Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 59811-MN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 16.00 MILLION (US$25.00 MILLION EQUIVALENT)

TO

MONGOLIA

FOR A

MN-MINING INFRASTRUCTURE INVESTMENT SUPPORT PROJECT

April 7, 2011

China and Mongolia Sustainable Development Unit Sustainable Development 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.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 7, 2011)

Currency Unit = Tugrug (MNT) US$ 1 = MNT 1,210

MNT 1 = US$ 0. 00083

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS ADB

CQS

DA

EIA

ESMF

FDI

FM

FMM

FMS

GAGR

GFMIS

GIZ

GMA

GMC

GOM

ICB

IDA

IFC

IFR

IPSAS

IWRM

LCS

MINIS

MNET

MNT

MOF

NDIC

OA

Asian Development Bank

Consultants’ Qualification

Designated Account

Environmental Impact Assessment

Environmental and Social Management Framework

Foreign Direct Investment

Financial Management

Financial Management Manual

Financial Management Specialist

Groundwater Assessment for Southern Gobi Region

Government Financial Management Information System

German International Cooperation

Groundwater Management Administration

Groundwater Management Council

Government of Mongolia

International Competitive Bidding

International Development Association

International Finance Corporation

Interim Financial Report

International Public Sector Accounting Standards

Integrated Water Resource Management

Least Cost Selection

Mining Infrastructure Investment Support Project

Ministry of Nature, Environment and Tourism

Mongolian Tugrug

Ministry of Finance

National Development and Innovation Committee

Operating Account

OT Oyu Tolgoi

PAD

PDO

PIM

PMU

PPIAF

PPP

PS

PSC

QBS

QCBS

RAP

RBC

REA

SBD

SMIS

SOEs

SPC

SPIA

SRFP

SSS

TT

Project Appraisal Document

Project Development Objective

Project Implementation Manual

Project Management Unit

Public-Private Infrastructure Advisory Facility

Public-Private Partnership

Procurement Specialist

Project Steering Committee

Quality Based Selection

Quality and Cost Based Selection

Resettlement Action Plan

River Basin Council

Regional Environmental Assessment for the Southern Gobi Region

Standard Bidding Documents

Southern Mongolia Infrastructure Strategy

Statements of Expenditure

State Property Committee

State Professional Inspection Agency

Standard Request for Proposals

Sole Source Selection

Tavan Tolgoi

USD

WPP

United States Dollar

Water Partnership Program

Vice President: James Adams

Country Director: Klaus Rohland

Country Manager Coralie Gevers

Sector Director:

Sector Managers:

John Roome Ede Ijjasz-Vasquez Vijay Jagannathan

Task Team Leader: Jim Reichert

MONGOLIA MN-Mining Infrastructure Investment Support Project

CONTENTS

Page

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

A.  Country and Sector Issues ................................................................................................... 1 

B.  Rationale for Bank Involvement ......................................................................................... 3 

C.  Higher Level Objectives to Which the Project Contributes ................................................ 4 

II.  PROJECT DESCRIPTION ................................................................................................. 4 

A.  Lending Instrument ............................................................................................................. 4 

B.  Project Development Objective and Key Indicators ........................................................... 4 

C.  Project Components ............................................................................................................ 5 

D.  Lessons Learned and Reflected in the Project Design ........................................................ 5 

E.  Alternatives Considered and Reasons for Rejection ........................................................... 6 

III.  IMPLEMENTATION ...................................................................................................... 7 

A.  Partnership Arrangements ................................................................................................... 7 

B.  Institutional and Implementation Arrangements ................................................................ 8 

C.  Monitoring and Evaluation of Outcomes/Results ............................................................... 8 

D.  Sustainability....................................................................................................................... 8 

E.  Critical Risks and Possible Controversial Aspects ............................................................. 9 

F.  Credit Conditions and Covenants ..................................................................................... 11 

IV.  APPRAISAL SUMMARY ............................................................................................. 11 

A.  Economic and Financial Analyses .................................................................................... 11 

B.  Technical ........................................................................................................................... 12 

C.  Fiduciary ........................................................................................................................... 12 

D.  Social................................................................................................................................. 12 

E.  Environment ...................................................................................................................... 13 

F.  Safeguard Policies ............................................................................................................. 13 

G.  Policy Exceptions and Readiness...................................................................................... 14 

Annex 1: Country and Sector or Program Background ......................................................... 15 

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 21 

Annex 3: Results Framework and Monitoring ........................................................................ 22 

Annex 4: Detailed Project Description ...................................................................................... 25 

Annex 5: Project Costs ............................................................................................................... 32 

Annex 6: Implementation Arrangements ................................................................................. 33 

Annex 7: Financial Management and Disbursement Arrangements ..................................... 36 

Annex 8: Procurement Arrangements ...................................................................................... 46 

Annex 9: Economic and Financial Analysis ............................................................................. 50 

Annex 10: Safeguard Policy Issues ............................................................................................ 51 

Annex 11: Project Preparation and Supervision ..................................................................... 56 

Annex 12: Documents in the Project File ................................................................................. 57 

Annex 13: Statement of Loans and Credits .............................................................................. 58 

Annex 14: Country at a Glance ................................................................................................. 59 

Annex 15: Maps........................................................................................................................... 61 

MONGOLIA

MN-MINING INFRASTRUCTURE INVESTMENT SUPPORT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASCS

Date: April 7, 2011 Team Leader: James A. Reichert Country Director: Klaus Rohland Sector Director: JohnRoome Sector Managers: Ede Jorge Ijjasz-Vasquez Vijay Jagannathan

Sectors: General transportation sector (45%);General energy sector (45%);Water supply (10%) Themes: Infrastructure services for private sector development (90%);Regulation and competition policy (10%)

Project ID: P118109 Environmental category: Full Assessment Lending Instrument: Specific Investment Loan Joint IFC:

Project Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank Financing (US$ mil.): 25.00 Proposed Terms: Standard amortization payable over twenty years, including ten years of grace.

Financing Plan (US$ mil.) Source Local Foreign Total

BORROWER/RECIPIENT 0.00 0.00 0.00 International Development Association (IDA) 25.00 0.00 25.00 Total: 25.00 0.00 25.00 Borrower: Ministry of Finance Chingeltei District, Khuvisgalchdiim Avenue -38, State Building #7 Ulaanbaatar, Mongolia Tel: 976 11 322 465 Fax: 976 11 328 107 hlspo@mongol.net Responsible Agency: Ministry of Finance United Nation's Street 5/1 Ulaanbaatar, Mongolia Tel: (976-11) 262-712 Fax: (976-11) 320-247 badruund@gmail.com

Estimated disbursements (Bank FY/US$ mil.)FY 2012 2013 2014 2015 2016 2017 Annual 2.50 5.00 6.00 6.00 4.50 1.00 Cumulative 2.50 7.50 13.50 19.50 24.00 25.00 Project Implementation Period: Start July 1, 2011 End: June 30, 2016 Expected Effectiveness Date: June 30, 2011 Expected Closing Date: September 30, 2016

Does the project depart from the CAS in content or other significant respects? Ref. PAD I.C.

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management?

[ ]Yes [X] No [ ]Yes [X] No

Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated “substantial” or “high”? Ref. PAD III.E.

[X]Yes [ ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G.

[X]Yes [ ] No

Project Development Objectives: Ref. PAD II.C., Technical Annex 3

The development objectives of the Mining Infrastructure Investment Support Project (MINIS) are to facilitate investments in infrastructure to support mining and downstream processing activities, regardless of funding source, and to build local capacity to prepare and transact infrastructure projects.

Project Description: Ref. PAD II.D., Technical Annex 4

The MINIS will finance four components: (i) support for infrastructure investments; (ii) capacity building and knowledge transfer; (iii) strengthening groundwater management; and (iv) project management.

Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10

As defined in Operational Policy 4.01 on Environmental Assessment, the MINIS has been classified as a Category A. The project will only support technical assistance activities and will not directly finance any development of infrastructure. Its focus will not be on mining, but rather on general infrastructure that will support the mining sector. While most such projects are expected to be in the Southern Mongolia region, projects in other locations will also be eligible for technical assistance support under MINIS. Based on the Bank’s understanding of safeguards issues in Southern Mongolia, there is potential for four World Bank policies to be triggered; environmental assessment, OP/BP 4.01, natural habitats, OP/BP 4.04, physical cultural resources, OP/BP 4.11, and involuntary resettlement, OP/BP 4.12. Since specific projects to be prepared under MINIS have not been identified during project implementation, screening for Bank safeguard policies will be undertaken for each

project activity. An Environmental and Social Management Framework (ESMF) has been prepared which includes screening procedures to determine which of the Bank’s safeguards policies, if any, would be triggered, as well as procedures and criteria to identify safeguard requirements for each policy triggered.

Significant, non-standard conditions, if any, for: Ref. PAD III.F.

Board Presentation:

None

Loan/Credit Effectiveness:

Conditions of effectiveness include: (i) establishing the PMU, including engaging the services of a Director, a procurement specialist and a financial management specialist for the PMU; (ii) preparing an acceptable Project Implementation Manual, which will include a Financial Management Manual; and (iii) establishing the Project Steering Committee, chaired by the State Secretary for Finance.

Covenants applicable to project implementation:

None

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I. STRATEGIC CONTEXT AND RATIONALE

A. Country and Sector Issues

1. Mining Sector Offers Great Economic Promise. Mongolia’s mining sector is a major contributor to the economy. It accounts for about one-third of the country’s economic activity, some 70 percent of exports, and generates nearly 40 percent of government revenue. Foreign direct investment (FDI) in the sector currently accounts for nearly 80 percent of total FDI, and this is expected to climb in the coming years. While there are numerous mineral occurrences throughout the country, the Government of Mongolia (GOM) is poised to develop several major mineral deposits in Southern Mongolia, including copper and gold at Oyu Tolgoi (OT), and coal at Tavan Tolgoi (TT), Nariin Sukhait and elsewhere. It is widely recognized that the country’s wealth of mineral resources offers perhaps its greatest potential for economic growth and development. 2. Turning the mining sector’s promise into economic productivity and job creation will depend on the Government's ability to conclude equitable agreements that allocate risks accordingly between investor and Government, and on its capacity to implement legal, regulatory, environmental and social regimes in a consistent and transparent manner. While attention has long centered on devising appropriate legal and regulatory frameworks to govern the extraction of mineral resources and in concluding investment agreements with mining firms, far less focus has been given on how best to finance, build, operate and maintain the infrastructure that will be needed to support the mining developments, once agreements have been concluded. 3. Creating Economic Opportunity through Mining-Related Industrial Production. The Government is exploring options to increase economic opportunity and generate wealth by developing the country’s capacity to export raw and semi-processed mineral commodities to multiple export destinations. Consideration is being given to creating industrial complexes to process mineral resources, but with private investment and operation of processing units, such as copper smelters and iron pellets plants. It is also hoped that such activities would support more sustainable economic growth. Because of Sainshand’s location on the Trans-Mongolian Railway just 215 km from the border with China, it is considered one of the best locations to develop an industrial park.

4. However, the development of industrial parks would require significant investment in infrastructure, both to transport raw and processed mineral resources to and from productive sites, and to provide access and utility infrastructure to the industrial parks. Since much of the needed infrastructure is unlikely to be economically attractive to investors, the Government may need to finance many of these assets from its own resources. 5. Provision of Infrastructure is Complex. An agreement to develop OT was concluded on October 6, 2009 and production is underway. TT, which is the next major mine to be developed in Southern Mongolia and only 130 km from OT, is also located in a remote area, lacks appropriate access infrastructure and is without dependable utility services, including power, water and heat. For mines in the region to become fully operational, an array of infrastructure facilities and services will be required. The development of an industrial park at Sainshand with

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appropriate infrastructure facilities and services would be a complex undertaking that would necessitate a highly integrated planning approach and be a mix of both public and private funding. These large capital projects necessitate adequate preparation and coordination among numerous government entities, and where the private sector is involved, appropriately structured tender processes that are objective and have clear procedures for identifying and selecting the most qualified investors. 6. Timing will be Critical. To enable production at OT and TT, transport facilities will need to be constructed and reliable utility services made available, and they will need to be appropriately sequenced and delivered before full-scale production at the mines can begin. This poses a complex and formidable undertaking - investments are cumbersome, require long lead times to properly prepare, and need to be coordinated across various sectors and levels of government, and among numerous stakeholders. The challenges of delivering the required infrastructure are exacerbated by the need to bring most services on-line at about the same time. 7. Infrastructure is Costly to Develop. The cost to build the required transport, power, water and township infrastructure in Southern Mongolia alone will be substantial,1 and the Government plans to seek private sector investment, through public-private partnerships (PPPs), to the extent possible. Partnering with the private sector would bring much needed capital at a time of constrained budgets, and speed the development of infrastructure essential for mining operations. 8. Specialized Skills will be Required. As agreement emerges on appropriate investment strategies, a variety of skills will be needed. Different strategies will demand distinct skill sets for those charged with implementing the chosen strategies. Should the Government decide to build and finance infrastructure on its own, the line ministries are positioned to complete the task. However, a strategy that involves private sector investment to develop infrastructure requires specialized skills to prepare, structure, and manage transactions. To attract private financing, good project preparation is critical, and the Government must be clear about the extent of private sector participation and the types of services it wants from investors. Support from transaction advisors is highly recommended for initial transactions. Skills to monitor and enforce contractual terms and conditions would need to be strengthened. 9. Enabling Environment for Private Investment in Infrastructure. The Government continues to strengthen and refine the legal and regulatory framework and institutional arrangements needed to enable private investment in infrastructure. In November 2008, a parliamentary working group was created to assess critical aspects of PPPs, including the legal and regulatory frameworks governing PPPs in Mongolia, as well as the country’s capacity to implement PPPs. The working group drafted a policy paper on PPPs and a law on concessions, and submitted them to Parliament for consideration on July 3, 2009. The Policy Paper on PPPs was subsequently approved by Parliament on October 20, 2009. The Concession Law was also approved by Parliament and went into force on March 1, 2010.

1 The Infrastructure Strategy for Southern Mongolia AAA estimates that by 2015, more than $5 billion in basic

infrastructure would be required to support mining activities in Southern Mongolia.

3

10. Management of Water Resources Essential. Southern Mongolia has a complex variety of aquifers at various depths, and the development of mines in the region will involve abstraction of groundwater. Both town and rural populations rely extensively on groundwater from wells, and current consumption levels are about 50,000 m3/day. Based on projected growth in populations and mining developments, that figure could rise to as much as 350,000 m3/day by 2020. Initial findings suggest that there is enough groundwater in the region to support the needs of expected mining activities, local communities, and herders for at least ten years, possibly more. However, additional hydro-geological studies are needed to determine the extent of groundwater potential in the region, and to match demand with supply in the right locations and with the right quality for the intended use. The extraction of water needs to be carefully monitored so that if unexpected consequences occur, alternative sources can be identified. B. Rationale for Bank Involvement 11. As the Government continues to prepare the overall framework that will guide the country’s approach to developing infrastructure facilities and services, it will require on-going support and guidance. The Southern Mongolia Infrastructure Strategy (SMIS), which was a AAA activity that was well received by key government officials, members of Parliament and the private sector, provides a solid basis for continuing the Bank’s dialogue on options for developing needed infrastructure. The strategy assessed options for providing infrastructure to support mining activities in Southern Mongolia and analyzed the potential environmental and social impacts of large-scale infrastructure development in the region. The document also incorporates key findings of the Bank’s Regional Environmental Assessment for the Southern Gobi Region (REA), and Groundwater Assessment for Southern Gobi Region (GAGR). The National Development and Innovation Committee, the country’s planning agency, adopted much of the SMIS as a basis to carry out its planning activities for Southern Mongolia, and the Minister of Finance formally requested the Bank to prepare a follow-on project to facilitate private investment in mining infrastructure. The Mining Infrastructure Investment Support Project (MINIS) is based on the analytical work and recommendations contained in the SMIS, the REA, and the GAGR. 12. The MINIS will complement the Mining TA Project’s (P108768) objective of developing regulatory, institutional and planning frameworks to effectively manage the mining sector by helping build capacity to create plans that integrate infrastructure development into a coherent strategy to support extractive activities. The MINIS will also help prepare infrastructure projects to enable the development of priority mineral deposits and allow the government to begin realizing the sector’s revenue potential. 13. The World Bank Group has significant global experience in mobilizing private investment for infrastructure. On the transaction side, the International Finance Corporation’s Advisory Services in Infrastructure has established a reputation for competence, transparency and fairness, which has provided reassurance to stakeholders and led to the completion of more than 165 transactions in nearly 70 countries. The recently established Global Experts Team offers yet another avenue for providing advice on PPPs.

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C. Higher Level Objectives to Which the Project Contributes 14. National Development Strategy. The Government has prepared a strategy for the country’s long-term development (through 2021). A key priority of the strategy is to develop infrastructure to meet the needs and demands of the population, users, and the country’s economic development. The policy on infrastructure development seeks to increase private sector participation in infrastructure development, which is a tenet of the MINIS. 15. Key Government Objectives. A key Government objective in developing the Mongolian economy is to seek investment from a variety of countries. Structuring open and transparent tenders with the support of advisors is a good mechanism for attracting an array of potential investors from various countries. 16. Interim Strategy. The MINIS is consistent with the Bank’s Interim Strategy Note (CY 2009-10) for Mongolia,2 which supports the Government’s response to the economic crisis and associated reforms to improve management of the country’s mineral-based economy by encouraging transparent and prudent investments in mining. The continued growth of Mongolia’s mining sector will be central to the country’s development and ability to weather global economic downturns. The MINIS will support growth of the sector by preparing infrastructure projects.

17. Sustainable Infrastructure Development. The project will also underpin the World Bank’s Sustainable Infrastructure Action Plan’s (FY 2009-2011) objective of supporting developing countries to meet enormous lags in core infrastructure by creating a supportive environment for investment and facilitating private financing of infrastructure. 18. Other Bank Operations. As a complement to the Mining TA Project (P108768), the project will help build capacity to prepare plans that integrate infrastructure development into a coherent strategy to support extractive activities. The MINIS will also prepare infrastructure projects to enable the development of priority mineral deposits.

II. PROJECT DESCRIPTION

A. Lending Instrument 19. The lending instrument will be a Technical Assistance Credit because the focus of the MINIS is on preparing investments in infrastructure and building local capacity. The duration of the project is five years, and the currency will be denominated in United States Dollars (USD). B. Project Development Objective and Key Indicators 20. Project Development Objective. The development objectives of the MINIS are to facilitate investments in infrastructure to support mining and downstream processing activities, regardless of funding source, and to build local capacity to prepare and transact infrastructure projects.

2 A Country Partnership Strategy will be prepared during the first half of FY2012.

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21. Key Indicators. Indicators to gauge whether the project’s development objectives are met include: (i) two infrastructure assets ready for tender; and (ii) good practice and procedures established for preparing infrastructure projects for public and private financing. Key performance indicators are defined in Annex 3. C. Project Components 22. The MINIS focuses on general infrastructure that will support the mining sector and local communities within an investment’s area of influence. While many of the projects are expected to be in the Southern Mongolia Region, projects in other locations throughout the country will also be eligible for financing under the MINIS. The project has four main components:

Component 1: Support for Infrastructure Investments (US$19.69 million); Component 2: Capacity Building and Knowledge Transfer (US$1.45 million); Component 3: Strengthening Groundwater Management (US$3.23 million); Component 4: Project Management (US$0.63 million).

23. To support investments in needed infrastructure, the project will provide financing to conduct feasibility studies to assess technical options and determine economic and financial implications of proposed projects, and address emerging priority issues as a result of the country’s nascent enabling environment governing private investment in infrastructure. To develop local skills to prepare infrastructure projects, including transactions involving investors, both formal and on-the-job training will be carried out. An emphasis will be placed on learning by doing. Funds will be extended to hire consultants, carry out regular programs of training on topics germane to the preparation of mining-related infrastructure projects, including cost-benefit analyses, and bring in specialists to train officials in contract administration, as needed. In addition, annual conferences to promote and provide guidance on preparing infrastructure transactions will be held for Government officials. Support will also be extended to strengthen the management of groundwater by piloting a new institutional structure at two locations in Southern Mongolia. 24. The International Finance Corporation (IFC) is providing complementary support to the Government’s PPP Program. The IFC will serve as transaction advisor for up to three pilot PPP transactions, at least one of which is expected to be associated with mining. D. Lessons Learned and Reflected in the Project Design 25. For projects that cover more than one sector, experience indicates that the implementing agency should have the power and respect to convene and arbitrate among a range of government stakeholders. It is also important that the implementing agency be considered neutral and have an interest in ensuring that projects are developed based on sound economics and good preparation. This is especially true for the MINIS, where the use of funds for specific projects has not been determined, and because a number of different ministries and agencies are expected to seek access to the funds. The Ministry of Finance is a good choice to implement the MINIS as it is a neutral agency that has the power to convene and arbitrate among sectoral ministries. It is also familiar with the requirements and procedures of World Bank operations.

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26. As the Government of Mongolia continues to develop the country’s mineral resources, it is important that the project is designed to be flexible and responsive to priority issues as they emerge. The policy environment governing the transport, energy and urban sectors is nascent and will require technical and financial support going forward, and the development of some projects could trigger the need for support in other, unexpected areas. For example, the Government plans to build new railway lines and roads to transport mineral resources to neighboring countries, and to expand existing border crossing facilities to better accommodate the increased flows of goods, supplies and people. However, there is currently no policy governing user access to transportation systems, and increased exports of mineral resources and movements of people and goods across borders may require modifications to existing transnational agreements, or the development of new ones. The MINIS has been designed to accommodate such eventualities. 27. A number of countries throughout Southeast Asia have developed the legal and regulatory frameworks and institutional arrangements necessary to enable private investment in infrastructure. However, in spite of these enabling environments, it has been difficult to attract, let alone conclude, any significant transactions with investors. Although Mongolia’s laws and institutions guiding private investment in infrastructure are still evolving, there is a growing sense of urgency among some members of Parliament and key ministers about the need to begin preparing PPPs, given the long lead times required to prepare and carry out such transactions. Many believe that a proactive stance by government will be essential to the long-term prospects of stimulating investment in infrastructure. As such, the notion of a two-track approach whereby government continues to develop the legal, regulatory and institutional environment to enable private participation in infrastructure, while preparing pilot PPP transactions at the same time, is gaining traction. Preparing a pilot transaction would reinforce on-going efforts to strengthen the enabling environment by revealing any shortcomings or gaps in the frameworks, and would serve as an effective way for the government to begin developing its capacity. Adopting such an approach has been endorsed by several PPP Specialists (both Bank staff and outside consultants) who have assisted other governments in establishing PPP frameworks. It does, however, require commitment at the highest levels of government, and the support of qualified advisors to guide the preparation and tender process for these sophisticated and complex transactions. The IFC will serve as transaction advisors for the first three pilot PPP transactions, and funding is provided under the MINIS to carry out studies to help prepare projects that align financial incentives and allocates risks among the different parties, including the private sector/operator, users, and the Government. E. Alternatives Considered and Reasons for Rejection 28. An operation to invest in a small infrastructure facility to support mining activities was briefly considered, but because of the limited amount of International Development Association (IDA) resources available to Mongolia, this option was not considered worthwhile. 29. An Adaptable Program Credit was discussed because of the need for long-term support to the key infrastructure sectors. However, because of the uncertainty about how the Government intended to finance and build much of its mining-related infrastructure - either by asking mine

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operators to finance and develop it or by obtaining loans directly from neighboring countries - this was rejected as it would be difficult to establish triggers for subsequent phases.

III. IMPLEMENTATION

A. Partnership Arrangements 30. A number of development partners have extended financial resources to support the MINIS. These include:

Singapore Cooperation Enterprise: To help build capacity to structure transactions with investors through tailored training programs in Singapore (est. US$75,000);

Temasek Foundation: To finance the preparation of business cases for two priority PPP projects (est. US$450,000);

Public-Private Infrastructure Advisory Facility: Based on the Government’s list of priority projects, to prioritize and sequence the most critically needed infrastructure projects to be developed as PPPs, (US$137,500);

Water Partnership Program (WPP): To define a framework for strengthening groundwater management in Southern Mongolia, including an appropriate institutional structure, mandate, staffing arrangements, and action plan for the first three years of operations (US$70,000); and

Groundwater Management Advisory Team: To complement the work of the WPP program (above) by reviewing and providing guidance on the consultants’ technical outputs, and carrying out awareness training programs for officials on the importance of managing groundwater so that long-term development of the mining sector can occur, while ensuring the needs of local communities and herders (US$70,000).

31. The MOF asked donors to coordinate their activities for greatest impact. MINIS activities have been discussed with the Asian Development Bank (ADB) and German International Cooperation (GIZ), the other donors that have active programs of support in the area of PPPs, with a view to harmonizing our efforts. Relevant donor activities are identified in the following table.

Donor Activity

ADB About $900,000 in grant financing to aid in preparing legislation and structure institutional arrangements to support private investment in infrastructure.

ADB The Southeast Gobi Urban and Border Town Development Project (US$15 mil.) will finance priority improvements in utility infrastructure and tender performance-based contracts as a means of improving service delivery for select towns in the region.

GIZ Under its Investment Policy Advisory Services Project (approx. US$3 mil.), GIZ is extending support to promote investment throughout Mongolia. Areas of focus include public investment projects, PPPs, and projects involving foreign direct investment.

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B. Institutional and Implementation Arrangements 32. The MINIS is expected to be implemented between July 1, 2011 and June 30, 2016, and is the Credit’s expected closing date is September 30, 2016. 33. Because the types of infrastructure projects to be developed using MINIS funds have not been identified, and because they are expected to cover more than one sector, a Project Steering Committee (PSC) will be established to agree and oversee the use of project funds. The State Secretary for the Ministry of Finance will Chair the PSC, which will be comprised of representatives from key line ministries and agencies. 34. The Ministry of Finance (MOF) will be the implementing agency for the project, and a new Project Management Unit (PMU) will be established at the MOF. The MOF will manage the MINIS on behalf of project beneficiaries from other ministries and agencies, especially the fiduciary aspects. The MOF will ensure that the relevant line ministry and/or agency support the PMU in managing the technical aspects of activities associated with their sectors. 35. A PMU Director will be hired to oversee implementation of the MINIS and will report to the State Secretary, Ministry of Finance. A Procurement Specialist (PS) and Financial Management Specialist (FMS) will also be hired to implement the MINIS in accordance with World Bank fiduciary policies and procedures. Technical specialists are expected to be contracted, from time-to-time, to support the work of the PMU. C. Monitoring and Evaluation of Outcomes/Results 36. The PMU Director will issue quarterly and annual progress reports. Quarterly reports will be due the last day of April, July, October and January, while the annual report will be delivered by the end of February. A mid-term review will be prepared before the end of 2013, and an Implementation Completion Report will be completed within six months of project closing. The PMU Director will also monitor progress against agreed performance indicators, as defined in Annex 3. 37. For specific studies, assignments and training events financed under the MINIS, technical specialists from the relevant line ministry or agency will work closely with and support the PMU to implement, monitor and evaluate activities associated with their sectors. 38. Based on the Bank’s review of quarterly reports and the results of supervision missions, the PMU Director will take measures to ensure that the MINIS’s components are implemented in a manner that allows the development objectives to be achieved. D. Sustainability 39. The Government is under pressure to deliver much needed infrastructure to support planned and on-going mining operations throughout the country, and in late-2009, the Ministry of Finance formally requested the Bank to prepare the MINIS. Since project preparation began, the Task Team has received numerous informal requests from line ministries for assistance to

9

prepare infrastructure projects. As such, there is substantial demand and support from key ministries for funds to carry out feasibility studies and other related assessments. 40. It is expected that the MINIS will promote coordination and decision-making among ministries through the Project Steering Committee. Officials will need to work together to agree on priority projects and allocate funds to the greatest needs. 41. Focused capacity building and knowledge transfer events to be financed under the project will also improve the project’s sustainability by promoting good practices and procedures for preparing infrastructure projects. These training events will be offered to a wide array of policy makers, officials and business groups. In addition, support from outside technical specialists, will strengthen the understanding and capacity of officials to select and implement good projects. 42. For projects involving private investment, sustainability will be strengthened by ensuring that contractual documents contain appropriate language to address future potential difficulties. These might include: (i) mechanisms to resolve disputes; (ii) an equitable approach to increasing tariffs; or (iii) provisions for ensuring investments are well-maintained, and in those instances where projects will revert to Government, that they are turned over in acceptable condition. Involving IFC in the drafting of contractual documents will improve project outcome and sustainability. 43. A key deliverable of the groundwater component will be to identify a reliable and sustainable revenue source to finance the work of the new groundwater agencies after the MINIS closes. This will help ensure that the new structure can fund its operations into the future. E. Critical Risks and Possible Controversial Aspects 44. The MINIS has an overall risk rating of moderate. Potential risks to the MINIS are identified in the following table.

Risk Factors Description of Risk Risk

Rating Mitigation Measures

Residual Risk

Rating

Country and/or Sub-National Level Risks

Parliament hesitant to approve use of Bank Credits to finance TA, insists on grant financing.

Moderate The government has a strong interest in using the Bank’s comparative advantage in providing policy advice and sharing international best practices.

Low

Project champions may change, interests of line ministries not aligned.

Moderate MOF serves as project champion and neutral body with power to convene and arbitrate among sectoral ministries.

Moderate

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Project Team to work closely with concerned counterparts during implementation and looks to identify new champions, as warranted.

Project Level Risks

Understanding and capacity to implement PPPs weak, process for preparing PPPs undefined.

High Guidance from the IFC will help ensure that projects are properly prepared and tendered in a transparent manner. Support under the MINIS to transfer knowledge, enhance understanding.

Moderate

Poor project selection based on political reasons, rather than good economics.

Moderate Project Team and consultants will work with the Government to ensure they are fully aware of the implications of project selected for development.

Moderate

Implementation may start slowly.

Moderate Early agreement on initial projects to be financed under MINIS will be sought. The new PMU will be encouraged to work with and learn from the existing PMUs at the Ministry of Finance. Capacity development will be facilitated through cooperation with the Project Team, including early training activities.

Moderate

Fiduciary Risks

Lack of qualified fiduciary specialists.

Substantial Strengthen the capacity and understanding of the FMS to implement the MINIS in accordance with World Bank procedures. Establish appropriate FM and disbursement arrangements, prepare Financial Management Manual specifying internal controls, FM procedures.

Moderate

Capacity of the Implementing Agency to carry out procurement for the project according to Bank guidelines and

Substantial As a Condition of Effectiveness, Hire qualified procurement specialist as Condition of Effectiveness.

Moderate

11

procedures. Procurement training to be provided by Bank UB Office before start up of project launch.

Safeguards Risks

Projects with the potential for moderate to significant environmental and social impacts are subsequently implemented under separate financing.

High An Environmental and Social Management Framework (ESMF) has been prepared to ensure that any projects that are subsequently implemented address and identify measures to avoid and minimize environmental and social impacts. Safeguards training to be carried out under the MINIS.

Substantial

F. Credit Conditions and Covenants 45. Conditions of Effectiveness will include: (i) establishing the PMU, including engaging the services of a Director, procurement specialist and financial management specialist for the PMU; (ii) preparing an acceptable Project Implementation Manual and Financial Management Manual; and (iii) establishing the Project Steering Committee, chaired by the State Secretary for Finance.

IV. APPRAISAL SUMMARY

A. Economic and Financial Analyses 46. Because the MINIS is a Technical Assistance Credit, it does not lend itself to economic evaluation or other quantitative analysis, such as net present value or economic rate of return calculations. 47. Some benefits might accrue by prioritizing and preparing the most economically beneficial projects, which would result in more efficient use of government funds and higher-quality projects. Strengthened capacity would also facilitate better decision-making at the program and project levels. 48. For infrastructure projects involving private investment, financial benefits can be anticipated in the form of cost reductions to develop, construct and operate infrastructure facilities. Because the IFC will organize competitive and transparent tenders for PPPs, potential investors will have greater confidence that the Government will structure an equitable investment and is committed to partnering with investors. It also signals to prospective bidders that the Government has retained competent advice and projects will be well structured. With greater confidence in the tendering process, more investors will be inclined to prepare bids, which will

12

increase competition for projects. Greater competition will help ensure that the Government receives the best terms and conditions available for a given investment. 49. There are no major financial issues under the project. B. Technical 50. The MINIS is designed to support the preparation of, and enhance the Government’s ability to, prepare infrastructure projects, regardless of funding source. This support will be extended to line ministries and agencies charged with preparing infrastructure projects, including those involving private investment. No significant technical issues are anticipated. C. Fiduciary 51. A new PMU will be established at the Ministry of Finance. It will have responsibility for managing the MINIS’s fiduciary requirements. 52. Financial Management. An assessment of the financial management risks was carried out as part of appraisal. The financial management (FM) risk pre-mitigation was assessed as “substantial” and post-mitigation was assessed as “moderate.” Measures to mitigate risks have been identified. Annual audits will be carried out by an independent external auditor and in accordance with standards acceptable to the Bank. Additional details can be found in Annex 7. 53. Procurement. The new PMU at the Ministry of Finance will also carry out procurement according to Bank policy and procedures. An assessment of the procurement risks was carried out as part of appraisal. The overall procurement risk-rating was assessed as “moderate” and measures to mitigate risks have been proposed, which are defined in Annex 8. D. Social 54. Because Mongolia is so sparsely-populated, the provision of infrastructure would improve social services and quality of life for both local communities and herders. It would also facilitate the development of infrastructure needed to support long-term development of the mining sector and community planning. 55. Since the MINIS will largely finance feasibility studies, it is not expected to have direct social impacts. However, if the infrastructure project(s) are subsequently implemented, there could be potential adverse impacts including, changes in land use and access to resources, loss or damage of physical cultural resources, public health and safety, and social and cultural disturbance on local communities or herders and other social issues from both planned and unplanned developments. These issues necessitate proper planning, effective implementation and monitoring, and responsive and adaptive management. To help manage these potential impacts, an Environmental and Social Management Framework (ESMF) has been prepared. Feasibility studies during the preparation of projects will identify potential social impacts and mitigating measures, which will be incorporated into relevant contractual documents.

13

E. Environment 56. Due to its extremely harsh natural environment, much of the country remains largely undisturbed by human activities. Southern Mongolia includes a number of critical and non-critical natural habitats and hosts unique biodiversity and wildlife species. The development of infrastructure facilities and future mining activities are likely to generate moderate to significant environmental impacts. Potential adverse impacts resulting from projects that could be prepared under the MINIS include, impacts on critical/non-critical natural habitats wildlife and biodiversity, fragmentation of natural habitats, blocking of wildlife migratory routes, loss of surface vegetation, land degradation, groundwater pollution and depletion, and noise and air pollution. To address these possible events, the Government needs to initiate careful study and proper planning early on to ensure effective implementation and monitoring over the long-term. 57. Building capacity at the national and local levels has been incorporated in the project to develop and mainstream good management practices, and in an effort to sustain good management of safeguard matters beyond the life of the project. Further, feasibility studies financed under the MINIS will comply with the Bank’s safeguard policies. F. Safeguard Policies

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Pest Management (OP 4.09) X Indigenous Peoples (OP/BP 4.10) X Physical Cultural Resources (OP/BP 4.11) X Involuntary Resettlement (OP/BP 4.12) X Forests (OP/BP 4.36) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X

58. While most of the projects to be financed under the MINIS are expected to be in the Southern Mongolia Region, projects in other locations throughout the country will also be eligible for financing. Based on the Bank’s understanding of safeguards issues in Southern Mongolia, OP/BP 4.01, environmental assessment, would be triggered. However, since specific projects to be prepared under the MINIS have not been identified, screening for Bank safeguard policies will be undertaken and determined for each project activity with potential safeguards requirements during project implementation. 59. A number of Bank-financed studies that are relevant to the MINIS were reviewed during preparation. The review was intended as a summary of what safeguard reviews and assessments had been carried out, to identify key findings and recommendations, and to determine those recommendations that can reasonably be addressed under the project. The full report, entitled Summary of Safeguard Documents with Relevant Recommendations (June 2010), is available in the Project Files.

14

G. Policy Exceptions and Readiness 60. The MINIS complies with Bank policies and does not require any exceptions.

15

Annex 1: Country and Sector or Program Background

MONGOLIA: MN-Mining Infrastructure Investment Support Project 61. Mining Sector Offers Great Economic Promise. Mongolia’s mining sector is a major contributor to the economy. It accounts for about one-third of the country’s economic activity, some 70 percent of exports, and generates nearly 40 percent of government revenue. Foreign direct investment (FDI) in the sector currently accounts for nearly 80 percent of total FDI, and this is expected to climb in the coming years. While there are numerous mineral occurrences throughout the country, the Government of Mongolia is poised to develop several major mineral deposits in Southern Mongolia, including copper and gold at Oyu Tolgoi (OT), and coal at Tavan Tolgoi (TT), Nariin Sukhait and elsewhere. It is widely recognized that the country’s wealth of mineral resources offers perhaps its greatest potential for economic growth and development. 62. Turning the mining sector’s promise into economic productivity and job creation will depend on the Government's ability to conclude equitable agreements that allocate risks accordingly between investor and Government, and on its capacity to implement legal, regulatory, environmental and social regimes in a consistent and transparent manner. While attention has long centered on devising appropriate legal and regulatory frameworks to govern the extraction of mineral resources and in concluding investment agreements with mining firms, far less focus has been given on how best to finance, build, operate and maintain the infrastructure that will be needed to support the mining developments, once agreements have been concluded. 63. Creating Economic Opportunity through Mining-Related Industrial Production. The Government is exploring options to increase economic opportunity and generate wealth by developing the country’s capacity to export raw and semi-processed mineral commodities to multiple export destinations. Consideration is being given to creating industrial complexes to process mineral resources, but with private investment and operation of processing units, such as copper smelters and iron pellets plants. It is also hoped that such activities would support more sustainable economic growth. Because of Sainshand’s location on the Trans-Mongolian Railway just 215 km from the border with China, it is considered one of the best locations to develop an industrial park.

64. However, the development of industrial parks would require significant investment in infrastructure, both to transport raw and processed mineral resources to and from productive sites, and to provide access and utility infrastructure to the industrial parks. Since much of the needed infrastructure is unlikely to be economically attractive to investors, the Government may need to finance many of these assets from its own resources. 65. Provision of Infrastructure is Complex. An agreement to develop OT was concluded on October 6, 2009 and production is underway. TT, which is the next major mine to be developed in Southern Mongolia and only 130 km from OT, is also located in a remote area, lacks appropriate access infrastructure and is without dependable utility services, including power, water and heat. For mines in the region to become fully operational, an array of infrastructure facilities and services will be required. The development of an industrial park at Sainshand with appropriate infrastructure facilities and services would be a complex undertaking that would

16

necessitate a highly integrated planning approach and be a mix of both public and private funding. These large capital projects necessitate adequate preparation and coordination among numerous government entities, and where the private sector is involved, appropriately structured tender processes that are objective and have clear procedures for identifying and selecting the most qualified investors. 66. Timing will be Critical. To enable production at major mining sites, transport facilities will need to be constructed and reliable utility services made available, and they will need to be appropriately sequenced and delivered before full-scale production at the mines can begin. This poses a complex and formidable undertaking - investments are cumbersome, require long lead times to properly prepare, and need to be coordinated across various sectors and levels of government, and among numerous stakeholders. The challenges of delivering the required infrastructure are exacerbated by the need to bring most services on-line at about the same time. 67. Delivering Needed Infrastructure will Present Large Organizational Challenges. The diverse range of infrastructure investments required to support mining development, as well as the legal and financial implications of the investments, will require extensive coordination among various government ministries. No single entity or ministry will have exclusive responsibility for all of the issues that these developments will bring, and several ministries will need to work in a collaborative fashion to successfully conclude investments. Ensuring that all Government agencies move together to facilitate development will be essential to delivering the required infrastructure to meet the timeframes established by developers. Stakeholder consultations will also be important in building national consensus about what should be done and who should be responsible. 68. Infrastructure is Costly to Develop. The cost to build the required transport, power, water and township infrastructure in Southern Mongolia alone will be substantial,3 and the Government plans to seek private sector investment, through public-private partnerships (PPPs), to the extent possible. Partnering with the private sector would bring much needed capital at a time of constrained budgets, and speed the development of infrastructure that is essential to mining operations. 69. There are also plans to raise as much as US$1.0 billion on international capital markets by early- to mid-2011. Given that the Government’s capacity to borrow will be constrained by its fiscal space, it is important that debt financing not be used to fund projects that could source their own financing (i.e., through private investment). The development of a program of viable PPP projects would help ensure that all sources of finance for infrastructure are fully optimized. 70. Specialized Skills will be Required. As agreement emerges on appropriate investment strategies, a variety of skills will be needed. Different strategies will demand distinct skill sets for those charged with implementing the chosen strategies. Should the Government decide to build and finance infrastructure on its own, the line ministries are positioned to complete the task. However, a strategy that involves private sector investment to develop infrastructure requires specialized skills to prepare, structure, and manage transactions. To attract private 3 The Infrastructure Strategy for Southern Mongolia AAA estimates that by 2015, more than $5 billion in basic

infrastructure would be required to support mining activities in Southern Mongolia.

17

financing, good project preparation is critical, and the Government must be clear about the extent of private sector participation and the types of services it wants from investors. Support from transaction advisors is highly recommended for initial transactions.4 Skills to monitor and enforce contractual terms and conditions would need to be strengthened. 71. Management of Water Resources Essential. Southern Mongolia has a complex variety of aquifers at various depths, and the development of mines in the area will involve abstraction of groundwater. Both urban and rural populations, and associated livestock, rely extensively on groundwater from wells and currently consume about 50,000m3/day. The towns of Dalanzadgad, Mandalgobi, and Sainshand have a combined population of 55,000, and together consume around 6,200 m3/day of water. Their supply is from well fields, with treatment where necessary to reach drinking water standards. Rural water supply in the region is mainly from individual herder wells and deep wells with pipelines, which supply the soums. The total rural water supply is estimated at 1,000-3000 m3/day, assuming a daily consumption of 10 liters to 30 liters per day for a rural population of 95,000. Livestock watering makes up the bulk of water use in rural areas and is estimated at approximately 32,000m3/day. Current water demand of the mining industry is around 40,000 m3/day. Industry, commerce and irrigated agriculture presently have low levels of demand for water, but it is possible that as towns are established, these activities could develop in surrounding areas. 72. Based on projected development of mines and associated growth in populations, as much as 350,000 m3/day of water could be required by 2020. Estimates of groundwater potential range from 550,000 m3/day to 1,370,000 m3/day (200-500 million m3/year), which would indicate enough groundwater in the region to support the needs of expected mining activities, local communities, and herders for at least ten years, likely more. This wide range is caused by the uncertainty in the available data and information, and more detailed studies are required in order to spatially match water demands with water resources, and to determine the longer-term water resource arrangements for the region. Water quality also needs to be assessed, since different qualities of water can be used for different mining activities, as well as for supplying humans and livestock. The extraction of water needs to be carefully monitored so that if unexpected negative consequences occur, alternative sources can be identified. 73. There is a wealth of information about groundwater in the region, but it is spread across different institutions, including the Geological Information Center, Institute of Environment, Ministry of Nature and Environment, private sector, and individual experts. This information needs to be assembled in one location to determine the extent of knowledge about groundwater in the area. Based on what’s known about groundwater, additional studies to develop a comprehensive understanding of water resources throughout the region are needed. 74. Structure of Water Sector. The water sector in Mongolia is institutionally multifaceted and dispersed, especially at the national level, with 13 main agencies and many minor ones involved in various aspects of sector planning and management. There are often overlaps, and sometimes gaps, in responsibilities. There is no single body coordinating groundwater

4 In late-May 2009, the Government canceled a tender for a new power plant after the only bid it received was

judged to be technically non-responsive. Nearly thirty prospective bidders purchased the tender documents, but the poor quality and confusing nature of the request resulted in a single bid.

18

management in Mongolia, although several Ministries and institutes carry out part of the tasks, and no coordination of water management at the Aimag and soum levels. Available data are not kept in a central location and often are either not accessible or only accessible for a fee. 75. In 2004, the Government of Mongolia adopted the water basin approach for managing its surface and groundwater resources, which is an essential first step to introducing an integrated approach to managing water resources throughout the country. The establishment of River Basin Councils (RBCs) is specified in the Water Law (2004), which further specifies powers of the RBCs. These include assessing water resources, planning for the use of water resources, monitoring and protecting water resources, and conducting appropriate research. 76. The Water Authority under the Ministry of Nature, Environment and Tourism has identified 29 water basins that cover the entire country. For the southern part of Mongolia, these basins are in fact “groundwater basins,” as surface water drainage is of minor importance there. Consideration is being given to aligning the boundaries of these groundwater basins with Aimag boundaries, rather than topographical boundaries as for the surface water basins. 77. For the Southern Mongolia Region, the Government is considering establishing entities to manage groundwater in two basins. The proposed basin level groundwater management organizations would consist of a Groundwater Management Council (GMC), and a Groundwater Management Administration (GMA). Together, these organizations would form the focal organizations for Integrated Water Resources Management (IWRM) in a basin. This proposed structure reflects the institutional organization at the national level with the National Water Commission and the Water Authority. 78. The GMC would act as the basin level coordinating body, in which all relevant stakeholders and actors would be represented to voice and protect their interest in groundwater in the basin. The smaller GMA would have full-time staff to carry out the daily management tasks. It would function as the knowledge and information center on water issues in the basin and carry out the supporting studies for policy development and IWRM. If successful, this structure would be rolled out to other basins. 79. Enabling Environment for Private Investment in Infrastructure. The Government continues to strengthen and refine the legal and regulatory framework and institutional arrangements needed to enable private investment in infrastructure. In November 2008, a parliamentary working group was created to assess critical aspects of PPPs, including the legal and regulatory frameworks governing PPPs in Mongolia, as well as the country’s capacity to implement PPPs. The working group drafted a policy paper on PPPs and law on concessions and submitted them to Parliament for consideration on July 3, 2009. The Policy Paper on PPPs was subsequently approved by Parliament on October 20, 2009. The Concession Law was also approved by Parliament and went into force on March 1, 2010. 80. The Concession Law stipulates that the State Property Committee (SPC)5 will be responsible for implementing PPP projects with relevant line ministries and will serve as a

5 The SPC is the state administrative authority in charge of state property, including assets and enterprises. It does

not, however, own the land on which assets and enterprises are located.

19

clearinghouse to review and screen all proposed PPP transactions. Proposals for existing assets will be the responsibility of the SPC, while PPPs proposed for new facilities and services will be prepared by the relevant line ministry. For PPPs that are approved, working groups will be organized with line ministries to prepare tender documents. The SPC will sign concessions and contracts for PPPs. To facilitate its work, the SPC created a specialized eight-person unit entitled the Department of PPPs and Concessions. 81. A Decree issued by the Prime Minister in January 2009 established the National Development and Innovation Committee (NDIC) as a national economic policy and planning unit reporting to the Prime Minister. Among its tasks the NDIC is responsible for implementing the Government’s National Development Strategy, tracking progress on attaining the Millennium Development Goals, and providing comprehensive advisory support for the country’s overall economic and social development. Its mandate includes, preparing plans for regional development, articulating investment plans for key economic sectors, and coordinating key investments among government entities. It might also play a role in facilitating PPPs and private sector investment. It is expected to play a critical part in the country’s development, including Southern Mongolia. 82. In May 2009, the Cabinet established the South Gobi Region Infrastructure Working Group, an advisory body that consists of some 15 members from key ministries. Its mandate is to help prioritize infrastructure investments for the region. 83. Capacity Challenges, Geopolitics, and Institutional Complexities. The failure in 2009 to conclude an agreement to build a fifth power plant for Ulaanbaatar revealed the Government’s lack of understanding and capacity to prepare projects involving private investment. The relevant ministry prepared the bid documents and tendered the transaction without the benefit of outside expertise or advice, and while nearly thirty firms purchased the bid documents, just one bid was received. After two months of negotiations with the single bidder, the Government cancelled the tender. 84. The development of key infrastructure is contentious and there is geopolitical interference surrounding the development of large infrastructure facilities to support developments at the OT and TT mines. Various potential railway routes are being considered for the export of mineral resources, and neighboring countries have offered to build railway infrastructure, as well as power plants, in return for access to the region’s mineral resources. In addition, the role mining companies might play in developing trunk infrastructure and urban services is not known. Specific transactions and how they’ll be financed have not been identified and the process for doing so is not transparent. 85. There are institutional challenges, as well. The process for planning large infrastructure investments in Mongolia is still developing, and there is no defined structure for taking decisions about which investments should take precedence and how various government entities should interact to prepare and implement PPPs. The Concession Law gives the SPC responsibility for preparing PPPs for existing state assets, and for appraising greenfield PPPs proposed by line ministries. However, the Law is silent about procedural aspects for identifying, selecting and approving PPP projects, and about the specific roles and responsibilities of line ministries, the

20

SPC and the Ministry of Finance (MOF). Because investors will likely seek assurances (in the form of contingent liabilities and/or possibly minimum revenue guarantees) from the Government against certain types of risks, the MOF will need to have input about proposed PPP projects, since such guarantees would directly impact the budget. All of a project’s fiscal risks must be known, accounted for, and adequately reflected in budgets.

21

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

MONGOLIA: MN-Mining Infrastructure Investment Support Project

Project Donor Description Amount (US$ mil.)

Infrastructure

Energy Sector Project

World Bank To reduce system losses and improve revenue collection in electricity distribution companies in Mongolia.

$30.0

Energy Sector Project (Additional Financing)

World Bank To fund urgently needed investments to help avert disruptions in the delivery of power to residents of Ulaanbaatar by renovating existing equipment and upgrading portions of the electricity distribution network.

$12.5

Second Ulaanbaatar Services Improvement Project

World Bank Support to improve water supply in ger areas, reduce water losses, replace obsolete electrical equipment, and improve operational and commercial aspects of the water agency.

$22.9

Southeast Gobi Urban and Border Town Development Project

ADB Funding will be extended to improve utility infrastructure, and reform service delivery for urban services through performance based contracting.

$15.0

Support for Public-Private Partnerships

ADB Assist in the development of a legal & regulatory framework, as well as institutional arrangements, for PPPs, and begin to identify a pipeline of PPP projects.

$0.90

Investment Policy Advisory Services Project

GIZ Support to government ministries to promote investment in public projects, PPPs, and projects involving foreign direct investment.

$3.00

PPP Twinning Arrangement Government of South Korea

Advice and training is being provided to Government of Mongolia officials on appropriate institutional arrangements and approaches to developing a program of PPPs.

$0.50

Mining

Mining Sector TA Project World Bank Assist Government to develop appropriate policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of government, industry and civil society.

$9.3

Fiscal Policy

Governance Assistance Project World Bank To improve public investment planning and budgeting of priority projects.

$14.0

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Annex 3: Results Framework and Monitoring

MONGOLIA: MN-Mining Infrastructure Investment Support Project

Results Framework

Project Development Objective

Project Outcome Indicators

Use of Project Outcome Information

A. Facilitate investments in

infrastructure to support mining and downstream processing activities, regardless of funding source.

B. Build local capacity to prepare

and transact infrastructure projects.

A. At least two infrastructure assets

ready for tender. B. Good practice and procedures

established for preparing infrastructure projects for public and private financing.

A. Government assesses what went

well and identifies areas for improvement to strengthen preparation of subsequent projects.

B. Ensure officials are aware of

what constitutes well prepared projects.

Intermediate Outcomes

Intermediate Outcome Indicators

Use of Intermediate Outcome Monitoring

A. Process defined and

understanding of studies required to assess and prepare infrastructure projects.

A. Studies and assessments

underway.

A. Gauge whether preparation of

projects is being processed effectively.

B. Government officials use

improved practices and procedures to develop infrastructure projects.

B. Officials able to identify studies

required to prepare infrastructure projects.

B. Determine whether training is

sufficient, effective.

23

Arrangements for Results Monitoring

Target Values Data Collection and Reporting

Project Outcome Indicators

Baseline FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 Frequency and Reports

Data Collection

Instruments

Responsibility for Data

Collection A. At least two

key infrastructure assets ready for tender.

B. Good practice

and procedures established to prepare projects for public & private financing.

Technical/financial

understanding to prepare

transactions lacking.

Limited

understanding of required studies, no

guidelines on economic

evaluation.

Process and

types of required

assessments defined.

Methodology & criteria to

prioritize projects agreed (Q3).

Viability of two priority

projects determined

(Q2).

One

transaction ready for

tender (Q2).

One

transaction ready for

tender (Q4).

Good practice & procedures adopted.

Quarterly

PMU reports & annual

SPN reports.

Quarterly PMU reports

& annual SPN reports.

Consultants’

progress reports &

SPN mission docs.

Consultants’

progress reports &

SPN mission docs.

PMU and

World Bank

PMU and World Bank

Intermediate Outcome Indicators

Component 1: 1.1 Feasibility

studies for infrastructure projects.

1.2 Rapid

response to address issues impacting private investment.

Studies for priority projects not available.

Technical/financial support to address

issues not available.

Studies launched for infrastructure

projects (Q4).

On-going studies for

infrastructure projects.

Rapid response to at

least 1 issue.

Bid docs for 1 transaction available

(Q4).

Rapid response to at

least 1 issue.

On-going studies for

infrastructure projects.

Rapid response to at

least 1 issue.

Bid docs for 1 transaction

available (Q2).

Rapid response to at

least 1 issue.

On-going studies for

infrastructure projects.

Rapid response to

at least 1 issue.

Quarterly PMU reports

& annual SPN reports.

Quarterly PMU reports

& annual SPN reports.

Consultants’ progress reports &

SPN mission docs.

Progress reports &

SPN mission docs.

PMU and World Bank

PMU and World Bank.

24

Component 2: 2.1 Training

programs and events.

2.2. Conferences

to promote investment opportunities.

2.3 Consultants

provide hands-on training and help administer government-financed projects and PPP concessions.

n/a

n/a

No concessions to administer.

1 program

n/a

2 programs

At least 1 event.

n/a

2 programs

At least 1 event.

n/a

2 programs

At least 1 event.

Administration begins on at

least 1 project (Q3).

2 programs

At least 1 event.

On-going

1 program

At least 1 event.

On-going

Quarterly

PMU reports & annual

SPN reports.

Quarterly PMU reports

& annual SPN reports.

Quarterly

PMU reports & annual

SPN reports.

Reports on

specific training events.

Reports on each event.

Progress reports &

SPN mission docs.

PMU and

World Bank.

PMU and World Bank.

PMU and World Bank.

Component 3: 3.1 Ability to

manage groundwater strengthened.

Insufficient resources/capacity

to manage groundwater in

Southern Mongolia.

Members of GMCs

appointed (Q1).

GMAs fully staffed (Q2).

GW investigations

launched (Q4).

GW management & monitoring

plans launched

(Q1).

GW investigations

on-going.

GW management & monitoring

plans completed

(Q4).

GW investigations

on-going.

Electronic database

operational (Q1).

GW investigations

on-going.

Sustainable revenue source

identified (Q4).

Quarterly PMU reports

& annual SPN reports.

Quarterly PMU reports

& annual SPN reports.

Quarterly

PMU reports & annual

SPN reports.

Consultants’ reports &

SPN mission docs.

Consultants’ reports &

SPN mission docs.

Progress reports &

SPN mission docs.

PMU and World Bank

PMU and World Bank

PMU and World Bank.

25

Annex 4: Detailed Project Description

MONGOLIA: MN-Mining Infrastructure Investment Support Project 86. The US$25.00 million MINIS is a technical assistance project that will facilitate development of infrastructure to support mining activities, including downstream, value-added processes, through feasibility studies and assessments, and build local capacity to prepare infrastructure projects. Funds will be used to prepare projects that are financed from government resources, as well as by investors. It is important to note that the MINIS does not focus on mining operations, but rather on general infrastructure that will support the mining sector and local communities within an investment’s area of influence. While many of the projects are expected to be in the Southern Mongolia Region, projects in other locations throughout the country will also be eligible for financing under the MINIS. The project will consist of four components.

Component 1: Support for Infrastructure Investments (US$19.69 million) 87. To support infrastructure development, the project will provide financing to prepare regional infrastructure investment plans, conduct feasibility studies to assess technical options and determine economic and financial implications of proposed projects, and address emerging priority issues as a result of the country’s nascent enabling environment governing private participation in infrastructure. It is possible that financing under the MINIS would be used to retroactively finance on-going assignments to determine the feasibility of a proposed industrial park at Sainshand, and the best structure for financing a proposed railway to transport mineral resources to markets other than China.

1.1: Planning/Feasibility Studies/Business Cases (US$19.32 million) 88. To support better strategic planning and facilitate the selection of projects to be prepared under the MINIS, up to four regional infrastructure investment plans will be developed. The plans will be expected to determine priority infrastructure needs based on mineral developments that are planned for a particular region, sequence their implementation, and identify required feasibility studies for specific investments. 89. Financial support will be provided to relevant government entities and line ministries to carry out various feasibility studies and develop business cases for priority infrastructure projects. The feasibility studies are expected to include technical assessments, such as engineering designs, geotechnical surveys, economic and financial analyses, environmental and social impact evaluations, and reviews of specific aspects of the country’s legal, regulatory and institutional frameworks. Funds could be used to prepare mining-related infrastructure projects whether financed from the government budget or the private sector. Projects in the energy, transport, IT and communications, water, housing and social sectors will be eligible, as will logistics and border crossing facilities. In addition, the evaluation and structuring (for private investment) of downstream, value-added activities, such as copper smelters and iron pellets plants, will also be eligible for funding.

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90. If, during implementation, the counterpart requests technical assistance to carry out feasibility studies for a coal-fired power plant, the Bank's Senior Management would review such a request on a case-by-case basis, and the Bank's March 2010 Operation Guidelines on Criteria for Screening Coal Projects under the Strategic Framework for Development and Climate Change would be followed. In addition, other relevant guidance documents would also fully apply to any upstream technical work. 91. For projects that are proposed to be developed with private funding, including PPPs, business cases for individual investments will be developed to determine their bankability. This process is likely to include a review of government priorities for potential projects, identifying government commitments and obligations under various investment structures, inclusive of potential financial contributions and contingent liabilities, developing investment and financing plans, reviewing the country’s legal and regulatory framework governing private investment, determining appropriate allocation of risks and underlying commercial principals for transactions, and undertaking market soundings to gauge investor appetite.

1.2: Rapid Response to Address Emerging Priorities (US$0.37 million) 92. This component has been designed to flexibly respond to existing or emerging priority issues that could impact the potential for private investment in infrastructure facilities and services, and facilitate the export of mineral resources. While specific interventions have not been identified, possible areas of support could include finalizing on-going transactions with investors, strengthening laws, developing national standards for infrastructure development, facilitating border crossing or transnational agreements (transit), managing guarantees to mobilize private financing, or establishing mechanisms to coordinate regional development and ensure that investors are adequately addressing their corporate social responsibilities. 93. For some infrastructure projects, the Government may have already identified investors and would need to develop contractual structures to define roles and responsibilities of the parties to the transaction. For those cases, support could be extended to hire specialized firms, including legal firms, to bring transactions to close. The Government plans to build up to 1,600 km of new railway over the next five years, some of which might be privately-financed. There is concern, however, that the legal and regulatory framework is deficient and may need to be amended in order to attract international private financing. Key issues include the need to ensure fair and transparent competition and access based on open market principals, and eliminating the duplication in economic regulation between the 2007 Railway Transport Law and the 2000 Law on Unfair Competition. Presently, there are no defined standards for building rail infrastructure. Reference is often made to “Russian standards,” but these may not be appropriate for intensive mineral resource movements and an adequate set of national standards for transporting mineral resources by rail within the country is needed. To facilitate the movement of mineral resources from Mongolia to neighboring countries, transnational agreements will need to be concluded. To attract private investment, it is likely that guarantees will be required. However, there is an apparent conflict between the Concession Law (2010), which allows the government to issue guarantees, and the Fiscal Management and Responsibility Law of 2001, which prohibits the issuance of guarantees. The Government will need to develop a consistent policy to manage contingent liabilities, including criteria for issuing guarantees and an approach

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for managing the Government’s overall exposure. Decisions about infrastructure investments in the region and their long-term socio-economic impacts will necessitate input from local communities, exchange of information among numerous government entities, and coordination of decisions across various levels of government. To effectively do so, the Government might want to establish and operationalize a regional infrastructure development council to facilitate decision-making and information sharing. Component 2: Capacity Building and Knowledge Transfer (US$1.45 million) 94. A long-term approach for building capacity and developing the requisite skills to prepare infrastructure projects and transactions with investors will be necessary to develop local skills. The emphasis would be on learning by doing but with sufficient support from qualified consultants. This support will be extended to line ministries and agencies charged with preparing government-funded projects, as well as transactions with investors.

2.1: Training and Advocacy Programs (US$0.33 million)

95. An important part of building the Government’s capacity to assess the viability of complex, infrastructure projects will involve both formal and on-the-job training with guidance from qualified specialists. The range of potential projects to be prepared under the MINIS spans a number of sectors and involves varying levels of complexity. Some could be as simple as building access roads, while others might involve the development of integrated platforms with access and utility infrastructure supporting advanced technological industries or industrial parks. 96. This component will provide staff training and development on basic principles, practices and techniques on a variety of project preparatory activities, including: (i) technical and engineering reviews; (ii) technical designs, drawings and specifications; (iii) economic evaluations and cost-benefit analyses; (iv) financial assessments and forecasting; (v) environmental and social impacts evaluations, especially as they pertain to the project’s environmental and social safeguards framework; (vi) legal and regulatory reviews; (vii) further assessments of potential PPPs to determine viability; and (vii) market soundings. This training will be extended to line ministries and agencies6 at the national, Aimag and soum levels, as appropriate.

97. Training and public awareness activities will also be a cornerstone for building government capacity to prepare transactions for private investment. Because the development of PPPs is dynamic, a comprehensive program of on-going training for officials charged with preparing transactions is fundamental to ensuring that appropriate methods and up-to-date practices are employed to prepare PPP transactions. Training will be provided for a variety of possible topics, such as to: (i) increase awareness of options to involve the private sector in the development of infrastructure; (ii) elevate understanding of private investment in power, transport (rail and roads) and water; (iii) identify possible investments with local governments;

6 Line ministries are expected to include Ministry of Finance, Ministry of Roads, Transport, Construction and

Urban Development, Ministry of Mineral Resources and Energy, and Ministry of Nature, Environment and Tourism, while agencies will include National Development and Innovation Committee, and State Property Committee.

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(iv) understand how to conduct feasibility studies to prepare PPPs; (v) refine the country’s existing policy and regulatory framework governing PPPs; (vi) strengthen the capacity of regulators to oversee and monitor compliance with contractual terms and conditions, including technical, legal, regulatory, economic, financial, environment, and social issues; and (vii) training of trainers. Developing guidance notes and/or manuals on specific PPP topics, including translation and printing costs, is also envisaged as part of this component.

98. Preparing pilot PPP projects would also be an effective way of transferring knowledge and capacity to local specialists. Under the support provided by the IFC, a series of real-time learning events could be organized whereby the IFC advisory teams preparing the pilot projects would give workshops at important milestones or phases, such as during the pre-feasibility and due diligence period, when assessing the legal and regulatory frameworks, or when testing the market. These events could be targeted at officials directly involved in preparing the pilot transaction, as well as staff from other line ministries that may be preparing subsequent PPP projects. 99. Training programs would be targeted for national, Aimag and soum level officials, and both domestic and international training is anticipated. Study tours could be organized to countries with relevant experience in developing large-scale programs to quickly build-up infrastructure to support mining activities, and implementing PPP programs. Also, outside specialists might visit Mongolia to share their country’s experience. Fees and travel-related costs for officials traveling abroad to attend events will be covered by the Credit, as will the costs associated with bringing specialists to Mongolia. In addition, funds will be available to finance logistics of events organized in Mongolia, including venue fees, translation and printing of workshop documents, simultaneous translation, meals and coffee/tea breaks for participants, and banners. 100. Promoting awareness and building capacity of government officials and the local business community about investment opportunities and the use of PPPs through conferences and other communication mechanisms is important for spreading knowledge, obtaining buy-in, and increasing understanding about possible investment opportunities. It is anticipated that at least one conference per year, possibly more, will be conducted to disseminate information for audiences consisting of government officials, business groups and trade associations.

2.2: Consultants (US$0.82 million)

101. To strengthen local abilities to identify priority investments and carry out feasibility studies to prepare infrastructure projects, both full-time and part-time consultants will be utilized. A range of consultants could be called upon, including strategic planners, engineers, sectoral and technical specialists, economists, and environmental and social experts. In addition, consultants could be hired to support the Government in the preparation of terms of reference for feasibility studies. 102. For transactions involving the private sector, full-time or part-time consultants will be contracted for the SPC to develop skills to prepare transactions with investors. The consultant(s) will be responsible for a number of activities, including:

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conducting initial training on PPPs and private participation in infrastructure development;

identifying additional relevant training opportunities for local staff;

developing model terms of reference and a model bidding process to hire lead transaction advisors;

assisting in the procurement of lead transaction advisors, including assistance with design of bidding process for selection of advisor, and negotiations with winning bidders;

providing general advice as transactions advance;

providing on-going advice to the Government on policy to attract private financing; and

preparing a report on completion of the assignment that identifies key achievements and outstanding issues.

103. In addition, consultants might be contracted to develop the capacity of officials in other ministries and agencies to prepare PPP transactions. These might include Legal Counsel, Institutional Specialists, Financial Consultants, and Implementation Specialists.

104. The local staff to be hired to support the pilot PPP transactions that are being prepared with the support of the IFC would also be eligible for financing under the Credit. 105. As a precursor to establishing a Risk Management Unit at the Ministry of Finance, it is expected that a consultant would be hired to help develop a framework to manage contingent liabilities, including developing a methodology and criteria for issuing guarantees, a process for approving them, and a structure to limit the Government’s overall exposure.

2.3: Contract Administration (US$0.30 million) 106. Once agreements have been concluded, the government will need to ensure that both investors and the government are in compliance with contractual terms and conditions. Funding would be made available to hire specialists to support and train officials in a number of activities, such as ascertaining whether required investment, operational and maintenance standards are being met, measuring performance based on pre-determined criteria, calculating payments based on performance, and understanding whether environmental and social obligations are being adequately fulfilled. In addition, changes to agreements during implementation are not uncommon, and assistance would likely be required for any modifications to contractual documents. To administer contracts and monitor compliance, the government would likely assemble small teams of specialists within government, and then hire outside technical, legal, financial and/or environmental consultants to provide hands-on support and training in specific areas, as needed.

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Component 3: Strengthening Groundwater Management (US$3.23 million) 107. Support will be provided to strengthen the capacity of local authorities to manage groundwater resources in the region. The government has established a framework of 29 water basins for the entire country. For Southern Mongolia, these basins are centered on groundwater, as surface water is of minor importance in the southern part of the country. It is expected that a new institutional structure will be piloted at two locations in Southern Mongolia with jurisdictional responsibilities defined along groundwater boundary basins. A framework, including a mandate and staffing needs, has been defined and will be made operational under this component. Under the proposed framework, up to two Groundwater Management Councils (GMC) and at least two Groundwater Management Administrations (GMAs) will be established in Basin 17 and combined Basins 18 and 20. 108. The GMCs will act as the coordinating body in which all relevant stakeholders and actors will be represented to voice and protect their interest in groundwater management in their respective basins. It is expected that the GMC will only have two full-time staff - a Chairman and a secretary. The other GMC participants will be stakeholders who are invited to attend the occasional meetings without payment. 109. The GMAs will consist of a small core team of professional staff to carry out the daily management tasks and function as the knowledge and information center on water issues in their respective basins. When needed, they will call on outside specialists, and where possible, the GMA will outsource key activities, such as drilling and water quality analyses. The GMAs are expected to have up to seven full-time staff, including a: (i) Director; (ii) secretary; (iii) hydrogeologist; (iv) water engineer; (v) water quality engineer; (vi) GIS database engineer; and (vii) driver. 110. Funds will be provided to finance start-up costs and carry out the following principal tasks:

reviewing existing laws and regulations and proposing any amendments needed to make the proposed structure implementable;

preparing a groundwater management plan with assistance from a qualified consultancy firm;

developing a groundwater monitoring plan to regularly measure groundwater levels, groundwater abstractions, and groundwater quality;

carrying out new data collect, including surveys of boreholes, groundwater use, groundwater storage and recharge and current groundwater quality;

carrying out groundwater investigations and research;

developing a data exchange protocol to allow the use of extensive existing data with various institutes;

monitoring and enforcing compliance with licenses to abstract groundwater;

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preparing, in close cooperation with the Water Authority, guidelines for the design and construction of wells;

monitoring bore hole installation; and

identifying a revenue stream to sustain operations of the GMCs and GMAs.

111. To make the GMCs and GMAs operational, furnishings and equipment, including field equipment and two vehicles, will be financed under the project. The newness of the framework and the obligations and responsibilities under the revised structure will necessitate substantial awareness training, and funding will be used for this purpose. 112. In addition, support will be provided to conduct a review of water resource pricing based on economic principles, including the economics of non-renewable resources. To sustain the Unit’s operations, the imposition of a consumption-based tariff (per cubic meter) or an annual fee on mining firms will be considered. Component 4: Project Management (US$0.63 million) 113. A new Project Management Unit (PMU) at the Ministry of Finance will be established to implement the MINIS. A PMU Director will be hired to oversee implementation of the MINIS and will report to the State Secretary for Finance. The PMU Director will have overall responsibility for managing the MINIS, including: (i) implementing project activities per the Project Implementation Manual, within budget and according to schedule; (ii) all procurement activities, including contracting consultants, and purchasing goods and equipment; (iii) maintaining financial records, making disbursements, managing the Designated Account, and financial reporting; (iv) monitoring the performance of consultants to ensure that contractual obligations are fulfilled; (v) reviewing and approving all reports and outputs issued by consultants; (vi) evaluating project activities and reporting on implementation progress; and (vii) ensuring that the environmental and social safeguards framework is effectively implemented. A Procurement Specialist and Financial Management Specialist will be hired to manage the fiduciary requirements of the project. Proceeds under the project will be used to hire a PMU Director and technical staff, as needed. 114. Funding will also be provided to contract domestic and international consultants to help monitor progress and assist in implementation, including financial audits for the project, and to acquire office equipment, pay PMU operating costs, and purchase one vehicle for the PMU. Incremental operating costs will also be financed through the Credit and include, inter alia, office rent, office consumables, communications, vehicle operating and repairs, and salaries of contractual staff (other than consultants).

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Annex 5: Project Costs

MONGOLIA: MN-Mining Infrastructure Investment Support Project

Project Cost By Component and/or Activity Local

US$ million Foreign

US$ million Total

US$ million Component 1: Infrastructure Investments 1.1 Feasibility Studies/Business Cases

0.920

17.480

18.400

1.2 Rapid Response to Emerging Priorities 0.035 0.315 0.350 Subtotal Component 1:

Component 2: Capacity Building 2.1 Training and Advocacy Programs

0.955

0.031

17.795

0.279

18.750

0.310 2.2 Consultants 2.3 Contract Administration

Subtotal Component 2: Component 3: Groundwater Management 3.1 Management Plans 3.2 Monitoring Plans 3.3 Groundwater Investigations 3.4 Capacity Building 3.5 Costs to Establish Offices 3.6 Operating Costs for Offices

Subtotal Component 3: Component 4: Project Management

0.070 0.029 0.130

0.112 0.300 0.413 0.060 0.307 0.540 1.732

0.715 0.261 1.255

0.263 0.450 0.338 0.240 0.053

1.343

0.785 0.290 1.385

0.375 0.750 0.750 0.300 0.360 0.540 3.075

4.1 Consulting Services 0.382 0.042 0.424 4.2 Goods and Equipment 0.038 0.038 4.3 PMU Vehicle 0.075 0.075 4.4 PMU Operating Costs (average annual) 0.063 0.063

Subtotal Component 4:

0.558 0.042 0.600

Total Baseline Cost: 3.375 20.435 23.810 Price Contingencies (5%): 0.169 1.021 1.190

Total Project Costs: 3.544 21.456 25.000

Total Financing Required 3.544 21.456 25.000

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Annex 6: Implementation Arrangements

MONGOLIA: MN-Mining Infrastructure Investment Support Project 115. Implementation Period. The MINIS will be implemented between July 1, 2011 and June 30, 2016, and the Credit’s expected closing date is September 30, 2016. 116. Project Oversight. Because the types of infrastructure projects to be developed using MINIS funds have not been identified, and because they are expected to cover more than one sector, a Project Steering Committee (PSC) will be established to agree and oversee the use of project funds. 117. The State Secretary for the Ministry of Finance will Chair the PSC, which will be comprised of representatives from:

Department for Development Financing and Cooperation, MOF (Director General or Alternate);

Department of Financial and Economic Policy, MOF (Director General or Alternate);

Department of Fiscal Policy, MOF (Director General or Alternate);

Ministry of Mineral Resources and Energy (Director General or Alternate);

Ministry of Roads, Transport, Construction and Urban Development (Director General or Alternate);

Ministry of Nature, Environment and Tourism (Director General or Alternate);

National Water Commission (Deputy Chairman or Alternate);

National Development and Innovation Committee (Deputy Chairman or Alternate); and

State Property Committee (Deputy Chairman or Alternate). 118. The PMU Director will serve as the PSC’s Secretary, but will not have a vote. Others can be appointed by the Chairman with the endorsement of the PSC, including a World Bank representative. The PSC will meet bi-annually, or on an as-needed basis. 119. The PSC’s chief functions will be to: (i) provide guidance on the use of MINIS funds and approve procurement plans; (ii) solicit input and cooperation from relevant ministries and Government agencies to prepare infrastructure projects that have cross-sectoral impacts; and (iii) for projects involving private investment, policy guidance to ensure that they are planned, developed and implemented in a comprehensive and coordinated manner. 120. Implementing Agency. The Ministry of Finance (MOF) will be the implementing agency for the project, and a new Project Management Unit (PMU) will be established at the MOF. The MOF will manage the MINIS on behalf of project beneficiaries from other ministries and agencies. The PMU will be responsible for: (i) procurement of all services, goods and

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equipment; (ii) financial record keeping, reporting and disbursements; (iii) project monitoring and reporting; and (iv) the contractual obligations with IDA.

121. A PMU Director will be hired to oversee implementation of the MINIS and will report to the State Secretary for Finance. The PMU Director will have overall responsibility for managing the MINIS, including:

(i) implementing project activities per the Project Implementation Manual, within budget and according to schedule;

(ii) managing all procurement activities, including contracting consultants, and purchasing goods and equipment;

(iii) overseeing financial record keeping, disbursements, the Designated Account, and financial reporting;

(iv) monitoring the performance of consultants to ensure that contractual obligations are fulfilled;

(v) with the support of relevant technical specialists from line ministries and agencies, reviewing and approving all reports and outputs issued by consultants;

(vi) gathering progress and evaluation of project activities from line ministries, and providing consolidated reports on implementation progress; and

(vii) ensuring that the environmental and social safeguards framework is effectively implemented.

122. The PMU will carry out the procurement and financial management of specific activities on behalf of the line ministries and agencies. MOF will ensure that the relevant line ministry and/or agency support the PMU in managing the technical aspects of activities associated with their sectors, including preparing terms of reference, and implementing, monitoring, evaluating and providing comments on the activities and specific outputs. Local and/or international consultants may be hired to support the technical specialists in these duties. For activities involving PPPs, SPC will work with the PMU and relevant line ministries and agencies, while activities involving strategic planning will require input from the NDIC. MOF will ensure that the Ministry of Nature, Environment and Tourism (MNET) provides sufficient resources and properly staffs up to two GMCs and at least two GMAs in Basin 17 and combined Basins 18 and 20, and supports the PMU with overall implementation of the technical aspects of Component 3 on strengthening the management of groundwater in Southern Mongolia. Ministry and agency staff will work closely with the PMU during implementation of their various activities. 123. Fiduciary Aspects. A Procurement Specialist and Financial Management Specialist will be hired to manage the fiduciary requirements of the project. These costs will be financed through the Credit. Both the Procurement Specialist and Financial Management Specialist will carry out their respective responsibilities according to the World Bank’s policies and procedures. The MINIS’s fiduciary team should be encouraged to work with and learn from the existing PMU at the Ministry of Finance that is responsible for the Bank’s Governance Assistance and Economic Capacity and Technical Assistance Projects. This is an experienced PMU that understands the Bank’s procurement and financial management requirements. A Project

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Implementation Manual, which will include a Financial Management Manual, will be prepared prior to project effectiveness.

124. Procurement. All training activities will require the approval and sign-off of the State Secretary for Finance.

125. Financial Audits. The Government of Mongolia (GOM) will appoint an independent external auditor, acceptable to the Bank, to conduct annual audits of the project’s accounts in accordance with International Standards on Auditing, under terms of reference satisfactory to the Bank. The audits will be financed from Credit proceeds.

126. PMU and GMA Costs. Funding will also be provided to contract domestic and international consultants to help monitor progress and assist in implementation, and to acquire office equipment, pay PMU and GMA operating costs, and purchase three vehicles (one for the PMU and one for each of the GMAs that will be established as part of the groundwater component). Incremental operating costs will also be financed through the Credit and include, inter alia, office rent, office consumables, communications, vehicle operating and repairs, and salaries of contractual staff (other than consultants).

127. Project Implementation Manual. A Project Implementation Manual (PIM) will be prepared to guide project implementation and define the framework for managing coordination among the various beneficiaries. The PIM will provide job descriptions, detail arrangements for implementing the MINIS, define training programs on Bank fiduciary and safeguard requirements, provide templates for reporting, and guidance on monitoring.

128. Monitoring and Evaluation. The PMU will issue quarterly and annual progress reports. Quarterly reports will be due the last day of April, July, October and January, while the annual report will be delivered by the end of February. A mid-term review will be prepared in 2013, and an Implementation Completion Report will be completed within six months of project closing. The PMU will also monitor progress against agreed performance indicators, as defined in Annex 3. Advisory teams supporting the Government in the preparation of feasibility studies and specific transactions will provide regular input to the PMU Director about project progress. 129. Based on the Bank’s review of quarterly reports and the results of supervision missions, the PMU will take measures to ensure that the MINIS’s components are implemented without delay and according to schedule so that the development objectives can be achieved.

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Annex 7: Financial Management and Disbursement Arrangements

MONGOLIA: MN-Mining Infrastructure Investment Support Project Introduction/Summary

130. During project preparation, the Financial Management (FM) team conducted an assessment of the adequacy of project financial management system for Mining Infrastructure Investment Support Project (MINIS). The assessment, based on guidelines issued by Financial Management Sector Board on March 1, 2010, concluded that the project would meet the minimum Bank financial management requirements, as stipulated in OP/BP 10.02, subject to the satisfactory resolution of the proposed FM effectiveness conditions of recruiting qualified financial staff and completion of acceptable project Financial Management Manual. In the FM team’s opinion, the project will have financial management arrangement 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. Financial management risk is the risk 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. The FM risk pre-mitigation has been assessed as “substantial” and post-mitigation has been assessed as “moderate.”

131. The funding source for the project will be an SDR16.00 million Credit (approximately US$25.00 million). Credit proceeds will flow from the World Bank into a project Designated Account (DA) to be established at a commercial bank acceptable to the World Bank and managed by a Project Management Unit to be established and located within the Ministry of Finance (MOF). Note that the PMU staff are not all from the MOF.

Country Issues 132. The overall fiduciary environment in Mongolia can be characterized as weak. The public sector financial accountability system does not function well and corporate governance remains inadequate. Given these existing weaknesses in the financial accountability framework, a ring-fenced control system will be established and maintained for Bank-financed projects until the systemic weaknesses have been adequately addressed. Project Description

133. The MINIS is a technical assistance project with four major components. The project aims to facilitate investments in infrastructure to support mining-related activities and downstream value-added processes, and to build local capacity to prepare and transact infrastructure projects. For the detailed project description, please refer to Annex 4 of the PAD. External Auditing 134. 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

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audits of the project’s accounts in accordance with International Standards on Auditing, under terms of reference satisfactory to the Bank. The audit will be financed from the Credit proceeds. The auditor will: (a) express an opinion on the annual financial statements; (b) determine whether the DA has been correctly accounted for and used in accordance with the financing agreement; and (c) determine the adequacy of supporting documents and controls surrounding the use of Statements of Expenditure (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 project 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. 135. The annual audit report of project financial statements will be due to the Bank within six 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:

Audit Reports Submitted by Date Due

Project financial statements PMU June 30 of each calendar year

Risk Assessment and Mitigation

136. An assessment of the financial management risks was carried out as part of appraisal, and the following risks with corresponding mitigating measures were identified:

Risk Risk Rating

Risk Mitigating Measures Incorporated into Project Design

Risk Rating After

Mitigating Measures

Conditions of Negotiation,

Board or Effectiveness

Inherent Risk Country Level High Ring-fenced arrangements for the

project will be applied until the Treasury Single Account System within Government Financial Management Information is implemented. Once it takes place, financial management arrangements for the project will be discussed and revised accordingly.

Substantial -

Entity Level Moderate The project’s implementing entity is MOF, which has extensive experience with designing, managing and implementing the donor funded projects. MOF will be responsible for overall management and implementation of the project.

Moderate -

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In addition, a PMU will be established and located within MOF to effectively carry out implementation and daily administrative activities.

Project Level Substantial A new PMU will be established for the project and the newly hired staff do not have experience with Bank-financed project. A detailed Financial Management Manual (FMM) will specify adequate financial management and disbursement procedures for successful implementation from financial management perspective.

Moderate The FMM will be a condition of effectiveness.

Control Risk Budgeting Substantial Project annual and quarterly

financial plans will be prepared by the PMU and approved by the Project Steering Committee. The PMU will conduct variance analysis regularly to ensure project activities can be implemented as planned.

Moderate -

Accounting Substantial An acceptable FMM needs to be developed by the PMU and reviewed by the Bank, and a capable financial management specialist (FMS) will be recruited with proper qualifications and experience. Relevant financial management training will be provided to the newly recruited FMS. Appropriate accounting software is recommended for the project.

Moderate The FMM is a condition of effectiveness. Recruitment of a capable FMS is a condition of effectiveness.

Internal Controls

Substantial The internal control procedures will be specifically designed for the project and documented in the project FMM, which will include ,but not be limited to, the following: - Regular bank reconciliation and periodic cash count; - Proper authorization and approval procedures for payments; - Appropriate segregation of duties and job description for each PMU

Moderate

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staff; - Bank’s no objection for significant project activities.

Funds Flow Moderate The flow of funds for the project will be straightforward to facilitate implementation. Approval procedures for payments and withdrawal applications will be documented in the FMM to make funds delivery more efficient.

Low

Financial Reporting

Substantial The project will adopt financial reports with proper format and content. Quarterly Interim Financial Reports (IFRs) will be prepared and submitted to the Bank for review on a regular basis, as specified in the legal agreements.

Moderate

Auditing Moderate An external independent auditing firm will be appointed by MOF and accepted by the Bank with proper terms of reference.

Moderate

Overall: Substantial Moderate

137. Based on the assessment, the overall FM risk-rating assigned to this project at the appraisal stage was moderate, provided the proposed mitigating measures are fully carried out. The FM team will closely monitor the effectiveness of the measures and project FM risk during project implementation. Strengths 138. MOF has long-term and wide-ranging experience in successfully implementing many Bank financed projects, including the Economic Capacity Building Technical Assistance Project and Governance Assistance Project. Weaknesses and Action Plan

139. The table below identifies the key weaknesses and proposes corresponding actions.

Significant Weaknesses

Resolution Responsible Agency

Completion Date

PMU has not been established and financial staff have not been recruited.

1) An FMM describing the detailed financial management procedures will be prepared. 2) A qualified FMS will be recruited and necessary FM/disbursement training provided.

MOF/PMU

Prior to project effectiveness

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Funds Flow and Disbursement Arrangements

140. The PMU will maintain and manage one USD DA at a commercial bank, on terms and conditions satisfactory to the Bank, including appropriate protection against set off, seizure and attachments. Credit proceeds will flow from the Bank to the DA and will be disbursed against all eligible project expenditures with appropriate approvals from the PMU Director and the authorized representatives from MOF.

141. The PMU will prepare withdrawal applications. The PMU Director will ensure the completeness and accuracy of all withdrawal applications and append his/her signature as part of the internal control procedures. All Bank withdrawal applications will be signed off by the PMU Director and the authorized representatives from the MOF.

142. As noted above, Bank-financed projects will possibly move into the Treasury Single Account system within the Government Financial Management Information System (GFMIS). Once this happens, the DA arrangement will be revised accordingly.

143. Advances will be made from the DA to operating accounts (OA) to be opened at a commercial bank acceptable to the Bank and managed by the PMU and GMAs. The OAs will be used to finance small expenditures relating to incremental operating costs only. Small expenses will include, inter alia, utilities, communications and vehicle operating costs and repairs. The OAs will be maintained at the same bank, or branch of the same bank, in Mongolian Tugrug or USD by the PMU and GMAs, and will have a maximum ceiling of US$20,000 equivalent. Uses of the advance will be reported and reconciled with the DA on a monthly basis. The outstanding balance of the OAs will be reported as a separate item in the DA reconciliation statement that is submitted together with the DA withdrawal applications to the Bank. 144. To transfer funds from the DA to the OAs, the PMU and GMAs will provide quarterly budgets (with monthly allocations) for incremental operating costs to MOF for its review and approval. Lump sum disbursement for incremental operating costs will be disbursed from DA to OAs on a monthly basis based on the approved budget, original receipts and other supporting documents (no photocopies). Both the PMU Director and the PMU’s Financial Management Specialist will approve all payments made out of the OAs. 145. The flow of funds will be as follows:

World Bank

Designated Account (DA) of PMU

Operating Account (OA) of PMU and GMAs

Contractors, Suppliers, Beneficiaries

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146. Three disbursement methods are all available for the project, including advance, reimbursement, and direct payment. Supporting documents required for Bank disbursements under different disbursement methods are documented in the Disbursement Letter issued by the Bank. Applications will be supported by:

For reporting eligible expenditures paid from the DA for requesting for reimbursement:

(a) list of payments against contracts, together with records evidencing eligible

expenditures (e.g., copies of receipts, supplier invoices) for the contracts subject to the Bank’s prior review;

(b) statements of Expenditure in the form detailed in the Disbursement Letter for all other expenditures/contracts not subject to the Bank’s prior review; and

(c) a Designed Account Reconciliation Statement with applicable bank statement for reporting eligible expenditures paid from the Designed Account.

For requests for Direct Payment:

(d) records evidencing eligible expenditures, e.g., copies of receipts, supplier invoices.

147. Credit proceeds will be disbursed against eligible expenditures (taxes inclusive) according to the following table:

Category Credit

Allocated Amount (in SDR million)

Disbursement Percentage

Consulting Services 14.750 100

Goods and Equipment 0.300 100

Training and Workshops 0.575 100

Incremental Operating Costs 0.375 100

Total: 16.000

148. Retroactive financing of US$50,000 has been requested for this project to pay for staff salaries and basic equipment and supplies to establish the PMU. Eligible expenditures between February 10, 2011 and the signing of the Financing Agreement may be retroactively financed. 149. 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 auditors and Bank supervision missions. If the auditors or the Bank find any disbursements that are not justified by supporting documentation or which are

42

made for ineligible expenditures, the Bank may withhold further deposits to the DA until the Borrower has: (a) provided the accepted 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 Institutional Structure 150. The MINIS is expected to cover more than one sector while the exact types of infrastructure projects to be developed have not been identified. As such, a Project Steering Committee, chaired by the State Secretary of MOF, will be established to agree and oversee the use of project funds. This committee will be comprised of representatives from key line ministries and agencies. 151. MOF will be the implementing agency for the project, and a new PMU will be established at the MOF. The PMU will be responsible for the day-to-day project implementation and management work. The PMU will be composed of a PMU Director, Procurement Specialist and Financial Management Specialist. The PMU Director will oversee implementation of the MINIS and will report to the State Secretary of MOF. The hiring of the PS and FMS will need to be reviewed and agreed to by the World Bank to ensure that these individuals meet the relevant qualifications. The FMS will be responsible for budget preparation and execution, financial management including operation of the DA and OA, disbursement, accounting and financial reporting. Technical specialists are expected to be contracted, from time-to-time, to support the work of the PMU. 152. 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 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 taking further actions;

Recording transactions for all project activities;

Managing and maintaining the DA and OA;

Preparing monthly bank reconciliation statements in a timely manner;

Preparing SOEs, withdrawal applications, and supplier records;

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

Preparing quarterly Interim Financial Reports (IFRs) as part of Project Progress Reports and submitting them to the Bank;

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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 may be assigned. Staffing and Training 153. Adequate project accounting staff, with educational background and work experience commensurate with the work they will be expected to perform, will be a critical factor to successfully carrying out the project’s financial management activities. The PMU will hire a capable FMS who will be responsible for maintaining the MINIS’s financial management system. The FMS will have a sufficient education degree in finance and appropriate and relevant work experience. The recruitment should be completed prior to project effectiveness. 154. The FMS will be responsible for overall and day-to-day financial management issues. To ensure the FMS is qualified and has a good understanding of the Bank’s policies and requirements, as well as project specific financial management procedures and guidance, the Bank will provide the newly recruited FMS with financial management training prior to project effectiveness. Budgeting 155. The PMU will prepare project annual budgets based on the initial overall budget for the project life period in line with the Bank requirement. The annual and quarter budgets will be discussed and approved by the Project Steering Committee and thereafter sent to the Bank, for its no objection. The annual budget will be consistent with the agreed format of IFRs. 156. The PMU will conduct regular variance analyses and report the results in the IFRs during project implementation to explain reasons for any differences between planned (budgeted) and actual expenditures, and to take necessary actions to ensure that the project can be implemented, as planned. Accounting Policies and Procedures 157. The administration, accounting, and reporting of the project will be set up in accordance with Bank requirements, which obligates Borrowers to prepare financial statements in accordance with acceptable accounting standards. The Bank does not mandate a format for 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 any non-cash transactions and payables. The PMU will adopt the cash basis of accounting for preparing financial statements. Consistent with IPSAS requirements, the financial statements will include the following:

Balance Sheet of the Project;

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Statement of Sources and Uses of Funds by Project Components;

Statement of Implementation of Credit Proceeds;

Statement of Designated Account for the Credit; and

Notes to the Financial Statements. 158. Project accounts and records will be maintained by the 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. 159. As the PMU will manage all aspects of the project’s financial management, it will be responsible for recording project accounts, preparing project financial statements, and retaining all disbursement supporting documents, as well as processing of withdrawal applications throughout the life of the Project. 160. To strengthen financial management capacity and achieve consistent quality of accounting, a financial management manual (FMM) will be prepared for the project. The FMM, which will be part of the Project Implementation Manual (PIM), will provide detailed guidelines on financial management, including internal controls, accounting procedures, fund and asset management, procedures for preparing withdrawal application, financial reporting, and auditing arrangement. MOF can refer to the FMM of other similar projects such as Economic Capacity Building Technical Assistance Project and Governance Assistance Project to prepare the aforementioned FMM. The FM team will review and provide feedback to the PMU once the draft is received and the FMM should be finalized prior to project effectiveness. The FMM will be periodically updated based on significant changes in project implementation and financial management practices. Information Systems

161. The Project is encouraged to use a computerized accounting system. Accounting software suitable for the business and nature of the MINIS should be installed and, in all cases, should include modules for preparing bank reconciliation, general ledger and financial statements. It would help the PMU in improving the reliability, effectiveness and quality of the financial management systems, and enable the system to avoid the inherent risks associated with manual accounting systems and over-dependence on spreadsheets. The task team will monitor the accounting process especially during the initial stage to ensure complete and accurate financial information will be provided in a timely manner. Internal Controls

162. The PMU Director will regularly monitor the financial reporting process to ensure the FMS can fulfill his/her responsibilities in accordance with adopted procedures. 163. To mitigate risks in the area of internal controls, regular oversight by the Project Steering Committee, periodic Bank supervision, and annual external audits will serve as mechanisms to ensure that financial management controls are functioning appropriately. In addition, proper authorization for payment requests, segregation of duties, and other internal control mechanisms

45

will be defined and included in the FMM. The procedures in the FMM must be fully and adequately implemented. Financial Reporting Arrangements

164. The PMU will prepare IFRs for the Project in accordance with agreed formats as part of progress reporting. The IFRs will be used to monitor and supervise project implementation. 165. The IFRs will include, but not be limited to, the following financial statements: (a) balance sheets; (b) statements of sources and uses of funds by project components; (c) statements of implementation of the Credit Agreement; and (d) statements of designated account for the Credit. The IFRs will be submitted to the Bank within 45 days after the end of each quarter. 166. The PMU will agree with the Bank on the content and format of IFRs, which will be designed to accommodate project design and cost structure. The draft IFR formats will be submitted to the Bank for review and comment prior to project effectiveness.

Financial Covenants

167. No specific financial covenants are applicable to the project except for those standard financial covenants like project audit and IFRs. Supervision Plan 168. The supervision strategy for this Project is based on its FM risk rating, which will be regularly evaluated by the Bank Team’s Financial Management Specialist and in consultation with relevant task team leader.

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Annex 8: Procurement Arrangements

MONGOLIA: MN-Mining Infrastructure Investment Support Project A. General 169. Procurement for the project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits," dated May 2004 and revised October 2006 & May 1, 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers," dated May 2004 and revised October 2006 and May 1, 2010, and the provisions stipulated in the Legal Agreements. 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 consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame 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 actual project implementation needs and improvements in institutional capacity. 170. Procurement of Works. Works will not be financed under the project.

171. Procurement of Goods. A total amount of US$0.470 million is expected to be used from the Credit to procure goods and equipment. Goods procured under this project will include: office equipment and furniture, computers, software, and one vehicle for the PMU. Goods will also be obtained to make the three groundwater offices operational and will include office equipment and furniture, computers, software, field equipment, and two vehicles. The procurement will be done using the Bank’s standard bidding documents (SBDs) for all International Competitive Bidding.

(i) International Competitive Bidding (ICB). Any contract for goods estimated to cost US$50,000 equivalent or more shall be procured under ICB procedures specified in the Procurement Guidelines.

(ii) Shopping. Any contract for goods with cost estimate of less than US$50,000 equivalent per contract may be procured under shopping procedures as specified in Para. 3.5 of the Procurement Guidelines.

(iii) Direct Contracting. Equipment, including standard software with proprietary nature and obtained only from one source, or which meet other circumstances as specified in Para. 3.6 of the Procurement Guidelines will be procured on the basis of direct contracting.

172. Selection of Consultants. Under the MINIS, the services of consulting firms and individual consultants will be obtained. A total of US$23.100 million from the Credit will be required for consultant services and training. Services can be expected to include: (i) feasibility studies covering a range of technical, legal, regulatory, engineering, economic, financial, and safeguards matters; (ii) support from consultants, both firms and individuals; (iii) specialized training programs outside of Mongolia and within the country; (iv) PMU staff multiple contracts; and (v) other ad hoc advisory services and annual financial audits of project accounts. Short lists

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of consultants for services estimated to cost less than US$100,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Services are expected to be provided by both consulting firms and individual consultants. 173. Selection of Consulting 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) processes as appropriate in accordance with the relevant provisions of the Consultant Guidelines. For the selection of auditors, Least Cost Selection (LCS) procedures will be used. Under the circumstances stipulated in the Consultant Guidelines, Consultants may also be selected based on Selection Based on the Consultants’ Qualification (CQS) method and Single-Source Selection (SSS) basis. The Bank’s Standard Request for Proposals (SRFP) shall be used for the selection of consulting firms. 174. Selection of Individual Consultants. Individual consultants will be selected and awarded in accordance with the provisions of Section V of the Consultants Guidelines. Individual consultants may also be selected on a sole source basis, subject to the Bank’s prior approval. 175. Training and Workshops. A total amount of US$0.898 million will be used from the Credit to finance travel-related costs and fees for training events and workshops abroad. In addition, Credit proceeds will be used to fund logistics of events organized in Mongolia, including venue fees, translation and printing of workshop documents, simultaneous translation, meals and coffee/tea breaks for participants, and banners. 176. Incremental Operating Costs. A total amount of US$0.532 million will be used from the Credit to finance incremental operating costs. These costs are related to office rents, office supplies and communications services for the PMU, translation and printing of key documents, including materials from training sessions, in-country travel costs, lodging and per diems for PMU staff, and advertising expenses and banking charges incurred in connection with the management and coordination of Project activities. B. Assessment of the Agency’s Capacity to Implement Procurement 177. Procurement activities will be carried out by the new PMU, which will be responsible for overall coordination and management of the MINIS, including: (i) monitoring and evaluation activities; (ii) reporting on implementation progress; (iii) the procurement process; (iv) all fiduciary requirements associated with financial management and audits; (v) effective implementation of the environmental and social safeguards framework; and (vi) implementing the project within budget and according to schedule. It is expected that the PMU will be staffed with a Director, and specialists in procurement and financial management. 178. An assessment of the capacity of the Implementing Agency (MOF) to carry out procurement for the project according to Bank guidelines and procedures was carried out by the Team’s Procurement Specialist between December 20 and 22, 2010. The assessment reviewed MOF’s organizational structure and functions, past experience, staff skills, quality and adequacy

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of supporting and control systems, legal and regulatory framework. Overall, MOF has adequate experience in implementing World Bank funded projects. However, the assessment considered some risks associated with the project procurement such as lack of qualified procurement people, those who make procurement decision and project champions may be changed (turnover in key government positions is not uncommon in Mongolia, especially with demand from mining companies offering high wages) and work load of technical staff involved in the project procurement process and decision making may not allow to allocate their time fully which may affect the quality of the project procurement. With the mitigating measures provided in the assessment report, the overall procurement risk rating for the MINIS is moderate. 179. An action plan has been proposed, which includes the following: (i) the PMU should be established prior to effectiveness and the roles and responsibilities of PMU staff clearly defined in the project’s institutional organization; (ii) terms of reference and qualification of the PMU’s Procurement Specialist will be subject to the Bank’s prior review; (iii) procurement training for PMU staff will be provided by the Bank’s Ulaanbaatar Office before project start-up; and (iv) the format of procurement monitoring reports and procurement filing system will be agreed before negotiations and in place prior to project start-up. C. Procurement Plan 180. During appraisal, a procurement plan for the first 18 months of the project was prepared. The Procurement Plan, which defines the basis for the procurement methods, will be available at the MOF and other appropriate government agencies. It will also be available in the project’s database and on the Bank’s external website. The Procurement Plan will be updated annually, or as required to reflect actual project implementation needs and/or changes in institutional capacity. D. Frequency of Procurement Supervision 181. In addition to the prior review supervision to be carried out from the Bank’s office in Ulaanbaatar, the capacity assessment of the Implementing Agency recommends that supervision missions visit the field at least twice a year to carry out post-reviews of procurement actions. E. Details of the Procurement Arrangements Involving International Competition 182. Goods and Non-Consulting Services

(a) List of contract packages to be procured following ICB and Direct Contracting:

Ref. No.

Contract

(Description)

Estimated

Cost

Procurement

Method

P-Q

Domestic

Preference (yes/no)

Review by Bank

(Prior / Post)

Expected

Bid-Opening Date

1 Field Equipment

$140,500 ICB NA No Prior SEP 11

2 Vehicles $234,000 ICB NA No Prior AUG 11

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183. Works will not be financed under the project. All contracts in excess of US$50,000 for goods and all direct contracting contracts, regardless of contract value, and the first three shopping contracts will be subject to prior review by the Bank. 184. All other contracts will be subject to ex-post review by supervision missions. The post review sampling ratio should be no less than one out of five contracts. 185. Consulting Services

(a) List of consulting assignments with short-list of international firms. Ref. No.

Description of Assignment

Estimated Cost

Selection Method

Review by Bank

(Prior / Post)

Expected Proposals

Submission Date

1 Eastern Railway Financing Plan $500,000 QCBS Prior MAY 11

(b) Consultancy services with firms estimated to cost US$100,000 or more per contract, individual consultant assignments estimated to cost US$50,000 or more, single source selection of consultants (firms) and sole-source selection of individuals regardless of contract value will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$100,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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Annex 9: Economic and Financial Analysis

MONGOLIA: MN-Mining Infrastructure Investment Support Project 186. Because the MINIS is a Technical Assistance Credit, it does not lend itself to economic evaluation or other quantitative analysis, such as net present value or economic rate of return calculations. 187. Some benefits might accrue by prioritizing, fully assessing and preparing the most economically beneficial projects. This would result in a more efficient use of government funds and higher-quality projects. Strengthened capacity would facilitate decision-making at the program and project levels. 188. For infrastructure projects involving private investment, significant financial benefits can be anticipated in the form of cost reductions to develop, construct and operate infrastructure facilities. Because the IFC will organize competitive and transparent tenders for PPPs, potential investors will have greater confidence that the Government will structure an equitable investment and is committed to partnering with investors. It also signals to prospective bidders that the Government has retained competent advice and projects will be well structured. With greater confidence in the tendering process, more investors will be inclined to prepare bids, which will increase competition for projects. Greater competition will help ensure that the Government receives the best terms and conditions available for a given investment. 189. There are no major financial issues under the project.

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Annex 10: Safeguard Policy Issues

MONGOLIA: MN-Mining Infrastructure Investment Support Project Background 190. The Mining Infrastructure Investment Support Project (MINIS) is a technical assistance project that will facilitate investments in infrastructure to support mining activities, including downstream value-added processes, and to build local capacity to prepare and transact infrastructure projects, regardless of funding source. While most of the projects are expected to be primarily in the Southern Mongolia Region,7 projects in other locations throughout the country will also be eligible for financing under the MINIS. 191. The project will not finance any physical activities or works that pose direct environmental and social impacts. However, when the projects that are transacted under the MINIS are subsequently implemented, there is the potential for moderate to significant environmental and social impacts. 192. Projects in the energy, transport, IT and communications, water, housing and social sectors will be eligible, as will logistics and border crossing facilities. In addition, the evaluation and structuring (for private investment) of downstream, value-added activities, such as copper smelters and iron pellets plants, will also be eligible for funding. 193. If, during implementation, the counterpart requests technical assistance to carry out feasibility studies for a coal-fired power plant, the Bank's Senior Management would review such a request on a case-by-case basis, and the Bank's March 2010 Operation Guidelines on Criteria for Screening Coal Projects under the Strategic Framework for Development and Climate Change would be followed. In addition, other relevant guidance documents would also fully apply to any upstream technical work 194. It is possible that one or two infrastructure projects will be prepared as PPPs with some support from the MINIS. Potential PPP project(s) could include, transport systems (road, railway, airport) water supply systems, wastewater systems, border crossing facilities, or housing. Key Safeguards Issues and Safeguards Instruments 195. The projects to be transacted under the project are likely to present moderate to significant environmental and social impacts, including on critical/non-critical natural habitats wildlife and biodiversity, fragmentation of natural habitats, blocking of wildlife migratory routes, loss of surface vegetation, land degradation, groundwater pollution and depletion, noise and air pollution, social and cultural disturbance on local communities or herders.

7 The Southern Mongolia Region includes the Aimags of Omnigovi, Dundgovi and Dorngovi.

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196. Given its potential for environmental and social impacts during implementation, the project triggers the World Bank safeguards policies, and is classified as a Category A project as per World Bank Operational Policy 4.01 Environmental Assessment. 197. Upstream feasibility studies, including for transactions with investors, that are financed under the MINIS shall comply with environmental and social safeguards requirements of the Mongolian national legislations, as well as the World Bank safeguards policies. 198. To facilitate management of these and other potential impacts, an Environmental and Social Management Framework (ESMF) has been prepared. The screening process and other procedures specified in the ESMF will apply to all activities under the project that have potential safeguards requirements. The following procedures are established as a framework to ensure compliance with safeguards throughout project identification, preparation and implementation. Environmental and Social Safeguards Framework (ESMF) 199. The ESMF is designed to streamline the Mongolian national environmental and social safeguards policies and procedures, and the requirements of the World Bank’s safeguards policies. It identifies the legal framework, specifies the responsibilities of project stakeholders, and details the procedures and requirements for environmental and social safeguards screening, reviewing and approval, monitoring and reporting. 200. The screening process and other procedures specified in the ESMF will apply to all activities under the project that have potential safeguards requirements. The following procedures are established as a framework to ensure compliance with safeguards throughout project identification, preparation and implementation:

Step 1: Initial Screening for Potential Environmental and Social Safeguards Issues. To be carried out by the Ministry of Nature, Environment and Tourism (MNET), which will conduct initial screenings for potential environmental and social safeguards issues using the ESMF’s screening tool. The screening will categorize projects according to their expected environmental and social impacts. Step 2: Review and Approval of Initial Screening by the World Bank Task Team. After the initial screening, the World Bank task team environmental and social specialists will review, comment and finally confirm the conclusion of project categorization and necessary safeguards document instruments. Step 3: Incorporation of Detailed Safeguards Requirements into Specific Projects. With Bank approval, project specific terms of reference for environmental impact assessments (EIAs) and other Bank policy guidelines will be developed as part of the EIA screening process.

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Step 4: Incorporating ESMF into Contractual Documents.8 The Project Management Unit (PMU) under the Ministry of Finance will be responsible for ensuring that the full ESMF, including project-specific TORs for EIAs, are incorporated into the relevant contractual documents, which will contractually obligate the entities involved in a transaction to prepare safeguards documents and implement them according to the ESMF. Step 5: Review and Approval of Safeguards Documents. This will be the primary responsibility of the MNET (for EIAs and/or EMPs), and Land Departments of local government (for Resettlement Action Plans). The Bank will provide input and guidance in the approval of safeguards documents. Step 6: Implementation, Supervision and Reporting. During implementation, the PMU, with support from the Bank, will be responsible for ensuring that the safeguards requirements are properly implemented as approved by MNET, and annual reports are provided to MNET. Local branches of the Environmental Protection Unit of the State Professional Inspection Agency (SPIA) will carry out periodic supervision, and provide reports to MNET.

Implementation Arrangements 201. Implementing Agency. The Ministry of Finance (MOF) will be the implementing agency for the project, and a new Project Management Unit (PMU) will be established at the MOF. The MOF will manage the MINIS on behalf of project beneficiaries from other ministries and agencies. The PMU will be responsible for: (i) procurement of all services, goods and equipment; (ii) financial record keeping, reporting and disbursements; (iii) project monitoring and reporting; and (iv) the contractual obligations with IDA. The PMU will be staffed with a Director, and procurement and financial management specialists. The PMU will rely on the Ministry of Nature, Environment and Tourism (MNET), a member of the Project Steering Committee, on environmental and social safeguards screening, review and approval. 202. The PMU will be responsible for ensuring that the social safeguards requirements are properly implemented as approved by local government. An internal monitor will be hired to conduct monitoring of the social safeguards instruments during implementation. 203. Ministry of Nature, Environment and Tourism. As mandated under the Mongolian law, MNET will be responsible for environmental screening of potential projects. It is also responsible for reviewing and approving EIA documents of potential projects, and granting environmental permits for commencement of construction. For projects with significant impacts, MNET will be part of the inter-agency council that is responsible for completion inspection and grant permit for operation. 204. State Professional Inspection Agency (SPIA). The Environmental Protection Unit of SPIA is the national environmental protection and enforcement agency. Its local branches are

8 It should be noted that Steps 4, 5 and 6 will apply only to those projects that are subsequently implemented,

regardless of funding source.

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equipped with environmental inspectors that carry out periodic on-site environmental safeguards supervision during project construction and operation. Capacity Building 205. The capacity of the PMU, MNET, EIA experts panel and local branch staff of MNET and SPIA, as well as the Ministry of Road, Transportation, Construction and Urban Development, Government Agency of Land Affairs, Geodesy and Cartography, Aimag and Ulaanbaatar city land departments, will be critical to effectively implement environmental and social safeguards requirement under Mongolian legislation and World Bank policies. Capacity building activities are designed in the TA project to provide adequate training to strengthen the management and technical capacity of these agencies, which will be responsible for ensuring that safeguards requirements are enforced after the MINIS has closed. 206. A component to build capacity and transfer knowledge (US$1.45 million) is designed under the project. Among the various activities that are expected to be carried out, environmental and social safeguards training will be conducted for the environmental staff of the MNET, local branch staff, environmental officers from line ministries, and land departments at the Aimag level. Potential training would focus on environmental and social safeguards policies and practices of the World Bank and international society, safeguards screening, environmental assessment techniques (including cumulative impacts, REA, SEA) and good practices (infrastructure and mining sectors), social assessments, and implementation supervision and monitoring. 207. Training will be delivered by Bank environmental and social specialists and international consultants. Key staff will be invited to World Bank safeguards training activities, and overseas study tours could be organized to expose counterparts to environmental and social safeguards practices in other countries. A detailed training plan will be further developed at the start of the project in consultation with relevant agencies. Public Consultation and Disclosure of Information 208. The ESMF has built in requirements for public consultation and disclosure of information during the preparation of EIAs and RAPs (if necessary). These requirements will be incorporated into any contracts with private investors. 209. To reflect the concerns of the local communities regarding the use of water resources and the potential impacts on local economics, the Government of Mongolia and the World Bank co-hosted two workshops in Dalanzadgad and Ulaanbaatar on April 26 and 28, respectively. Both events stressed the critical importance of managing groundwater in Southern Mongolia so that long-term development of mining activities can occur without endangering the supply to local communities and herders. 210. A separate consultancy assignment was carried out to assist the Government in developing a framework to manage groundwater in Southern Mongolia. Key activities included defining a mandate and appropriate institutional structure for the entity to implement during its

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initial years of operation. Workshops to garner input from stakeholders about an appropriate structure and mandate to strengthen groundwater management in the region and to present the findings of the consultancy were held in June and September 2010. 211. The ESMF states that feasibility studies financed under the MINIS will comply with environmental and social safeguards requirements of the Mongolian national legislations, as well as the World Bank safeguards policies. As such, public consultations and disclosure of information as required when preparing EIAs and RAPs (if necessary) have been built into the ESMF. Furthermore, in December 2010 the ESMF was put on the MOF’s website (in the Mongolian language) for public consultation. It was also disclosed at the World Bank’s InfoShop on November 17, 2010.

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Annex 11: Project Preparation and Supervision

MONGOLIA: MN-Mining Infrastructure Investment Support Project Planned Actual PCN review July 30, 2009 July 30, 2009 Initial PID to PIC September 30, 2009 March 1, 2010 Initial ISDS to PIC September 30, 2009 May 6, 2010 Appraisal December 22, 2010 December 20, 2010 Negotiations February 22, 2011 February 10, 2011 Board/RVP approval May 10, 2011 Planned date of effectiveness June 30, 2011 Planned date of mid-term review October 31, 2013 Planned closing date September 30, 2016 Key institutions responsible for preparation of the project:

Ministry of Finance Bank staff and consultants who worked on the project included:

Name Title Unit Mr. Jim Reichert Mr. Aldo Baietti Mr. Kofi Awanyo Ms. Gerelgua Tserendagva Mr. David I Ms. Yi Geng Ms. Dulguun Byambatsoo Ms. Lkhagvanyam Baldan-Ish Mr. Peter Leonard Mr. Yiren Feng Mr. Jun Zeng Mr. Martin Serrano Mr. Jay Pascual Mr. Roch Levesque Mr. Michael Stanley

Sr. Infrastructure Specialist/TTL Lead Infrastructure Specialist Lead Procurement Specialist Procurement Specialist Sr. Financial Management Specialist Financial Management Specialist Consultant Consultant Sr. Social Development Specialist Environmental Specialist Social Development Specialist Sr. Counsel Counsel Sr. Counsel Peer Reviewer

EASCS EASIN EAPPR EAPPR EAPFM EAPFM EACMF EACMF EAPCO EASCS EASCS LEGES LEGES LEGES SEGOM

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Annex 12: Documents in the Project File

MONGOLIA: MN-Mining Infrastructure Investment Support Project World Bank Documents

1. Interim Strategy Note for Mongolia (CY2009-2010)

2. Southern Mongolia Infrastructure Strategy (March 2010)

3. Sustainable Infrastructure Action Plan (FY 2009-2011)

4. Back-to-Office Reports

5. Project Concept Note

6. Minutes of Concept Review Meeting

7. Project Appraisal Document

8. Minutes of Decision Meeting

9. Correspondence with Government Safeguards Documents

10. Minutes of Safeguards Review Meeting (Concept Stage)

11. Minutes of Safeguards Review Meeting (Appraisal Stage)

12. Environmental and Social Management Framework (January 2011)

13. Southern Gobi Regional Environmental Assessment (January 2010)

14. Groundwater Assessment of Southern Gobi Region (April 2010)

15. Livestock & Wildlife Issues: Context of Development in Southern Gobi (March 2010)

16. Protected Area Corridors: Urban Dev’t. & Wildlife Movement in Mongolia (June 2007)

17. Room to Roam? The Threat to Khulan (Wild Ass) from Human Intrusion (September 2006)

18. Comparison of Mongolian and World Bank Environmental Policies (1998)

19. Directory of Important Bird Areas (February 2009)

20. Safeguarding Important Natural Habitats (February 2009)

21. Environmental Management Guidelines for Mongolia: Oil & Gas Dev’t. (March 2004)

22. Environmental Management Guidelines for Mongolia: Placer Gold Mining (March 2004)

23. Fluorspar in Mongolia (September 2009)

24. Summary: Safeguard Documents with Relevant Recommendations, World Bank (June 2010) Government Documents

25. Government of Mongolia’s National Development Strategy (March 2008)

26. Concession Law of Mongolia (March 2010)

27. Government of Mongolia Policy on Public-Private Partnerships (October 2009)

28. Government of Mongolia Action Plan for 2008 - 2012

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Annex 13: Statement of Loans and Credits

MONGOLIA: MN-Mining Infrastructure Investment Support Project

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P119825 2010 Mongolia Multi-Sector TA 0.00 12.00 0.00 0.00 0.00 11.74 -1.00 0.00

P113160 2009 MN-MONSTAT 0.00 2.00 0.00 0.00 0.00 2.12 0.40 0.00

P108768 2008 MN- Mining Sector Inst Strengthening TA 0.00 9.30 0.00 0.00 0.00 5.80 3.01 0.00

P101446 2008 MN-Enhanced Justice Sec Services 0.00 5.00 0.00 0.00 0.00 4.24 3.37 0.00

P099321 2007 MN-Renewable Energy for Rural Access 0.00 3.50 0.00 0.00 0.00 0.33 0.02 0.18

P096439 2007 MN-Sustainable Livelihoods Project II 0.00 33.00 0.00 0.00 0.00 13.40 5.27 0.00

P098426 2006 MN-Governance Assistance 0.00 14.00 0.00 0.00 0.00 3.93 1.26 0.00

P096328 2006 MN-Rural Education and Development -READ

0.00 5.00 0.00 0.00 0.00 0.49 -1.24 0.00

P092965 2006 MN-Info & Com Infra Dev 0.00 8.00 0.00 0.00 0.00 2.05 1.54 0.00

P088992 2005 MN-Private Sector Development Credit II 0.00 10.57 0.00 0.00 0.00 0.78 0.64 0.00

P088816 2005 MN-Index-Based Livestock Insurance 0.00 17.75 0.00 0.00 0.00 12.81 2.78 0.03

P074591 2004 MN-UB SERVICES IMPROVMT 2 0.00 18.00 0.00 0.00 0.00 3.09 2.12 0.00

P077778 2003 MN Economic Capacity Tech. Assistance 0.00 7.50 0.00 0.00 0.00 1.27 0.34 -0.58

P040907 2001 MN-Energy Sector 0.00 42.00 0.00 0.00 0.50 11.45 -5.47 -5.21

Total: 0.00 187.62 0.00 0.00 0.50 73.50 13.04 - 5.58

MONGOLIA STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2004 AgBank 0.00 1.17 0.00 0.00 0.00 1.17 0.00 0.00

2001 SEF XACBank 0.30 0.00 0.00 0.00 0.30 0.00 0.00 0.00

2004 TDB 0.00 0.00 4.89 0.00 0.00 0.00 4.89 0.00

Total portfolio: 0.30 1.17 4.89 0.00 0.30 1.17 4.89 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

59

Annex 14: Country at a Glance

MONGOLIA: MN-Mining Infrastructure Investment Support Project

Mongolia at a glance 2/25/11

East Lo wer-P OVER T Y and SOC IA L A sia & middle-

M o ngo lia P acif ic inco me2009Population, mid-year (millions) 2.7 1,944 3,811GNI per capita (Atlas method, US$) 1,630 3,172 2,316GNI (Atlas method, US$ billions) 4.4 6,167 8,825

A verage annual gro wth, 2003-09

Population (%) 1.2 0.8 1.2Labor fo rce (%) 2.4 1.0 1.5

M o st recent est imate ( latest year available, 2003-09)

Poverty (% of population below national poverty line) .. .. ..Urban population (% of to tal population) 57 45 41Life expectancy at birth (years) 67 72 68Infant mortality (per 1,000 live births) 24 21 43Child malnutrition (% of children under 5) 5 12 25Access to an improved water source (% o f population) 76 88 87Literacy (% o f population age 15+) 97 93 80Gross primary enro llment (% of school-age population) 102 111 107 M ale 102 111 109 Female 101 112 105

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1989 1999 2008 2009

GDP (US$ billions) 3.6 0.91 5.3 4.2

Gross capital formation/GDP 47.8 37.0 38.6 50.2Exports of goods and services/GDP 22.5 58.6 57.2 55.8Gross domestic savings/GDP 16.4 23.1 24.3 43.4Gross national savings/GDP 8.5 30.7 25.2 40.7

Current account balance/GDP -33.3 -6.3 -13.7 -9.1Interest payments/GDP .. 1.2 0.7 0.7Total debt/GDP .. 100.9 34.9 52.6Total debt service/exports .. 3.9 2.6 4.5Present value of debt/GDP .. .. .. 35.6Present value of debt/exports .. .. .. 60.4

1989-99 1999-09 2008 2009 2009-13(average annual growth)GDP -0.1 6.9 8.9 -1.6 ..GDP per capita -0.8 5.6 7.6 -2.7 ..Exports of goods and services .. .. .. .. ..

ST R UC T UR E o f the EC ON OM Y

1989 1999 2008 2009(% o f GDP)Agriculture 15.5 41.2 21.1 23.5Industry 38.8 21.7 39.8 32.7 M anufacturing 32.7 5.3 4.5 4.7Services 45.7 37.1 39.2 43.8

Household final consumption expenditure 60.4 59.8 60.8 55.2General gov't final consumption expenditure 23.2 17.1 15.0 1.4Imports of goods and services 53.9 72.5 71.5 62.6

1989-99 1999-09 2008 2009(average annual growth)Agriculture 2.4 3.5 5.0 2.3Industry -3.7 6.3 0.8 -4.1 M anufacturing .. 7.6 4.7 -11.9Services -0.5 8.8 15.9 2.5

Household final consumption expenditure .. .. .. ..General gov't final consumption expenditure .. .. .. ..Gross capital formation .. .. .. ..Imports of goods and services .. .. .. ..

Note: 2009 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

-5

0

5

10

15

04 05 06 07 08 09

GCF GDP

Growth of capital and GDP (%)

Mongolia

Lower-middle-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Mongolia

Lower-middle-income group

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital formation

60

Mongolia

P R IC ES and GOVER N M EN T F IN A N C E1989 1999 2008 2009

D o mestic prices(% change)Consumer prices .. 10.0 22.1 2.7Implicit GDP deflator 7.1 9.7 22.4 0.3

Go vernment f inance(% of GDP, includes current grants)Current revenue 48.9 27.5 35.1 32.9Current budget balance 2.6 0.7 6.6 3.3Overall surplus/deficit -16.5 -11.6 -5.0 -5.4

T R A D E1989 1999 2008 2009

(US$ millions)Total exports (fob) 722 454 2,534 1,903 Copper 281 119 836 502 Non monetized gold 131 96 600 336 M anufactures .. 184 369 267Total imports (cif) 963 513 3,245 2,131 Food .. 61 436 314 Fuel and energy .. 85 964 567 Capital goods .. 231 1,065 692

Export price index (2000=100) .. .. 284 ..Import price index (2000=100) .. .. 222 ..Terms of trade (2000=100) .. .. 128 ..

B A LA N C E o f P A YM EN T S1989 1999 2008 2009

(US$ millions)Exports of goods and services 832 530 2,999 2,347Imports of goods and services 1,978 656 3,803 2,632Resource balance -1,145 -126 -804 -285

Net income -49 0 -130 -235Net current transfers .. 69 181 119

Current account balance -1,190 -57 -722 -382

Financing items (net) 1,320 12 384 858Changes in net reserves -130 45 338 -476

M emo :Reserves including gold (US$ millions) .. 117 .. ..Conversion rate (DEC, local/US$) 3.0 1,021.9 1,166.0 1,441.0

EXT ER N A L D EB T and R ESOUR C E F LOWS1989 1999 2008 2009

(US$ millions)Total debt outstanding and disbursed .. 914 1,833 2,212 IBRD .. 0 0 0 IDA .. 130 338 392

Total debt service .. 21 81 112 IBRD .. 0 0 0 IDA .. 1 6 6

Composition of net resource flows Official grants .. 50 145 165 Official creditors .. 101 38 153 Private creditors .. -3 43 46 Foreign direct investment (net inflows) .. 30 683 437 Portfo lio equity (net inflows) .. 0 0 0

World Bank program Commitments .. 12 8 42 Disbursements .. 14 13 55 Principal repayments .. 0 4 4 Net flows .. 14 10 51 Interest payments .. 1 3 2 Net transfers .. 13 7 48

Note: This table was produced from the Development Economics LDB database. 2/25/11

-20

-15

-10

-5

0

5

10

15

03 04 05 06 07 08 09

Current account balance to GDP (%)

0

1,000

2,000

3,000

4,000

03 04 05 06 07 08 09

Exports Imports

Export and import levels (US$ mill.)

0

5

10

15

20

25

04 05 06 07 08 09

GDP deflator CPI

Inflation (%)

B: 392

C: 182

D: 677

E: 664

F: 225G: 72

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

Composition of 2009 debt (US$ mill.)

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JAPANCHINA

MONGOL IA

RUSSIANFEDERATION

D.P.R. OFKOREA

REP. OF KOREA

LakeBaikal

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Japan

130°E120°E110°E100°E

50°N

50°N

40°N

40°N

60°N

MONGOLIA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 200 300 400100

0 100 200 300 Miles

500 Kilometers

IBRD 38293

MONGOLIAREGIONAL RAILWAYS AND SEAPORTS

OTHER EXISTING RAILWAYS

MAJOR COAL PORTS

SELECTED CITIES

RIVERS

NATIONAL CAPITALS

INTERNATIONAL BOUNDARIES

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105°E 110°E

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100°E 105°E 110°E 115°E 120°E

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0 50 100 150 200 Miles

300 Kilometers

IBRD 38294

FEBRUARY 2011

M O N G O L I A

IMPORTANT MINES ANDINFRASTRUCTURE SYSTEMS

SELECTED CITIES AND TOWNS

PROVINCE (AIMAG) CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE (AIMAG) BOUNDARIES

INTERNATIONAL BOUNDARIES

COAL MINES

COPPER MINES

SILVER MINES

GOLD MINES

URANIUM MINES

PROPOSED WATER TRANSMISSION PIPELINES

PLANNED RAILWAYS

POWER PLANTS

220 kV LINES

110 kV LINES

This map was produced by theMap Design Unit of The World Bank.The boundaries, colors, denominationsand any other information shown onthis map do not imply, on the part ofThe World Bank Group, any judgmenton the legal status of any territory, orany endorsement or acceptance ofsuch boundaries.

PLANNED EXISTING