Contingent liability risk

assessment and governance

framework of PPP in Mongolia
Graduate student: Gantogtokh Luvsandorj

Graduate school of humanities and Social sciences

Saitama university
1

Content
1. Introduction
2. Literature overview
3. Methodology
4. Analysis result
5. Conclusion
6. Recommendation
1.1
Public-Private Partnership (PPP)

• Governments use a number of tools for providing public goods and

services.

• ‘PPP is a long-term contract between a private party and a government

entity, for providing a public asset or service, in which the private party
bears significant risk and management responsibility, and
remuneration is linked to performance’. (World Bank, 2017)
• PPP contract types: Type of asset involved (Greenfield or Brownfield), Type
of function responsible for (DBFO, BOT, etc), Funding (user-funded,
government-funded, mixed)

Picture source: https://www.wallstreetmojo.com/public-private-partnership/

2
1.2 Benefits and risks of PPP

• PPPs can help emerging markets and developing economies expand

their infrastructure stock, build required infrastructure more
efficiently, and maintain it better in the long run. (World bank, 2022)

Figure source: World bank, PPP reference guide version 3, 2017

• However, PPPs also come with risks and challenges, including

contingent liabilities that may arise in the future. (OECD, 2008)

• The average fiscal cost of PPPs contingent liability realization was 1.2
percent of GDP, and the maximum fiscal cost was 2.0 percent of GDP in
80 economies between 1990-2014. (Elva Bova and others, 2016)
3
1.3
PPPs in the World
• PPPs have a long history in Europe, with origins tracing to the Roman
Empire. (PPIAF, 2009a)
• Throughout the 1990s and early 2000s, increasingly more countries – both
within outside the OECD area – started using PPPs. (OECD, 2008)
• A resurgence of interest in PPPs globally has quadrupled PPP-funded capital
stock between 2001 and 2019. (IMF, 2023)

Figure source: IMF Working paper, The Future of Western Balkans, 2023

• PPI investment in 2022 accounted for US$91.7 billion across 263

projects, representing 0.25 percent of the GDP of all low- and middle-
income countries. (The World Bank, PPI Annual report, 2023)
4
1.4
PPPs in Mongolia
• ”National Policy on PPPs” in 2009, and Concession law in 2010
approved by parliament.
• Total of 60 agreements (40 are BT, 20 are BOT, and other) are made,
a total contract amount of 8.9 billion US$. (Ministry of Finance, 2022)

• The government has 3,000.0 70%

Budgeted public investment
banned BT contracts. 2,500.0 60%
57%
• 17 contracts of BOT 2,000.0
50%

billion MNT
and others (BOT, 1,500.0
40%

DBOT, DBFOT, BOO, 30% 30%

1,000.0 24%
IOT) are still valid, 19%
22% 20%
500.0 12%
but only one BOT 9% 10% 10%

contract reached
- 0%
2016 2017 2018 2019 2020 2021 2022 2023

financial closure. Public investment BT concession payment BT concession payment/Public Investment

Data source: Approved annual budget law since 2016

• Mongolian economy highly depends on mining, has high external debt,

reached fiscal constraints, and has a need of 6.0 billion$ (34.8% of
nominal GDP) in public projects. (National Investment Program 2021-
2025)

• ”Public-private partnership law” is approved in December 2022, and

will start to implement in July 2023.
5
1.5 Research overview

Question:
How can the Mongolian government strengthen its control over contingent
liability risks from PPPs?

Objective:
• Assess the contingent liability arising from PPPs in Mongolia
• Evaluate the PPPs governance framework focusing on fiscal risk
• Propose policy measures for better management of contingent liability

Target:
Infrastructure PPP projects (excluding BT projects) that have been contracted
or will be established within the approved legal framework

6
2.1
Outline of literature

• It has been mentioned in many pieces of research that public-private

partnerships are a major factor in creating fiscal risks and contingent
liabilities.

• Polackova (1998) and Polackova-Brixi (2002) developed a budget risk

matrix and mentioned that any guarantees or obligations given by the
PPP agreement to the private sector create indirect and explicit risks in
the budget.

• Cebotari (2008), Cebotari and others (2009) also mentioned that PPP is
a major component of contingent budget liabilities and how to manage it
to mitigate them.

• Bova and others (2016) analyzed data from 1990-2014 for 80 countries
and determined that the fiscal cost arising from PPP contingent liabilities
was equal to 1.2 percent of GDP.

7
2.2
Outline of literature

• Irwin and Mockdad (2010) detail examples of countries successfully

managing this risk, including Australia, Chile, and South Africa.
• Shendy, Martin, and Mousley (2013) have written on the case of Ghana
on how to manage the framework for managing fiscal risks arising from
PPPs.
• Aslan and Duarte (2014) also studied how to measure, manage and
monitor the risks arising from PPP using the examples of Chile, Peru,
South Africa and Turkey.
• Irwin, Mazraani, and Saxena (2018) studied how to control the fiscal
costs of PPP.
• IMF (2021) describes in detail how risks arise from PPPs and how to
manage them. (Martijin, et al., 2023) studied the current situation of
PPP in Western Balkan countries, evaluated the current governance
framework, and compared it with advanced European countries.

8
3.1
Methodology: Assessment of contingent liability

• The Public Fiscal Risk Assessment Model, PFRAM developed by the IMF and
the World Bank Group.
• Excel based analytical tool to assess fiscal costs and risks arising from PPP
projects.
• The first version launched in April 2016. PFRAM 2.0 launched in September
2019.

Figure: PFRAM Country engagements Figure: Start page of PFRAM 2.0

Source: infrastructuregovern.imf.org Source: World bank, PFRAM2.0 template in English x

9
3.2
PFRAM 2.0: Data collection
The navigation of PFRAM 2.0 works around a main menu that comprises of five frames

• Country macroeconomic data (National GDP,

Real GDP, GDP deflator, Nominal exchange rate,
Primary net lending/Borrowing, Cash balance,
Government gross debt projections, Government
revenue)

• Historical data’s 2011-2022 from the

National Statistics Office, Projections from
Staff statement of IMF Article IV mission
(2019-2025), Medium term fiscal
framework of Mongolia (2022-2025),
Mongolian Vision-2050 policy document

• Project information (Project initial data as the

name of the project, start year, length of the
contract, project general information, asset-
specific information, maintenance, operation cost,
project revenue, and guarantee)

• Collected general contracts, and

amendments from National Development
Agency (NDA)’s website, the Ministry of
Economic and Development (MED)’s
website. Total 17 contracts.
• Find some project-related information from
the internet.
• Projected some unavailable data

Source: World Bank, PFRAM2.0 model 10

3.1
PFRAM 2.0: Output and sensitivity analysis
Contingent liability estimation
• Estimates the value of contingent
liabilities arising from: (1) debt
guarantees; and (2) MRGs.
• Estimate the impact of
macroeconomic shocks on the PPP
portfolio
• Calculating the impact of contract
termination on government gross debt
and cash balance

Source: World Bank, PFRAM2.0 model, output

Other estimation
• Estimates the annual cash flows of
each project, its internal rate of
return, shows investors financial
statement
• Calculates the fiscal costs of a PPP,
presenting the marginal impact of the
individual PPP on government financial
statement, balance sheet, cashflows
• Shows the marginal expected impact
from an individual PPP project on the
government’s net lending and
borrowing, gross debt, cash balance Source: World Bank, PFRAM2.0 model, output

11
3.3
Methodology- Governance framework assessment

• Martijn and others developed the PPP governance framework

Evaluation methodology and used it in the IMF working paper in
February 2023.
• The methodology has 19 questions that evaluate the country’s PPP
governance framework and focuses on Fiscal risk. The questions
cover three main areas—institutional control of PPPs, PPP
procurement and renegotiation, and management and
reporting of fiscal risks.
• The responses benchmarked against best practices identified by
World bank and IMF are then “translated” into colors in the chart,
based on answers to each question. The colors in the chart are based
on answers to each assessment question. Green indicates the highest
level of compliance with best practices, and red the lowest.
• In making the assessment, laws, and regulations approved by the
parliament and the government, reports issued by the Government of
Mongolia, and reports of international organizations were considered.

12
4.1
Analysis result- Contingent liability assessment

• A total of 20 project contracts were signed and 3 project contracts

were terminated. Out of the remaining 17 projects, only 8 projects
were included in the list of the National Investment Strategy 2021-
2024. Only 1 project has reached financial closure.

Figures source: Result of the PFRAM 2.0 model

13
4.1
Analysis result- Contingent liability assessment

2.0 Percent shock on GDP, Exchange rate

Figures source: Result of the PFRAM 2.0 model

5.0 Percent shock on GDP, Exchange rate

Figures source: Result of the PFRAM 2.0 model

14
4.2
Analysis result- Governance Framework assessment

15
4.2
Analysis result- Governance Framework assessment

1. Assessment of Institutional Control of PPPs

• Current (Concession law) and New (PPP law) laws both define the PPP
and apply uniformly.
• Concession list, and PPP Contracts were approved separately from Public
Investment Strategy.
• PPP projects were not included in budget documents.
• Ministry of Finance had only the right to a corresponding opinion
• Current institutional control of PPPs is the same as Western Balkan
countries, but it is improved under the new legal framework.
16
4.2
Analysis result- Governance Framework assessment

2. PPP Procurement and Contract Management

• Public Procurement Law does not cover PPP procurement. the procurement
regulation is to be developed by the Ministry responsible for PPP and approved by the
Government.
• The Concession and PPP laws provide for open tendering for PPP projects, but direct
contracts can be concluded under certain conditions.
• The Law on Concessions stipulates that concessionaires will be selected through an
Open Procurement process, and direct contracts will be awarded only in exceptional
cases. However, 77.2 percent of the total concession contracts were signed directly,
which violates laws and regulations by restricting competition. (National Audit Office,
2018)
• Current Procurement and Contract Management was weaker compared to countries,
and the new PPP Law has improved it.
17
4.2
Analysis result- Governance Framework assessment
3. Management and Reporting of Fiscal Risks

• According to the Fiscal Stability Law, Mongolia uses the Government

Debt, Debt Guarantee Limit and Budget Deficit Limit, but no limit on
PPPs
• International Public Sector Accounting Standards (IPSAS) and
Government Finance Statistics Manual (GFSM) 2014 have yet to be fully
implemented.
• information on PPP projects implemented by the build-transfer type is
reported in the form of disclosure
• Management and Reporting of fiscal risk is still weak compared to
Advanced European countries.
18
5
Summary

• The second wave of PPP is about to begin in Mongolia.

• Although the amount of current contingent liabilities is small, it

is likely to pose a risk to the budget in the future.

• The legal environment has improved and is approaching

international good examples.

• However, PPP Procurement and Contract Management and

Management and Reporting of Fiscal Risks are still lacking.

19
6
Recommendation

• Improve the process of PPP procurement, need to regulate

with Public procurement law, competition needs to be
encouraged

• Improve contingent liability assessment, implement value

for money approach in PPP

• Establish clear lines of accountability. A central review of

major commitments must be combined with the
decentralization of smaller decisions and contract
monitoring.

• Impose limits (limit on commitment or on stocks)

20
6
21
References
• World bank. (August, 2019). Assessing and Managing Credit Risk from Contingent Liabilities:
A focus on Government Guarantees. Washington D.C.
• Ministry of Finance, Mongolia. (2021). Assessment report on the implementation of the
concession law. Ulaanbaatar.
• National Audit Office. (2018). Performance audit report on the implementation of the measures
approved in the list of state-owned concession items by the Concession Law.
• Brixi, H. P., & Schick, A. (2002). Government at Risk. Washington: PUBLICATION OF THE
WORLD BANK AND OXFORD UNIVERSITY PRESS.
• Bova, E., Ruiz-Arranz, M., Toscani, F., & Ture, H. (2016). The Fiscal Costs of Contingent
Liabilities: A New dataset. IMF.
• Cebotari, A. (2008). Contingent liabilities: Issues and Practice. International Monetary Fund-
Fiscal Affairs Department.
• International Monetary Fund. (2016). Analyzing and Managing Fiscal Risks: Best practices.
IMF.
• Irwin, T., & Mokdad, T. (2010). Managing Contingent Liabilities in Public Private Partnerships:
Practice in Australia, Chile, and South Africa. Washington D.C: The International Bank for
Reconstruction and Development / The World Bank.
• Aslan, C., & Duarte, D. (2014). How Do Countries Measure, Manage, and Monitor Fiscal
Risks Generated by Public-Private Partnerships? Chile, Peru, South Africa, and Turkey. World
bank.
• International Monetary Fund, Fiscal Affairs Department. (2021). Mastering the Risky Business
of Public-Private Partnerships in Infrastructure. Washington D.C: International Monetary Fund.
• Martijin, J., Sun, Y., Khachatryan, A., Lindquist, W., Mooi, Y., Ozturk, E., & Selim, H. (2023).
The future of PPPs in the Western Balkans. International Monetary Fund.
• Ministry of Finance, Mongolia. (2022). Government's Consolidated Financial Statements for
2021. Ulaanbaatar: Ministry of Finance.
21
THANK YOU FOR YOUR
ATTENTION