Public – Private Partnerships Development – A Mongolia Perspective
© ICMCI and Purev Narantsetseg, CMC; 2015
1. Importance of PPPs
PPPs have a great role to play and can make effective contributions to the Infrastructure Development sector, which defines national development and investment results. So the creating of favorable policy, law and regulatory environment are necessary for the PPPs effective development, investment results, effective risk and debt management and equity management. For that, the PPPs policy, law and regulatory analysis and evaluation are of great significance for intensive investment development.
- PPPs are a long‐term contract between government and private parties. The effective PPP project cycle management and stakeholders management is of importance for long‐term results of the PPP contracts. Also, a variety of stakeholders’ effective relationships should be managed effectively for successful PPP project cycle, so managing complicated issues are necessary toward project results.
- PPPs are complex method of procuring public services and infrastructure accordance with their benefits or demand for services by combining main abilities of the public and private sectors with great importance on Value for Money, efficient risk allocation and delivering high quality public services.
- PPP is a knowledge-based process to sign effective concession contracts and to provide successful implementation of contracts in long term. So PPP contracts are complex and require a high level of professional skills by officers and they need to design concession contracts accurately.
- The public‐private partnerships is mechanism for developing, maintaining and operating infrastructure and other sectors facilities where the responsible governmental entity lacks budgetary resources to undertake the expensive capital projects.
- Effective risk management is also significant for successful process and implementation of PPP programs and projects in long term. The risk identification and risk allocation methodologies are related to forms of risks (such as fiscal, legislative and regulatory, completion, cost overrun, operational, design, environmental, supply, exchange rate, political, private partner, stakeholder, resources and input risk, construction cost, Force Majeure risks, inflation risk, total project value, distributional risks, Market, demand, volume risks, technology and utilities risks and etc.), process of risk management and methodologies of risk analysis. Thus, effective risk and guarantee management is a key function for protecting financers, investors and high quality public service delivery.
- Main role of government is to provide guarantee of process and implementations of PPPs programs and projects in long term financing. Government guarantees are a key method to protect investors and financers for providing long‐term investment and financing. So valuation, international accounting and financial statement standard, budget rule, guarantee revenue and returns are necessary.
2. Analysis for PPP development
2.1 Infrascope index
PPPs development of Mongolia was analyzed by Infrascope index. Score 100 represents ideal environment for PPP projects. According to Infrascope index, environment for PPP projects are ideal and mature in Australia (92.3), UK (89.7) and Korea (71.3). PPP project environment is developed well in India (64.8) and Japan (63.7). Environment for PPP projects is nascent and is not well developed in Mongolia (23.3). Also according to Infrascope index, Mongolia has ranked in lowest ranking comparing to other Asia‐Pacific countries. Evidently, countries with high index score procure on using fair and transparent competitive bidding in wide range.
2.2 Lender and investor requirements for legal and regulatory framework
Great volume investments are made as results of PPPs. So, the favorable policy, law, regulatory, institutional and contractual environment should be created for ensuring effectiveness of PPP contract and project cycle in long‐term. Mongolian state policy on PPPs and concession law was analyzed by criteria related to requirements for legal and regulatory framework, which are crucial for protecting lenders and investors. Main regulating questions in acts for protecting investments are important for lenders and investors. But requirements for legal and regulatory framework to protect investors and lenders are not regulated in PPP state policy (resolution No.64) and concession law of Mongolia in full. Opportunities and inconvenience in PPP policy and law of Mongolia are defined according to criteria, which are necessary for protecting lenders and investors.
Next main opportunities are in PPP policy and concession law of Mongolia.
- Created policy and law environment on PPPs concession.
- Reflected provision on PPP bidding process principles in concession law.
- Reflected provision on compensation mechanism in concession law.
- Reflected provision related to right to receive commission in situation of cost increasing and income reducing in Concession agreement condition of concession law.
2.3 Risk assessment
Mongolian credit risk enhancement is evaluated by Banking industry country risk assessment and government rating according of the Standard & Poor’s rating service.
2.3.1 Banking industry country risk assessment
(Source: www.standardandpoors.com, 22‐Mar‐2012)
Standard & Poor’s evaluated the Mongolian banking system by BICRA methodology. BICRA is scored on scale from 1 to 10, “group 1” is lowest risk banking group, “group 10” is highest risk banking group. The BICRA is consisted of two main areas of analysis—"economic risk" and "industry risk"‐‐on which Mongolian banking system scores '9' and '8'. Mongolia has ranked in group '9'. Strengths and disadvantages of Mongolian banking sector are evaluated according to the Standard and Poor’s analysis. Mongolian banking sector strengths are defined by Controllable economic imbalance, low reliance on external funding and Banks' limited exposure to innovative, complex, and risky products. Weaknesses of banking sector are defined by the vulnerabilities in a small, undeveloped, primarily commodity‐based, low income economy; regulatory framework with weak transparency and disclosure and Aggressive lending and weak underwriting standards.
Strengths of banking industry of Mongolia:
- 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.
Weaknesses of banking industry of Mongolia:
- Vulnerabilities inherent in a small, undeveloped, primarily commodity‐based, low‐income economy.
- Loose regulatory framework with weak transparency and disclosure.
- Aggressive lending and weak underwriting standards in the fragile banking system.
Mongolia is included with other countries with high risk according to the Standard and Poor’s economic risk evaluations. Economic risks of Mongolia are analyzed and evaluated by main factors as economic resilience, economic imbalances, and credit risk in the economy. Mongolian economic risks score has been ranked on score 9 according with banking industry assessment. Mongolia has ranked on country with high risk according to the Standard and Poor’s industrial risk evaluations. Industrial risks of Mongolia are analyzed and evaluated by main factors as institutional framework, competitive dynamics, and systemwide funding. Mongolian economic risks score has been ranked on score 8 according to the banking industry assessment.
2.3.2 Mongolian government rating for credit enhancement
Mongolian government rating was analyzed by issuer credit rating and Sovereigns Rating. The Standard and Poor’s rated Mongolian issuer credit rating on BB‐ on foreign and local long‐term rating and on B foreign and local short‐term rating. They rated the Sovereigns Rating of Mongolia on BB‐ rating. The issuer credit rating of Mongolian Mining Corporation (MMC) is evaluated by the Standard and Poor’s corporate rating indicators. The Standard and Poor’s rated MMC on 'B+' corporate credit rating to company and a 'B+' issue rating to its proposed senior notes.
Development Bank of Mongolia is evaluated by the Standard & Poor’s foreign currency issue rating and has rated ‘BB‐“. Main role of development bank is to secure variety infrastructure including railroad, transportation and energy and industrial projects financing. ‘BB’ rating expresses meaning less vulnerable in near‐term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
Mongolia is a country with high risks. So, a variety of risks are possible to impact PPPs – project cycle, successful implementation and final results and cost grow of project in Mongolia. Risk allocation, risk mitigation and risk management is of importance for effective PPP project cycle management in Mongolia. Risk category, risk status and impact should be defined for PPP project accurately. PPP procurement stage should be conducted and managed effectively for selecting best and final clear preferred bidder. Negotiation process is one of main part of PPP procurement stage, so risks matters should be discussed and negotiated clearly. The possible risk status is high in Mongolia according to completion risk, cost overrun risk, design risk, environmental risk, force majeure risk, operating risk, political risk and regulatory risk. So risk mitigation measures should be optimal and correct. Also qualitative service delivery is important to consumers and users.
The Standard and Poor’s rated the Mongolian credit rating is BB- and positve in 2015.
3. Recommendation and improving ways
The creating of certain and stable policy, law, regulatory and contractual environment is necessary for intensive investment, PPP development and effective PPP project cycle management in Mongolia. Improvement of infrastructure network is importance for intensive mining development and long‐term qualitative life and long‐term investment is necessary for infrastructure intensive development. So, concession contract specific is defined by long term investment and long‐term contract duration. In this case, long term concession contract stable implementation should be provided.
The most part of PPP financing is contained of debt, 70‐80% of total financing. So affordability, value for money, performance quality, qualitative output, results, capacity for repayment, possible rate of return of equity and debt service ratio is important. The taking of next measures on regulations and contractual approach are important:
- To create PPPs law and regulation environment according to international approach of PPPs methodology and principle for improving life quality and providing qualitative service delivery.
- To improve contractual environment. For that, objectives of PPP contract management for government and end users should be reflected in PPP contractual relation accurate: ‐to obtain services set worth in output specifications of contract, ‐to ensure affordability and VFM, ‐to ensure risks transferred to private sector and improvement performance.
- To create PPP contract management framework including partnership management, service delivery management and contract administration management certain and accurately.
- To regulate formula, tariff and price adjustments certain and accurate according to international approaches of PPPs.
- To identify risk, risk matrix and risk allocation and risk management method and to regulate it in PPP policy and concession law certain, accurate and full.
- To regulate allocation process to ensure government payments in PPP policy and law detail for the lenders and investors.
- To regulate robust, forward planning program of public sector in PPP policy and law.
- To regulate legal capacity of public sector on long‐term payment commitments in PPP policy and law.
- To reflect risk that obligations transfer to body without legal capacity reflected in PPP policy and law.
- To regulate transition path for harmonizing contract with regulations in PPP policy and law.
- To regulate matters related to certain roles of regulator in supervising and during implementation in PPP policy and law.
- To reflect end‐user tariffs and availability tariffs clear in PPP policy and law.
- To regulate government and Investors right in contract termination in the PPP policy and law.
- To regulate matters on accounting regulation affect to profit distribution in the PPP policy and law.
- To reflect restriction and use of qualified expatriate personnel in PPP policy, law and regulation.
- To regulate matters on Lender’s right to take over assets management in PPP policy, law and regulation.
- To define form of government guarantee available for certain risks and bear risk of law change in PPP policy, law and regulation certain and detail.
- To regulate matters on combined procurement of construction, long‐term operation and maintenance certain in PPP policy, law and regulation.
- To provide qualitative service guarantee to users and consumers by public and private sectors.
- To use penalty mechanism for protecting consumer and user’s right and providing qualitative service delivery to consumers and users.
- Banking industry country risk assessment from web www.standardandpoors.com, 22‐Mar‐2012
- Concession law of Mongolia
- Edward Farquharson and others, How to Engage with the Private Sector in Public‐Private Partnerships in Emerging Markets, 2011
- Evaluating Environment for PPPs in Asia Pacific, The Infrascope: Findings and Methodologies. Economist Intelligence unit, 2011
- Guide to Credit Rating Essentials, Standard & Poor’s from web www.standardandpoors.com, 22‐Mar‐2012
- Martin E. Sandbu, Natural Wealth Accounts: Proposal for Alleviating the Natural Resource Curse. University of Pennsylvania
- PPP Officer’s Management skills development, Institute for Public Private Partnerships and Loughborough University, 2010
- PPP Skills and competency development, Institute for Public Private Partnerships and Loughborough University, 2012
- PPP policy documentation of Mongolia
- PPP Reference Guide, WBI, 2012
- Sandeep Verma, Government Obligations in PPP Contracts, Journal of Public Procurement, Volume 10, No.4, 2010, p.564‐567
- Standard & Poor's Financial Institutions Ratings from web www.standardandpoors.com, 22‐Mar‐2012