Infrastructure Final

8/3/2019 Infrastructure Final

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INFRASTRUCTURE IN MONGOLIA:

CHALLENGES AND OPPORTUNITIES

April, 2009


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April, 2009Ulaanbaatar, Mongolia




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2009EurasiaCapital.Allrightsreserved.

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Contents1. OVERVIEW................................................................................................................................................. 4

1.1. INFRASTRUCTURE BOTTLENECK......................................................................................................................... 4

1.2. SHORTAGEINFINANCING................................................................................................................................. 4

1.3.

IFIINFRASTRUCTUREFINANCING.......................................................................................................................

6

1.4. PUBLICPRIVATEPARTNERSHIP:THESOLUTION.................................................................................................... 6

2. INFRASTRUCTUREINMONGOLIA:NOWANDFUTURE................................................................................ 8

2.1. POWER........................................................................................................................................................ 8

2.2. WATER..................................................................................................................................................... 12

2.3. TRANSPORT............................................................................................................................................... 17

3. BESTPRACTICES....................................................................................................................................... 23

3.1. MANILAWATER,INC.,PHILIPPINES................................................................................................................. 23

3.2. PHUMY3POWERPLANT,VIETNAM............................................................................................................... 24

3.3.

SHARUSTKAMENOGORSKSTATIONRAILWAYLINE,KAZAKHSTAN

.......................................................................

26

4. OUTLOOK................................................................................................................................................. 27

CONTACTS........................................................................................................................................................ 29


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www eurasiacm com info@eurasiacm com

1. OVERVIEW

The issueof improvingthe infrastructuresectorhasbecomecrucialforMongoliaasaresultofeconomic

and social developments during the last few years. Growing urbanization around the capital city

Ulaanbaatar and major mining areas, increase in industrial production, residential and commercial real

estate

construction

and

foreign

trade

have

caused

a

significant

pressure

on

supply

of

infrastructure

services.Existingphysicalcapacitiesareoutdatedand insufficient investmentshavebeenmadetorenew

and expand them, and to improve their

quality. As a result, current status of

infrastructure is unable to meet increasing

demand. Power supply has experienced

shortages to better match to growing

migration to Ulaanbaatar and industrial

production.Sohaswatersupply asa result

of rising living standards that led to

importance of improving the quality of

drinking water and sanitation services.

Launching

new

mining

deposits

has

raised

concerns primarily in transportation

network amid expanding trade with China

andRussia.

For the purpose of this report, the World

BanksclassificationonPPPinInfrastructure

databasewasusedwithregardtothetypes

ofinfrastructureservices.

1.1. INFRASTRUCTUREBOTTLENECK

Todays infrastructure capacities do not allow Mongolia to provide sufficient and quality basic public

services. Only 67% of population has access to power (electricity) and 35% to water. Roads are in poor

condition,only3.5%ofroadarepavedandexistingonesneedcapitalrepair.Therailwaynetworkcapacity

doesnot matchto growingexportimportcargo flows.Such infrastructurebottleneck isexpected toget

furthernarrowedstartingfrom2012whenthemajorminesstartproductionofminerals.About8,000jobs

areestimated tobecreated in themineareas,withmost of theemployeescoming fromother regions,

thatwillleadtomoreburdenonwater,sanitation,electricityandheatingsupplyinthesouthernregions.

More road construction is needed amid

increasing number of motor cars and

trucks. Transporting multimillion tons of

the

minerals

to

be

mined

both

for

internal use and exports to Russia and

China, will further increase pressure on

landtransportinfrastructure,inparticular

railwaytransport.

1.2. SHORTAGEINFINANCING

Mongolian infrastructure sector requires substantial investments to renew existing capacities and build

new ones. Mongolias infrastructureneeds US$8bnover thenext decade,Tradeand DevelopmentBank

CEOsaidatMongoliaAsiaInvestmentForumonMarch31thisyearinHongKong.AccordingtotheWorld

Bankestimates,theinfrastructurefortheOyuTolgoiandTavanTolgoiprojectsalonewillrequireaninitial

investmentofmorethanUS$5bnoverthenextfiveyears.

Infrastructuresegmentalclassification

Segments Subsegments

Energy electricitygeneration,transmission, and

distribution

naturalgastransmissionanddistribution

Transport airportrunwaysandterminals

railways(includingfixedassets,freight,

intercitypassenger,andlocalpassenger)

tollroads,bridges,highways,andtunnels

portinfrastructure,

superstructures,

terminals,andchannels

Water potablewatergenerationanddistribution

seweragecollectionandtreatment

Telecommunications fixedormobilelocaltelephony

domesticlongdistancetelephony

internationallongdistancetelephony

Source:TheWorldBankPPPinInfrastructuredatabasemethodology

Potentialmajorminerals inSouthernMongolia

Mineral Life

(years)

Production

(000tons/year)

Employment

Estimate

Startdate

Estimate

Coal 20200+ 69,000 4700 20032015

Copper* 2050 2,250 5000 2012

*Productionfigureisforcopperconcentrate(30%copper)

Source:TheWorldBank


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5www eurasiacm com info@eurasiacm com

The government alone does not have sufficient resources for

infrastructuredevelopment.Although internationalfinancial institutions

suchastheWorldBankandtheAsianDevelopmentBankhaveprovided

multimillionUS$investmentloans inthesector,Mongoliawillstillneed

more investments from private sources, particularly from mining

companiescomingtothesouthernmineareas.

The

government,

realizing

the

importance

of

infrastructure

development, has increased capital spending in power, transport and

communication over the recent years. Investments in infrastructure

reachedarecordlevelin2007at19%oftotalexpenditures(10%ofGDP)

from 13% (4% of GDP) in 20012006. Between 20062008 the capital

spending tripled. The public investments amounted to 10% of GDP in

2008,includingthestatebudgetfinancesUS$290mn.

Over 19952005, loans, grants, private investment and the

governments investments in infrastructure have averaged

US$128mn per year, including grants 20.3% and loans 68.7%,

with government and private resources providing the rest.

Assuming that infrastructure investment needs are estimated

atUS$427mnperyear,existingfinancingsourcesleaveagapof

US$300mnperyear.

Compared with previous levels, annual road infrastructure

investment alone will equal eightfold in absolute terms over

thenextdecade.Totalinvestmentsneededequaltoanannual

investmentofabout15%ofGDPoverthecomingyears,stillan

unsustainable level without international precedent. The

mismatchbetweenavailablefinancialresourcesandproposed

investmentssuggeststhatplanswillhavetobecombinedwith

regulatory

and

institutional

reform

and

a

greater

role

forprivate investments as well as with effective use of budget

spending.

Basic public infrastructure services, including heat transmission

and distribution, sewerage, pure water supply, are provided by

26housingandcommunalservicecompanies, licensedfromERA

(ElectricityRegulatoryAuthorityofMongolia).Sincepricesforthe

publicinfrastructureservicesarelow,theseserviceprovidersarelossmaking.Asof2008,opreationalloss

in25licenseholderstripled.Systemiclossesdonotenablethehousingandcommunalservicecompanies

torepairand/orrenewtheinfrastructurecapacitiesresultinginfurtherdeterioration inthequalityofthe

services.

Housingandcommunalservicecompanies'revenue

2007 2008 Change Change

MNTmn MNTmn MNTmn %

Revenue 27,011.7 33,592.4 6,580.8 124.4%

ofwhichRevenueofelectricityforheating 12,470.4 16,442.6 3,972.2 131.9%totalexpense 27,436.8 32,153.6 4,716.8 117.2%

Operationalprofit 425.2 1,438.8 1,013.7 338.4%

NetProfit(Aftertax) 1,665.8 1,744.5 78.7 104.7%

InvestmentneedsforSouthern

Mongolia

US$mn

Electricity 2,711

Towndevelopment 1,454

Landtransport 800

Waterresources 262

TOTAL 5,177

Source:TheWorldBank

Investments ininfrastructureas%ofGDP

Source:TheWorldBank

Annualinvestmentgap

Source:TheWorldBank


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6




1.3. IFIINFRASTRUCTUREFINANCING

The Asian Development Bank (ADB) is the largest lender to

Mongolia among international financial institutions. During

19912007 period, ADB has financed 35 projects totaling

US$676.5mn in Mongolia, including US$292.3mn (43% of

total

ADBs

financing)

in

12

infrastructure

projects.

It

is

estimated that ADB spent US$36.8mn for Western Regional

Road (Corridor Development Project Phase I) in 2008,

accordingtotheADBscountrystrategy for20082010. The

financialinstitutionisplanningtofinanceUS$30mnforSouth

Gobi infrastructure project and US$40mn for Western

Regional Road (Corridor Development Project Phase II) in

20092010.

Accordingtotherecentdata,theWorldBankthrough its

International Development Agency (IDA) has provided

more than US$184mn (44% of the World Banks total

financing)for

infrastructure

and

mining

projects.

Currently

there are four active projects worth US$61mn in energy,

water and sanitation, and mining sectors. There is also a

pipeline energy project in Ulaanbaatar with the Banks

financingUS$15mn.

1.4. PUBLICPRIVATEPARTNERSHIP:THESOLUTION

The

private

sector

involvement

in

Mongolian

infrastructure

development

has

mixed

records.

Though

private investment record in air transport and mobile telecommunication is quite impressive, private

participation in other sectors remains lagging or has no track record mainly due to uncertainty in

regulation, lacking transparency and political will. As a result private investment in infrastructure

(excluding civil aviation and telecommunication) remains limited. In order to attract sustainable private

investmentandinvolvement,thereisanurgentneedforpolicy,regulatoryandpricingreformstoensurea

levelplayingfieldforprivateprovidersbasedoncostbasedtariffsandtheconfidencethatsucharegime

willextendintothelongterm.

Takingintoaccount10%increaseofGDPoverthecomingyears,accordingtotheofficialauthorities,and

estimated annual infrastructure investment approaching 20% of GDP, the government and interational

donorsareunabletomeetthesustainablelevelwithoutprivateinvestors.Practicesregardingcoordination

and integrationofmininginfrastructuretobebuiltbytheprivatesectoraremixed.Undercertaincriteriawhichareconformingtoregulationandofquantifiablesocialbenefitsandeffectivecost,thegovernment

maychooseoptionstoparticipateinmultiuseinfrastructureprojects.

Since thegovernments budget spending and IFIs investment loans are insufficient, private investments

are highly needed and promoted at all levels of the Mongolian authorities. As a solution to the

infrastructure shortage, Mongolia is considering to use publicprivate partnership (PPP) scheme. Taking

intoconsiderationthefactthatMongoliahasnotrackrecordonthisformofinvestmentprojects,andwith

aviewtoeffectivelyintroduceandfurtherexecutePPPprojectsininfrastructure,respectiveregulatoryand

institutionalbaseshavetobeinplace.Mostinfrastructureservicesaresettobenaturalmonopoliesunder

variousstate oraimagrunagenciesand/orenterprises.Currentlydraftconseccionlawisbeingdeveloped

which

will

envisage

various

aspects

of

PPP

implementation:

project

initiation,

assessment,

structuring,

financing,regulation,tariffsformulation,managing,monitoring,controlling,etc.Ontopofthat,ministries

and agencies lack special PPP project management skills. The laws on natural monopolies and

ADBfinancingSector Numberof

projects

ADBfinance,

US$mn

Transportand

Communication

6 171.6

Energy 4

93.8Water Supply, Sanitation

andWasteManagement

2 26.9

Total 12 292.3Source:ADB

TheWorldBankfinancing(completedprojects)

Project WorldBankfinance,

US$mn

CoalProject 35

TransportDevelopmentProject 34

TransportRehabilitationProject 30

EconomicRehabilitationProject 30

EconomicTransitionSupportProject 20

SustainableLivelihoodsProject 18.7

Ulaanbaatar Services Improvement

Project

16.7

Total 184.4

Source:TheWorldBank


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private/foreigninvestmentsaretobeamendedbecausePPPprojectsrequiredelegationofpoweramong

variousstateagenciesprovidinginfrastructureservicesandprotectionofprivateinvestorsrights.

Asfarastariffsforinfrastructureservicesareconcerned,whiletelecommunications,airandrailtransport

sectorschargemarketbasedormoreindependentserviceprices,roadtransport,powerandwaterutilities

services, particularly in Ulaanbaatar, are significantly underpriced or below operating costs. To attract

private investment,Mongolianeedsareadjustmentofpricingpolicytoensurefinancialsustainabilityand

longterm

maintenance

of

capital

stock.

Setting

independently

regulated

cost

recovery

or

market

based

tariffscombinedwiththecentralgovernmentfundedsubsidymechanismfordomesticenergyandwater

services,followedbyagradualintroductionoftransportpricingreform,isthemosturgentpricingreform

to meet the urgent need to increase private sector involvement. A new business approach leading

infrastructure business entities to a commercially sustainable footing in longer term will be crucial for

successfuldevelopmentofMongoliasinfrastructure.

In this regard, thegovernmentof Mongolia formedSouthern Mongolia InfrastructureCoordination Unit

underPrimeMinister inchargeofthemajorminingprojects.AsinglePPPUnitissettobeestablishedat

somelevel,eitherundertheMinistryofFinanceorNationalDevelopmentandInnovationCommittee.The

IFIs have expressed willingness to assist to the PPP Unit by providing capacitybuilding and advisory

services.


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8




2. INFRASTRUCTUREINMONGOLIA:NOWANDFUTURE

2.1. POWER

The energy market in Mongolia is an integrated system of coal production for electricity and heat

generation. Outside the combined heat and electricity system, there are many Heatonlyboilers (HOBs)

thatproducehotwaterandsteamfueledbycoaltomeetthespaceheatingandtaphotwaterneeds.In

theCentralEnergySystem(CES)therearefiveelectricitygenerationcompanies,onetransmissioncompany

and four distribution companies. Each of the combined heat and power plants (CHP) has two supply

outlets: 1) an electricity transmission system that buys and sells electricity to multiple distribution

companies;and2)adistrictheatingcompanythatbuystheheatandtransmits ittosubstationsandthe

municipalhousingservicecompany.

Underthecurrentmarketstructure,thetransmissioncompanybuysfromgenerationcompaniesandsells

to distribution companies based on contractual arrangements. Currently, the structure is really a cash

settlementsystem, inwhichelectricitydistributioncompaniesdepositpaymentsforelectricitypurchases

intoazerobalanceaccountthatthetransmissioncompanyadministers.

Space

heating

in

Mongolia

is

provided

through

three

sources:

1)

CHPs

provide

electricity

heat

and

hot

water to theurbancenters inUlaanbaatarand a fewothercities; 2)HOBs meet heating andhot water

needs, usually serving either a single building or a small central network of several buildings; and 3)

individualheatstovesburningcoalorwood.

The overall energy balance available for Mongolia shows that the country mainly depends on coal as a

primary energy source, which is the only source of energy for electricity generation and space heating,

accountingforover80%ofthetotal.Petroleumaccountsforthemostpartoftheremainingbalance.Over

90%of

the

gross

energy

supply

goes

into

the

production

of

electricity

and

heat.

Russia

MGL

exports

electricity

(Avg 1518

mn kW/h

per

annum)

TPP2

TPP3

TPP4

ErdenetTPP

DarkhanTPP

CentralRegional

Electricity

TransmissionGrid

Company

(CRETGC)

(C)pays

cashfor

consump

tionof

energy

TheNationalDispatcherCenter(NDC)

TPSs sell

energy to

CRETGC

CRETGC

pay

cash to

MGL imports electricity

(Avg 135 mn kW/h

P

CRETGC

sells

energy to

EDC

P2

EDC pay

cash to

CRETGC

EDC

sells

energy

to(C)

P3

P5

P4

The Energy Regulatory Authority (ERA) regulate P1, P2 and P3

directlyonthebaseofcostofsoldgoodsforeachentities(TPSs,

CRETGC,EDC)andregulateP4andP5basedonpricequotefrom

Russia.

Energy

Distribution

Companies

(EDC)

Consumersof

electricity(C),

including

households,

organizations,

manufactories

andetc


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Coalindustrypotential

Asaprimary sourceof energy for Mongolia, the coal industry iscritical for theoperationofMongolias

energysystem.Estimatedpotentialcoalproductioncouldreach55milliontonsperannum. Thequalityof

thediscoveredreservesvaries from lowgradecoal lignite tohighqualitybituminouscoal cokingcoal.

Most part of the current production is lowquality coal primarily mined at Shivee Ovoo, Baganuur and

SharynGol.

Notwithstanding theheightened interest,Mongoliascoal resources receive limitedofficial interest from

international agencies. For example, the coal section of BPs annual statistical survey does not register

Mongolia at all. Similarly, the International Energy Agencys statistics section fails to recognize the

countrys resources, while it does not warrant a country report with the US Energy Information

Administration.Moreover,thecountryappearsinvisibleinthestatisticsoftheWorldCoalInstitute.

However, Mongolia contains one of the biggest

coal reserves in the world. According to US

consultingfirmNorwest,theTavanTolgoideposit,

which makes up a small part of the Gobi desert,

holds about five to six billion tons of coal, which

could

sustain

amine

life

of

50

years

and

annual

productionof100milliontons.Thisdepositalone

takesthecountry intothetoprankofworldcoal

exporters. The Mongolian Coal Association says

thattherearemorethan200knowncoaldeposits

inthecountry.

Another big coal reserve is Shivee Ovoo. Shivee

Ovoo is located inGovisumberaimag,besidethe

transMongolia railway line. It is estimated to

have over 2 billion tons of coal reserves. Shivee

Ovoocoal issubbituminous,withhighmoisturecontentandpoor ignition,thatcausessomedifficulty in

usingin

power

stations.

Given its limited domestic requirements, Mongolia has the potential to become one of the major coal

exporters in theworld.There isevery indication thatdemand forMongoliascoalwill increase. In2008,

Chinas massive demand for energy changed it from being net coal exporter to a net coal importer.

Indonesia,theworldssecondlargestcoalexporter,issuggestingthatitwillnotbeabletomeetexpected

demandgrowthintheAsiaPacificregionasthedomesticconsumptionisincreasing.

Electricity generationaccounted for25%of all Asianenergyuse in1990, but, in2006, the International

EnergyAgencyforecastthatby2030itwouldriseto44%.By2030,Asiaisexpectedtoreach45%ofglobal

electricity demand, compared with 20% in 1990. Coals share in Asian electricity production has been

projectedbytheIEAtorisefrom56%in2004to63%in2030.InChina,thecountryslongdependenceon

coal

has

grown

as

coalfired

plants

have

been

commissioned

on

a

weekly

basis.

By

end2007,

Chinas

712,290MWtotalcapacityincluded556,400MWofcoalfiredplantwhich,during2007,produced85%of

national electricity production. Moreover, much of that capacity was added in recent years, with 2007

alonewitnessingcoalfiredgenerationofadditional65,000MW.

ItisclearthatMongoliagoingforwardmayplaysignificantroleinenergymarketofAsia.Yet,despitesuch

huge energy potential, in recentyears Mongolia is hard pressed to meet the increasingenergy demand

domestically.Soonthe lackofadditionalelectricitycapacitymayhamperthedevelopmentofmanynew

miningdepositswhicharevitalfortheeconomyofthecountry.AccordingtotheWorldBankestimates,

SouthernMongoliamaygenerateaboutUS$2bnfromcokingcoalexport,aboutUS$1bnfromthermalcoal

export and around US$2.3bn from copper exports from the Oyu Tolgoy and Tsagaan Suvraga deposits.

Therefore,thebottleneckinenergysectormaycosttheeconomyaboutUS$5.3bnperannum.

PotentialmajorcoalminesinSouthernMongolia

Name Life

(years)

Production

(000tons/year)

Estimated

startdate

TavanTolgoi 200+ 15000 2012

Uhaahudag 100 10000

2009

BaruunNaran 20 6000 2012

TsagaanTolgoi 20 2000 2015

NariinSukhait 40 2000 2003

OvootTolgoi 50 5000 2008

Sumber 50 5000 2015

ShiveeOvoo 200+ 14000 2015

Source:TheWorldBank


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Electricitydemand

Recent growth in the Mongolian electricity network is extensive for the country with low income

populationand lowpopulationdensity.Percapitaelectricityconsumptionrateat1300kWh,higherthan

one might expect, is driven by energy used in the mining sector. The electricity and heating sectors

consumeabout5milliontonsofcoalorabout65%oftotaldomesticcoalproduction.TheCentralEnergy

System represents 91% of installed generating capacity and 96% of electricity supplied. At present,

generation,

transmission,

bulk

supply,

distribution

and

retail

tariffs

are

all

determined

by

Energy

RegulatoryAuthority(ERA)onacostofservicebasis.CESelectricitydemandrategrewabout4%annually

between20002007andpeakedinDecember2007at631MW.

Onthebackofsurgingcommodityprices,Mongoliahaswitnessedsignificanteconomicgrowthoverthe

last10years.UrbanizationfocusedaroundUlaanbaatarandminingareas,theexploitationofnewmines,

andcontinuedgrowthinRussiaChinatradeallhascontributedtotherapidexpansionoftheeconomy.In

addition,theexploitationofnewminingassetssignalsasubstantialrise inelectricitydemand,whichhas

averageda7.6% annualgrowth overthelastfiveyears.Increaseddisposableincomepushingthedemand

for more comfortable housing and the greater use of electrical appliances, as well as an increase in

passengervehicles.Furthermore,wagesandsalariesofworkershaveincreasedbyover40%during2001

2004. Private house construction more than doubled between 20012005, while the number of private

automobiles grew by about 50% in the same period. According to the World Bank estimates, without

additionalgeneratingcapacity,therewillbeinadequate supplyreservemarginfrom2011,andelectricity

demandwillexceedsupplyfrom2012.

ElectricityDemandandSupplyinMongolia

Source:EnergyRegulatoryAuthorityofMongolia

Ifdemandkeepsgrowingatthisleveltheelectricitydemandmayreachabout1200MWin2014.Demand

inSouthernMongolia isprojectedtoreach294MW in2012,and650MWby2020.Such levelsofrapid

growth in such a short period are unprecedented in Mongolias electricity sector and bring new

opportunities and challenges. Without additional generating capacity, electricity demand will exceed

supplyfrom2012.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

ErdenetTPP(CHP)

DarkhanTPP(CHP)

TPP#4(CHP)

TPP#3(CHP)

TPP#2(CHP)

Import

Export

Totaldemand,GWh


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Potentialsourcesofpower

Thereareabouttenpotentialsourcestomeetgrowthindemand,however,onlythreeofthemhavestrong

potential to be commissioned by 20132014. The proposed Oyu Tolgoi 450 MW thermal power plant is

probablytheonlyplantthatcouldbereadytosatisfytheincreasedelectricitydemandin2012.Adelayof

oneyear insupplyingpowertoOyuTolgoiwoulddeferminingrevenuesofUS$2bnandthegovernment

revenuesofUS$670mn.

Another potential source is Tavan Tolgoi thermal power plant. A minemouth plant at Tavan Tolgoi has

been proposed for development to meet electricity demand in Southern Mongolia as well as supply

electricitytotheCES.Theplant isplannedtobe fuelledbythermalcoalremovedtoallowaccesstothe

coking coal deposit at Tavan Tolgoi. According to the Ministry of Fuel and Energy of Mongolia, the

proposedplantwouldhaveacapacityof600MWwiththeinvestmentcostofUS$350mn.However,there

hasbeenlittleworkonthedevelopmentofthisprojecttodate.Allowingtimeforthenecessaryfeasibility

studiesandconstruction,itseemsunlikelythattheplantcouldbecommissionedbefore2013.

Third,theproposedthermalpowerplant#5wouldbeanewcombinedheatandpowerplant, locatedat

Ulaanbaatarandfueledbylignite.Becauseoftheurgentneedtomeettheelectricityandheatingdemand

growthinUlaanbaatar,thegovernmentofMongoliaissuedarequestforproposalsforTPP#5.Therequest

specifies

a

300MW

CHP

with

a

heating

capacity

of

700

GCal/hour,

at

an

estimated

investment

cost

of

US$650mnandwithanexpectedcommissioningdatein2013.

Finally, expanding electricity imports from Russia is another alternative to meet the current increase in

electricitydemand.However,theMongoliangovernmentisconcernedabouttherisksrelatedtoincreasing

dependenceonforeignenergysources,althoughthecurrentpricesforelectricityimportsfromRussiaare

significantlylowerthanthecostofnewcapacityinMongolia.Therelativelylowpricesreflectthepresent

excess capacity in Russia and it is uncertain how long such excess capacity will remain and what will

happen to prices when the Russian electricity system requires largescale investment in its aging

infrastructure.

The first three options require substantial investment. The government of Mongolia has proposed the

Mongolia

Integrated

Power

Systems

(MIPS),

a

40

year

power

and

heat

development

program,

as

a

way

to

address looming shortfalls in capacity, which could occur as early as 2012. The cost of such program is

about US$2bn over the period through 2020, which is wellbeyond the systems financial resources. On

averagethisprogramrequiresUS$150mnannually,whichissubstantiallyabovetherevenuetheCESearns

ineachyear.

Privatesectorparticipation

Currenttariffsforelectricityarelowtosustainthepowerindustry.Ifprivatesectorfinanceistobeusedto

buildpowerplants,tariffswillneedtocoverthecostsofservicedelivery,sincetheprivatesectorwillnot

invest innonprofitableprojects.According to theWorldBank estimates,comparedwithcurrent tariffs,

costcovering

tariffs

for

new

facilities

could be 3.5 times higher for

electricity. Also, the CES suffers

technicalandcommercial lossesequal

toabout25%ofenergy distributed in

35 KV and lower voltages, the losses

having risen from 21% in 1999. This

performance is substantially weak compared to international bestpractices where losses are below 5%,

andabout20%oftotalproductionisconsumedbytheplantsthemselves.

Inaddition,effectiveparticipationoftheprivatesectorinthefuturewilldepend,toaconsiderable extent,

on the condition of Mongolias regulatory framework, which has several impediments to successful

regulation.If

regulatory

reforms

are

not

carried

out,

the

result

will

be

to

greatly

increase

the

financing

gap

between available funds and capital expenditure needs, making it harder to fill the gap from private

investment.

Electricitytariff

2002 2007 2008

Households 0.039 0.044 0.054

Enterprises 0.039 0.044 0.079


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12




TherehasbeenacertainprogressintheregulatoryenvironmentinMongoliainrecentyears.Thecountry

hasdevelopedoneofthemostindependentandactiveenergyregulatorysystemsinAsia.However,some

regulatory functions are duplicated by aimags and the capital city. In total, Mongolia has more than 20

separate governmental entities with pricecontrol powers, while New Zealand, with an economy of 40

timeslargerthanMongolias,hasoneregulatorybodyoverseeingprices.

Outlook

It is clear that Mongolia needs huge investments in power generation to meet its growing domestic

demand and the country cannot afford such huge investments without private sector participation.

Although the country has succeeded to make considerable progress in the regulatory environment for

privateinvestors,thegovernmentdoesnothaveenoughpoliticalwilltoincreaseelectricitytariffstomake

thesectorattractiveforprivate investments.Therefore, it ismost likelythattheprivatemining investors

suchasIvanhoeMinesandRioTintowillproceedbuilding itsownpowerplants insidethefencetomeet

their own energy needs, while households, particularly those living in gers will continue to receive

restrictedsupplyofenergy intheshortrun. Inthemidterm,webelievethegovernmentwillbeableto

undertakethenecessaryinvestmentstoimprovetheenergyinfrastructureduetoincreasedrevenuefrom

windfalltaxes

and

profits

from

mining

companies.

2.2. WATER

Conclusionofinvestmentagreementswithminingcompaniestodeveloptwoprominentdeposits located

in Southern Mongolia, Oyu Tolgoi and Tavan Tolgoi, poses serious challenge to the water sector of

Mongolia.Thewaterdemand inSouthernMongolia isexpected to increase7foldby2020. Inaddition,

rapidurbanizationisaddingtothepressureofurbanutilityserviceprovidersthatalreadyoperateatafull

capacity.

The Mongolianwater sector is generally underdevelopeddue to low tariffs thatdo not cover costsand

insufficientinvestments.

As

result,

water

infrastructure

has

been

deteriorating

since

the

pull

back

of

Soviet

subsidies. The quality of water services is inadequate, where only 35% of population has access to

satisfactorywaterand25%topropersanitation.

The Government of Mongolia recognizes the issues in the water sector. The Millennium Development

Goals (MDG) set by the government targets to increase the proportion of population using satisfactory

waterto70%by2015and increaseadequatesanitationfrom25%to50%respectively.Howevertomeet

MDG targets, investments, not including infrastructure around mining projects, have to substantially

increasefromcurrentUS$14mntoUS$200mnperyearandsourceoftheseinvestmentshasnotyetbeen

identified.

Demandside:

Southern

Mongolia

Southern Mongolia is expected to experience substantial increase in fresh water demand due to the

developmentofminingprojects.Currently,freshwaterconsumptionisequalto50,000m3perdayandby

2020requiredwatersupplymayriseto350,000m3perday.Theminingindustrycouldrequire200,000m3

perdayby2020,a22foldincreasefromthecurrentdemandof9000m3perday.

Inadditiontotheminingsector,urbanwaterconsumptionisexpectedtorapidlygrow.Currentpopulation

ofSouthernMongoliaisabout55,000andwaterconsumption isabout6,000m3perday.TheMinistryof

ConstructionandUrbanDevelopmentforecastsapopulation increaseof110,000by2020.Thistranslates

intowaterconsumptionof30,000m3perdayby2020.


14/32


WaterDemandEstimatesinSouthernMongolia(m3)

Source:TheWorldBank

Remainingwaterdemand isanticipatedtocomefromrural

water consumption, industry, irrigated agriculture and

tourism.

To meet increasing water demand large investments into

freshwater sectorare required.TheWorldBankestimates

that fresh water sector investment needs in Southern

Mongolia range from US$260mn to US$500mn dependent

on whether ground water can be developed in Southern

Mongolia.

The previous exploration results suggest that Southern

Mongoliahasgroundwaterpotentialof500,000m3perday.

However,theseestimatesareuncertainandrequirefurtherinvestigation.Capitalcostestimateofground

waterdevelopmentisaboutUS$260mn.

Analternative

to

ground

water

is

to

build

long

distance

pipelines

from

Northern

(The

Orhon

Gobi

pipeline)

andCentralMongolia(TheKherlenGobipipeline).Inbothprojectswaterwillbeextractedfromrivers,the

Orhon river (The OrhonGobi pipeline) and the Kherien river (The KherlenGobi pipeleine). However,

capital cost of piping the water from Northern and Central Mongolia would be around US$500mn. In

addition, environmental consequences of using water from the Orhon and Kherien rivers are not well

understood.

The issue of whowillbe spending money on mining infrastructureprivate companies or the Mongolian

governmentorcombinationofbothisstillnotresolved.Toattractprivateplayers,industryreformshaveto

beinitiated.

Demandside:rapidurbanization

Currentlyover60%ofMongolianpopulationislocatedincitiesandthisnumberisexpectedtoincreaseto

75%in2030.ThegrowthofpopulationinUlaanbaatarandErdenetexceeds4%annually,whilethisfigure

isaroundorbelowzeroinsmallcities.

Demand for fresh water and sanitation services are expected to substantially increase by 2030 due to

migrationofpeoplefromruraltourbanareas.

InUlaanbaatarwastewaterflowisexpectedtoreach365,000m3perdayby2030fromcurrent154,000m3.

With existing capacity of waste water treatment plant of 177,000m3 per day, there is a need to either

substantially increase capacity of the existing plant or to build a new plant to provide current level of

sanitation

services.

0

50000

100000

150000

200000

250000

300000

350000

2008 2015 2020

Tourism

Irrigation

Industry

Rural

Urban

Mining

MiningIndustryWaterRequirements

Miningindustryneedswatertomakeoregiveupits

valuableminerals.

Water

is

used

for

the

extraction

of minerals such as coal, iron, and such liquids as

crude petroleum. The processes that need water

includes quarrying, milling (crushing, screening,

washing, and flotation of mined materials) and re

injectingextractedwaterforsecondaryoilrecovery.

Water usage is also dependent on the extraction

method, for example underground mining needs

water,whileopenpitdoesnot.


15/32

14




UlaanbaatarWaste

Water

Flow

(000

m

3

per

day)

Source: JapanInternationalCooperationAgency

Waterindustrystructure

Ulaanbaatar Water and Sewerage Authority (USUG) is a stateowned enterprise and is responsible for

watersupplyandsewerageinUlaanbaatar.USUGperformstheroleofawholesalerinUlaanbaatarwater

sector. It operates Waste Water Treatment Plant (WWTP) which treats collected waste water before

releasingittotheTuulriver.

USUGservicestodomesticconsumersareprovided through theHousing&CommunalServiceAuthority

(OSNAAG), which manages 19 exkantors serving groups of apartments and organizations with waterboughtwholesalefromUSUG.GerareaisprovidedwaterbyUSUGskiosks,eithernetworkedorsuppliedbyitsTankerDepartment.

A resolution of the Government of Mongolia issued in 1997 enabled the establishment of Public Utility

ServiceOrganizations(PUSOs)toprovideutilityservicessuchaswatersupplyandseweragesystems,the

supplyofhotwaterandheating toapartmentblocksandother formalbuildings,publicbathhousesand

solidwastecollection.PUSOoperateprimarily inprovincialcapitals.However, thequalityofservices fell

below expectations because of locally constrained revenues. PUSOs are unable to maintain their assets

properlyandrequirefinancialassistanceforworkingandcapitalexpendituresfromthegovernment.

0

50

100

150

200

250

300

350

2007 2010 2020 2030

WasteWaterFlow

MongoliasUrbanandRuralPopulations

Source:UnitedNations,2006

0

500

1000

1500

2000

2500

3000

3500

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

RuralPopulation UrbanPopulation


16/32



17/32

16




UlaanbaatarWaterSectorIncomeStatement

USUGAggregate

RetailersTotal

OperatingRevenue 10589 1805 12394

OperatingExpenses 11411 1436 12847

OperatingIncome

822

369

453

Depriciation 3647 284 3931

InterestExpenses 1515 1515

ForeignExchangeGains 1685 1685

Profit/Lossbeforetax 4299 85 4214Source:USUG

Financialresources

Majorsourcesoffinancinghavehistoricallybeenforeignloansandgrants.In19962004foreignassistance

totaledUS$88mn

with

average

US$9.8mn

per

year,

including

54%

loans

and

43%

grants.

At

present

the

ADBhascommittedUS$47mninloansunderIntegratedDevelopmentofBasicUrbanServicesinProvincial

TownsLoanprogramandUSIP2.

The other principal source of finance for the sector is the treasury via the budget of the Ministry of

Construction and Urban Development (MCUD). Although, with current adverse economic conditions in

Mongolia,MCUDbudgetisexpectedtobeconstrained.

TheMillenniumChallengeCorporationhasbeenseriouslyevaluatingabidforgrantaidofUS$45mnforgerareaimprovementstobespentover5years.

Thus annual projections forwater sector investmentmight total someUS$14mn consistingof US$10mn

from multinational agencies, US$3mn from the government budget sources and US$1mn from other

sourcesfor

each

of

5years.

US$14mn

is

sufficient

to

cover

current

capital

expenditures.

However,toreachtheambitiousMDGtargets, investment inwatersupplyalonewouldhavetotripleto

overUS$40mnperyear forthenext10years.To increasepopulationsadequateaccess tosanitationto

50%, sewer connection cost would be around US$350mn. In total water sector may require around

US$1.4bn by 2015 to meet MDG targets, including increasing and upgrading existing water supply and

sanitationcapacity.Sofarsourcesofmorethan90%ofrequiredinvestmenttoreachMDGtargetsarenot

identified.


18/32


2.3. TRANSPORT

Mongolia is a landlocked country, sandwiched between China and Russia. The transport sector of the

country possesses significant importance for the economic development of the country. The strategic

locationofMongoliabetweenthetwoglobaleconomieshasincreaseddemandfortransportationservices,

butthetransportsectorofMongoliaisunabletocopewithincreaseddemand,hencenegativelyimpacting

economicdevelopmentofthecountry.SinceChinaandRussiaarevitalforMongoliasinternationaltrade,

massive transport infrastructure development is required to connect large mining deposits to the two

majortradingpartners.

Taking into consideration that mining is the main

sector contributing to the recent growth of the

Mongolian economy, discovery of huge mining

resources will further stimulate the demand for

transportation services and increase overall

economic activity. Once mining deposits are

developed,RussiaandChinanotonlywillbeamong

the biggest consumers of those minerals, but also

will

remain

the

only

option

through

whichinternationalmarketsfortheMongoliangoodscan

bereached.

TheGovernmentofMongoliahasbeenseekingtobuildastronglogisticsnetworkinordertoenhancethe

countrys competitiveness and has been taking steps to enhance trade facilitation: developing transport

routes,increasinglegal,regulatoryandinstitutionalcapacity.Buttheneedforunforeseeninvestmentsinto

the transportation sector will test the governments capacity and ability to attract financial resources,

effectivenessandtheoverallabilityinexecutingvarioustransportinfrastructureprojects.

Roadtransport

TheMongolias

road

infrastructure

is

weak

with

3.5%

of

roads

only

being

paved

which

is

significantly

lower

than internationalstandards. The total roadnetwork isequal to 49,308km,of them11,218km arestate

roadsand38,100kmareprovincialorlocalroads.

Comparativeroadnetworkindicators Stateroadnetwork(km)

Source:ADB,CAREC Source:TheWorldBank

5.7

19.0

3.7

6.8

1.43.3

18.2

40.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

LaoPDR Mongoli a Taj ikist an Uzbekistan

km/1000people km/100sq.kmland

61.8%12.8%

12.0%

11.3%

1.8%0.3%

Improvedearth

Gravel

Earth

Asphalt

Surfacetreatment

Concrete

Transporttypes Length(thous.km) Share,

%

Road 49.308 50.25

Railway 1.815 1.85

CivilAviation 46.5 47.39

Maritime 0.5 0.51

Total 98.123 100

Source:MinistryofFinance


19/32

18





20/32



21/32

20





22/32


International financial institutions have supported Mongolia, the World Bank, the ADB and others have

been actively engaged in providing financing in developing transport infrastructure. However, transport

projects cannot be financed by IFIs alone. Financial sustainability of transport projects requires fiscally

constrainedplanning,prioritization,aswellasutilizationofdifferentfinancingresources.Thekeyquestion

ishowthefinancialinjectionsintotransportprojectswillbepaidback.Capacityoflocalauthoritieshaveto

be expanded in terms of financial planning and project execution, there are a number of investment

projectsin

the

transport

sector

proposed

by

various

government

agencies.

There

is

aneed

for

prioritizing

investmentsinordertoreduceinvestmentplantoadequatelevelsandutilizeothersourcesoffinance.

Lack of required legislation for PPP so far has deterred private sector from participation in transport

projects.Noparticular law is inplacetostimulatePPPprojects inMongolia,althoughdraftof the law is

being prepared for parliament. In order to raise interest from private sector, government has to ease

control over ownership of transport infrastructure. This is particularly relevant to railways mining

companies will be the main investors and clients of rail services. The central government is the main

providerandoperatorofrailandaviationinfrastructure.Onlyinroadsegmentthegovernmentdelegates

some obligation and authority over road infrastructure to aimag and soum agencies. PPP projects are

complexthathaveshownmixedoutcomesinothercountries.


23/32

22




GovernmentProposedInvestmentProgramforTransport,20082015(theWorldBank,PPIAFestimates

in2007)

Project Lengthorunits Totalcost(US$mn)

Roads

Millenniumroad 600 120

WesternMongoliaNorthSouthRoad 800 160

Othernorthsouthroad 1100 220

CompletionofUBPRCroad 300 60

SouthernroadtoAltai 225 27

Bridgemaintenance 16

Roadmaintenance 24

Subtotalroads 627Railways

Newparallelrailway 1100 1100

Otherrailwayextensions 500 500

Miningrailways 300 300

Railmaintenance 1100 55

SubtotalrailwaysAviation

Newinternational airport 1 300

Upgradingdomesticairports 4 40

Expansion ofthenavigationsystem 1 10

SubtotalAviation 350Urban

RoadstoaimagsinUB 100 10

Interchangesforouterbypass 5 2

TrafficmanagementinUB 1 1

SubtotalurbanTotal

transport

infrastructure

investment 2,945

Source:theWorldBank,PPIAFFoundationforSustainableDevelopment:RethinkingtheDeliveryofInfrastructureServicesinMongolia,2007


24/32


3. BESTPRACTICES

3.1. MANILAWATER,INC.,PHILIPPINES

Privatesectorhasalwaysplayedanimportantrole inthePhilippinesseconomy.Startingfrom1990s,the

country was progressive in terms of liberalizing the economy, privatizing state companies, obtaining

privatefinancingandthusoperatinginfrastructurebyusingPublicPrivatePartnership(PPP)arrangement.

PrivatizationinthePhilippinesstartedin1986.Bytheendof1990s,450stateownedcompaniesoutof562

were privatized. Private sector involvement in infrastructure projects through PPP has been important

componentfortheGovernmentsinfrastructureprograms.In1990and1994,buildoperatetransfer(BOT)

laws were enacted which allowed private sector to participate in the development and operation of

infrastructure, especially in power sector. By 2003, the Philippines had committed about US$25mn in

privatefinanceusingconcessions.ThroughPPParrangement,therewereimplemented45powerprojects

withtotalvalueofUS$10bn,20transportprojectswithtotalvalueofUS$6bn,17environmentalprojects

valued at US$8bn, and 49 other projects in areas of property development and information technology

procurement.

Oneof

the

successful

cases

is

Manila

Water

concession

which

provides

an

excellent

example

of

how

water

infrastructurecanbefinancedbyinvolvingtheprivatesector.

Initially, the private sector participation in water infrastructure consisted of two concessions in Manila:

MayniladWaterServices,Inc.andManilaWater,Inc.whichsplitbetweenthemselvestheserviceareasin

Metro Manila (West Zone and East Zone). These concessions were regulated by the Metropolitan

WaterworksandSewerageSystem(MWSS)whichcontinuedtoholdresponsibilitiesforoperationofboth

concessions that created a conflict of interest. Maynilad was cancelled due to the financial problems it

faced. In contrast, Manila Water concession was successful and since its contract began in 1997, it has

achievedsignificant improvements inwaterqualityand increased itsservicecoverage.Thecompanyhas

doubledthevolumeofwaterrunningthroughitsdistributionnetworkfrom440mnlitersto992mnliters

perday(2007)and increase itsservicecoveragefrom325,000to900,000households(2007).Water loss

fellfrom63%toarecordlowof23.9%(2007).ManilaWaterachievedtheseimprovementsthroughcosteffective operation which allowed the company to earn profit every year since 1999. The company

successfully launched an IPO in 2005 and raised additional US$65mn to invest in rehabilitation and

expansionofthewaterinfrastructure.

Howitworked

Under the privatization program of MWSS, the stateowned corporation, its original service area was

divided intotwoconcessionareas,theEastZoneandtheWestZone.UnderthetermsoftheConcession

Agreement entered in 1997 with MWSS, Manila Water Company, Inc. was granted exclusive rights to

service

the

East

Zone

as

an

agent

and

contractor

of

MWSS.

MWSS

granted

the

company

the

use

of

MWSSs

landandoperational fixedassetsand theexclusiveright toproduceand treatrawwater,distributeand

marketoffer,andcollect,transport,treat,disposeandeventuallyreutilisewastewater,includingreusable

industrial effluent discharged by the sewerage system for the East Zone. Manila Water paid MWSS a

commencementfeeofUS$5mn.Thecompanyisentitledtorecoveroverthe25yearconcessionperiodits

operating,capitalmaintenanceandinvestmentexpenditures,businesstaxesandconcessionfeepayments,

andtoearnarateofreturnontheexpenditures fortheremainingtermoftheconcession.Tariffscover

operating costs, capital maintenance and investment expenditures, a rate of return to finance such

expenditures (referred to as the Appropriate Discount Rate), the concessionaire cost of borrowing for

loans, financial costs of the performance bond, foreign exchange losses or gains, MWSSs operating

budget,andconcessionfeepayments.

Manila

Water

received

a

corporate

income

tax

holiday

for

six

years

from

the

date

of

actual

start

ofoperations01January2000.Followingtheexpirationofthetaxholiday,thecompanybecamesubjectto

thestandardcorporateincometaxrateof32%.Thecompanyisalsoentitledtopreferentialtariffsonthe


25/32

24




import of capital equipment, tax credits on locally produced equipment, and exceptions from local

governmentandfranchisetaxes.

Whilethecompanyhastherighttomanage,operate,repairandrefurbishspecifiedMWSSfacilitiesinthe

EastZone,legaltitletotheseassetsremainswithMWSS.

The companys business is highly regulated. It is obliged to operate its business under the terms and

conditions

of

the

Concession

Agreement.

The

agreement

sets

out

the

Companys

service,

asset

managementandemployeeobligationsandtheformulasusedtodeterminetheratesitcanchargeforthe

services it provides. The company is bound to comply with certain service committments relating to,

amongother things,water, sewerageand sanitationservicecoverage and waterqualityandavailability,

andisrequiredtomeetnumerousperformanceandbusinessefficiencytargets.

Participationofdonororganizations

TheAsianDevelopmentBankandtheWorldBankplayeda leadingrole in implementationofthisproject

and in financing the development of the countrys water supply and sanitation sector in general.

InternationalFinanceCorporation(IFC)assistedwithhumanandfinancialcapitalatvariousdevelopment

stages.

IFC

was

hired

to

act

as

a

transaction

advisor

in

structuring

the

concession

and

the

World

Bankapproved a loan financing the rehabilitation of sewerage networks and treatment plants and the first

phase of sewerage management expansion. Since 2003, IFC has provided Manila Water with a total of

US$90mn in loan facilities, US$15mn investment in equity (2004), brokered a relationship with local

microfinanceinstitution,helpedtodevelopasustainabilitystrategyandreport,andcontributedtoManila

Waterscorporategovernancemanual.

3.2. PHUMY3POWERPLANT,VIETNAM

Phu My 3 Power Plant is the first BuildOperateTransfer (BOT) power project in Vietnam. The 720MW

power plant was commissioned in March 2004. Phu My 3 is located at the Phu My industrial complex,

70kmsoutheast

of

Ho

Chi

Minh

City.

Currently,

the

plant

provides

about

7%

of

the

total

electricity

output

ofVietnam.

TheprojectwasdevelopedbythePhuMyBOTPowerCompany,alimitedliabilitycompanyincorporatedin

Vietnam. The company was initially 100% owned by British Petroleum. Currently, BP and SembCorp

UtilitiesofSingaporebothownonethirdoftheproject,whileJapansKyushuElectricPowerCo.andSojitz

Corp.sharetheremainingonethird.

Projectimplementation

The project initially had a slow start due to novelty of the BOT model to Vietnam. The Government of

Vietnam did not have experience in implementing a largescale BOT project. The Phu My BOT Power

Companysigned

an

agreement

with

the

Vietnamese

government

to

develop

Phu

My

3as

anatural

gas

fired combined power plant in October 1995. The Ministry of Industry approved feasibility study in

December 1998. After long negotiations, the Ministry of Industry approved Phu My 3 BOT Power

Companys selection of Siemens as the main engineering, procurement and construction general

contractorfortheprojectinMay2001.

The terms of the EPC (engineering, procurement and construction) contract envisaged full turnkey

construction of thepower plant. Siemens started the constructionworks inDecember 2001.Thepower

plantachievedcommercialoperationafterjust26monthsofconstruction.Thecompanyalsosigneda12

yearmaintenanceagreement.


26/32


Projectfunding

TotalprojectcostwasUS$385.9mnfundedbyshareholderequityofUS$96.5mnanddebtofUS$289.4mn.

TheJapanBankforInternationalCooperationprovidedUS$99mnloantotheProjectCompany.TheAsian

Development Bank provided a direct loan without government guarantee of US$37.5mn. The rest was

arrangedbycommercialbanksMizuhoCorporateBank,FortisBankofBelgium,BankofTokyoMitsubishi,

CreditLyonnaisandCreditAgricoleIndosuez.

NipponExportandImportInsurance,theAsianDevelopmentBankandMultilateralInvestmentGuarantee

Agency (MIGA), World Bank Group provided guarantee insurance to cover political risk for the portion

financed by commercial banks. Nippon Export and Investment Insurance covered political risks for

US$95mn.ADBissuedapoliticalriskguaranteetocovercommercialbankloansofUS$30mn.MIGAissued

US$43.2mn in guarantees to SembCorp Utilities of Singapore to cover its US$38mn equity investment.

MIGAalso issuedUS$75mn incoveragetoCreditLyonnaistocoveraUS$43mnnonshareholder loanto

theproject.Thefollowing2004year,MIGAissuedaguaranteeofUS$15mntoCreditLyonnaisforitsswap

agreementsrelatedtothefinancingofPhuMy3BOTPowerCompany.

Development organisations involvement helped the Phu My 3 project investors obtain financing at

competitiverates,whilespeedingupprojectimplementation.

Overall,Phu

My

3had

highly

structured

project

financing

with

afull

onshore/offshore

security

package

and

a comprehensive direct agreement regime, insurance package and extensive mechanisms to maximize

revenueconversiontotheUSdollaranditsexpatriation.

Governmentinvolvement

Inlinewithitsdeclaredintentionofattractingprivatesectorintoinfrastructuresector,theGovernmentof

VietnamprovidedcomprehensivesupporttoPhuMy3project.

TheBOTcontractspecifiestherightsandobligationsofalltherelevantpartiesinimplementingtheproject.

The concession has a term of 23 years and operates in conjunction with a 20 year power purchase

agreementwithElectricityofVietnam(EVN),thestateownedutilityonatakeorpaybasisandgassupply

agreement

with

the

Oil

and

Gas

Corporation

of

Vietnam

(PetroVietnam).

The

gas

price

passes

through

under power purchase agreement whereby EVN pays a tariff incorporating a fuel charge. Gas supply

agreementisalsobasedonatakeorpayprinciple;howevertheobligationsarepassedtoEVN.

Naturalgas isdelivered fromNamConSongas field,jointly developedbyBP,ONGCand PetroVietnam.

UnderagassupplyagreementsignedinMay2001,PetroVietnamsupplies3.2mncum/dayofnaturalgas

tothePhuMy3powerplant.

TariffsweresetbasedonasimilarBOTPhuMy2.2projecttariffs.PhuMy2.2wasawardedbasedona

transparent, international competitive bidding process to ensure the leastcost tariff. The tariffs are

indexedtotheUSdollarandescalatedtotakeaccountofinflation.

Under the BOT agreement the government covered the cost of some infrastructure facilities, which

includedthePhuMydistributioncentre,partofthecoolingchannel,theportandsecondaryfueldelivery

facilities,andthegasdistributionfacilities.Thegovernmentalsoprovidedguaranteeundertakingtocover

performanceobligationsoftheVietnamesecounterparties, includingEVN,PetroVietnam,theMinistryof

IndustryandUDEC(siteuseagreement).Theguaranteealsocoverstheconvertibility intoandavailability

oftheUSdollar,andprovidesthatthelegalandtaxregimesagreeduponwillremainvalidandstablefor

thedurationoftheProject.

Twenty years after commercial operation, the power plant will be transferred to EVN without

compensation.

Overall, the Phu My 3 power plant development proved to be an example of successful PPP. Well

structuredBOTagreementeffectivelyutilizedprivatesectorcapabilitiesforpublicgood.Theconstruction

ofthe

power

plant

was

completed

in

just

26

months.

Actual

construction

costs

of

US$385.9mn,

noticeably

less than estimated US$412mn. Construction costs and timeframe once again proved effectiveness of

privatesectorinsupplyingtimelyproductsatcompetitiveprices.


27/32

26




The power plant itself turned into viable business capable of servicing all its debts and increasing

shareholder value. The case serves as blueprint for the Government of Vietnam for development of its

infrastructuresector.

3.3. SHARUSTKAMENOGORSKSTATIONRAILWAYLINE,KAZAKHSTAN

EastKazakhstan,

an

important

region

for

the

economy

of

the

country,

is

an

industrial

zone

that

comprises

of plants producing cement, copper, zinc, timber cutting and other commodities. The railway

communicationbetweeneastofthecountryandotherregionshasbeencarriedoutthroughtheRussian

stationLokot.Forcargoshippersitwasassociatedwithadditionaltransportandcustomsexpendituresand

reducedthespeedofthecapitalturnover.Toavoidthis,theKazakhstanGovernmentdecidedto initiate

BOTconcessiontoconstruct,operate,andmaintainthenewrailwaylineSharUstKamenogorskStation

(around150kilometersofrailways)tothejointstockcompanyspeciallycreated(JSC)DoszhanTemirZholy.

TheprojectaimstoavoidrelianceontheRussianrailwaysystem,toreducecosts,increasespeedoffreight

transportation,excludedoublecrossingofKazakhRussianboarderandpassingoftheappropriatecustoms

procedures.Therequiredinvestmentfortheconcessionuntil2028,hasbeenestimatedatUS$250mn.The

volumeofcargoplannedforthenewrailwayisaround9,400tonsfor2009andisplannedtoreach16,300

tonsper

year

by

2028.

The Kazakhstan Investment Fund (a public fund) participated in Doszhan Temir Zholi as a minority

shareholder. Inorder to finance project JSCDoszhan TemirZholy issued infrastructurebonds backed by

state guarantee to attract investments particularly from pension funds. The company issued 30000000

bonds with nominal price of KZT1000 indexed to inflation rate. Construction of the railway started in

August2005andtheconnectionofthenewlinetoexistingKazakhstanrailwaysystemwasannounced in

December2007, a yearbefore theplanned schedule. In thebeginningof2009mainconstructionworks

havebeencompletedandrailwayhasbeenput intooperation,fullexploitationoftherail linewithboth

passengerandfreighttransportationisexpectedwithin36month.

TheprojectwasthefirstconcessionprojectinKazakhstanandfacedsignificantchallengesas institutional

andlegalframeworkforsuchprojectswasnotfullyestablishedandassessedthroughpractice.Asaresult

of high inflation in 2007, deteriorated economic situation and especially stagnation of the construction

sectorhadnegative impactonthefinancialsituationoftheJSCDoszhanTemirZholy. Thecompanywas

notabletoraisefullKZT30bnthroughinfrastructurebonds,thegovernmentguaranteewasonlyvalidfor

theconstructionperiodoftheprojectinitially,lateritwasextendedtofullconcessionperiodtill2028.Asa

resultthecompanycouldnotpay intereston issued inflationfixed infrastructurebonds(19.95%) forthe

periodofAugust20072008.ThegovernmentallocatedKZT3.09bntoSamrukKazynaFundtoaddressthe

situationandprovideadequatecapitalforprojectcompletionandrepaymentofinterestcouponsthrough

acquisitionofsharesofDoszhanTemirZholyinDecember2008.


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4. OUTLOOK

Eurasia Capital views that outlook for infrastructure market in Mongolia is positive. The Mongolian

governmentandtheParliamentwillcontinueconsideringthesectorasapriority.Launchingmajorminesin

the southern region will lead to increased demand for infrastructure services, and, given financing

constrainsof

Mongolias

internal

sources,

offer

strong

investment

opportunities.

Major

mining

companies,

expectedtoexploitthemines,maybecommittedtodeveloptheinfrastructure,relatedtotheinsidemine

area only. The nations authorities are likely to offer outsidemine area to international infrastructure

companies inpower,water and transport industries. International financial institutions arealso likely to

continuefinanciallysupporttheinfrastructuredevelopmentinthecountry.

Considering the current low global prices for coal and copper, expecting that the prices for these

commoditieswillreboundsoon,aswellasrecognizingthestrategicallyimportanceofavoidingfuthergrow

inpoverty, the authorities are likely tospeedup theirefforts increatingand improving legislations and

regulations to involve private investors in the countrys infrastructure. With cofinancing and advisory

supportby the IFIs,theminingcompaniesand interestedpartners,private investorsparticipation in the

marketisviewedtogrow.


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SENIORMANAGEMENT

AlisherAliDjumanov

Chairman

EurasiaCapitalGroup

[email protected]

SardorKoshnazarov

Director,HeadofResearch

EurasiaCapital

[email protected]

DimaOrazimbetov

Director

EurasiaCapitalManagement

[email protected]

EURASIACAPITALRESEARCHTEAM

UlugbekAzamov

PrivateEquityAnalyst

[email protected]

AkmalAminov

ResearchAnalyst

[email protected]

SherzodRakhimov

EquityAnalyst

[email protected]

BatkhuyagChoijiljav

FinancialAnalyst

[email protected]

EnkhbayarDavaatseren

ResearchAnalyst

[email protected]

ZultsetsegChuluunbat

ResearchAnalyst

[email protected]

ChinbolorBatbileg

ResearchAnalyst

[email protected]

COMPANYDESCRIPTION

EURASIA

CAPITAL

GROUP

Eurasia CapitalGroup (ECG) is aSingaporebased investment groupwith primarily focus on Central Asia

andEurasiaregion.ECGhastwomainbusinesses:EurasiaCapital,aninvestmentbankandEurasiaCapital

Management, a fund management firm. Eurasia Capital Management (ECM) is focused on investing in

emergingmarkets inEurasia includingRussia,China,CentralAsiaandMongolia.WithoverUS$100mn in

assets under management and advisory mandates, ECM invests across various industries (oil and gas,

mining,banking, telecom,energy/infrastructure,consumergoods,agribusiness)andassetclasses (public

securities,privateequityandproperty)throughafamilyoffundsaswellasmanagedaccounts.


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CONTACTS

HeadOffice:

SINGAPORE

Level34,CentennialTower

3TemasekAvenue

Singapore,039190

Tel:+6565497483

Fax:+6565497001

EMail:

[email protected]

www.eurasiacm.com

www.eurasiac.com

OfficesinEurasia:

MONGOLIA

Suite71,7thFloor

GrandOfficeCenter

12,JamiyangunStreet,1stKhoroo

SukhbaatarDistrict

Ulaanbaatar,Mongolia

Tel/Fax:+97670130078

KAZAKHSTAN

NurlyTauBusinessCenter

Building2B,office505,5thFloor

13AlFarabiAvenue

Almaty,050059

Tel:+7

727

3111080

UZBEKISTAN

11A,AlmazarStreet

Tashkent100003

Tel:+998711403538

Fax:+998711403533

GEORGIA

MeidanPalaceBusinessCenter

44,LeselidzeStreet

Tbilisi0105

Tel:+99595629735

Internationaloffices:

USA

14WallStreet,20thfloor

NewYork,NY10005

Tel:+12126181856

Fax:+12126181705

MALAYSIA

Office58,Level40Tower2,

PETRONASTwinTowers

KualaLumpur50088

Tel:+60321684200

Fax:+60321684201


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Infrastructure Final

Documents

Transcript of Infrastructure Final