The main legal act dealing specifically with concessions at the national level and establishing the comprehensive legal framework for PPP (meaning non-concession PPP) and concession PPPs in the country is the Law on Concessions dated 28 January 2010.
The Law consists of 8 parts and 36 articles and was approved by the Mongolian Great Hural on 28 January 2010. It was influenced by the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects, the OECD Basic Elements of Law on concession Agreements, the EC Green Paper on PPPs and the Community Law on Public Contracts and Concessions. It also relies heavily on recommendations from the UNDP, ADB and USAID and other international practices and guidelines. The purpose of the Law is to regulate matters related to the conclusion, revision and termination of concession agreements, the settlement of disputes and the organisation of tenders to grant investors concessions over state and local own property.
The Concession Law provides for a broad range of concession deals as well as for a number of security instruments. In accordance with investor expectations, it also provides for the possibility of Government support and guarantees and even contains a chapter regarding lender rights, the possibility of a direct agreement and a step-in right to provide for the bankability of project finance deals.
Firm but flexible basis
The Law provides a firm but flexible basis for the creation of concession projects at the central and local government level and across a range of concession models and sectors. The Law allows a wide variety of BOT models/concessions and non-concession PPPs/PFIs to be used and also allows for much flexibility. It provides a strong basis on which the contracting authority is allowed to select concession projects, but not before a preliminary economic evaluation/feasibility study of the projects has been carried out.
Private Party Selection
The provisions of the Law also guarantee that the contracting authority has to select private parties through a competitive tender process and through a transparent, non-discriminatory and objective award procedure. The Law protects PPP contracts against changes by the public authority and allows the parties to the agreement to revise the concession agreement by mutual consent. The concessionaire may, under certain circumstances defined by the Law, even propose that the agreement to receive compensation be revised.
According to the Law, Mongolian and foreign legal entities or their consortia that meet the general requirements of this Law have a right to submit sealed proposals to participate in the tender to authorized entities.
Potential investors will be satisfied that the Law provides an open and balanced list of grounds for termination of the project agreement by both parties without it affecting the stability of the contractual relationships. The Law provides for the possibility of a contractual specification on how compensation due to either party is calculated in the event of the concession agreement being terminated.
The provisions of the Law expressly provide the concessionaire with the right to receive payments to operate the concession item or provide services and also ensure that the regulatory authorities are obliged to provide support to the concessionaire in obtaining permits, licenses, land or land use rights necessary for the implementation of the concession.
Mongolia ratified the New York Convention on recognition and enforcement of foreign arbitral awards (1958) and ratified 20 or more bilateral treaties on the avoidance of double taxation. All potential disputes between the parties will be settled according to the parties’ agreements. These provide for the possibility of international arbitration. The ratified treaties and the possibility of international arbitration provide investors with enough security regarding their potential claim. The Law also provides for the possible creation of security interests for movable assets and proceeds as well as immovable assets related to the project.
Further security is provided to the investors because the Law expressly provides for the possibility of the public party entering into a “direct agreement” and that, in the event of non-performance or failure by the concessionaire to properly perform under the concession agreement, a step-in right is provided.
Room for Improvement
Nevertheless, there are still certain fields that could benefit from further clarification with the purpose of securing more stability and balance for the legal framework.
Adaption of tariffs according to a published index and/or formula to be charged by the private party according to cost increases would be an improvement over the current system, which is not bad but does not offer an automatism of tariff adaptation.
A direct provision in the Law permitting the contracting authority to enter into a project agreement that is subject to international arbitration where there is foreign participation in the project company would also be a slight improvement over the current system, which does not specifically mention international arbitration, although it can be inferred from the provisions of other laws.
Since the Law came into full force a great number of concession projects have been agreed on and executed or are still ongoing. In 2010, the Government issued the PPP Project List, which approved the list of 121 concession projects. The Government then revised the list in September 2013 and the list now consists of 52 projects submitted by line ministries and 5 projects submitted by the private sector.
According to PPP Indicators for 2016, Mongolia’s PPP unit has expanded the regulatory framework and gained significant project experience since 2010. There is evidence of an extensive track record regarding concession projects in Mongolia, with emphasis on projects in the energy, infrastructure and transport sectors.
The policy makers and legislator still have to work on certain fields and improve a small number of issues that have arisen. Unfortunately, although the concession Law does provide for a broad spectrum of concession projects, there is still no specific legal framework dealing with classic PPP projects.
One of the issues that requires work is better preparation of the planned projects together with more transparent budget provisioning. A simplified regime for contracts below a certain threshold should be introduced to the legal framework, as well as the possibility of an institutional PPP, provided it does not create a conflict of interest and does not affect the competition principles.
Allowing a competitive dialogue is also a possible solution that would vastly improve the legal framework regarding concessions and PPPs. A requirement that the concession project be in conformity with the government investment plan or with government priorities would also allow the investors to be better prepare and harmonize their goals with the effective possibilities.
The principle of transparency would also be strengthened if a third party could assess the validity of a preliminary study and if their advice would be binding or made publicly.
By dealing with these issues, the implementation of the government’s infrastructure plans would increase the socio-economic returns and more possibilities and options regarding future concessions in Mongolia would be available.
Stakeholders report the country to have a real PPP policy. The concession projects’ list is approved by a government resolution and there is a model agreement as a basis for all PPP projects.
Currently a BOT model is preferred. The government has recently approved PPP projects based on BOT conditions in Ulaanbaatar, Darkhan, Tavantolgoi-Gashuun Sukhait, Bichigt and Baruun-Urt and the projects have been included in the concessions’ list. The next step is to organise work groups for these projects, as well as to select concessionaires.
Capacities should be built in parallel, as the number of qualified PPP professionals is not sufficient to support implementation of other models.