Frontier: Infrastructure Development Prospects In Mongolia
The panelists invited for the discussion represented two different organizations, the Ministry of Road, Transportation, Construction & Urban Development, and the European Bank of Reconstruction and Development (EBRD), whose common goal is to solve this challenging impediment to the country's developments and to discuss possible future directions with respect to longterm infrastructure development.
Mr. Mendoza also emphasized that despite the unexplored potential and opportunities of resources rich Mongolia, the lack of infrastructure is indeed the confining factor that limits the economic growth.
Mr. ter Woort, Head of EBRD Resident Office Mongolia, referred to the enormous "infrastructure gap" which Mongolia faces in UB and in the rural areas, in particular in power generation and transmission, transport and general municipal sectors (urban transport, water, waste water). It is likely that the combination of current budget constraints and budgetary policies restrictions as a result of the adoption by the Parliament of the "Fiscal Stability Law" (effective from 2013 onwards) will limit for the time being the Governments' financial capacity to solve this "infrastructure gap".
Because of the tremendous capital requirement and financing needs related to massive infrastructure projects, a possible finance tool that could support Mongolia's infrastructure development is the "Public-Private Partnership" projects ('PPP'). "Through a PPP, [the Government] has the potential to mobilize private capital in support of infrastructure development projects which offers an opportunity for the Mongolian Government to accelerate infrastructure projects which otherwise would have to be postponed due to funding constraints" said Mr. ter Woort.
Mr. ter Woort added that „the Mongolian government passed the concession law ('PPP Law') last year with the hope that this would serve as a legal "template" for future PPP projects and that it would contribute to many PPP's to be concluded. However, because PPP's are, in reality, complex contractual arrangement there is no 'one size fits all' and each PPP must be therefore structured individually. The workings of PPP's are often misunderstood and there is the risk of a gap between "ambition and reality." Moreover, not all infrastructure projects prepared for PPP consideration by the various state-owned entities are suitable to be operated under PPP framework and each must be reviewed on the basis of its own merits'.
As Mongolia is in desperate need for urgent infrastructure construction, allowing the private sector to participate in infrastructure projects is a logical solution that would enable a faster and more effective implementation. Another rewarding advantage of PPP approach is the risk transfer feature, shifting part of the investment risk from the public to the private sector. To make PPP realistic, it is necessary all parties involved very well understand the limitations of PPP. Mr. ter Woort elaborated on this point, advising that strong 'political will to support possible tariff revisions, a sizeable project size and a stable fee structure which allows for a reasonable return for the investor, are essential building blocks to attract private operators to invest in the concessionary projects'.
Representing the public authority's interest, investment analyst from the Ministry of Road, Transportation, Construction & Urban Development, Mr. Batmunkh approached the infrastructure agenda from the different end of the spectrum. As a result of the PPP law adoption in 2010, some ground breaking PPP projects such as, road construction for Mongolian Mining Corporation, have already been in the pipeline. Additionally, since PPP, by nature, entails negotiation and cooperation for mutual gain between the public and the private sector, it is feared that the public sector in Mongolia, may not have acquired yet "the capability to negotiate equally with the private sector on certain projects [and that therefore,] the government might be outsmarted by the private sector." In Mr. Batmunkh's perspective, although the government may get project advisory from experienced international experts "to fill in the spot," the main argument is that the government needs to develop necessary capability to conduct construction and concession projects independently. He also shared an inspiring story of copper smelter PPP project that, if implemented, would be structured to complement Ivanhoe mining and to achieve a win win solution for both the government and the sponsoring operator.
Specifically in charge of railway projects Mr. Batmunkh updated the conference participants that in June 2010, the Parliament of Mongolia approved the state policy on railway transportation. The policy states that railway infrastructure of 1,100 - 1,200 kilometers, providing transportation passage for Tavan Tolgoi mining operation, will be constructed. As government funding alone is not sufficient for this project to take off, the project financing will likely be implemented through intertwined stake holding interest of sponsoring railway operator, mining company, industrial park owner, bank and the government.
In line with the railway policy implementation, railway construction Phase I was licensed to the Mongolian state-owned railway company, MTZ. Bankable feasibility study was then conducted, and more detailed analysis on technical consideration and project financing now need to be further investigated.
Mr. Mendoza, panel moderator, summarized two key messages from two panelist's discussion regarding PPP. 1) PPP's could become an important financial tool to contribute to solving a number of Mongolia's infrastructure problems; 2) Although the PPP law has already been enacted, no PPP project thus far did really materialize which reflects the complexities of PPP's. Also, Mr. Mendoza gave his view on the topic, adding that infrastructure programs in certain industries, for example, civil and commercial aviation or mobile telecommunications, offer lucrative revenue generating vehicles with excellent return potential for investors.
He rationalized that these kinds of infrastructure investments "were possible in the first place because [unlike] roads or power generation, there is no regulation for civil aviation with regards to tariff." In contrast, operational and pricing policies on power generation infrastructure, for instance, are very "sensitive" to politicians. Because of this condition, the political risk in infrastructure PPP project needs to be addressed and justified between the authority and the private company prior to the project kickoff. In short, when undertaking PPPs, there is potential tension and conflict of interest between the policy conscious politicians and profit driven private operator.
Mr. Mendoza then asked for the panelists' opinion regarding how the government can properly devise industry and tariff deregulation policy for PPPs to be realistic and successful.
Mr. ter Woort responded that transparent tariff structure and politics free regulatory body that is enabled to implement the policies and regulation competently throughout the PPP lifetime are needed to make a project "PPPable" and to attract private operators' capital. A different view on PPP was given by the Ministry representative, Mr. Batmunkh, asserting that "PPP is not for every country. PPP has been successful in some countries; has failed in others...it can do great things, but...we need to look at other examples [to understand] what worked, what didn't work." Lastly, the first action step to move PPP forward, in his opinion, is for the government to develop the capability in the public sector to moderate and manage the private interest.
About Frontier Securities
Frontier Securities is the first local Mongolian Securities firm with a global network and international expertise. Established by Masa Igata, Frontier has been given full-service securities related license by the Financial Regulatory Committee (FRC) of Mongolia. Frontier also has brokerage, dealing and underwriting licenses that are regulated by FRC. Since its establishment, Frontier's primary area of focus has been the cross-border investment banking business.