GOVERNMENT SUPPORT AND GUARANTEES FOR THE IMPLEMENTATION OF PUBLIC-PRIVATE PARTNERSHIP PROJECTS

Background

A Public-Private Partnership (PPP) is a long-term, legally binding agreement between a public entity and a private company, under which the private party undertakes to provide comprehensive services that may include financing, design, construction, operation, and maintenance of public infrastructure. The private partner is compensated through user fees, payments from the public entity based on performance, or a combination of both.

PPP PRINCIPLE STRUCTURE[1]

PPP is widely considered an effective solution to address insufficient government funding, the lack of technical expertise in the public sector to maintain infrastructure, and the need for risk sharing of infrastructure projects. As a result, PPPs have been extensively implemented in infrastructure development across the globe. Moreover, a large and growing global PPP market has emerged to support infrastructure projects worldwide, playing a crucial role in promoting the sustainable development of developing countries[2].

Likewise, Mongolia has adopted PPPs as a strategic approach to achieve its sustainable development goals. The Law of Mongolia on Public-Private Partnerships mandates that all PPP projects must contribute to climate change mitigation, utilize environmentally friendly technologies, and promote a green economy. These elements are not just encouraged but required, forming the foundational principles of any PPP initiative in the country.

In 2023, Mongolia took a further step by enacting the Regulation on Providing Government Support and Issuing Government Guarantees, aimed successfully implementing partnership projects in priority sector and improve the investment environment for the project. It aims to distribute risks between the partnering parties, prevent risks, attract investment, and create interest in participating in the partnership in planning, approving, concluding contracts, and implementing partnership projects.

Government Support for Public And Private Partnership Projects in Mongolia

Effective PPPs align with supportive policy and regulatory framework that incentivize sustainable practices. These policies may include tax incentives, subsidies for green technologies, and streamlined approval processes for sustainable construction projects[3]. As specified in the Law of Mongolia on Public-Private Partnerships, the government may provide following support to the private sector partners under a partnership agreement:

Government Guarantees for Public-Private Partnerships Projects in Mongolia

The government guarantees ensures the successful and long-term sustainable implementation of the partnership project. The Regulation defines two principal types of guarantees:

1. Obligation Guarantee: This ensures that in the event the government breaches its contractual commitments, financing from the state budget will be made available to cover project costs—either incrementally, for specific components, or as a combined measure. This significantly improves the project’s creditworthiness and helps secure external financing.
2. Procurement and Utilization Guarantee: This ensures the output of the PPP project—such as infrastructure, utilities, or public services—will be used for public benefit. The government may either procure the output or commit to making it available without direct procurement. This mechanism guarantees demand for the project’s outputs, making the project more attractive to private investors.

These guarantees are defined and agreed upon at the time of private partner selection and must be documented in the partnership agreement. Their clarity and enforceability are critical to mitigating long-term risk exposure.

Possibility to Initiate a Partnership Project

Projects aimed at delivering public infrastructure and government services may be initiated by the relevant sector ministries. Proposals to implement such projects through partnerships can also be submitted by the private sector. In such cases, the project proposal should be submitted to the corresponding sector ministry. For example, if the project involves the construction of renewable energy facilities, the proposal should be submitted to the Ministry of Energy.

If a project proposed by the private sector is determined, through a full analysis, to be unsuitable or inefficient for implementation as a partnership, the proposal will be returned to the applicant. The private entity initiating the project shall finance the costs associated with conducting the full analysis of the project using its own funds. These expenses will not be reimbursed regardless of whether the project is approved or not.

If the project proposed by the private sector is determined to be suitable for implementation through a partnership, the selection of a private partner to implement the project shall be organized in accordance with the procedures specified by law. The private initiator of the project may participate in the selection process on an equal basis with other participants and is entitled to receive preferential points as specified in the selection procedure.

If no concrete proposals are received during the selection process, negotiations may be held with the original proposer. If a decision is made to enter into an agreement, a partnership agreement shall be concluded.

Stages of Public-Private Partnership Projects in Mongolia

A partnership project involves the following stages: conducting a preliminary and feasibility assessment of the partnership project, developing a preliminary feasibility study and a detailed feasibility study, preparing the initial partnership project, defining the partnership project, selecting a private sector partner, signing the partnership agreement, ensuring contract management, implementing the project or delivering public infrastructure and government services in accordance with the agreement, monitoring the implementation of the project, auditing and reporting on the project’s activities and outcomes, the private sector partner’s exit from the partnership, and transferring the infrastructure to the public partner. These constitute the planning and implementation phases of the partnership project.

Types of Partnership Agreements

Depending on the specifics of the project to be implemented through a partnership, the partnership agreement may be of the following types:

• Design, build, operate, and transfer (DBOT);
• Build, operate, and transfer (BOT);
• Build, transfer, and operate (BTO);
• Build, lease, operate, and transfer (BLOT);
• Build, own, operate, and transfer (BOOT);
• Lease or sublease to provide public services;
• Operation and maintenance (O&M);
• Rehabilitate, own, operate, and transfer (ROOT);
• Management contract;
• Other types of partnership agreements identified through the project’s full analysis.

Ongoing Public-Private Partnership Projects for Implementation in Mongolia

The Public-Private Partnership Centre is responsible for developing and providing the information, regulations, tender requirements, instructions, templates, sample partnership contracts, and other relevant documents necessary for PPP projects. It ensures that this information is regularly uploaded to the integrated PPP information database and made publicly accessible and transparent.Depending on the characteristics of a partnership project, PPP contracts can take the following forms:

• Design, budgeting, construction, operation, and transfer;
• Construction, operation, and transfer;
• Construction, transfer, and operation;
• Construction, lease, operation, and transfer;
• Construction, ownership, operation, and transfer;
• Leasing and providing public services;
• Operation and maintenance;
• Restoration, ownership, operation, and transfer;
• Management;
• Other types of PPP contracts as determined through full project analysis.

The following projects[4], initiated by the private sector and relevant ministries, are currently under various stages of preparation and implementation and are open for investment:

Conclusion

Public-Private Partnerships (PPPs) are a strategically effective means of involving the private sector in developing infrastructure, supporting sustainable development, and improving the delivery of public services. In Mongolia, the adoption of the Law on Public-Private Partnerships and subsequent approval of procedures for government support and guarantees for PPP projects have laid the foundation for attracting investment to large-scale infrastructure projects and successfully implementing sustainable development initiatives.

In addition to sectoral ministries, private sector entities may also initiate PPP projects. In such cases, the private initiator is responsible for covering the cost of assessing the project’s feasibility. If selected for the competitive process, the initiator is entitled to receive preferential scoring as outlined in the selection procedure.

A list of ongoing PPP project studies is available on the website of the Partnership Center. Currently, a full feasibility analysis is being conducted for a 1,250 km railway project along the Artsuur – Nariinsukhait – Shiveekhuren route, and proposals from the private sector are expected. Most of the investment-required PPP projects under study are based on Build-Operate-Transfer (BOT) type agreements.

References:

1. Law of Mongolia on Public-Private Partnership (2022);
2. Regulation of Mongolia on Providing Government Support and Issuing Government Guarantees (2023);
3. Public-private Real Estate Development Transaction Structures Summary, City Resilience Program

https://www.gfdrr.org/sites/default/files/publication/Public%20Private%20Partnerships.pdf;

4. Ma, M.;Wang, N.; Mu,W.; Zhang, L. The Instrumentality of Public-Private Partnerships for Achieving Sustainable Development Goals. Sustainability 2022, 14, 13756. https://doi.org/10.3390/su142113756;
5. Asuamah Yeboah, Samuel (2024): Bridging the Gap: Public-Private Partnerships in Sustainable Building for Developing Countries

https://mpra.ub.uni-muenchen.de/122643/.

6. Official website of Public-Private Partnership Center

https://pppc.gov.mn/projects-under-study

For further information, please contact V. Bolormaa, GRATA International Law Firm Executive Director at [email protected], and Associate Kh.Enkh-Uchral at ekhurelbaatar@gratanet.com or +976 70155031.

GRATA International, Mongolia is part of the global law firm, which has offices in 20 other nations. This legal material is not a thorough examination of any particular problems; rather, it is meant to provide general knowledge. Before making any decisions, the reader should consult a professional for advice that is suitable to their situation (s). Any consequences or damages resulting from the use of this legal information are not our responsibility.

[1] Public-private Real Estate Development Transaction Structures Summary, City Resilience Program

https://www.gfdrr.org/sites/default/files/publication/Public%20Private%20Partnerships.pdf

[2] Ma, M.;Wang, N.; Mu,W.; Zhang, L. The Instrumentality of Public-Private Partnerships for Achieving Sustainable Development Goals. Sustainability 2022, 14, 13756. https://doi.org/10.3390/su142113756

[3] Asuamah Yeboah, Samuel (2024): Bridging the Gap: Public-Private Partnerships in Sustainable Building for Developing Countries. https://mpra.ub.uni-muenchen.de/122643/

[4] https://pppc.gov.mn/projects-under-study