NEW MONGOLIAN LAW ON CONCESSIONS

A lack of basic infrastructure has clearly been a major factor constraining economic growth in Mongolia. It is essential to improve the quality of services and management in the infrastructure field, since lack of this infrastructure has a negative impact on economic growth, living standards, and “transaction costs” of businesses. In that Mongolian state resources are sufficient to provide the requisite investment to supply adequate infrastructure in logistics, railroads, and energy, to name a few priority areas, alternate methods to garner investments in this fields must be found, particularly since large foreign investments in the mining sector has put increased pressure on the presently inadequate infrastructure.

Well-structured and competitively implemented Public-Private Partnerships (“PPPs”) are an effective and efficient means for operation, maintenance and financing of the infrastructure sector in Mongolia. A Law on Concessions can be an important element in stimulating PPPs.

Mongolia has been in the process of drafting a Law on Concessions since 2006; but only succeeded in enacting such a law in 2010. After adoption of state policy on PPPs on 15th October 2009, the Parliament of Mongolia started the process of discussing the Draft Law on Concessions. The Draft was prepared based on the “Instructions on legal regulation of projects in the infrastructure field with private entities” of the International Trade Commission of the United Nations; including “Basic Articles on Concession Agreements “from the Economic Cooperation and Development Organization and “Green Book on Concessions in Cooperation between the Public and Private Sector” from European Union. 

After the draft law went through successive discussions the Parliament of Mongolia, it approved the Law on Concessions in January, 2010 and it became effective on 1st March, 2010. The law used the lessons learned from other countries and adapted international best practices to Mongolian conditions.

The rule of law in Mongolia is a key factor in evaluating trade and investment opportunities. The Law on Concessions and other relevant laws, as stated in the Law on Concessions, include the Constitution of Mongolia, Civil Code, Law on Government, Law on State and Local Property, and the Foreign Investment Law, provide the legal infrastructure for concessions in Mongolia.

The working group, which drafted the Law on Concessions, believes the law will open up state and local properties for better investment opportunities without them being privatized. According to the working group’s statements, the law will reduce the burden on the Government to develop infrastructure and provide improved social services to citizens.

The Law on Concessions has eight chapters and 36 articles, regarding powers of the state and local self-governance and administrative authorities relating to concessions, list of concession objects, granting concession rights, concession agreements, powers of the concessionaire and the concession financier, guarantees for the implementation of concessions and dispute settlement.

The Law on Concessions, Article 3.1.1 defines a concession as a special right to transfer posession and operations of state-owned property, for the creation and improvement of state and locally owned property, for the purpose of rendering basic social and infrastructure services to the public, based on an agreement, according to conditions and regulations specified in the Law on Concessions.

An “authorized entity” can be a state administrative authority in charge of state property where the state property is a concession object or the governor of a province or of the capital city, in case local property is the concession object.

Unlike other countries which limit concessions only to foreign investors, which is seen as a major shortcoming in those laws, the Law on Concessions defines a concessionaire as a Mongolian or foreign legal entity or their consortium that has obtained a concession according to the procedures set forth in that law.

This Law not only does not limit concessions to either foreign investors or domestic entities , but it also does not provide preferential treatment for domestic entities or afford special treatment to bidders that undertake to use national goods or employ local labor. Foreign entities can offer the necessary financial and intellectual resources to help make infrastructure projects in Mongolia a success.

The Law on Concessions, Article 4 specifies 7 types of concessions:

“Build-Operate-Transfer” contract –the concessionaire must build the concession object by using its own or raised funds, commission it, and operate it within the period specified in the agreement and transfer it, after the completion of the agreement period, to the state or local ownership in compliance with conditions stated in the agreement.
“Build-Transfer” contract – the concessionaire shall build the concession object by using its own or raised funds, commission it and transfer it to state or local ownership, in accordance with the conditions stated in the agreement.
“Build-Own-Operate” -  the concessionaire must build the concession object by using its own or raised funds, commission it, own and operate in compliance with conditions and obligations stated in the agreement.
“Build-Own-Operate-Transfer”-the concessionaire shall build the concession object by using its own or raised funds, commission it, operate and own it within the period specified in the agreement and transfer it after the completion of the agreement period to the state or local ownership, in compliance with conditions stated in the agreement.
“Build-Lease-Transfer”- the concessionaire shall build the concession object  by using its own or raised funds, commission it, give it  to the possession of the authorized entity under a financial lease as specified in the agreement and transfer it to state or local ownership once the lease duration is complete.
“Design-Build-Finance-Operate” –the concessionaire shall design the concession object by using its own or raised funds; operate it within the period specified in the agreement and transfer it after the completion of the period to state and/or local ownership in accordance with the conditions stipulated in the agreement.
“Renovate-Operate-Transfer” –the concessionaire shall renovate the concession object by using its own or raised funds, operate it within the period specified in the agreement and transfer it together with the renovation to state or local ownership in accordance with the conditions stipulated in the agreement.

The objects eligible for concessions are not explicitly referred to in the law. The law states that the government or Citizen’s Representative Assemblies of provinces and the capital city shall create a list of objects offered for transfer as concessions. The list of objects for a concession is supposed to be publically announced by the state administrative body in charge of state property. This Announcement should contain the title and description of the concession object, concession type, work, and services to be rendered, and specify whether financial assistance from budget funds shall be provided and guaranteed and whether a tender is to be organized as specified in the law or an agreement will be concluded directly.

Concessions may be publically tendered or in some cases directly negotiated with a firm.
The Law on Concessions, Articles 13 and 15 provide how the winner of the bid is to be determined and provides details about the selection procedures for a concessionaire. The Law on Concessions, Article 14 also specifies that the procedure of submitting project bids and of their evaluation shall be open to the public and shall be published in the daily press.

The Law on Concessions, Article 19.1 requires that the government publicly issue its decision on granting a concession and authorizing an authorized entity, with the authority to enter into a concession agreement. As defined in Law, a concession agreement is to be created in written form for the implementation of a concession between the authorized entity and a concessionarie. The Law states that the length of a concession agreement shall be mutually determined by the parties to the agreement considering the specifics of the industry, period of implementing the investment plan, amount of investment, its recuperation time, profits and the period of the concession item usage. The duration of a concession agreement can be prolonged by an authorized entity if it is required, due to situations as specified in the Law on Concessions, Article 22.2.

In terms of ownership rights related to a concession object, profits earned during the possession and operation of the concession, belong to the concessionaire. However, the tangible property and intellectual values created during the use of the concession shall remain state and local property. It may be difficult for PPPs to be implemented within Mongolia, without the concessionaire’s ability to pledge these assets as collateral for financing. In order to obtain financing for certain types of PPPs, they will need to be able to show banks that they have rights to either own or use these assets.  A concessionaire is prohibited from transferring or granting its controlling shares to others, without the permission of the authorized entity by pledge and/or sale unless the concession agreement provides otherwise, Law on Concessions, Article 24.2.5.

Government support for concessionaires can include loan guarantees, a certain part of concession financing; providing tax credits and exemptions according to relevant laws, covering insurance, issuing a guarantee for the minimum amount of the concessionaire’s profit and providing compensation where the law and the concession agreement specify.  Land use rights can be transferred to a concessionaire, to implement the concession, Law on Concessions, Article 2.5

Dispute settlement between the parties of a concession agreement may be resolved by the way of mutual reconciliation. The Law implies that international arbitration is possible for parties to a concession agreement. However, disputes caused between the concessionaire and customer of the activities under the concession agreement, are subject to the courts in Mongolia, Law on Concessions, Article 34.

An internationally competitive legal and regulatory framework for concessions is a key instrument to attract much needed private investment as a partner in developing needed infrastructure. This Law is very close to international standards. Ensuring that both foreign and domestic investors can participate in concessions and allowing for international arbitration are relatively easy steps to improve the Law on Concessions and to successfully implement major infrastructure projects in Mongolia. .

This legislation has a potential to improve the provision and sound management of infrastructure and public services for the sustainable economic and social development of Mongolia. However, an effective infrastructure project on a public and private partnership model is not dependent solely on the legal framework. In international practice, investors take into account the stability of the legal and economic environment before entering into concessions, because the successful implementation of infrastructure projects are depend on economic and social conditions of a country, including its fiscal regime, investment grade, country risk, human resources, institutional arrangements, judicial environment, etc.

There are still barriers to implementing this law, due to economic and social conditions in Mongolia. There should also be a clear policy framework, adequate institutional infrastructure, and clearly defined promotion policies in order to implement this law for successful infrastructure projects.

Foreign investors’ commenting that the Law on Concessions have suggestion that  the law be implemented and supplemented by the issuance of regulations providing further details, such as, those governing the selection process of bidders, foreign exchange controls of the concessionaire, unsolicited concession proposals, etc. [ http://www.bcmongolia.org/legislative-working-group/320-bcms-comments-on-draft-concession-law]

 Anderson & Anderson LLP, Ulaanbaatar Office
Odmaa Khurelbold (Attorney), Myagmarsuren Lhagvasuren (Attorney) and David C. Buxbaum (Attorney)

 REFERENCES

2010 State Information # 9 (264), edited by the  Government of Mongolia, Law on  Concessions;
BCM’s Comments on draft Law on Concessions (http://www.bcmongolia.org );
Mongolia’s infrastructure deficit, Public-Private Partnerships and the Law on Concessions (News by the USAID- http://www.eprc-chemonics.biz );
http://www.parliament.mn /- official website of the State Great Khural of Mongolia; and
http://www.legalinfo.mn/insys/list.php?tabclick1=0&vlett=О- official website of the legal information of Mongolia