its Social Welfare system. In 2009 there were 66 welfare-related transfer programs implemented by the Mongolian Ministry of Social Welfare and Labor (MoSWL). Budgeted expenditures for social welfare programs in 2009 are MNT 266 billion, the equivalent of 11.5 percent of the

Note, there is no data on capital stocks against which to compare the repair expenditures as the government does not have an asset register.

27

government’s budget and 4.3 percent of GDP in the same year.6 Most of these transfers are oriented to families or children, or are targeted categorically to groups regarded as vulnerable, such as the elderly and disabled. Mongolia does not currently implement any transfer programs specifically targeted to poor households.

33. Discussions within the Government and with the donor community led to an initiative by the MoSWL for a more comprehensive reform and restructuring of Mongolia’s system of social transfers. Indeed, with technical support from the World Bank and Asian Development Bank (ADB), the MoSWL prepared a plan for a major overhaul of the social welfare sector. The proposed reform consists of three main components:

(1) Consolidation, rationalization, and simplification of the system of social transfers;

(2) Establishment of a new targeting mechanism for identifying the poor, based on a Proxy Means Test (PMT); and

(3) Introduction of a new benefithransfer program, targeted exclusively to poor households.

34. The details of this reform proposal have been debated within the Mongolian cabinet and, in early November 2009, the Government agreed with the IMF to submit the proposal to Parliament no later than December 1,2009. However, by the end of November, there had been a number of additional important developments for social welfare in Mongolia. On November 19, 2009, Parliament passed a Law for the creation of a new fund, the Human Development Fund (HDF). The HDF, created as a result of recent electoral campaign promises by both main political parties, has been established to distribute Mongolia’s mineral wealth to the country’s citizens. According to this Law, resources from the HDF can be used for four types of benefits: (i) payments for pension and health insurance premiums; (ii) payments for the purchase of housing; (iii) cash benefits; and (iv) payments for education and health services. The Parliament subsequently approved the Budget Law for 20 10, as a result of which 3 of the 66 existing welfare programs - the CMP, the Newlywed benefit, and the Newborn benefit - receive zero budget allocations in 2010, and are thus effectively eliminated. At the same time, a new universal cash benefit was established that will be funded from the HDF. While the exact size and structure of the benefit is not yet clear, the value of the budget allocation is equivalent to about 120,000 Tg. per Mongolian citizen. ’ According to unofficial exchanges with the MoSWL, these developments will not affect the Government’s overall plans to consolidate and reform the social welfare system. The Ministry still intends to transform the focus of the welfare system towards poverty reduction, by introducing poverty targeting for some or all of the remaining 63 programs, and by introducing a new poverty-targeted benefit. In light of these changes, the Government came to a new agreement with the IMF to submit the new Welfare Law to Parliament no later than February 1 st, 20 1 1.

Estimates based on data from the Minister of Social Welfare and Labor’s presentation on social welfare reform at the Government of Mongolia-External Partners Technical Meetings on 30 October 2009 (http://siteresources.worldbank.org/lNTMONGOLIAINMONGOLIAN/Resources/Social~welfare~ENG.pdf) and GDP projections from the IMF‘s 2nd SBA review document. ’At the time of drafting this proposal, the World Bank did not have information as to whether this benefit will be distributed monthly or through a single yearly payment, nor as to what the Government’s plans will be for this transfer beyond 20 10.

28

6

35. Cabinet has submitted the reformed Welfare Law to Parliament, where the Law is currently awaiting discussion and approval in the Spring session which started on April 5'h, 2010. The final version of the Law aims at achieving the consolidation of programs as set out in component 1 of the reform. The number of benefits decreases from 66 to 17. Efforts to develop the new poverty targeting mechanism envisioned as part of the reform (component 2, above) have already begun, with the support of the World Bank and the ADB (as part of their Food Stamps Program). A formula for the PMT, developed with World Bank and ADB assistance, has been formally adopted as the official targeting formula for social welfare in Mongolia by the National Statistical Office. Work has also already begun on field testing of the PMT questionnaire. Challenges

36. progress on the social welfare reform, Mongolia faces some important challenges:

In the area of safety nets, despite considerable progress on the social welfare reform

The success of PMT data collection largely depends on the Food Stamps Project Management Unit in the MoSWL, who is responsible for collecting the data and entering it in the database. There is a risk of that the database might not be complete and be ready for use in January 20 1 1.

The reformed Social Welfare Law might not be approved by Parliament, which would impede the possibility of reforming the current system. 'Additionally, there is the risk that the Law is approved, but with unplanned modifications, resulting from the political process rather than on a technical basis.

Ensuring commitment on behalf of government to allocate sufficient budget to the Ministry of Social Welfare and Labor in 2010 to ensure adequate protection and promotion of the welfare of the poor. The budget of the MoSWL was drastically cut from Tg 266 billion in 2009 to Tg 99 billion in 2010. The current allocation is not sufficient to ensure implementation of the reform, especially with regards to the introduction of a new poverty benefit. If the reformed Welfare Law is passed, there is a presumption that the new poverty benefit introduced there would receive some funding. However, there is no such guarantee until the 201 1 budget process takes place in September 201 0.

The Government of Mongolia, which has little experience with poverty-targeted programs, currently lacks the technical . and institutional capacity to carry out a comprehensive, poverty-focused social welfare reform without external support (envisioned under the WB and ADB social protection sector programs).

Expected Results

37. The expected result of the reform supported by DPC2 and MTAP is to lay the foundation for a more efficient, cost-effective social welfare system in Mongolia that better protects the poor and is more fiscally sustainable. By early 201 1, this will mean a more streamlined and rational system of social transfers, which targets the poor. The reformed system will be more coherent in terms of its design and structure and more effective in protecting the poor at a lower cost to the government budget.

29

38. In the medium term, success of the reformed social welfare system will depend on efforts to strengthen the institutional. and technical capacity of the government in implementing programs, particularly the poverty-targeted benefit. A key factor in understanding the effectiveness of the reformed system will be the development of a system for monitoring and evaluating its impacts, including the efficacy of the new grievance, appeals, and accountability mechanisms. All of these elements are envisioned under the reform program, as currently designed; they are also areas of planned support under the DPC2 and the associated technical assistance operation.

C. Financial Sector

Background

39. Starting in the middle of 2008, confidence in the banking sector declined as the performance of major borrowers, such as in the construction and mining sectors, weakened. Anod Bank, the fourth largest bank by assets, failed by the end of 2008. This decline in confidence resulted in a sharp increase in deposit outflows in late 2008 along with a currency run on Tugrug. Total deposits of the banking sector declined by 12 percent on a yoy basis at the start of 2009. The authorities’ policy response at the beginning of 2009, including liquidity support for banks, a blanket deposit guarantee, and a sharp increase in the policy rate, contributed to a recovery in the level of deposits. At the end of 2009, deposit levels had risen by 40 percent on a yoy basis. Including the valuation effects of the currency depreciation, foreign currency deposits accounted for 34 percent of total deposits at end-December 2009, up from a ratio of 32 percent a year earlier. Newly issued loans fell markedly in late 2008 and early 2009, down 58 percent on the year for example in Q1 2009, but the level gradually recovered thereafter. By the 4th quarter, newly issued loans were doubled although they were still 22 percent down from the first quarter of 2008.

40. Despite the stabilization of the situation, banks remained cautious, preferring to purchase less risky central bank bills and depositing their foreign exchange with the central bank. Banks’ credit exposures became more concentrated, with the top 50 borrowers by loan size accounting for close to 30 percent of total loans in December 2009. Bank balance sheets remained weak as evidenced by rising non-performing loans (NPLs). Loan quality deteriorated markedly, particularly of loans to those private companies most affected by the downturn such as construction and mining and quarrying. Zoos Bank, one of the top ten banks, failed in November 2009. At around the same time another top-ten bank became technically insolvent. Currently, NPLs and loans with principals in arrears stand at around 20 percent of total outstanding loans, roughly twice the levels at the end of 2008. Even excluding the two failed banks, which account for around one-third of the aggregate NPLs, this ratio was around 15 percent, as compared to a level of less than 3 percent before mid-2008. Banks continue to be concerned over finding new capital. Deteriorating assets quality are increasingly hurting bank liquidity and capital, although within the commercial banks there is differentiation in balance sheet strength.

4 1. Various reviews and analyses have identified significant system weaknesses such as limited capacity for financial system oversight and enforcement, poor financial accounting and reporting, inadequate risk management, and weak corporate governance and internal control. All these factors point to the potential for more bank failures amid an economic downturn.

30

42. After initial hesitation, the Bank of Mongolia (BoM) acted quickly to address the failure of Zoos Bank in November 2009. Zoos Bank, together with Anod Bank, was put under receivership, and the State Bank of Mongolia (SBM) was established. The SBM is 100 percent owned by the MoF, and it is mandated to manage the performing assets and deposits of Zoos Bank. The MoF is committed to privatize the SBM in the near future. The BoM has also recognized the need for sector-wide bank restructuring in order to address the causes of the ongoing system distress. Assisted by donors, the BoM is preparing a bank restructuring strategy and plans to implement it as soon as the strategy is endorsed and its funding regime approved by the Parliament. International auditing firms engaged by the BoM are conducting special portfolio reviews of systemic banks or banks with opaque ownership structure/links with systemic banks. The findings of those reviews will provide the basis for determining the estimated cost of bank restructuring. A new Banking Law was approved by the Parliament in January 2009 along with new amendments to the Central Bank Law. The new laws have made progress towards international practices in the areas of consolidated supervision, connected party ownership and transaction, and supervisor protection.

Challenges

43. Failed bank resolution and bank restructuring is a difficult and high-risk project. It is particularly challenging in many developing countries including Mongolia where there are opaque relationships between business and politics, the credit culture is weak, and where the legal and regulatory framework does not support expedient repossession or disposal of assets. The first and foremost challenge to the authorities, in particular the BoM, is to complete the resolution of the two failed banks, and this should include effective operation of the SBM and preparation of the bank’s privatization as soon as a strategic investor is ready. As part of the challenge, the BoM will need to adopt a bank restructuring strategy that is in line with international practices, has a solid legal basis, and is substantiated by in-depth assessment of the hole in the banks’ capital base. There should be forensic audits to go to the roots of bank failures. Corporate debt has to be restructured in parallel with bank restructuring if the latter is to succeed. These kinds of expertise are sparse in Mongolia. Assistance in legal transactions will also be needed especially given defaults on foreign creditors, involvement of foreign investors, and fraudulent off-balance-sheet activities involving foreign exporters.

44. While a lack of effective action to address problems identified through supervision in the boom years contributed to the sudden failure of Anod and Zoos banks, the two banks were largely brought down by what was not reported or captured by supervisors, such as insider and connected party lending and abnormally huge off-balance-sheet exposures. These problems are by no means confined to the two failed banks, and hence, another challenge the BoM faces is to develop and enforce a financial reporting regime that can better capture the true financial status of banks. There are more than 40 regulations to support enforcement of central bank and banking laws. The regulatory framework for bank supervision therefore must be streamlined and revamped to support enforcement of the new laws for bank supervision.

45. A third challenge is limited human capital. In terms of staff trained the BoM ranks at the top of all Mongolian institutions. However, there is no regular training program to systemically train supervisors to understand commercial bank business and financial statements, risk-based and consolidated supervision, and prompt corrective actions. The BoM’s Supervision

31

Department is staffed with young and talented employees who need training on failed bank resolution and bank restructuring, including forensic audits.

46. The BoM is aware of the challenges and the capacity constraints. Together with the MoF, the central bank has requested the Bank’s technical assistance to address the challenges, which would be provided under the proposed MSTA.

Key Measures to be Supported by DPC2 and the TA Project

47. DPC2 and the TA Project will support BoM’s development and implementation of well- developed action plans for the resolution of failed banks that is in line with the international practices for transparent processes and least-cost to the taxpayer. Also supported is BoM’s efforts in better understanding the financial position and performance of systemically important banks, based on which banking restructuring can be planned.

48. Finally, the Banking Law, Central Bank Law, Corporate Law, and Civil Code will be reviewed for what amendments may be needed to provide the BoM with adequate powers and flexibility for use of a wide range of bank resolution techniques. Appropriate amendments to the laws on foreclosure and collateral will also be considered and presented to the Parliament to ensure that borrowers are not overly protected impeding loan recovery. In parallel, the tax rules will also be assessed against different resolution techniques, including mergers and acquisitions, to facilitate prompt action, and allow asset transfers and other transactions in a bank resolution, without distorting or offsetting the corrective nature of such measures. Further, a review and amendments, as needed, of the foreclosure legislation and procedures will be beneficial to the pertinent needs of the present situation.

Expected Results

49. The special bank assessments would provide insights on the banks’ quality of assets, quality of earnings, interest rate, foreign exchange risk exposures, and liquidity position. This information will help the BoM to determine the capital level of the banks. Should a bank’s capital be below the regulatory requirements or the bank be insolvent (that is, if it has negative capital), the international auditor would recommend solutions and resolution approaches based on least-cost principles. An action plan for the resolution of the two failed banks that demonstrate incorporation of the international practices can set a good precedent for future bank resolution. Timely implementation of the plan will send a strong signal to the market and can be instrumental in strengthening corporate governance in Mongolia’s banks.

32

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

MONGOLIA: Multi-Sectoral Technical Assistance Project

Objectives Amount (US$ m) Project

Fiscal Policy Economic Capacity Technical Assistance Credit

Governance Assistance Project

Social Protection Social Sector Support Program

Food and Nutrition Social Welfare Program

IMF technical assistance to BoM Supervision

Bank/Donor

WB

WB

ADB/JICA

ADB

Financial Sector Mongolia Bank Restructuring Program

Mongolia Second Private Sector Development Credit Project Economic Policy Reform and Competitive Project

To improve budgetary and public expenditure management systems and processes, and to improve civil service and public administration performance. To improve the efficiency and effectiveness of key governance processes in management of finance, public accountability, and investment climate.

To assist, in close coordination with other development partners and donors, in reducing Mongolia's fiscal gap to limit social sector expenditure cuts in 2009 and 20 10. Support to Mongolia for the Food and Nutrition Social Welfare Program and Project (FNSWPP) through: (i) a program grant of $9 million to design and implement a food stamp program, and (ii) a capacity development project grant of $3 million to strengthen social welfare systems, both from the Special Funds resources (Asian Development Fund) of the Asian Development Bank (ADB).

W B

WB

USAID

~

This AAA activity funded by the Bank's administrative budget is to assist the BoM in coordination with IMF, USAID and ADB, to develop and adopt a sector-wide bank restructuring strategy. This lending operation contains a BoM TA component which is supporting the special assessments of systemic and related banks.

This USAID TA program is an 8-year program managed by a small TA team supports monitoring of the banking sector, Zoos Bank receivership, and development of a bank restructuring strategy. This TA program funded by the IMF provides individual TA services to support banks.

7.5

14

40

12

n.a.

1

34

n.a.

33

Annex 3: Results Framework and Monitoring

MONGOLIA: Multi-Sectoral Technical Assistance Project

P D O Complementing the work of other donors, the Project’s development objective is to support government’s efforts to enhance its capacity for policy making, regulation, and implementation in the fiscal, social, and financial sectors.

Intermediate Outcomes Capacity enhanced in M o F to strengthen budget preparation and public financial management (component 1)

Project Outcome Indicators By the Closing Date, the Recipient will prepare and execute national budgets that adhere to the aggregate limits set in the MTFF and are consistent with the fiscal rules specified in the Fiscal Stability Law. By the Closing Date, the Recipient shall have established a national committee for accounting and auditing standards vested with the responsibility of ensuring that Mongolia’s accounting and auditing standards are substantially compliant with international financial reporting standards and international standards of auditing

prepared a poor households database, on the basis of the Proxy Means Test survey.

(A) successfully caused the completion of the restructuring of those systemic banks which have failed to meet the adjusted risk-based capital adequacy ratio as of July 3 1 , 20 10; and (B) prepared, adopted and implemented new improved prudential regulations.

Intermediate Outcome Indicators

By the Closing Date, MoSWL has

0 By the Closing Date, BOM has:

Economic appraisal criteria used to screen and prioritize new public investment projects. The Public Investment Plan includes estimations of future recurrent costs of investment projects. Revisions and enhancement to the legal framework for accounting and auditing. Capacity enhanced for improved financial management including internal auditing. Capacity enhanced for international financial reporting standards setting and enforcement. Improved legal framework for tax complaints handling and dispute resolution.

Use of Project Outcome Information

Supervision by the Bank, combined with a strong field presence and exchanges with other donors, will be used to track progress toward the PDO and make changes in the project, if necessary, during implementation.

Use of Intermediate Outcome Monitoring

Information on outputs and outcomes will be used to track progress in capacity building and to continue to monitor remaining and/or emerging capacity needs.

34

Intermediate Outcomes Capacity enhanced in MoSWL for improved poverty targeting social protection to better protect the poor (component 2)

bank stabilization; and (ii) prudential regulation and supervision (component 3)

Intermediate Outcome Indicators

formula and methodology as the official poverty-targeting mechanism. PMT methodology document signed jointly by the National Statistical Office and the Ministry of Social Welfare. Data on poor households living in X aimags has been entered in the ministry’s poverty database.

0 Official government resolution of the design of the poverty-targeted benefit program (including definition of program eligibility requirements, the proposed formula for establishing benefit levels, payment method, frequency of payment, and institutional and governance arrangements) has been submitted to the cabinet.

Adoption of the Proxy Means

Capacity enhanced for failed bank resolution and bank restructuring as evidenced by:

Resolution of two failed banks completed and systemically important banks recapitalized in accordance with international good practices.

undertaken against non-systemic banks in serious non-compliance with prudential regulations and the bridge bank (SBM) privatized in accordance with the new banking law and other relevant laws.

Capacity enhanced for prudential regulation and supervision as evidenced by:

Priority regulations adopted and

Prompt regulatory actions

implemented for enforcement of the new banking law.

house training of bank supervisors put in operation that is compatible with those for bank supervisors in more develoDed markets.

A medium-term program for in-

~~

Use of Intermediate Outcome Monitoring

To monitor progress so that 3djustments can be made in the Project, if necessary

To assess progress towards achieving the PDO for the banking sector; and to promptly address issues in planned bank restructuring strategy as well as the planned activities for strengthening bank regulation and supervision.

35

a *

e, u C m S Lr c- 0

.-

i?

L

i-, v1 .- c .-

0 N

C - .- d I

0 m

3 m

3 N

3

ci 0

0 E

rl Q\

0 Q\

0 \D

O VI

VI

ci 0

0 rl

0 c1

E

m p! *

t

I

00 m

Annex 4: Detailed Project Description

MONGOLIA: Multi-Sectoral Technical Assistance Project

1 . and the financial one. It consists of four components.

This TA Project supports capacity building in three sectors: the fiscal, the social,

Component 1: Enhancing Capacity for Fiscal Management [US$1.7 million]

2. The objectives of this component are to enhance capacity in MoF and thereby to support government efforts to enable it to better: (a) implement a budget that is fiscally sustainable and better linked to national, local, and sectoral priorities, and (b) improve public financial management so that the budget is executed in a more efficient and transparent manner. Various technical assistance activities would be provided to MoF and FRC in support of strengthening capacity. The estimated cost of this component is US$1.7 million.

3 . Specifically, technical assistance will be provided in the following areas:

(a) Enhancing the capacity for improved budget preparation with the aim to help: (a) ensure that budget’s are fiscally sustainable by effectively operationalizing the planned Fiscal Stability Law; (b) align budgets to national, sectoral, and local priorities by providing advice on expenditure assignments, revenue sharing, mechanisms for inter-governmental grants; and (c) facilitate fiscal decentralization and investment planning; and

(b) Improving public financial management by: (a) revising and strengthening the legal framework for accounting and auditing, (b) strengthening MoF’s and FRC’s institutional capacity to ensure compliance with international financial reporting standards and international standards on auditing, (d) strengthening MoF’s internal controls by improving its internal auditi,ng capacity, (d) improving accounting and auditing professional education and training, and (e) increasing transparency in tax collection through enhancing the mechanisms for citizen complaints redressal.

Sub-component 1.1: Supporting budget preparation, fiscal decentralization, and investment planning

4. The Project would support capacity building in MoF for implementation of the planned Fiscal Stability Law (FSL). The Law would put in place three complementary rules that would function as a fiscal “circuit breaker” and would work together to ensure fiscal discipline:

(a) A ceiling on the “structurul” de$cit. The structural deficit adjusts the deficit for swings in copper prices. Specifically, revenue projections would be based on a “normal” or smoothed copper price instead of the actual copper price. This helps insulate the budget from copper price volatility, and prevents fiscal policy from

’

transmitting copper price shocks to the rest of the economy. This is the main rule to prevent a repeat of boom-bust policies. A similar such rule has worked well in Chile. The plan is to target structural budget balance, albeit with a transition period before that target is achieved.

A debt ceiling. This rule would prevent excessive borrowing against future wealth-a common mistake among resource economies. High public debt makes the economy vulnerable to commodity price changes, other shocks, or financing constraints. A debt ceiling also reinforces the government?s commitment to fiscal sustainability. The authorities plan to set the ceiling at 40 percent of GDP.

A ceiling on expenditure growth. Rapid spending growth is bad for the economy (leading to overheating and inflation) and, from a fiscal perspective, is difficult to manage without reducing quality and efficiency. This rule is a safeguard that would apply when structural revenue is rising fast, such as when the Oyu Tolgoi mine comes on line. In more normal times, it would generally be non-binding.

Effectively operationalizing the Law would require strengthened capacity in the Ministry of Finance for macro-fiscal forecasting, financial programming, and debt- sustainability analysis, and the institutional and organizational arrangements for managing the savings that accrue from increased mineral revenues. The Project will also provide assistance to the Ministry of Finance and the National Development and Innovation Committee to strengthen strategic planning and policy analysis to improve the linkage between the budget and national priorities, and to strengthen the inter-sectoral coordination that is required to develop the mineral economy. The project will also support Mongolia?s phased move towards greater fiscal decentralization by providing advice on the appropriate expenditure and tax assignments, and mechanisms for improving the transferring funds to local governments to increase transparency and predictability. It would also provide some support to investment planning.

Sub-component 1.2: Improving public financial management

6 . This component will support the improvement of accounting and auditing to increase the transparency of budget execution and to improve corporate financial accountability and governance arrangements. There is a worldwide recognition of the fact that a robust infrastructure of accounting and auditing practices helps generate useful information for effective economic management at both the micro and macro levels. The accounting information feeds into the decision process of key players in the economy and thus supports progress of the market economic system in emerging and developing economies. The weaknesses in accounting and auditing practices undermine financial stability, financial intermediation, and the investment climate, and thus impede economic growth and poverty alleviation. The specific activities that the Project will support include strengthening the statutory and legal framework for accounting and auditing through revisions in existing laws, strengthening the capacity of the key regulators (Financial Regulatory Commission and Ministry of Finance), ensuring compliance with the international financial reporting standards, and improving accounting and auditing professional education and training.

40

7 . However, it will not be sub-component itself.

Monitoring and evaluation will be strengthened under each sub-component.

Component 2: Supporting Government Efforts to Better Protect the Poor IUSS3.5 million]

8 . The objectives of this component are to improve capacity of MoSWL with the aim of assisting government efforts of improving the efficacy of social expenditure in reaching the poor and at making the system sustainable from a fiscal standpoint. This Project would provide technical assistance to the MoSWL to design and implement the proposed reform of its system of social transfers.

Sub-component 2.1: Program design support

9. Design, piloting implementation of the benej2 for poor households: This would provide technical assistance in the design and implementation aspects of the centerpiece of the reformed system: a cash benefit for poor households. Assistance in this area would be aimed towards::

(a) Determining the size of the transfers, its frequency and possible variation according to the target sub-group (households versus individuals, extremely poor versus poor, etc). Determining the possible conditions to which the transfer will be attached to, and the possible variation of the conditions according to the target subgroup (urban versus rural, able-bodied versus not, etc.). On the basis of (iii) above, defining final structure of the permanent program.

(b)

(c)

Sub-component 2.2: Program implementation support

I 0. Technical assistance for targeting system: The rolling-out of the targeting system needs to begin as soon as possible and will be financed out of the Ministry?s budget. It is not only a crucial step that is needed for the reform but also because of the logistical challenges, its implementation will require time. This activity would provide technical assistance to support the piloting and national roll-out of the targeting system, in coordination with ADB?s own technical assistance activities.

1 1 . Development, testing and management of beneficiary database: This activity would support the development of a beneficiary database that would underpin the reformed social welfare system, as well as protocols for the management of the beneficiary data base, linkages between the beneficiary data base and the payments data, periodic assessments of data? quality and improvement of its accuracy, linkages between the beneficiary data base for the poverty targeted program and existing beneficiary data under the Labor and Social Welfare Service Office, systems of updates (demographics and migration), and others. Within this component, it will be of great importance to develop the capacity within MoSWL and LSWSO to meaningfully analyze this data. This could be achieved through the institution of an in house Research Unit, to be trained for that purpose.

41

12. Design and implementation of a grievance and appeals mechanism for the social welfare system, including information and communication campaigns: This activity would support an important component of the targeting system with the objectives o f (a) providing information to the beneficiaries on their rights and responsibilities, (b) establishing formal mechanisms to review cases where targeting errors could have occurred, (c) increase public acceptance and satisfaction with the welfare system and the quality of services provided through it.

13. Strengthening of the institutional and governance structures within the MoSWL, as well as within the other line Ministries involved in providing welfare services, namely Health and Education: This component will as a first step analyze the governance structure and institutional aspects (staffing, organization, etc) of MoSWL and LSWSO. On the basis of this analysis, a proposal can be formulated, laying out changes that can make the agencies more effective in carrying out their mandates.

14. Development and implementation of an Information, Education and Communication (IEC) strategy for the program, for citizens to know their rights and entitlements under the new program.

Sub-component 2.3: Monitoring and evaluation

15. Program monitoring: This would support technical aspects related to the design and implementation of periodic monitoring of the social transfers system by analyzing the programs' payments and beneficiaries data bases.

16. Setting-up a system of auditdsocial accountability: This component aims to improve the transparency in the allocation of transfers and benefits that are managed by the local offices of MoSWL and LSWSO. It would also include auditing of operational performance'of the two agencies.

17. and other human development outcomes.

Impact evaluation: Evaluation of the impact of the reformed system on poverty

Sub-component 2.4: Capacity building

18. Training of the staffof MoSWL and LSWSO on the implementation of the reform system: As part of the implementation of the reform, it will be important to conduct training activities with the actors that will be directly in charge of implementing it. Training of both mid level management of MoSWL and LSWSO staff as well as of the decentralized social workers in soums and districts will be given their key roles in ensuring these services are delivered successfully to poor and vulnerable populations.

19. Development and printing of reference guides and other material for MoSWL and LSWSO st@ This activity would complement the training described above by providing printed material describing and disseminating information about the different benefits and programs.

42

Component 3: Enhancing Capacity for Maintaining Financial Sector Stability [US$6.2 million]

20. In the financial sector, the immediate objective is to ensure its continued stability by intensifying supervision and taking decisive action in case of bank failures in order to retain confidence in the financial sector. The Project would strengthen the capacity of BoM through technical assistance and training activities, to support (i) the implementation of a bank restructuring program, (ii) strengthening of the regulatory framework under the new banking law, and (iii) development of human capital. The total estimated cost of the Component is US$6.2 million (including contingencies). These funds will be provided to BoM on a grant basis. EBRD would provide co-financing for activities related to the State Bank of Mongolia under a parallel grant-funded TA program. The Component consists of the following four sub-components: (a) supporting failed bank resolution, and bank and corporate debt restructuring; (b) strengthening legal and regulatory framework of the banking sector; (c) building human capital, and (d) supporting project implementation.

Sub-component 3.1: Supporting failed bank resolution, and bank and corporate debt restructuring

21. The main activities under sub-component 3.1 include: (a) liquidation of the two banks’ assets under receivership; (b) finalization, adoption, and implementation of the above-described bank restructuring strategy; (c) development and implementation of corporate debt restructuring in the mining and construction sectors; (d) targeted forensic audits; (e) effective operation and eventual privatization of the SBM; and (0 on-the-job training in these areas. These activities would be supported by short-term and longer- term advisory services ; A legal firm would be engaged to assist in legal transactions for failed bank resolution and bank restructuring, and to advise on the privatization of the SBM. The sub-component also includes on-the-job training by international specialists, with-in-country workshops and focused study tours and overseas short-term training on the related subject matters.

Sub-component 3.2: Strengthening the legal and regulatory framework of the banking sector

22. Under sub-component 3.2, a new financial reporting regime for commercial banks is to be developed and adopted, to strengthen BoM’s regular off-site supervision and support prompt corrective actions. The body of bank regulations is to be streamlined and priority ones to be developed/revised, to support the implementation of the newly amended central bank law and the new banking law. The Project would support the implementation of these activities. Technical assistance services would also be provided to assist in the planning of the transition from the blanket guarantee to a limited deposit insurance regime. Training on the subject matters would also be provided.

Sub-component 3.3: Building human capital

23. There are two groups of activities under sub-component 3.3. The first group of activities is to develop and deliver

43

This sub-component is devoted to staff training.

a medium-term, regular training program for supervisors. They include skills gap analysis, program designing, curriculums development, capacity building of BOM’s training center and conducting of training up to the closure of the Project. The second group contains overseas study tours and short-term training, as well as workshops to be held within the country. These activities would provide opportunities for face-to-face discussions with BoM’s peers in selected countries regarding failed bank resolution, bank restructuring, consolidated supervision, and limited deposit insurance. At the BoM’s request, sub-component 3 would also finance short-term technical assistance services and a study tour to support knowledge sharing on capital flows between countries that have strong impacts on Mongolia’s macroeconomic management and financial stability.

Sub-component 3.4: Supporting project implementation

24. Sub-component 3.4 would utilize a small amount of the IDA financing under this Component for implementation and administration-related expenses of the BoM, including:

0 Incremental operating expenses (incremental telecommunication expenses, and stationery costs related to project documents production)

Translation and interpretation cost

25. BoM’s Supervision Department is responsible for the implementation of sub- components 3.1 (except SBM related activities), 3.2, and 3.4. BoM’s training center is the main implementing unit for sub-component 3.3 (except for capital flow-related activities), while the implementation of activities on capital flows management is the responsibility of the Monetary Policy Department. The MoF is responsible for the implementation of SBM related activities.

Component 4: Project Management [US%0.6 million]

26. The objective of component 4 is to enable effective coordination and management of the Project. MOF will be principal executing agency for the project. Day-to-day management of the Project will be ensured by the PMU which consists of adequate technical staff and is headed by an experienced Project Manager. The PMU is currently implementing the World Bank ECTAC and GAP projects, and its performance has been satisfactory. The technical capacity of the PMU for managing the multi-sectoral TA Project will be strengthened by contracting part-time or full-time coordinatorshterlocutors for the three sectors.

27. To effectively oversee the project implementation and provide strategic guidance, there will be a PSC, headed by the Vice-Minister of the Ministry of Finance, and comprising the State Secretary of MoF (who will also serve as Project Director), the Director of the Strategic Planning Department of MoSWL, and the Director of the Supervision Department of the Bank of Mongolia. The PMU will prepare review reports and critical issues to be discussed by the PSC. The MoF, MoSWL, and the Central Bank each will have Technical Working Groups to finalize terms of reference, technical requirements, and training proposals, as appropriate, for their respective components.

44

Annex 5: Project Costs

Enhancing Capacity for Maintaining Financial

Supporting failed bank resolution and corporate 3 Sector Stability

3.1 debt restructuring 3.2 Strengthening banking regulatory framework

3.4 Supporting project implementation 3.3 Building human capital

Total Component 3

MONGOLIA: Multi-Sectoral Technical Assistance Project

2,760,000 1,354,000 2,o 19,000

105,000 6,238,000

4 Project management Total Component 4

597,000 597,000

45

~

Total project costs 12,000,000 1

Annex 6: Implementation Arrangements

MONGOLIA: Multi-Sectoral Technical Assistance Project

1 . Given the fact that the Project is aimed at improving the policy-making capacity of the country, it is necessary to obtain appropriate level of commitment and support of various government agencies and ministries. In order to ensure this, the following institutional arrangements have ,been proposed as described below and also shown in Figure 10.

2. The MoF will be the main executing agency of the Project and will be responsible for its overall management and implementation. The existing Project Management Unit (PMU) responsible for GAP and ECTAC will also provide its services for this TA Project. The PMU will ensure compliance with the procurement, disbursement, and financial management policies and procedures.

3. To effectively oversee the implementation, there will be a Project Steering Committee (PSC), headed by the MoF, and comprising MoSWL and the Central Bank of Mongolia. The MoF, MoSWL, and the Central Bank will each have Technical Working Groups to manage the day-to-day implementation of their component. This is in line with the directions provided in the Paris declaration and the Bank’s policy on project implementation arrangements. The PSC will meet quarterly and perform the following key functions regarding the project implementation:

(a) Ensure efficient interdepartmental (inter-ministerial) interaction and resolve interdepartmental (inter-ministerial) issues;

(b) Exercise monitoring and evaluation of project progress on a semi-annual basis and propose improvement recommendations where needed; and

(c) Interact with the Bank and other donors.

4. All day-to-day administrative aspects of the Project would be implemented by the relevant ministry responsible for the individual components of the Project with technical assistance by the Project. The MoF will be responsible for implementing the fiscal component; the MoSWL will be responsible for implementing the social protection component; and the Central Bank of Mongolia will be responsible for implementing the financial sector component. All aspects of the Project would be implemented by relevant ministry staff with technical assistance of the Project.

5 . To effectively carry out the implementation and daily project administrative work, there wil1,be a PMU. The PMU will report to the Project Director, and the PMU will assist the sector-specific Technical Working Groups with project procurement and financial management. The PMU’s responsibilities regarding project management would be as follows: Provide overall management and implementation support of project activities; undertake loan and operating accounting; bring issues that may arise and which cannot be resolved at the level of the implementing units to the immediate attention of the

46

Project Director, the Steering Committee and/or the Bank for resolution; liaise with the implementing agencies and with Bank representatives to ensure satisfactory project administration and implementation support; establish, in collaboration with the executing units and under the overall guidance of the Steering Committee, the annual work program that will state expected quantitative and qualitative achievements. The PMU will be responsible for: (a) procurement, including all contracting of technical assistance services; (b) project monitoring, reporting, and evaluation; (c) the contractual relationship with IDA; and (d) financial record keeping, financial management reports, the Designed Account, and disbursements. The reporting responsibilities include the preparation of: Financial Monitoring Reports (FMR), Physical Progress Reports (PPR), and Procurement Management Reports (PMR); more details on this are provided in the Project Implementation Manual (PIM).

6. A PIM will be prepared to set the framework of rules by which the project coordination team will manage the Project, under the World Bank regulations for financial management and procurement. The manual will also include written job descriptions for each member of the team that clearly define responsibilities, lines of supervision, and limits of authority. An appropriate training program, which will include World Bank financial and procurement management procedures, will be designed for staff and will start prior to project effectiveness to ensure that the project team is active and ready to operate at project effectiveness. The allocation of responsibilities should enable the appropriate separation of duties to ensure proper accountability. The team will produce all necessary reports on financial and procurement activities as requested by the World Bank and described in the manual of procedures.

Figure 10. Implementation arrangements for Multi-Sectoral TA Project

Minister of Finance

_* 1 Project Steering Committee I

I Project Director I

P PMU

47

Implementing agencies of the three components:

Component 1 - MoF, Component 2- MoSWL Component 3 -BoM

Each implementing agency will have a Technical Working Group for:

Developing TORS incl. technical

0 Contract management; Assessment of results;

0 Oversee and monitor project activity; and Ensure transfer of skills and knowledge.

specifications

Annex 7: Financial Management and Disbursement Arrangements

MONGOLIA: Multi-Sectoral Technical Assistance Project

Introduction/Summary

1. The Financial Management Team (FM team) has conducted an assessment of the adequacy of the project financial management system for the Mongolia Multi-Sectoral Technical Assistance Project (the Project). The assessment, based on guidelines issued by the Financial Management Sector Board (FMSB) on March 1, 2010, has concluded that the Project meets the minimum Bank financial management requirements, as stipulated in BP/OP 10.02. In the FM team’s opinion, the Project will have financial management arrangements acceptable to the Bank and, as part of the overall arrangements that the borrower has in place for implementing the operation, provide reasonable assurance that the proceeds of the IDA credit will be used for the purposes for which the credit is provided. Financial management risk is the risk that World Bank loan proceeds will not be used for the purposes intended and is a combination of country, sector, and project-specific risk factors. Taking into accouht the risk mitigation measures proposed under the Project, a “moderate” FM risk rating was assigned to the Project at the appraisal stage.

2. The funding source for the Project is 100 percent 1DA.Credit. The IDA Credit proceeds will flow from the Bank into a project Designated Account (DA) to be established at a commercial bank acceptable to the Bank and managed by a PMU and the MoF.

Country Issues

3 . The Country Financial Accountability Assessment (CFAA) of November 2002, the 2008 Public Expenditure and Financial Management Review, the 2008 ROSC Accounting and Auditing report, and our experience and understanding of the country found that the overall fiduciary environment is weak, that public sector financial accountability system does not function well, and that corporate governance remains inadequate in Mongolia. Given the existing weaknesses in the financial accountability framework, a ring-fenced control should be maintained for Bank-financed projects until the systemic weaknesses have been adequately addressed. The Bank and Government of Mongolia (GoM) are currently working together to integrate the Bank-financed Project into the Government Financial Management Information System (GFMIS) which would eliminate the need to ring-fence the FM arrangements for Bank projects. However, this is still at piloting stage, and the timing of this roll-out is still undetermined. Therefore, this assessment is still prepared under current conditions and the use of ring-fenced controls still applies for the Project. Once projects are rolled into GFMIS, thus using country systems, this Project’s FM arrangement will be revised accordingly.

48

Project Description

Audit Reports Project financial statements

4. The overall objective of the Project is to provide technical assistance to support the policy reforms in the banking sector, social protection, and the fiscal framework. The Project consists of 4 components which are described in Annex 4.

Submitted by Due date PMU June 30 of each calendar year

External Auditing

5 . The Bank requires that project financial statements be audited in accordance with standards acceptable to the Bank. In line with other Bank-financed projects in Mongolia, the GoM will appoint an independent external auditor, acceptable to the Bank, to conduct annual audits of the project accounts in accordance with International Standards on Auditing, under terms of reference satisfactory to the Bank. The audit will be financed from the IDA proceeds. The auditors will: (a) express an opinion on the annual financial statements; (b) determine whether the Designated Account has: (i) been correctly accounted for, and (ii) been used in accordance with the Development Credit Agreements; and (c) determine the adequacy of supporting documents and controls surrounding the use of Statement of Expenditures (SOEs) as a basis for disbursement. The auditors will also furnish a separate Management Letter, which will: (a) identify any material weakness in accounting and internal control as well as asset management; (b) report on the degree of compliance of financial covenants of the Financing Agreement; and (c) communicate matters that have come to the attention of the auditors which might have a significant impact on the implementation of the Project.

6. The annual audit report of project financial statements will be due to the Bank within 6 months after the end of each calendar year. This requirement is stipulated in the Financing Agreement. The responsible agency and timing are summarized as follows:

Risk Assessment and Mitigation

7. during the assessment:

The following risks with corresponding mitigating measures have been identified

49

Risk Inherent Risk

Country Level

Entity Level

Project Level

Control Risk Budgeting

Accouflting

Internal Control

Risk Rating

High

Moderate

Substantial

Substantial

Moderate

Substantial

Incorporated Risk Mitigating Measures

Maintain ring-fenced controls for the project. The MoF has long-term experience with designing, managing and implementing donor-funded projects. In addition, the PMU has extensive experience on Bank- financed projects will support the MoF on handling the day- to-day project management and coordination. This PMU is currently handling the on-going GAP and ECTAC projects. Detailed financial management manual (FMM) will specify sufficient internal controls to be in place to monitor the Project from financial management perspective.

Project annual plan will be prepared, by PMU and approved by the Project Steering Committee. PMU will conduct regular variance analysis to ensure project activities could be implemented as planned. The FMM being used by the existing GAP project has been updated to adapt the specific situation of new TA project. GAP Project financial staffs, which have experience on several Bank-financed projects, will handle project accounting for this new TA Project. Appropriate accounting software will be utilized for the new project. They will use the same accounting software that is used for the GAP and ECTAC projects. The internal control system specifically designed for the project will be documented in the project FMM, which will at least include, but not be limited :o the following:

Residual Risk Rating

Substantial

Moderate

Moderate

Moderate

Moderate

Moderate

Conditions of Negotiations,

Board o r Effectiveness

No

No

No

No

No

No

50

1 Risk

I

- r u n u s r i u w

Financial Reporting

Auditing

Overall

Risk Rating

Moderate

Moderate

Moderate

Moderate

Incorporated Risk Mitigating Measures

Regular bank reconciliation and periodic cash count; Proper authorization and approval procedures for payment requests; Appropriate segregation of duties; Bank’s no objection for significant project activities; and Annual audits by external independent audit firm.

Flow of funds is straightforward and related review and approval procedures will be documented in the FMM to make the reviewing and funds delivery process more efficient. Project financial reports with proper format and content will be adopted by the project; and Semi-annual or calendar semester Interim Financial Reports (IFRs) will be prepared and submitted to the Bank for review on a regular basis as specified in the legal agreements. An external independent auditing firm will be appointed, acceptable to the Bank, with proper terms of reference.

Residual Risk Rating

Conditions of Negotiations,

Board or Effectiveness

I No

Moderate

Moderate I No

+ Moderate

Moderate

Therefore, the overall FM risk-rating assigned to this project at the appraisal stage is Moderate, provided the proposed mitigating measures are carried out. The FM team will closely monitor the effectiveness of the measures and project FM risk during project implementation.

Fund Flow and Disbursement Arrangements

8 . The PMU and MoF will maintain and manage one USD Designated Account (DA) at a commercial bank, on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure and attachments. The IDA credit proceeds will flow from the Bank to the DA, and will be disbursed against all eligible project expenditures. All Bank withdrawal applications will need to be signed off by both the PMIJ and MoF. The ceiling of the designated account will be discussed and agreed between the Bank and borrower during the project negotiation and specified in the

51

Bank’s Disbursement letter. As noted above, Bank-financed projects will possibly move into the Treasury Single Account system within the GFMIS. Once this happens, the DA arrangement for this Project will be revised accordingly.

DA at the PMU

9. Further advances will be made from the DA to an operating account (OA) to be opened at a commercial bank acceptable to the Bank and managed by the PMU. The OA is used to finance small expenditures relating to incremental operating costs and training. The OA is maintained in Mongolian Tugrug, and the maximum ceiling of OA should be limited to the equivalent of US$20,000. Uses of the advance should be reported and reconciled with the DA on a monthly basis. The OA outstanding balance should be reported as a separate item within the DA reconciliation statement that is submitted together with the DA withdrawal applications.

Operating Account

10. To transfer the funds from the DA to the OA, the PMU will send the quaiterly budget (with monthly allocation) for incremental operating costs to the MoF for its review and approval. Lump sum disbursements for the incremental operating costs will be disbursed from the DA to OA on monthly basis based on the approved budget. Both the Project Manager and Senior Financial Management Specialist of PMU should approve all payments from OA to contractors, suppliers, and beneficiaries.

11 . The PMU will prepare the withdrawal applications which will be signed and approved by authorized representatives from MoF. The PMU Manager will ensure the completeness and accuracy of all withdrawal applications and will append her/his signature as part of the internal control procedures.

12. The flow funds and withdrawal applications is as follows:

52

14. inclusive) as in the following table:

The Bank IDA proceeds would be disbursed against eligible expenditures (taxes

Category

Table 4. Eligible expenditures

IDA Credit Percentage of Expenditures

to be financed (tax inclusive)

Allocated Amount (in US$)

- Goods Technical assistance services for BoM, MoSWL, and MoF Training and workshops Incremental operating expenditures Total

0.2 100 Yo 7.6 100 Yo

4.0 100 Yo 0.2 100 Yo

12.0 100 Yo

15. Retroactive financing under IDA credit is available for this Project. If needed, the disbursement plan for retroactive financing will be prepared by MoF and submitted to the Bank for review and approval. The amount and date of expenditures eligible for retroactive financing will be specified in the Financing Agreement.

16. The PMU will be directly responsible for the management, maintenance, and reconciliation of the DA and OA activities of the Project. The PMU will retain disbursement-supporting documents for one year after the receipt of the last audit report. These documents will be made available for review by the auditors and Bank supervision missions. If the auditors or the Bank find any disbursements not justified by supporting documentation or made for ineligible expenditures, the Bank may withhold further deposits to the DA until the Borrower has: (a) provided the acceptable supporting documents; (b) refunded the amount involved to the Bank; or (c) submitted evidence of other eligible expenditures that offset the ineligible expenditures.

Financial Management and Reporting Arrangements

Implementing Agencies

17. The Project will be supervised by a Project Steering Committee (PSC) comprised of representatives of each beneficiary agency and Project Director. The Steering Committee will be headed by the Deputy of MoF, and will comprise the General Director of the Fiscal Policy Department of MoF, the State Secretary of MoSWL, and the Deputy Governor of BoM. The PMU will prepare review reports and critical issues to be discussed by the SC. The MoF, MoSWL, and the Central Bank each will have Technical Working Groups to finalize terms of reference, technical requirements, and training proposals, as appropriate, for their respective components.

18. In order to ensure project financial management is maintained at a high quality, it is agreed that the GAP/ECTAC PMU will also handle this Project and that the implementation and management framework will follow those set up for the GAP project.

53

The GAP/ECTAC PMU will be headed by the State Secretary of MoF, who will serve as Project Director. The PMU will also include:

(a) Project Manager responsible for the overall management of project activities and compliance with its objectives, and for ensuring proper coordination among the various government agencies;

(b) Senior Financial management specialist and a Financial Management Assistant responsible for budget preparation and follow-up, financial management including operation of the DA, disbursement, and financial reporting; and

(c) Senior Procurement Specialist and two Procurement Assistants responsible for carrying out procurement activities consistent with procedures approved by IDA, managing on-going contracts, and reporting on the progress of procurement activities and deliverables under contract.

19. The Project Manager reports to the Project Director will be responsible for: (i) execution of the Project based on the Project Implementation Manual; (ii) managing procurement activities including all contracting for technical assistance services, project contract monitoring, reporting and evaluation; (iii) project financial management, accounting and record keeping, management of the DA, disbursements; and financial reporting; and (iv) maintenance of communication and coordination between the MoF and the various beneficiary government agencies and other stakeholders involved in the project.

20. The MoF, BoM, and MoSWL will each have one or more technical coordinators responsible for technical completion of relevant project components and sub-components and be the in-house champions in their organization for component implementation and ensure the achievement of contractual objectives and deliverables by the Project technical assistance services.

2 1. The PMU will be responsible for overall coordination of the fiduciary aspects of the project including financial management, accounting, and auditing. In particular, it will be at least responsible for, but not limited to the following:

Designing and establishing a computerized financial management system including assigning a chart of accounts;

Maintaining up-to-date accounting records and ledgers as well as asset management;

Preparing project financing plans on a monthly, quarterly, and annual basis;

Conducting variance analysis on project financial position and take further actions;

Recording transactions for all project activities;

Managing and maintaining the DA and its reimbursement;

54

Preparing monthly bank reconciliation statements in a timely manner;

Preparing SOEs and Summary sheets, withdrawal applications, and supplier records;

Ensuring that a proper internal control system is in place to achieve accountability at all levels;

Preparing semi-annual Project IFRs as part of Project Progress Reports and submitting them to the Bank;

Preparing annual financial statements in accordance with consistently applied accounting standards acceptable to the Bank;

Submitting audit reports;

Properly filing and maintaining all accounting forms and supporting documents; and

Such other tasks as assigned.

Staffing and Training

22. Adequate project accounting staff, with educational background and work experience commensurate with the work they are expected to perform, is one of the factors critical to the successful implementation of project financial management. The senior financial management specialist with advanced education degree in finance and extensive working experience with Bank projects will be responsible for maintaining the financial management system of the proposed Project.

23. The senior financial management specialist and financial management assistant will be responsible for day-to-day financial management issues. Both of them have extensive experiences on Bank-financed projects and are competent for project financial management.

Budgeting

24. In accordance with the cost table prepared for the Project, the PMU will prepare an annual work plan and budget which will identify the detailed project activities to be undertaken and the role of different parties in implementation. The annual work plan and budget will be submitted to the Project Steering Committee for approval, and thereafter to the Bank, for no objection. The annual work plan and budget will be consistent with the agreed format of IFRs.

25. The PMU is required to conduct regular variance analysis and report them in IFRs during project implementation to explain reasons for differences between planned (budget) and actual and take necessary actions to make sure the Project can be implemented as planned.

55

Accounting Policies and Procedures

26. The administration, accounting, and reporting of the Project will be set up in accordance with Bank requirements. The Bank requires borrowers to prepare financial statements in accordance with acceptable accounting standards. The Bank does not mandate a format of annual financial statements. However, where a borrower prepares financial statements on a modified cash basis, the Bank encourages the adoption of formats laid out in the International Public Sector Accounting Standards (IPSAS), and Financial Reporting under the Modified Cash Basis of Accounting, in order to monitor and fully reflect the non-cash transactions and payables. The PMU will adopt the cash basis of accounting for its preparation of the financial statements. Consistent with IPSAS requirements, the financial statements will include the following:

0

0

27.

Balance sheet of the Project

Statement of sources and uses of fund by category

Uses of funds by components and subcomponents

Statement of designated account

Procurement monitoring report

Disbursement report

Notes to the financial statements

The accounting and reporting of the Project will be set up in accordance with Bank requirements and financial statements are prepared in accordance with acceptable accounting standards. The Bank does not mandate a format of annual financial statements; however, a cash basis of accounting will be used. Accounts and records for the Project will be maintained by PMU, which will operate and maintain a financial management information system capable of generating IFRs in accordance with formats to be agreed with the Bank.

28. As the PMU will centrally manage and handle the project financial management, they will be responsible for recording the project accounts, preparing project financial statements and retaining all documentation supporting disbursements as well as processing the withdrawal applications during the life of the Project. As implementing agencies, the MOF, BoM, and MoSWL will be responsible for providing all eligible and sufficient supporting documents against the payments for respective components that are made by the DA.

29. To strengthen financial management capacity and achieve consistent quality of accounting work, the task team has suggested that the FMM used by GAP Project will be updated to reflect the specific situation and requirements of the proposed Project. The FMM provides detailed guidelines on financial management, including internal controls, accounting procedures, fund and asset management, withdrawal application procedures,

56

financial reporting, auditing arrangement, etc. The updated FMM was submitted to the Bank for review, and it is deemed appropriate for usage. This FMM should be periodically updated based on significant changes in project implementation and financial management practices.

Information System

30. to account for project activities for this Project.

The PMU will use its existing computerized “Info-systems’’ accounting software

Internal Control and Internal Auditing

3 I . There is no internal audit department within the MoF and for the Project. In order to mitigate the risks in the area of internal controls, regular oversight by the Project Steering Committee and MoF, Bank’s periodic supervision, and yearly external audits will serve as the mechanism to ensure that financial management controls are functioning appropriately. In addition, proper authorization for payment requests, segregation of duties, and other internal control mechanisms have been defined and included in the FMM. The procedures in the FMM must be fully and adequately complied with.

Financial Reporting Arrangements

32. part of project progress reports. supervision.

The PMU will prepare IFRs for the Project in accordance with agreed formats as The IFRs will be used for project monitoring and

33. The IFRs will include but not be limited to: (a) Balance Sheet of the Project; (b) Statement of sources and uses of funds by category (c) Uses of funds by components ,

and sub components; (d) Statement of designated account for IDA credit; (e) Procurement monitoring report; ( f ) Disbursement report. The IFRs will be submitted to the Bank within 45 days after the end of each calendar semester.

34. project design and cost structure.

The PMU agreed with the Bank on the content and format of IFRs according to

Financial Covenants

35. standard financial covenants like project audits and interim financial reports.

No specific financial covenants are applicable to the project except for those

Financial Management Action Plan

36. None noted.

57

Supervision Plan

37. The supervision strategy for this Project is based on its FM risk rating, which will be evaluated on regular basis by the FM staff in line with the FMSB’s FM Manual and in consultation with the Task Team Leader (TTL).

5 8

Annex 8: Procurement Arrangements

MONGOLIA: Multi-Sectoral Technical Assistance Project

A. General 1. Procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated May 2004 (Revised October 2006); and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 (Revised October 2006), and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or TA services provider selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframe are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually, or as required, to reflect the actual project implementation needs and improvements in institutional capacity.

2. Project .

Procurement of Works: No works would be required and financed under the

3. Procurement of Goods: A total of about US$200,000 will be procured under the Project. The goods mainly include office equipment and standard software. Procurement will use the Bank’s Standard Bidding Documents (SBD) for all ICB.

(i) International Competitive Bidding (ICB). Any contract for goods estimated to cost US$lOO,OOO equivalent or more will be procured under ICB procedures specified in the Procurement Guidelines.

(ii) Shopping. Goods estimated to cost less than US$lOO,OOO equivalent per contract would be procured through shopping procedures in accordance with the provision of paragraph 3.5 of the Procurement Guidelines.

(iii) Direct Contructing. Goods which are proprietary and obtained only from one source or to be compatible with the existing equipment may with the Bank’s prior agreement, be procured through direct contracting in accordance with the provisions of paragraphs 3.6 and 3.7 of the Procurement Guidelines.

4. Selection of Technical Services Providers: A total of about US$7.6 million worth of technical assistance services would be required under this Project. The services mainly would include Twinning Partnership TA, PCT staff multiple contracts, advisory services, auditing services, and monitoring and evaluation. Technical assistance services would be provided by firms and by individuals; these would be selected as follows:

(a) Selection of Firms: Contracts expected to cost more than US$200,000 equivalent per contract will use the Quality and Cost-Based Selection (QCBS) or Quality- Based Selection (QBS) in conformity with paragraphs 2.1 through 3.4 of the Consultants Guidelines. Technical assistance services estimated to be under

59

US$200,000 equivalent per contract would be selected and awarded through the Selection Based on Consultants Qualifications (CQS). Mongolian universities and research institutes can be shortlisted if they comply with paragraph 1 . I 1 of the Consultants Guidelines. In such cases, QBS or CQS would be used instead of QCBS. For the selection of auditors, Least Cost Selection (LCS) would be used. Shortlists of individual technical assistance providers for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely of national providers in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines. Under the circumstances described in paragraph 3.10 of the Consultants Guidelines, individual service providers may be selected and awarded on a single-source basis, subject to the Bank’s prior approval.

(b) Selection of Individual Technical Assistance Providers: Individual providers would be selected and contracts awarded in accordance with the provisions of paragraphs 5.2 through 5.3 of the Consultants Guidelines. Under the circumstances described in paragraph 5.4 of the Consultants Guidelines, individual technical assistance providers may be selected and awarded on a sole- source basis, subject to the Bank’s prior approval.

5 . Operating Costs: A total of about US$0.2 million would be required for the Project’s operational cost. These costs are largely related to office supplies, translation and printing of training materials, advertisement costs, logistics cost for workshops, etc.

6. Training and Workshops: A total of about US$4 million for training, workshops and study tours will be required. Detailed programs will be developed during implementation and included in annual implementation plans for the Bank’s review. Actual expenditures incurred in accordance with the approved programs will be used as the basis for reimbursement.

B. Assessment of the Agency’s Capacity to Implement Procurement 7. MoF would be the main executing agency of the Project and would be responsible for its overall management and implementation. In accordance with the institutional arrangement, the same Project Management Unit (PMU) established within MOF for the ongoing GAP and ECTAC projects would be responsible for project implementation. Accordingly, the procurement function rests with the same PMU. Based on the review of the capacity and experience of the PMU, technical support and internal clearance procedures in procurement process, in general, the PMU is capable for managing procurement of the Project. The overall procurement risk is moderate.

8. The following action plan is proposed and agreed: (i) initial 12 months procurement plan should be prepared and submitted to the Bank for clearance prior to credit negotiation; (ii) the format of the procurement monitoring report and procurement filing system would be agreed and be in place before start-up of the Project; and (iii) an additional qualified procurement assistant would be hired to supplement the current capacity of the PMU.

60

C. Procurement Plan 9. The Borrower would develop an initial 12-month Procurement Plan for Project implementation, which provides the basis for the procurement methods. The draft Plan was agreed by the Borrower and the World Bank team during appraisal. The Procurement Plan should be available at the PMU and Ministry of Finance procurement websites and should also be available in the project’s database and on the World Bank’s external website. The Plan will be updated in agreement with the World Bank annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity.

D. World Bank Prior Review

10. All contracts in excess of US$lOO,OOO for goods, all contracts for TA services providers in excess of US$lOO,OOO for firms, and all contracts awarded under single- source selection and direct contracting will be subject to prior review by the World Bank. All other contracts will be subject to ex-post review by supervision missions; the post review sampling ratio would be one out of five contracts.

F. Frequency of Procurement Supervision 1 1 . In addition to the Bank’s prior review, the capacity assessment of the Implementing Agency has recommended at least one supervision mission per year to visit the Project to carry out an ex-post review of procurement actions.

61

Annex 9: Economic and Financial Analysis

MONGOLIA: Multi-Sectoral Technical Assistance Project

Economic

1 . The characteristics of this Project do not lend themselves to the standard calculation of economic rate of return. As the main objective of this Project is to strengthen the capacity for policy formulation and implementation in the MoF, MoS WL, and the Central Bank, the benefits from the Project cannot easily be measured in monetary terms. However, investment in human resources associated with this Project is expected to generate tangible economic benefits. First, improvements in the efficiency of operations in these agencies will result in efficiency gains through improved policy- making and implementation. Second, improved implementation will enable better protection of the poor. Third, the project will help stabilize the financial sector by preparing and implementing best practice action plans for the resolution of the two failed banks.

Financial

2. The Project is not amenable to standard financial analysis as the MoF, MoSWL, and Central Bank have very limited opportunities for significant cost recovery. Therefore, only marginal financial returns are expected from this Project. However, there can be several fiscal impacts through the Government’s increased ability to generate fiscal savings. First, improvements in fiscal policy should result in a more efficient budgeting process and public expenditure management. Second, there would be an increase in Government savings generated from efficient management of government finances for public investment planning.

62

Annex 10: Safeguard Policy Issues

MONGOLIA: Multi-Sectoral Technical Assistance Project

1 . The Indigenous Peoples Policy (OP 4.10) is triggered by Component 2 - Supporting Government Efforts to Better Protect the Poor. As a consequence, an Indigenous Peoples Planning Framework was prepared and disclosed by the Ministry of Social Welfare and Labour.

2. The Project will support significant reforms to the system of social welfare in Mongolia, aimed at increasing support to the poor and vulnerable and social inclusion for disadvantaged groups. Specifically, the project will provide technical assistance to the Ministry of Social Welfare (MoSWL) in the design and implementation a new poverty- targeted cash transfer program. The four sub-components of component 2 are: (i) program design support; (ii) program implementation support, (iii) strengthening monitoring and evaluation systems within MoSWL, and (iv) capacity building within MoSWL (see Annex 4 for a thorough description of the planned reforms). Within this reform process, the technical assistance provided for each of the sub-components will promote the inclusion and support to vulnerable households within indigenous communities. For that purpose, the project includes the following strategy:

3. Use of the Proxy Means Testing Methodologv. An important element of the social welfare reform process is to ensure that the welfare of poor and vulnerable groups is adequately protected. The key to social inclusion in social welfare is the mechanism by which program beneficiaries are determined. Several different targeting mechanisms have been considered and a Proxy Means Test approach coupled with a formal and institutionalized grievance mechanism has been selected. The introduction this targeting approach for welfare programs will ensure a fair and inclusive allocation of transfers and access to services. The PMT has no "indigenous" variable per se. However, being indigenous is given weight in the context of the benefit/program targeting formula through the inclusion of a set of dummy variables related with resident location (province specific) and remoteness from urban areas, thus ensuring the model is culturally appropriate.

4. Currying out a social assessment. This will include: (i) a review of the legal and institutional arrangement framework; (ii) collection of baseline information; (iii) analysis of relevant stakeholders; and (iv) an assessment based on free, prior and informed consultation with the affected IPS communities of the possible effects of the TA. During the initial phase of the Project (year one and two), as the Bank team holds dialogue with MoSWL to define the elements of the project, a careful social analysis will be carried out to help to map how institutional rules and behaviors, including organizational constraints and formal and informal practices within the Ministry, may affect indigenous people. The social analysis will also analyze stakeholders and their capacity to achieve the intended outcomes. Consultation with representatives from Indigenous Communities will also be held at the national, regional, and local level, to ensure participation in and transparency of the reform process. On the basis of the social analysis and results from consultations, the finalized sub-components of the TA will include the necessary elements to ensure that

63

the activities financed through the TA are culturally appropriate and support the livelihoods of disadvantaged households living in indigenous communities.

5 . Consultation framework and disclosure arrangements for an appropriate gender and inter-generationally inclusive framework that provides opportunities for consultation. Consultation methods (using indigenous language, allowing time for consensus building, and selecting appropriate venues) which facilitate the articulation by indigenous peoples of their views and preferences. To that effect, and in response to suggestions received in consultations, some specific features have been incorporated into project design to ensure that traditional Tsaatan communities have an equitable opportunity to benefit from the welfare reform that is supported by the Project. These measures are as follows:

(a) Outreach to the Tsaatan communities making best use of existing mechanisms of Tsaatan community facilitator/mobilize. Because the reindeer-herding groups live in remote areas and generally do not participate in soum center activities, they generally are not represented in local decision-making. Those involved in decision-making processes at the soum level have little contact with remote Tsaatan and little familiarity with their needs and preferences. Moreover, they understandably can be expected to represent the interests of the broader majority in mum (or khural) deliberations. To address this issue, the SLP I1 project introduced a mechanism so that the Tsaatan communities will select from their membership a person to act as their facilitator or representative in project activities. The TA project will ensure that the community facilitator ensures communication between the Tsaatan communities and the Tsagaannuur Soum officials, and assist the communities in getting informed on the available services and benefits. Specific functions and remuneration arrangements will be established by MoSWL procedures for the implementation of the poverty benefit. The effectiveness of community facilitation arrangements will be considered at the project midterm review.

(b) Specific actions targeted to Tsaatan communities in getting civil registration. The above mentioned procedures for the implementation of the poverty benefit, will specifically address this issue and specify targeted actions of the local Social Welfare and Labor offices in this regard.

6 . to documentation in Kazakh language, in Bayan Olgii and Khovd aimags :

In the same way, the project will include the following measures to ensure access

(a) All relevant information will be made available in Kazakh language.

(b) In areas where Kazakhs constitute a majority of the population, Kazakh people will be provided a choice of having PMT survey conducted in Khazak language. To enable that choice, PMT survey questionnaire will be made available in Kazakh language and bi-lingual survey numerators will be specifically trained. This will reduce the risks of misinterpretation of survey questionnaire (in Mongolian language) which might lead to an increase in exclusion and inclusion errors of the OMT methodology.

64

7. Disclosure arrangements will provide all relevant information about the TA activities which will benefit them in a culturally appropriate manner in each stage of the consultation.

8. Institutional arrangements including capacity building activities for screening TA supported projects. The project includes a specific sub-component (2.4) on strengthening institutional arrangements and promoting capacity building within the MoSWL, both at the national and local lever. This sub-component will support the training of the staff of MoSWL and LSWSO on the implementation of the reform system. Training of both mid- level management of MoSWL and LSWSO staff as well as of the decentralized social workers in soums and districts will be given their key roles in ensuring that these services are delivered successfully to poor and vulnerable populations.

9. Monitoring and reporting arrangements, including mechanisms and benchmarks appropriate to the TA: culturally appropriate support to Indigenous Communities will be supervised though appropriate monitoring and evaluation systems. As sub-component 2.3 indicates, the project will specifically support technical aspects related to the design and implementation of periodic monitoring of the social transfers system by analyzing the programs? payments and beneficiaries databases, as well as setting up a system of audits/social accountability, to improve the transparency in the allocation of transfers and benefits that are managed by the local offices of MoSWL and LSWSO. It would also include auditing of operational performance of the two agencies, and carrying out an evaluation of the impact of the reformed system on poverty and other human development outcomes.

10. costed in the project implementation plan.

Both the M&E and capacity building activities are included and appropriately

1 1. The safeguard screening category is B.

12. The environmental screening category is C (no adverse environmental impacts).

65

Annex 11: Project Preparation and Supervision

MONGOLIA: Multi-Sectoral Technical Assistance Project

Planned Actual PCN review February 1 0, 20 10 February 25, 2010 Initial PID to PIC Initial ISDS to PIC

April 6, 20 10 May 6,2010

Appraisal April 1 , 2010 Negotiations April 8, 2010 BoardlRVP approval May 13,2010 June 15,2010 Planned date of effectiveness May 27,2010 July 1, 2010 Planned date of mid-term review Planned closing date May 27,2014 June 30,2014

Key institutions responsible for preparation of the project:

Ministry of Finance Central Bank of Mongolia Ministry of Social Welfare and Labor

Bank staff and consultants who worked on the project include:

Name Title Unit Rogier van den Brink Task Team Leader ESAPR Jinan Shi Senior Procurement EAPPR

Zahid Hasnain Senior Public Sector EASPR

Xiaofeng Hua Senior Financial Sector EASFP

Specialist

Specialist

Specialist

Andrew Mason Lead Poverty Specialist EASPR Dulguun Byambatsoo Consultant EACMF Tungalag Chuluun Operations Officer EASHE Tserendagva Gerelgua Procurement Analyst EAPPR Yi Dong Senior Financial Management EAPFM

David I Senior Financial Management EAPFM

Ochir Lkhagvasuren Operations Officer EACMF Altantsetseg Shiilegmaa Economist EASPR Lucilla Maria Bruni Junior Professional Associate EASHS Trang Van Nguyen Young Professional EASPR Juan Martinez Senior Social Scientist EASER Ernst Lutz Consultant AFTEN Ashley Taylor Young Professional EASPR Tehmina Khan Consultant EASPR Jiyoung Song Consultant EASPR Dirk Reinermann Peer Reviewer, Head ECCBK Cevdet A. Denizer Peer Reviewer, Lead CFPIR

Specialist

Specialist

Economist

66

Annex 12: Documents in the Project File

MONGOLIA: Multi-Sectoral Technical Assistance Project

1 , Mongolia: Technical Assistance Project Credit 2. Project Appraisal Document 3. Project Information Document 4. Integrated Safeguard Data Sheet

67

Annex 13: Mongolia Joint IMFNorld Bank Debt Sustainability Analysis

MONGOLIA: Multi-Sectoral Technical Assistance Project

1. The near-term outlook has improved since early 2009 due to the authorities’ adherence to the macro policy framework supported by the development partners and a recovery in the external environment. However, risks associated with the financing of the budget deficit and the weak balance sheets of many banks remain, and current economic activity remains weak. It is therefore essential that progress on fiscal adjustment and banking sector supervision and restructuring continues, bridging the period until the start of the expected mining-induced, high revenue growth era in the medium term.

2. Mongolia’s medium-term growth outlook is very favorable, driven by the signing of the major OT mining investment agreement in October 2009. Capital expenditure on infrastructure and investment relating to the development of the OT mines is expected to be in the region of US$700 million in 2010, and similarly large amounts are expected to be spent in the next few years. This will raise GDP growth rates to an expected average of 7 percent between 2010 and 2012 (Table 5). The revival in economic activity will lead to a rise in inflation over this period, to around 5-6 percent. Once copper production actually starts in 2013, GDP growth is forecast to rise sharply, up to 25 percent, and is projected at around 10 percent over medium-term (2014- 2020). The growth outlook could improve even further if other prospective mining projects also materialize, notably the Tavan Tolgoi (TT) coal deposits, which could transform Mongolia into a leading global coal producer.

3. The current account deficit, which improved considerably in 2009, is set to worsen markedly in the next few years as mining-related investment goods are imported for the development of the OT mine. The current account deficit has contracted by about 8 percentage points of GDP, in 2009 relative to 2008, as the trade balance improved through a sharper compression of imports relative to exports (Table 6). Imports supporting capital expenditures on the OT project will greatly enlarge the deficit, with total imports increasing to US$2.7 billion in 201 0, up almost US$600 million on 2009. In 201 0 the overall deficit including the impact of OT is projected at 11 percent of GDP. However, these near-term deficits are expected to be fully financed through FDI inflows and private loans. Once the OT mine becomes operational, the current account balance is expected to shift into surplus from around 2014.

4. Risks to public and external debt sustainability remain low. The assumption of new debt in 2009-1 0 related to the OT agreement is expected to cause public sector debt relative to GDP to double from 2008 levels to 65 percent in 2012. However, this will be more than offset by the enhanced outlook for growth and fiscal and export revenues. Debt service-to revenue ratios are projected to rise rapidly in 2014 when there is clustering of repayments (to the IMF and OT related domestic loans) but these do not breach related thresholds and are expected to fall rapidly thereafter as the economy rebounds, first due to Oyu Tolgoi-related investment spending and then supported by the production from the mine. The large loan repayments in 2013, in particular to the Fund, will reduce the external debt stock, and debt ratios will stabilize thereafter. The PV of external public debt is forecasted to fall from 29 percent in 2010 to 13 percent of GDP at the end of the projection period. Oyerall the latest debt assessment carried out in February indicates that Mongolia remains at low risk of external debt distress.

68

Table 5. Medium-term baseline projection

2008 2009 2010f 201 1 f Real sector Real GDP growth (percent yoy) CPI inflation (end-period, percent yoy) Monetary sector Broad money growth (percent yoy) Public sector Government revenues and grants (percent of GDP) Government expenditures and net lending (percent of GDP) Government balance (percent of GDP)

Non-mining balance (percent of GDP)"' Total public sector debt (percent of GDP), of which:

Domestic public debt' External public debt'

Balance of payments Current account balance (percent of GDP) Gross official reserves (US$ m )

(in months of next year's imports of goods and services)

Memo: Nominal GDP (MNT bn)

8.9 -1.6 7.3 23.2 1.9 7.5

-5.1 26.9 19.9

36.1 32.9 34.5

41 .O 38.3 38.5

-4.9 -5.4 -4.0 -15.1 -12.9 -12.2

33.8 56.4 62.7

0.1 9.3 22.7 33.7 47.1 38.7

-14.0 -5.6 -1 1.0 657 ' 1,327 1492

3.0 4.9 3.7

6020 6056 722 1

7.1 5.5

17.2

30.6

35.0

-4.5 -7.5

65.0

30.4 33.0

-21.0 1646

4.3

8055

(1) Includes expected fiscal cost of bank restructuring, the financing of the government's equity share in OT and the OT prepayment. (2) Includes prospective IMF credit under the SBA.

Source: IMF (2010).

Table 6. Balance of payments outlook US$ million unless otherwise specified

2008 2009 2010 201 1 Current account balance -722 -235 -566 -1302 (As percent of GDP)

Exports Imports

Capital and financial account, of which

Trade balance

FDI Loans, net

Errors and omissions Overall balance Financing, of which

Gross official reserves (- increase) Use of IMF credit (+)

(-14) -613

2,534

546 -3,147

836 189

-161 -337 337 343

-5

(-5.6) -158

1,902 -2,060

745

426 119

0 510

-510 -670

160

(- 1 0.9) -456

2,233

662 -2,689

422 1025

0 96

-96 -165

68

(-20.9) -1340 2,43 1

1446 -3,772

849 1566

0 145

-145 -141

-4

Source: IMF (20 IO).

69

5. However, in the period prior to the OT operation coming on-stream, fiscal pressures are expected to be significant. As a result of the OT project, fiscal revenues are expected to rise from around 40 percent as a share of non-mineral GDP currently to 60 percent in 201 6 (or 30 percent of GDP). But until then, revenues will remain under pressure, particularly from the expiration of the Windfall Profits Tax in 201 1 which could entail net revenue losses amounting to around 2 percent of GDP, while once the OT project becomes operational, dividends income from it will be offset against the domestic loan received from the mining company (for acquiring the government’s 34 percent equity share in the OT project). Meanwhile, the government will need to repay in 2010 a TJS$75 million loan it borrowed in 2009 to finance gold mining operations, while advance payment loans from the OT agreement will also become due from 2014 onwards. On the expenditure-side, preliminary estimates of bank restructuring costs, pending the development of bank-by-bank plans based on the audits, indicate that these amount to roughly 8 percent of GDP.

6. At the same time, options to finance the fiscal deficit are limited (Table 7). Donor financing is expected to dry up (with program loan financing falling from 3 to 0.8 percent of GDP from 2009 to 2010). Accordingly, continued fiscal restraint in the near term is necessary to maintain a deficit which can be financed in a sustainable, non-inflationary manner during this period. The 2010 budget targets a budget deficit of 5 percent of GDP in 2010, compared with a budget target of 5.8 percent in 2009, and falling to around 2 percent of GDP by 2012. If this fiscal adjustment is not adhered to, Mongolia risks another economic crisis, similar to the one experienced in 2008. As discussed below, this process of fiscal consolidation is crucial to avoiding financing pressures prior to the coming on stream of fiscal revenues associated with the Oyu Togoi (OT) copper deposits.

Table 7. Fiscal financing requirements and sources (IMF)

MNT billion unless otherwise specified ~

2008 2009 2010f Fiscal balance Total revenues and grants 2,170 1,993 2,493 Total expenditure and net lending 2,467 2,322 2,784

Financing

Domestic (net), of which: 258 29 27 1 Banking system (net) 249 76 82 Memo:

Overall balance -296 -329 -29 1

Foreign (net) 39 3 00 20

Overall balance (percent of GDP) -5 .O -5.4 -4.0 Non-mineral overall balance (percent of GDP) -15.1 -12.9 -12.2 Overall balance including banking sector -5.0 -5.4 -11.2 restructuring (percent of GDP)

The revenue loss from elimination of the WPT in 201 1 is estimated at around 5 percent of GDP, given projected copper prices. However the withdrawal of the WPT will mean that mining firms will have higher taxable profits which should lead to an increase of around 3 percent (of GDP) of corporate income tax receipts. This suggests that the ‘true’ cost of the withdrawal of the WPT will be around 2 percent of GDP per year.

70

7. In addition, despite the broad positive outlook further ahead, there remains considerable uncertainty attached to the baseline scenario values. Since a small number of major investment projects are so fundamental to the economic outlook, changes in the scale and timing of their progress would have large implications for macro outcomes in individual years. There is also uncertainty on the extent to which increased OT infrastructure-related investments will have positive spillovers for the domestic economy. On the external environment, Mongolia’s fiscal and export revenues will remain tightly tied to international mineral prices and particularly on the level of demand from China.

8. In conclusion, the current macro framework is satisfactory for a budget support operation as well as the proposed Multi-sectoral Technical Assistance Project. The authorities’ IMF SBA program remains on track, with the IMF Board approval of the 3rd review on 22 December 2009. Going forward, a few difficult years lie ahead with respect to the financing of the fiscal deficit until the structural increases in mining revenues materialize. To minimize the risks, continued fiscal adjustment and strong action on banking sector restructuring are essential. Finally, the appropriate macro and fiscal management policies need to be put in place to enable the country to reap the greatest economic benefits from the structural increase in mining resource flows and avoid the Dutch disease (viz. high inflation and strong currency appreciation, coupled with high unemployment).

71

Annex 14: Mongolia at a Glance

Page 1 of 3

Mongolia a t a glance 2r25110

Key Development Indlcators

llW8l

Populabon, mid-yeur (millions) Surface area (thousand sq. km) Populatlon g r o m ( X ) Urban population (Oh of total population)

GNI (Atlas method, US1 billions) GNI per capita (Allas method, USS) GNI per caplts (PPP. imemahonal $1

GDP g r o h (96) GDP per capim g r o m ( O h )

(most recent esUfnme, 2003-2008)

PoueW hnadcount mho at 11 25 a day (PPP, I) Poverty headcount mbo at 12.00 a day (PPP. Oh) Life expectancy a1 birth (yean) Infant mortailty (per 1,000 live births) Child malnuHion (%of children under 5)

Aduk Ikeracy, male (“6 of ages 15 and older) AduB literacy, female (X of ages 15 and older) Gross pnmaty enmllment male (X of age group) Gross pnmary enrollment female (Oh of age group)

Access lo an improvsd mlor source (X of population) Access to improved SanRlbon facildias (X 01 population)

Mongolia

2 6 1,567

0 9 57

4 4 1.680 3.480

8 9 7 9

22 49 67 35

5

97 98 99

101

72 50

East Asia & Pacific

1,931 16,299

0 8 44

5.080 2.631 5,399

8 0 7 2

17 39 72 22 13

96 90

112 110

87 66

Lower middle Income

3,702 32,309

1 .2 41

7,692 2,078 4,592

7 6 6.3

68 46 26

88 77

112 106

86 52

Age distibution, 2008

Male Female

I Under4 morblityrabe (per 1,000) I

Net Aid Flows

(US$ millions) Ne1 ODA and official aid Tw 3 domrs (in 2007):

Japan Gennany United States

Aid (X of GNI) Aid per caplt. (US$)

Long-Term Economlc Trends

Consumer prices (annual % change) GDP lmpllcit denator (annual X change)

Exchange rate (Mnual avenge, locd per US$) Terms of tnde index (2000 = 100)

Populdon. midyear (millions) GDP (US0 millions)

Apncunure lndusby

SeNiCeS

Hourahold find consumption expendihrre General govt final consumption expenditure Gross capital formation

Expo* of goods and sewices Impom of goods M d PeMcns Gross ravings

Manufacturing

1980

2

0 0 0

0 1 1

2 0

3 0

1 7 2,310

16 7 25 0

583

52 3 24 9 70 0

23 9 71 0 22 3

1990

13

2 4 0

0.7 6

325 5 0.0

5.0

2.1 2,093

2000

217

105 19 13

20 1 91

8 1 26 1

1,076 7 100

2 4 1,089

(% of GDPJ 15 2 32 7 40 6 20 3 35 8 4 6 4 4 2 4 7 0

61 6 70 1 28 8 1 5 4 35 6 29 0

2 2 4 56 4 49 4 70 9 .2 3 22 7

2008

228

52 30 13

5.9 87

22 1 22.4

1,166.0 128

2.6 5,258

21 .1 38.8 4 5

39.2

60.8 15.0 38.6

57.2 71.5 25.2

G r o m of GDP and GDP per rsplta (%I 1 1 5 1 I D

5

O

5

. I O

198&90 1990-2000 2000-08 (wenge annual gmrrlh %I 2 4 1 3 1 2 5 4 1 0 7 8

1 4 2 5 5 6 6 6 -2 5 7 4

-9 7 8 2 8 4 0 7 8 8

Note: Figures In lblics ara for yaan other than those spacified. 2008 data ara praliminuy. .. hdlcatat dam am not mi lable a. Aid dam are for 2007.

Development Economics, Development Data Group (DECDG)

72

Page 2 of 3

Mongolia

Balance of Payments a n d Trade

(USS niilhorrsl Total merchandise expom lfob) Tolal merchandise impons (Clq Ne1 trade In goods and servtces

Currenl account balance as a ?'i of GDP

Workers' remittances and compensation of employees (rempts)

Reserves including gold

Central Government Flnance

I% of GDP) Currenl revenue (including grants)

Current expendifure

Overall surplusidelicil

HtglPst !marginal lax rale ("4

Tax revenue

lndivlaual Corporate

External Debt a n d Resource Flows

(USS micons) Total deb1 oulslanding and disbursed Total debt SerVlCB Debt relief (HIPC MDRI)

Total debt (9b 01 GDP) Total debt service (K 01 exports)

Foreign direct investment (ne( Inflows/ onf folio equiry (net Innows)

2000

536 615

-158

-69 .e 3

12

141

29 9 22 2 26 8

-6 7

885 38

81 3 8 1

54 0

2008

2 534 3 245 -804

-722 -137

200

975

35 1 30 8 28 5

-5 0

1,721 73

32 7 2 3

683 0

COmposibon of total external debt, M08 sbimm, 0

Prlvata Sector Development

Time required to Stan a business (days) Cost to start a business (% of GNI per capira) Time reauired to register p f o ~ ~ n y (days)

Ranhed as a major mslrarnt to business (% of managers surveyed wno agreed)

Tax rates Access tcdmst of Rnanung

Stock market capGdlralion (% of GDP) Bank capital to Base1 rauo (%)

2ooo 2008

- 13 - 4 0 - 11

2wo zoo8

84 g 64

3 4 7 7

Technology a n d In f rast ructure

Paved roads (% of lotall Ffreu line ana mobile phone

Hlgh technology exwm subscribem [per 100 people)

(% of manufaciured expwts)

Envi ronment

Ayncullural land ("/e of land area) Foresl ared (% of land area) Nationally pmlecled areas (%of land area)

Freshwater resources per capcta (w meters) Freshwater wmrawal (billion Cubic melers)

C02 emissions per cap,@ (ml)

GDP PRI unil of energy use (2005 PPP f per kg of oil equivalent)

Energy use per cap& (kg of 011 equlvalenl)

World Bank Group portfolio

(USS mr/lmns)

l8RD Tolal debt wblanding and disbursad Disbursements Pnnupal repaymenls Intmest payments

IDA Tola1 debl ootstandtng and disbursed DiSbursemenis Tolal debt seriice

IFC rltscslyearl Total disburs6d and oulslanding ponfdio

Dtsbursemenis for IFC own a w n ! Pomolio sa& prepayments and

repayments for IFC own accnunl

of which IFC own account

MIGA Gross exposure New guarantees

2000

3 5

11

0 5

83 6 8

14 213 0 4

3 1

2 0

994

ZOO0

0 0 0 0

137 14 1

1 1 0

0

0

2008

41

7 5

83 6 5

13 9

13 341

3 4

2 6

1 080

t w 8

0 0 0 0

338 13 6

3s 39 30

0

0 0

Nole Figures in italics are for years olher than those speafied 2008 data are preliminary indicates dara are not available - indlcBms obsrrvatmn IS not applicable

Development Emomics Developmen1 Data Group (DECDG)

2R5H0

73

Page 3 of 3

Mongolia Millennium Development Goals

With selected targets to achfeve between 1990 and 2015 leifirnafe closesf m date shown */. 2 years)

Goal 1: halve the rates for extreme poverly and malnutrlllon Poverty headmunt ratio at S t 25 a day (PPP % of populabon) Poveny headmunt rabo al national poveny line (x 01 population) Share of income or wnsumptton lo the w r e s t qunitile (%I Prevalence of malnutrition (% of Chtldren under 5)

Goal 2: ensure thm children are able to complete pnmary schooling Primary school enrollment (net %I Pnmary m p l s t i m rate ("h of rekvant age group) Secondary SChWl enrollment (gross X) Yourn literacy rate (Yb of people ages 15.24)

Goal 3: ellminate gender dlapartty In education and empower women RaUo of girls (0 tayr in pnmery and sevlndaw education (%) Women ernplayed in lhe nonagricultural seclor (Y of nonagricultural emplp/menl) Proponion of seats held by m e n in national parliament (%)

Goal 4: reduce under4 mortally by two-mlrds Under4 mwtaliry rab (per 1 000) lnfanl mortality rate (per 1 000 live births) Measles immunization (proportion of one-year old8 immunized 96)

1990

90

E8

109

25

98 71 92

Goal I: reduce maternal m o m l l y by thrce-fourtha Malemal rnortahry raw (mOdeW estimate per 100 000 h e births) Births attended by skiiled health stall (% of Mal) Contraceptive prevalence (Oh of wmen ages 45-49)

Goal 6: halt and begln to reverse the apread of HN/AIDS and omer major dleeaaee Prevalence of HIV (% of pOpulation ages 15.491 Incidence of tuberarlosis (per 100 OW people) TUberCUlOSll Cam81 detected under DOTS (X)

Goal 7 : halve the proponlon of people wlthout rustalnable accear to t m l c nwds Access to an improved water source (% of population) A c e s lo improved sanilabori faulities (b of population) Forest area (% of mal land area) Nationally protected areas (% of total land area) CO2 ernlssions (metnc Ions per capita) GDP per unit of energy use (conslant 2005 PPP 5 per kg of oil equivalent)

Goat 8: develop a global partnership for development Telephone mainliner (per 100 people)

Internet users (per 1 W people) Personal cornpulers (per 100 people)

Motule phone SUbSCnbBrS (per 100 people)

I Education lndlcatm ('A) I I Maasla8 immuniution (X of l y a a r olds)

205

64

7.4

4.7 1 4

3 2 00 00

MongOlla

1995 2000 2008 18 8 15 5 22 4 38 3 36 f 7 4 75 7 2

11 6 5 3

90 89 71 67 110 60 63 92

96 95

112 107 48 50 53 a 8 4

43 35

82 63 49 61

85 92 9a

46 97 99

65 67 66

0 1 205 205 205

6 61 76

65 68 72 47 46 M 7 1 0 8 6 5

13 9 3 5 3 1 1 4 1 6 2 0 2 6

3 4 4 9 6 2 0 0 6 4 35 1 00 1 3 12 3 0 3 1 3 13 9

ICT Ind$.torv (per 100 people)

Y)

*a

30

s .

Nole Figure3 in ilallc~l BR tci yean Other lhan those specified . indicales data are not available

Development E~)nomI~s. Development Dola Grcup (DECDG)

2125110

74

Annex 15: Key Economic Indicators

Output, Employment and Prices Real GDP (% yoy change) Industrial production index (% yoy change) Unemployment (%) Consumer price index (% yoy change)

Public Sector Government balance (% of GDP) Non-mining balance (% of GDP)(l) Public Sector Debt (% of GDP)

Foreign Trade, BOP and External Debt(2) Trade balance ($ mn) Exports of goods ($ mn) (% yoy change) Copper exports (% yoy change) Imports of goods ($ mn) (% yoy change) Current account balance ($ mn) (% of GDP) Foreign direct investment ($ mn) External debt (% of GDP) of which public & publicly guaranteed (%of GDP) of which private (% of GDP) Debt service ratio (% of exports of g&s)(3) Foreign exchange reserves, gross ($ mn) (month of imports of g&s)

F i na ncia I Markets Domestic credit (% yoy change) Short-term interest rate (% per annum)(4) Exchange rate (MNT/USD, eop) Real effective exchange rate (2006=100)(5) (% yoy change)

Stock market index (2000=100)(6)

Memo: Nominal GDP (MNT bn) Nominal GDP ($ mn)

2003

7

3.4 4.6

-3.7 -5.9 3.1

-199.6 627 19.7

826.9 21.6

-102.4 -7.1

131.5 92.6 87.3

5.4 44.9

203.5 2.4

157.3

1168 94.2 -4.8

151.5

1660 1448

2004

583

10.6

3.6 10.9

-1.8 -5.8 1.4

-99.2 872

39

971.3 17.5 24.1

1.3 128.9

76 73.7

2.4 7.5

207.8 2

25.8 15.8 1209 93.9 -0.4

120.8

2152 1814 722

2005

7.3

3.3 9.6

2.6 -1.3 0.1

-99.5 1066 22.2 14.7

1021.1 16

29.7 1.3

257.6 61.2 59.7

1.5 2.7

333.1 2.6

18.8 3.7

1 2 2 1 99.6

6.1 203.6

2780 2307 900

2006 ~

2007 2008 2009

8.6 100

3.2 5.9

3.3 -7.3 1.0

136.2 1542 44.8 94.8

1485.6 25.4

221.6 7

289.6 45.1 44.3

0.7 2.3

718 4.3

-3.1 5.1

1165 102.8

3.2 382

3715 3156

10.2 8.9 -1.6 110.4 113.4 109.6

10.4 2.8 -3.3 2.8 2.8 3.3

14.1 23.2 1.2

2 .a -5.0 -5.4 -13.4 -15.1 -12.9

0.5 0.0 9.3

-52.4 1889 22.4 27.7

2117.3 42.5

264.8 6.7 360

40.1 38.9

-612.6 2539 34.4 12 .1

3615.8 70.8

-721.9 -13.9

836 34.6 33.7

-157.9 1902 -25.1 39.9

2131.3 -41.1

-235.1 -5.6 426

50 47.1

1.2 0.8 2.9 2.0 2.0 3.7

1000.6 656.9 1327 3.8 3.0 4.9

78.4 52.5 -7.5 8.4 9.8 ...

1170 1267.5 1442.8 104.8 127.4 102.9

1.9 21.5 -19.2 2048 1181.6 ...

4600 6020 6055 3930 5258 4203

1214 1491 1921 1552

2 O l O f

7.3 ... ... ...

7.5

-4.0 -12.2 22.7

-158 2233 17.4 32.2

2689 30.5 -566 -11.0

422 52.7 40.0

12.7 5.7

1492 4.0

46.7 ... ... ... ... ...

7221 5153 1885 GDP per capita ($) - ~.

(1) Non-mining balance excludes revenues from corporate income tax and dividends from mining companies, the Windfall Profits Tax and royalties. (2) The 2008 data for the balance of payments are based on the final revision. (3) On public and publicly guaranteed debt. (4) Yield o f 14-day bills until 2006 and o f 7-day bills for 2007. ( 5 ) Increase i s appreciation. ( 6 ) Top-20 index, end o f year, index=100 in Dec-2000. Source: Bank o f Mongolia, National Statistical Office, Ministry o f Finance, IMF and World Bank staff estimates

75

Annex 16: List of References

Araujo, M. Caridad (2006), ?Assessment of the Child Money Program and properties of its targeting methodology,? Working Paper 3601 8, World Bank, 2006.

Beck, Thorsten, Asli Demirguc-Kunt and Ross Levine (2004), ?Finance, inequality and poverty alleviation: Cross-country evidence,? Policy Reseurch Working Paper 3338, World Bank, 2004.

Budina, Nina, Sweder van Wijnbergen and Ying Li (2009), ?Copper revenues and sustainable

IMF (2007), ?The fiscal regime for the mining sector and the Development Fund,? IMF Fiscal

IMF (2008), Budget Preparation: A Roadniap for Reform and Institutional Strengthening, IMF

IMF (2009), Mongolia: Request for Stand-By Arrangement, April 2009.

IMF (20 lo), ?Mongolia: Fourth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria,? Country Report No. I U/84, March 29.

Ministry of Finance (2008), Studies under the ECTAC project on medium-term program budgeting, Government of Mongolia, 2008.

NSO (2009), Poverty proJile in Mongolia: Main outputs of Household Socio-Economic survey 2007-2008, National Statistical Office of Mongolia, March 2009.

UNICEF (2007), ?Child benefits and poverty reduction: Evidence from Mongolia?s Child Money Program,? UNICEF Working Paper, May 2007, available at http://www.unicef.org/videoaudio/PDFs/Child Benefits and Poverty Reduction Eviden ce from Monaolia.pdf.

Completion and Results Report (Credit 255 1-MOG), Report No 16600, June 19, 1997.

Completion and Results Report (Credit 2947-MOG), Report No 19285, July 13, 1999.

fiscal policy in Mongolia?, World Bank, under review, 2009.

Affairs Department, January 2007.

Fiscal Affairs Department Report, 2008.

World Bank (1 997), ?Economic Transition Support Credit-Mongolia,? Implementation

World Bank (1 999), ?Banking and Enterprise Sector Adjustment Credit, ? Implementation

World Bank (2004), ?Mongolia Mining Sector: Managing the Future,? 2004

World Bank (2005), ?Financial Sector Adjustment Credit,? Implementation Completion and

World Bank (2007a), ?Mongolia: Sources of Growth,? Country Economic Memorandum, July 26,

World Bank (2007b), ?Foundation for Sustainable Development: Rethinking the Delivery of Infrastructure Services in Mongolia?, PPIAF report, June 2007.

World Bank (2008), ?Mongolia Governance: Political Economy of the Resource Paradox?, Governance Assessment Report, October 2008.

World Bank (2009a), China Ql Quarterly Update, The World Bank, March 2009, available at httv:/lwww.worldbank.ordchina.

World Bank (2009b), ?Mongolia: Consolidating the Gains, Managing Booms and Busts, and Moving to Better Service Delivery,? Public Expenditure and Financial Management Review, January 2,2009.

Results Report (IDA-33340), Report No 3 1723, March 3 1, 2005.

2007.

76

World BanWIMF (2008), Mongolia: Financial Sector Assessment Report, in progress, September

World BanWlMF (2009), Joint IMF/World Bank Debt Sustainability Analysis, April 2009

World Bank (2008-09a), Review/assessments of banking sector and recent developments.

World Bank (2008-09b), Review/assessments of mining sector and recent developments.

2008.

77

Tavan Bogd Uul(4,374 m )

A

lt

ay

M

ou

nt

ai

ns

G o b i D e s e r t

H a n g a y n M t s . SÜKBAATAR

DORNOGOV'

ORHON

SELENGEDARHAN-UUL

BULGAN

H Ö V S G Ö L

ARHANGAI

GOVI-ALTAI

ZAVKHAN

KHOVD

KHENTI ID O R N O D

DUNDGOV'

ÖV

ÖR

KH

AN

GA

I

T Ö V

BAYANKHONGOR

UVS

BAYAN-ÖLGII

Ö M N Ö G O V '

Hovd

Ider

Selenge

Onon

Tesiyn

Dzav

han

Kerulen

Jargalant(Khovd)

Olgii Mörön

Esonbulag(Altai)

Bulgan

Zuunmod

Uliastai

Ulaangom

Sainshand

Arvaiheer

Öndörhaan

Baruun-Urt

Erdenebulgan(Tsetserleg)

Kherlen(Choibalsan)

Sühbaatar

Bayankhongor

Dalandzadgad

DarhanErdenet

ULAANBAATAR

Bayan Uul

Tamsagbulag

Hongor

Ereentsav

Tsagaan-Olom

Hatgal

ChoirGOVISÜMBER

Bayan Uul

Tamsagbulag

Hongor

Ereentsav

Tsagaan-Olom

Hatgal

Jargalant(Khovd)

Olgii Mörön

Esonbulag(Altai)

Bulgan

Zuunmod

Uliastai

Ulaangom

Sainshand

Arvaiheer

Öndörhaan

Mandalgovi

ChoirBaruun-Urt

Erdenebulgan(Tsetserleg)

Kherlen(Choibalsan)

Sühbaatar

Bayankhongor

Dalandzadgad

DarhanErdenet

ULAANBAATAR

R U S S I A N F E D E R A T I O N

C H I N A

C H I N A

SÜKBAATAR

DORNOGOV'

ORHON

SELENGEDARHAN-UUL

BULGAN

H Ö V S G Ö L

ARHANGAI

GOVI-ALTAI

ZAVKHAN

KHOVD

KHENTI ID O R N O D

DUNDGOV'

GOVISÜMBER

ÖV

ÖR

KH

AN

GA

I

T Ö V

BAYANKHONGOR

UVS

BAYAN-ÖLGII

Ö M N Ö G O V '

LakeBaikal

HulunNur

AchitNuur

Har Nuur

UvsNuur

HyargasNuur

HarUs Nuur

HövsgölNuur

Hovd

Ider

Selenge

Onon

Tesiyn

Dzav

han

Kerulen

To Biysk

To Ulan-Ude To

ChitaTo

Chita

To Hailar

To Jining

To Hami

A

lt

ay

M

ou

nt

ai

ns

G o b i D e s e r t

H a n g a y n M t s .

Tavan Bogd Uul(4,374 m )

90°E

90°E85°E

95°E

95°E

100°E 105°E 110°E

115°E

120°E

100°E 105°E 110°E 115°E 120°E

40°N

45°N

50°N

45°N

40°N

50°N

MONGOLIA

0 100 200

0 50 100 150 200 Miles

300 Kilometers

IBRD 36948

MAY 2009

MONGOLIASELECTED CITIES AND TOWNS

PROVINCE (AIMAG) CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE (AIMAG) BOUNDARIES

INTERNATIONAL BOUNDARIES

TAVAN TOLGOI

OYU TOLGOI