FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 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 Report No: MN 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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3 CURRENCY EQUIVALENTS (Exchange Rate Effective April 7, 2011) Currency Unit = Tugrug (MNT) US$ 1 = MNT 1,210 MNT 1 = US$ 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 OT 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 Oyu Tolgoi

4 PAD PDO PIM PMU PPIAF PPP PS PSC QBS QCBS RAP RBC REA SBD SMIS SOEs SPC SPIA SRFP SSS TT USD WPP 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 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

5 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 IV. APPRAISAL SUMMARY A. Economic and Financial Analyses B. Technical C. Fiduciary D. Social E. Environment F. Safeguard Policies G. Policy Exceptions and Readiness... 14

6 Annex 1: Country and Sector or Program Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Arrangements Annex 9: Economic and Financial Analysis Annex 10: Safeguard Policy Issues Annex 11: Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance Annex 15: Maps... 61

7 MONGOLIA MN-MINING INFRASTRUCTURE INVESTMENT SUPPORT PROJECT Date: April 7, 2011 Country Director: Klaus Rohland Sector Director: JohnRoome Sector Managers: Ede Jorge Ijjasz-Vasquez Vijay Jagannathan PROJECT APPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASCS Project ID: P Lending Instrument: Specific Investment Loan Joint IFC: Project Financing Data [ ] Loan [X] Credit [ ] Grant [ ] Guarantee [ ] Other: Team Leader: James A. Reichert 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%) Environmental category: Full Assessment For Loans/Credits/Others: Total Bank Financing (US$ mil.): Proposed Terms: Standard amortization payable over twenty years, including ten years of grace. Financing Plan (US$ mil.) Source Local Foreign Total BORROWER/RECIPIENT International Development Association (IDA) Total: Borrower: Ministry of Finance Chingeltei District, Khuvisgalchdiim Avenue -38, State Building #7 Ulaanbaatar, Mongolia Tel: Fax: hlspo@mongol.net Responsible Agency: Ministry of Finance United Nation's Street 5/1 Ulaanbaatar, Mongolia Tel: (976-11) Fax: (976-11) badruund@gmail.com

8 Estimated disbursements (Bank FY/US$ mil.) FY Annual Cumulative 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. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? Ref. PAD IV.G. [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [X]Yes [ ] No [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 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

9 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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11 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 1

12 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, The Policy Paper on PPPs was subsequently approved by Parliament on October 20, The Concession Law was also approved by Parliament and went into force on March 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. 2

13 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 m 3 /day. Based on projected growth in populations and mining developments, that figure could rise to as much as 350,000 m 3 /day by 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. 3

14 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 ) 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 ) 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 FY

15 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. 5

16 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 6

17 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 ADB ADB GIZ Activity About $900,000 in grant financing to aid in preparing legislation and structure institutional arrangements to support private investment in infrastructure. 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. 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. 7

18 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, 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 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 8

19 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 Country and/or Sub-National Level Risks Risk Rating Mitigation Measures Residual Risk Rating Parliament hesitant to approve use of Bank Credits to finance TA, insists on grant financing. Project champions may change, interests of line ministries not aligned. Moderate Moderate The government has a strong interest in using the Bank s comparative advantage in providing policy advice and sharing international best practices. MOF serves as project champion and neutral body with power to convene and arbitrate among sectoral ministries. Low Moderate 9

20 Project Level Risks Understanding and capacity to implement PPPs weak, process for preparing PPPs undefined. Poor project selection based on political reasons, rather than good economics. Implementation may start slowly. High Moderate Moderate Project Team to work closely with concerned counterparts during implementation and looks to identify new champions, as warranted. 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. Project Team and consultants will work with the Government to ensure they are fully aware of the implications of project selected for development. Early agreement on initial projects to be financed under MINIS will be sought. Moderate Moderate Moderate The new PMU will be encouraged to work with and learn from the existing PMUs at the Ministry of Finance. Fiduciary Risks Lack of qualified fiduciary specialists. Substantial Capacity development will be facilitated through cooperation with the Project Team, including early training activities. Strengthen the capacity and understanding of the FMS to implement the MINIS in accordance with World Bank procedures. Moderate Capacity of the Implementing Agency to carry out procurement for the project according to Bank guidelines and Substantial Establish appropriate FM and disbursement arrangements, prepare Financial Management Manual specifying internal controls, FM procedures. As a Condition of Effectiveness, Hire qualified procurement specialist as Condition of Effectiveness. Moderate 10

21 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. Substantial Safeguards training to be carried out under the MINIS. 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 higherquality 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 11

22 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 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. 12

23 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 noncritical 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. 13

24 G. Policy Exceptions and Readiness 60. The MINIS complies with Bank policies and does not require any exceptions. 14

25 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 15