1. Policy, Law and Regulatory Analysis for PPPs Development By NARANTSETSEG P. Associate/CC Mongolia

2. Content -Goal -Research importance -Analysis for PPP development: Infrascope Index Lenders and investors requirements Risk assessment Assessment for law and regulations -Recommendation and improving ways

3. Goal of Research Main goal is to analyze PPP policy, law and regulations of Mongolia, to evaluate and to make recommendation for the intensifying effective PPP development.

4. -Contributions to intensive development, -Stakeholder’s effective relationship management, -Complex method for procuring with VFM, risk allocation and high quality service, -Knowledge management process with high professional skills, -Mechanism to decide lack of budget, -Effective risk and guarantee management to protect investors. Importance

5. Infrascope Index CountryInfrascopePPP readiness Australia92.3Mature Korea71.3Developed Japan63.7Developed UK89.7Mature Bangladesh39.2Emerging India64.8Developed China49.8Emerging Pakistan38.8Emerging Philippines47.1Emerging Mongolia23.3Nascent

6. Infrascope Index CountryLaw, regulation framework Institutio nal frame Operatio- nal Invest. climate Financial facilities Sub- national adjust. Australia100 66.587.494.4100 Korea78.17568.854.288.950 Japan5066.761.457.583.375 UK96.910076.782.394.475 Bangladesh40.633.34147.344.425 India59.466.77052.372.275 China31.32578.151.666.775 Pakistan34.433.341.84338.950 Philippines43.841.744.846.361.150 Mongolia25 3.146.913.925

7. Lenders and investors requirements Deciding questionsState Policy on PPPs, Resolution No 64 Concession law of Mongolia, 2010 fair, transparent is the PPP bidding process -√+√ Robust, forward planning program of public sector -√ Allocation process to ensure government payments -√ Legal capacity of public sector on long-term payment commitments -√ Risk that obligations transfer to body without legal capacity -√ Transition path for harmonizing contract with regulations -√ Certain roles of regulator in supervising and during implementation -√

8. Lenders and investors requirements Deciding questionsState Policy on PPPs, Resolution No 64 Concession law of Mongolia, 2010 End-user tariffs and availability tariffs -√ Investors right in contract termination -√ Government right in contract termination -√ Accounting regulation affect to profit distribution -√ Restriction and use of qualified expatriate personnel -√ Lender’s right to take over assets management -√

9. Lenders and investors requirements Deciding questionsState Policy on PPPs, Resolution No 64 Concession law of Mongolia, 2010 Form of government guarantee available for certain risks -√ Handling contract change-√+√ Compensation mechanism -√+√ Bear risk of law change-√ Combined procurement of construction, long-term operation and maintenance -√

10. Advantages for creating PPP law -Created PPP law and regulatory environment. -Provision on the PPP bidding process principles. -Provision on compensation mechanism. -Provision related to right to receive commission

11. Risk Assessment -Banking industry country risk assessment -Mongolian government rating for credit enhancement Main source: Banking industry country risk assessment from web www.standardandpoors.com, 22-Mar-2012 www.standardandpoors.com

12. Banking industry country risk assessment

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

14. Strengths and weaknesses of banking industry Weaknesses -Vulnerabilities inherent in a small, undeveloped, primarily commodity-based, low-income economy. -Loose regulatory framework with weak transparency and disclosure. -Aggressive lending and weak underwriting standards.

15. Economic Risks Economic risksRisk situationMain factor Economic resilienceVery high riskEconomic structure and stability, Macroeconomic policy flexibility, Political risk, Economic imbalancesHigh riskExpansionary phase, Private sector credit growth, Real estate prices Equity prices Current account and external debt position Credit risk in the economyExtremely high riskPrivate sector debt capacity and leverage Lending and underwriting standards Payment culture and rule of law.

16. Industrial Risks Industrial risksRisk situationMain factor Institutional frameworkExtremely high risk Banking regulation and supervision Regulatory track record Governance and transparency Competitive dynamicsHigh riskRisk appetite Industry stability Market distortions Systemwide fundinghigh riskCore customer deposits & external funding Domestic debt capital markets Government role

17. Mongolian Government Rating for Credit Enhancement Issuer Credit Rating Ratings Rating Date Foreign Long TermBB-13-Dec-2007 Foreign Short TermB14-Jun-2001 Local Long TermBB-13-Dec-2007 Local Short TermB14-Jun-2001

18. Issuer Credit Rating Issuer Credit Rating (MMC) RatingsRating Date Foreign Long TermB+14-Mar-2012 Local Long TermB+14-Mar-2012

19. Possible Risk for PPP projects in Mongolia Risks categoryRisk statusRisk impact 1Completion risks high 2Cost overrun risk high 3Design risk high 4Environmental risk high 5Exchange rate risk mediumMedium 6Force Majeure risks high 7Inflation risks high 8Market, demand, volume risks medium 9Operating risks high

20. Possible Risk for PPP projects in Mongolia Risks categoryRisk statusRisk impact 10Political risk high 11Regulatory risks high 12Resource and input risks lowmedium 13Tax rate change risk high 14 Technology risks mediumhigh 15Utilities risks mediumHigh

21. Specific of law and regulations -Analyzed documents: State policy on PPP, Great hural resolution No. 64, 15 October, 2009 Concession law, Mongolia 28 January, 2010

22. Specific of law and regulations PPP contract management framework: PPP methodologyMongolian specific partnership management relationships between government and private sector. Accountability for law violations (article 35): -assets accountability, -administrative punishment and penalty, -discipline punishment. service delivery management Risk management and performance. Risk allocation (article 31 of concession law) -operational risks -Force majeure risks -Concession owner’s responsibility for loss, damage and roles contract administration management administrative processes is contained in PPP contract and all documentation. Power of state and local administrative organization on concession: -Control implementation auditing-article 25:

23. Main improving ways -To create favorable PPPs law and regulation environment, -To improve contractual environment, -Accurate formula, tariff and price adjustments, -To identify risk, risk matrix and risk allocation, risk management method, -Allocation process to ensure government payments, -Legal capacity of public sector on long-term payment commitments, -Risk that obligations transfer to body without legal capacity should be reflected, -Matters on Lender’s right to take over assets management should be regulated, -Form of government guarantee available for certain risks and bear risk of law change should be defined.