MONGOLIA: IMPROVING PUBLIC INVESTMENTS to MEET the CHALLENGE of SCALING up INFRASTRUCTURE Public Disclosure Authorized
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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized East AsiaandPacificRegion Poverty ReductionandEconomicManagementSectorUnit CHALLENGE OFSCALINGUPINFRASTRUCTURE IMPROVING PUBLICINVESTMENTSTOMEETTHE MONGOLIA: THE WORLDBANK January 2013 MONGOLIA: IMPROVING PUBLIC INVESTMENTS TO MEET THE CHALLENGE OF SCALING UP INFRASTRUCTURE ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CPA Central Procurement Agency CSO Civil Society Organizations DBM Development Bank of Mongolia ETT Erdenes Tavan Tolgoi LLC FSL Fiscal Stability Law GDP Gross Domestic Product IAAC Independent Authority Against Corruption IBL Budget Law of Mongolia IMF International Monetary Fund MCC Millennium Challenge Corporation MED Ministry of Economic Development MDG Millennium Development Goals MNAO Mongolia National Audit Office MNT Mongolian Tugreg MoF Ministry of Finance MTBF Medium Term Budget Framework MTFF Medium Term Fiscal Framework NDIC National Development and Innovation Committee OECD Organization for Economic Cooperation and Development OT Oyu Tolgoi Copper Mine PIP Public Investment Program PPLM Public Procurement Law of Mongolia PPP Public Private Partnerships PSMFL Public Sector Management and Finance Law SEG Social and Economic Guidelines SPC State Property Committee TT Tavan Tolgoi Coal Mine WB World Bank WDR World Development Report 2 MONGOLIA: IMPROVING PUBLIC INVESTMENTS TO MEET THE CHALLENGE OF SCALING UP INFRASTRUCTURE CONTENTS EXECUTIVE SUMMARY ............................................................................................................. 7 CHAPTER 1: THE CHALLENGE OF SCALING UP INFRASTRUCTURE .....................................20 Introduction: What this Report is about ................................................................................... 20 The Needs ............................................................................................................................... 21 The Plans and Financing .......................................................................................................... 23 The Analytical Framework .......................................................................................................24 What this Report does not cover ............................................................................................. 28 CHAPTER 2: KEY PROBLEMS THAT NEED TO BE ADDRESSED ........................................... 29 Not Spending in the Right Areas ............................................................................................. 29 The relative neglect of the “growth poles” ............................................................................. 30 Poor prioritization in medium-term plans ................................................................................ 35 Fragmented capital budget ..................................................................................................... 36 The neglect of maintenance .................................................................................................... 36 Public Investments not grounded in a Sound Macro-economic Strategy .................................. 37 “Build-Transfer” schemes .......................................................................................................38 The Development Bank of Mongolia ....................................................................................... 38 Weak regulatory framework for PPPs ...................................................................................... 41 Poorly Prepared Projects .......................................................................................................... 42 Limited project appraisal ......................................................................................................... 42 Poor coordination between the Ministry of Finance and the Ministry of Economic Development ..... 43 Extensive insertions of projects by parliament .......................................................................... 44 Problems in Public Procurement and Contract Implementation ................................................ 45 Capacity constraints ................................................................................................................ 45 Weaknesses in procurement planning ..................................................................................... 46 Lack of transparency and political interference ........................................................................ 47 Poor monitoring ...................................................................................................................... 48 The reforms underway ............................................................................................................ 48 Inflexibilities in Budget Execution ............................................................................................50 Capacity Limitations in the Construction Sector ....................................................................... 51 Restrictions on immigration ..................................................................................................... 51 Restrictions on the import of equipment ................................................................................. 53 Bottlenecks in the supply of construction materials ................................................................. 53 Non-competitive public procurement ...................................................................................... 53 The Result: Low Value for Money ............................................................................................54 CHAPTER 3: POLICY RECOMMENDATIONS .........................................................................55 Spending in the Right Areas ....................................................................................................57 Achieving the Balance between Infrastructure Needs and Macro-fiscal Stability ....................... 58 Ensuring that the DBM is within the framework of the FSL ...................................................... 59 Eliminating “build-transfer” schemes ...................................................................................... 60 Strengthening the legal framework for public-private partnerships .......................................... 60 Strong Corporate Governance for the Development Bank of Mongolia ................................... 61 Strengthening Project Preparation ...........................................................................................62 Ensuring a unified budget process ........................................................................................... 62 3 MONGOLIA: IMPROVING PUBLIC INVESTMENTS TO MEET THE CHALLENGE OF SCALING UP INFRASTRUCTURE Improving planning ..................................................................................................................64 Implementing the IBL provisions on project appraisal ................................................................65 Ensuring that projects proposed by MPs abide by the IBL .........................................................67 Greater Capacity, Transparency and Oversight in Public Procurement and Project Implementation ............................................................................................................67 The Central Procurement Agency .............................................................................................67 Civil society monitoring of procurement ...................................................................................69 Improving Budget Execution ....................................................................................................74 Addressing Human Resource Capacity Constraints ...................................................................74 Conclusion ...............................................................................................................................77 REFERENCES ............................................................................................................................78 FIGURES Figure 1: Mongolia is more heavily dependent on mineral resources compared to other countries in East Asia ...................................................................................................................................21 Figure 2: Government revenues are projected to increase rapidly over the medium to long term21 Figure 3: Road density in comparative perspective .....................................................................22 Figure 4: Transport performance ..............................................................................................22 Figure 5: Growth in government capital expenditures, 2003-2011 ............................................23 Figure 6: Investments are rapidly increasing overall ....................................................................24 Figure 7: Conceptual framework for infrastructure provision .....................................................25 Figure 8: The Mongolian population has been rapidly migrating from the periphery to the growth poles .........................................................................................................................................32 Figure 9: Ulaanbaatar has been relatively neglected in central government spending on electricity and transport infrastructure (2011 percent distribution