Policy, Law nd Regulatory Analysis for PPPs Development

By NARANTSETSEG P.Associate/CC Mongolia

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

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.

-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

Infrascope Index

Country Infrascope PPP readiness

Australia 92.3 Mature

Korea 71.3 Developed

Japan 63.7 Developed

UK 89.7 Mature

Bangladesh 39.2 Emerging

India 64.8 Developed

China 49.8 Emerging

Pakistan 38.8 Emerging

Philippines 47.1 Emerging

Mongolia 23.3 Nascent

Infrascope Index

Country Law, regulation framework

Institutional frame

Operatio-nal

Invest. climate

Financial facilities

Sub-national adjust.

Australia 100 100 66.5 87.4 94.4 100

Korea 78.1 75 68.8 54.2 88.9 50

Japan 50 66.7 61.4 57.5 83.3 75

UK 96.9 100 76.7 82.3 94.4 75

Bangladesh 40.6 33.3 41 47.3 44.4 25

India 59.4 66.7 70 52.3 72.2 75

China 31.3 25 78.1 51.6 66.7 75

Pakistan 34.4 33.3 41.8 43 38.9 50

Philippines 43.8 41.7 44.8 46.3 61.1 50

Mongolia 25 25 3.1 46.9 13.9 25

Lenders and investors requirements

Deciding questions State 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

-√ -√

Lenders and investors requirements

Deciding questions State 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

-√ -√

Lenders and investors requirements

Deciding questions State 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

-√ -√

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

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

Banking industry country risk assessment

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.

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.

Economic Risks

Economic risks Risk situation Main factor

Economic resilience Very high risk Economic structure and stability,Macroeconomic policy flexibility,Political risk,

Economic imbalances High risk Expansionary phase,Private sector credit growth,Real estate pricesEquity pricesCurrent account and external debt position

Credit risk in the economy Extremely high risk Private sector debt capacity and leverageLending and underwriting standardsPayment culture and rule of law.

Industrial Risks

Industrial risks Risk situation Main factor

Institutional framework Extremely high risk

Banking regulation and supervisionRegulatory track recordGovernance and transparency

Competitive dynamics High risk Risk appetite Industry stability Market distortions

Systemwide funding high risk Core customer deposits & external funding Domestic debt capital marketsGovernment role

Mongolian Government Rating for Credit Enhancement

Issuer Credit RatingRatings Rating Date

Foreign Long Term BB- 13-Dec-2007

Foreign Short Term B 14-Jun-2001

Local Long Term BB- 13-Dec-2007

Local Short Term B 14-Jun-2001

Issuer Credit Rating

Issuer Credit Rating (MMC)Ratings Rating Date

Foreign Long Term B+ 14-Mar-2012Local Long Term B+ 14-Mar-2012

Possible Risk for PPP projects in MongoliaRisks category Risk status Risk impact

1 Completion risks high high2 Cost overrun risk high high3 Design risk high high4 Environmental risk high high5 Exchange rate risk medium Medium6 Force Majeure risks high high7 Inflation risks high high8 Market, demand, volume risks medium medium9 Operating risks high high

Possible Risk for PPP projects in Mongolia

Risks category Risk status Risk impact

10 Political risk high high11 Regulatory risks high high12 Resource and input risks low medium13 Tax rate change risk high high14 Technology risks medium high15 Utilities risks medium High

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

Specific of law and regulations

PPP contract management framework:

PPP methodology Mongolian 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:

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 .