New Document of The World Bank · 2017. 3. 31. · i . CURRENCY EQUIVALENTS (Exchange Rate...

Document of The World Bank

Report No: ICR3500

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-44890 IDA-H4110)

ON A

GRANT/CREDIT

IN THE AMOUNT OF SDR 5.72 MILLION (US$ 9.3 MILLION EQUIVALENT)

TO

MONGOLIA

FOR A

MINING SECTOR INSTITUTIONAL STRENGTHENING

TECHNICAL ASSISTANCE PROJECT

March 30, 2017

Energy and Extractives Global Practice Mongolia Country Office East Asia and Pacific

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 30, 2017)

Currency Unit = Mongolian Tugrik 1.00 = US$ 0.00

US$ 1.00 = 2,454.00

FISCAL YEAR July 1 - June 30

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank ASM Artisanal and Small-scale Mining AusAID Australian Agency for International Development Country Assistance Strategy EBRD European Bank for Reconstruction and Development EA Environmental Assessment EIA Environmental Impact Assessment EITI Extractive Industries Transparency Initiative Erdenes Erdenes MGL LLC, Holding Company for State Equity FDI Foreign Direct Investment GAP Governance Assistance Project GDP Gross Domestic Product GDT General Department of Taxation GDNT General Department of National Taxation IDA International Development Association MOF Ministry of Finance MOFE Ministry of Fuel and Energy MOIT Ministry of Industry and Trade MOM Ministry of Mining MONE Ministry of Nature and Environment MOEGD Ministry of Environment and Green Development MRAM Mineral Resources Authority of Mongolia MRPAM Mineral Resources and Petroleum Authority of Mongolia NDS National Development Strategy PAM Petroleum Authority of Mongolia PDO Project Development Objective PIU Project Implementation Unit SDC Swiss Agency for Development Cooperation SESA Strategic Environmental and Social Assessment

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Regional Vice President: Victoria Kwakwa Senior Global Practice Director: Riccardo Puliti Country Director: Bert Hoffman Practice Manager: Christopher Sheldon Project Team Leader: Bryan Christopher Land ICR Team Leader: Bryan Christopher Land

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MONGOLIA MINING SECTOR INSTITUTIONAL STRENGTHENING

TECHNICAL ASSISTANCE PROJECT CONTENTS

A. Basic Information

B. Key Dates

C. Ratings Summary

D. Sector and Theme Codes

E. Bank Staff

F. Results Framework Analysis

G. Ratings of Project Performance in ISRs

H. Restructuring (if any)

I. Disbursement Profile

1. Project Context, Development Objectives and Design ................................................... 1

2. Key Factors Affecting Implementation and Outcomes ................................................ 12

3. Assessment of Outcomes .............................................................................................. 24

4. Assessment of Risk to the Development Outcome ....................................................... 34

5. Assessment of Bank and Borrower Performance ......................................................... 35

6. Lessons Learned............................................................................................................ 37

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners............... 40

Annex 1. Project Costs and Financing .............................................................................. 41

Annex 2. Project Components .......................................................................................... 42

Annex 3. Economic and Financial Analysis ..................................................................... 44

Annex 4. Bank Lending and Implementation Support/Supervision Processes ................. 47

Annex 5. Beneficiary Survey Results ............................................................................... 49

Annex 6. Stakeholder Workshop Report and Results ....................................................... 50

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ......................... 54

Annex 8. Comments of Co-financiers and Other Partners/Stakeholders .......................... 55

Annex 9: Environmental Action Plan ............................................................................... 56

Annex 10. List of Supporting Documents ........................................................................ 57

Annex 11. MAP ................................................................................................................ 58

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DATA SHEET

A. Basic Information

Country: Mongolia Project Name: Mongolia Mining Sector Technical Assistance Project

Project ID: P108768 L/C/TF Number(s): IDA-44890,IDA-H4110 ICR Date: 03/20/2017 ICR Type: Core ICR

Lending Instrument: TAL Borrower: GOVERNMENT OF MONGOLIA

Original Total Commitment:

XDR 5.72M Disbursed Amount: XDR 5.66M

Revised Amount: XDR 5.66M Environmental Category: B Implementing Agencies: Ministry of Finance Co-financiers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 10/18/2007 Effectiveness: 05/04/2009 05/04/2009

Appraisal: 04/24/2008 Restructuring(s): 07/02/2012 01/10/2014 03/30/2015

Approval: 06/26/2008 Mid-term Review: 07/15/2010 11/01/2011 Closing: 12/31/2012 12/31/2015 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Unsatisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Bank Ratings Borrower Ratings

Quality at Entry: Moderately Unsatisfactory Government: Moderately Satisfactory

Quality of Supervision: Satisfactory Implementing Satisfactory

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Agency/Agencies: Overall Bank Performance: Moderately Satisfactory Overall Borrower

Performance: Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes

Original Actual Major Sector/Sector Public Administration Central Government (Central Agencies) 80 80 Energy and Extractives Other Mining and Extractive Industries 20 20

Major Theme/Theme/Sub Theme Economic Policy Fiscal Policy 9 9 Tax policy 9 9 Private Sector Development Business Enabling Environment 33 33 Regulation and Competition Policy 33 33 Public Sector Management Public Administration 42 42 Transparency, Accountability and Good Governance

42 42

Public Finance Management 9 9 Domestic Revenue Administration 9 9 Public Expenditure Management 9 9

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E. Bank Staff Positions At ICR At Approval

Vice President: Victoria Kwakwa Victoria Kwakwa Country Director: Bert Hofman James Anderson Practice Manager/Manager:

Christopher Gilbert Sheldon Christopher Gilbert Sheldon

Project Team Leader: Bryan Christopher Land Bryan Christopher Land ICR Team Leader: Bryan Christopher Land ICR Primary Author: Bryan Christopher Land F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meet the needs of the public sector, industry, and civil society, including the operation of Erdenes MGL LLC according to international standards associated with commercial entities. Revised Project Development Objectives (as approved by original approving authority) To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry and civil society. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : The Fiscal Stability Fund (FSF) is implemented in line with the Fiscal Stability Law with appropriate guidelines, procedures and organizational support

Value quantitative or Qualitative)

Human Development Fund established but deficient without defined operating criteria

Supporting organization established for the FSF, including guidelines and procedures

FSF is operated by a department of MoF in accordance with regulations issued under the Fiscal Stability Law of 2010 and law on Special Funds of 2006

Date achieved 01/10/2014 01/10/2014 12/31/2015 Comments (incl. % achievement)

Fully achieved although success is attributable to a combination of MSISTAP financed activities and other Bank activities on public financial management.

Indicator 2 : Level of spending towards basic public service delivery and investments programs of Aimag and Soum authorities is known and publicly disclosed

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Breakdown of aimag and soum budgets by functional and economic classifications published regularly

Aimag and Soum budgets are published regularly under the Integrated Budget Law 2011.

Date achieved 12/31/2012 12/31/2015 Comments (incl. % achievement)

Partially achieved only since achievement was not directly attributable to MSISTAP financed activities, which were limited mainly to training/study tours.

Indicator 3 : Mining tax audits are completed and assessments raised


No tax audits completed

Two audits completed

2 audits were completed in 2014


Fully achieved. One audit resulted in a tax dispute that was settled in the Government's favor in 2015.

Indicator 4 :

Clear authority and responsibilities for Government mining sector management institutions, especially regarding environmental and social aspects associated with mining activities


Roles confused, resulting in gaps and conflict

Institutional restructure implemented

Action Plan to implement recommendation of Functional Management Review is adopted

Selected recommendations of the MSISTAP financed Functional Review were endorsed

Date achieved 12/31/2012 12/31/2012 01/10/2014 12/31/2015

Comments (incl. % achievement)

Partially achieved. The then Minister of Mining endorsed the recommendation to establish a national geological agency independent of regulatory functions. No Action Plan to implement other recommendations was adopted.

Indicator 5 : Cadaster system in place and publicly accessible at the MRAM


No cadaster system in place

System operational, used for licensing mining operations

A fully computerized cadaster can be accessed online and used for filing license applications

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Date achieved 01/10/2014 01/10/2014 12/31/2015


Fully achieved. During the period from 2010 to 2014 there was a moratorium in place on new licensing which meant that the benefits of this reform only became evident from 2015 onwards

Indicator 6 : Increased availability and publication of digital geological information for investors and society


Very limited data availability

200,000 data points digitized

Geological information not digitized


Not achieved: Progress was hindered by restrictions placed on the digitization and disclosure of geological data by the National Security Council on national security grounds.

Indicator 7 : Establishment of good practice internal management systems and standard operating procedures for state equity holding company Erdenes MGL LLC


Annual reports clearly detail sources and uses of funds

Dropped at restructuring 10-Jan-2014


The rationale for dropping this PDO indicator is provided in ICR Section 1.3.

Indicator 8 : Companies and civil society participate in consultation for pieces of policy, legislation and regulation for mining sector thru public fora arranged by the government.


Consultations taking place for policy, each piece of legislation and regulation

Consultations took place for mining policy and several pieces of legislation and regulation


Fully achieved: MSISTAP supported consultations on several policy and legislative reforms, as recorded in the Annual M&E reports.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Sovereign Wealth Fund or alternative revenue stabilization mechanism

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established Value (quantitative or Qualitative)

None

Fund operational

A Fiscal Stability


Fully achieved although success is attributable to a combination of MSISTAP financed activities and other Bank activities on public financial management.

Indicator 2 : Preparation of draft model Stabilization Agreement or equivalent for mining and draft model Production Sharing Agreement or equivalent for petroleum.

Value (quantitative or Qualitative)

Advice provided to the government. Implementation initiated for the recommendations which are accepted.

A draft model Petroleum Production Sharing Agreement has been prepared.

Date achieved 01/10/2014 12/31/2015


Partially achieved. A model Production Sharing Agreement for petroleum investments was prepared and was first used in 2015. However, in 2014 the Gov't removed jurisdiction over some aspects of investment agreements away from the Min. of Mining.

Indicator 3 : Preparation, adoption and publication of a good practice policy statement on State equity participation in the mining sector.


Policy adopted and in line with good practice.



Indicator 4 : Ministry of Mining policies reviewed and revised (such as industrial development, coal, unconventional oil and gas, iron ore, and communications).


Government adopts recommendations in the form of policy statements.

Several policies were reviewed.


Partially achieved since although MSISTAP funded policy studies on industrial development of minerals, coal, unconventional oil and gas, iron ore and communications these did not result in specific policy statements.

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Indicator 5 : Support establishment of mechanisms for preparation and dissemination of independent professional mining sector economic and policy reports.


Produce first report.

No reports produced.

Date achieved 01/10/2014 12/31/2015


Not achieved: This objective could not be met as repeated attempts to support independent generation of policy analysis and reports failed to get traction with the government institutions.

Indicator 6 : Modern Mining cadaster regulations are prepared, promulgated, implemented and monitored


Companies confirm cadaster processing times reduced

Cadaster system operational, used for public tendering for mineral licenses.

Cadaster system operational and in use for managing award of mineral licenses.


Fully achieved. During the period from 2010 to 2014 there was a moratorium in place on new licensing which meant that the benefits of this reform only became evident from 2015 onwards.

Indicator 7 : Income tax law on mining and supporting regulations drafted.


Final modifications to tax laws submitted to Parliament for consideration.

Drafts prepared.


Partially Achieved since the drafts had yet to be considered by Parliament at closing due to wider changes in fiscal legislation being prepared.

Indicator 8 : Options study prepared based on Review of Double Taxation Treaties (DTTs).


Tax avoidance prevented

Work completed on double taxation treaties _ Government satisfied with current position on double taxation

Options were prepared and actions taken by the Government to prevent tax avoidance.

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treaties.


Fully achieved. The review of DTTs was undertaken and resulted in Government cancelling two DDTs and renegotiating others.

Indicator 9 : GDNT tax audit staff trained and competent to carry out mining company tax audits


10 staff trained and 2 staff lead mining tax audits

All tax audit staff received training and 2 mining company audits were conducted.

Date achieved 12/31/2012 12/31/2015


Fully achieved. Tax audit staff of the GDNT were trained at a variety of levels, participated in study tours and were supported with audit manuals. With this preparation GDNT was able to conduct the audit of two mining companies in 2014.

Indicator 10 : Modern company reporting requirements regulations are prepared, promulgated, implemented, and monitored.


Companies confirm in line with good practice

Regulations issued, enforced.

Regulations had been prepared.

Date achieved 12/31/2012 01/10/2014 12/31/2015


Not achieved: Preparation of the regulations was delayed until after the amendments of the Mining Law in July 2014 and by closing had not been promulgated.

Indicator 11 : Modern occupational health and safety regulations are prepared and promulgated.


Legislation passed, authorities actively monitoring health and safety practices based on new regulations

Regulations had been prepared by closing.


Partially achieved since preparation of the regulations took place after delayed amendment of the Mining Law but by closing had not been promulgated.

Indicator 12 : A strategic environmental and social assessment (SESA) undertaken, areas for

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improvement in social (including gender aspects) and environmental regulation are identified and recommendations made for updating laws and regulations.


Results presented, Government responding to key findings

SESA completed in December, 2014 with Action Plan discussed by Government.


Fully achieved.

Indicator 13 : Consultation with a range of stakeholders including civil society, community members and the private sector undertaken as part of a social and environmental strategic assessment process.


SESA Consultation process completed. Working local engagement tools (models) evolved

SESA consultation process was completed and provided demonstration of local engagement approaches.


Partially achieved. While the SESA consultation offered a demonstration of local engagement approaches these were not explicitly adopted as models of engagement.

Indicator 14 : Modern mine closure and post closure regulations are prepared and promulgated.


Mine closure regulations prepared, finalized

Regulations had been prepared.


Partially achieved since preparation of the regulations took place after delayed amendment of the Mining Law but by closing had not been promulgated.

Indicator 15 : Increased number of outreach and education programs for artisanal and small scale miners on technology, safety and environmental issues.


6 (cumulative) including social impacts



This indicator was dropped once the relevant project sub-component was dropped.

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Indicator 16 : Adoption of appropriate legal framework for Erdenes including governance and oversight arrangements


Well qualified Board of Directors

Charter in line with good corporate practice

Charter adopted but not assessed as being in line with good practice


Partially achieved since whether the charter was in line with good practice standard was not assessed

Indicator 17 : Erdenes MGL financial reports are provided quarterly to the Board of Directors.


8 reports (cumulative, 2013 - 2014)

Quarterly reports provided over the two years.


Fully achieved

Indicator 18 : Provision of management-related and governance related training events to build capabilities needed within Erdenes MGL.


16 training events/ attendance at conferences.

Several MSISTAP funded trainings completed but the number of events not verified.


Partially achieved since the number of events and attendance was not recorded and verified.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/27/2009 Satisfactory Satisfactory 0.00 2 06/30/2011 Satisfactory Moderately Satisfactory 3.53 3 04/21/2012 Moderately Satisfactory Moderately Satisfactory 4.80

4 04/03/2013 Moderately Unsatisfactory

Moderately Unsatisfactory 5.63

5 12/25/2013 Moderately Moderately 6.52

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Unsatisfactory Unsatisfactory 6 05/05/2014 Moderately Satisfactory Moderately Satisfactory 7.41 7 11/17/2014 Moderately Satisfactory Moderately Satisfactory 7.95 8 06/01/2015 Moderately Satisfactory Moderately Satisfactory 8.75 9 12/29/2015 Moderately Satisfactory Moderately Satisfactory 8.69

10 06/03/2016 Moderately Satisfactory Moderately Satisfactory 8.69 H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made DO IP

07/02/2012 MS MS 4.80

Extended project closing following findings of the Mid Term Review

01/10/2014 Y MU MU 6.87

Changed PDO, selected legal covenants and results indicators, dropped 2 sub-components and further extended project closing date

03/30/2015 MS MS 8.75

Further extended project closing to allow for completion of Environmental Action Plan

If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Unsatisfactory Against Formally Revised PDO/Targets Moderately Unsatisfactory Overall (weighted) rating Moderately Unsatisfactory

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I. Disbursement Profile

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1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country and sector issues 1. By the mid-2000s Mongolia was emerging as a significant mining country. Mongolia’s historic mineral output had been largely copper, gold, coal and fluorspar, under control of State enterprises, especially Erdenet copper mining company, which from the late 1970s earned about half of all foreign exchange and provided almost a quarter of government revenues. Following the passage of the Mineral Law of 1997, foreign direct investment in mineral exploration had risen dramatically. The boom in exploration had resulted in the discovery of an impressive pipeline of potential world class mineral projects. The contribution of the mining sector to the economy in 2008 was 20% of GDP and 60% of exports. 2. The Government was in the process of defining the policy and regulatory framework and defining the role for state institutions. Under the Mineral Law of 2006 the Government prioritized the development of “mineral deposits of strategic importance” and had a policy of inviting foreign participation in the development of these, so long as the State retained a substantial equity interest. At appraisal the Government had begun negotiation of an investment agreement with the foreign project sponsors for development of the very large Oyu Tolgoi copper-gold deposits and was interested in promoting development of the giant Tavan Tolgoi metallurgical coal deposits to supply export markets. Its equity interests (34% in Oyu Tolgoi and at least 51% in Tavan Tolgoi) would entail a significant funding requirement, so the Government was seeking ways to raise finance in international capital markets. It was also interested in opening opportunities for the Mongolian public to participate in the benefits of mining by promoting wide share ownership. Aside from strategic deposits, mining had attracted a wide array of junior foreign and local companies, encouraged by Mongolia’s seemingly boundless mineral opportunities and rising commodity prices. 3. Another challenge was to manage the proliferation of artisanal and small scale mining (ASM). In the wake of opening to the market economy in the 1990s, ASM had also become prevalent, supporting at times as many as 250,000 people, including miners and their extended family members, according to some estimates, which was close to 10% of the population. The ASM miners generally engaged in poor and unsafe mining practices, and liberally used mercury and occasionally cyanide (for gold extraction) without understanding the risks for their own health and the natural environment. Much of this mining and trading of minerals was done illegally. The official attitude towards ASM had been to discourage the sector by clamping down on unauthorized operations and banning the use of mercury and cyanide in an attempt to reduce the harmful health, safety, and environmental impacts. By appraisal the Government had adopted a strategy to foster small and medium sized commercial enterprises in the sector through better coordination and raising awareness of risks. 4. Mongolia responded to global pressures to increase transparency in the governance of mining by joining the Extractive Industries Transparency Initiative (EITI). EITI was launched as a global barometer of transparency in 2005 and Mongolia was an early candidate for membership in 2007. It undertook to publicly disclose resource revenues under the oversight of a multi-stakeholder group and thereby attained compliant status in 2010 (one of the first group of five countries to achieve this).

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Rationale for Bank Assistance 5. The World Bank had previously engaged in Mongolia with non-lending support for the development of a regulatory framework for private sector-led mining sector investment for more than 10 years. This included establishing the initial legislative and fiscal regimes to apply to mining (through the 1997 Mineral Law) and supporting improved efficiency of State-owned coal mining operations at Baganuur, near Ulaanbaatar. Subsequent World Bank support focused on macro-economic management of mining revenues that was provided by the Governance Assistance Project (GAP), which was approved in May 2006. The GAP also supported initial development of modern mining cadaster regulations together with the design and development of a computerized mining cadaster intended to increase transparency of mining licensing and reduce the risk of possible malpractice. 6. An overall approach of development partners towards the mining sector - including ADB, EBRD, IFC and the World Bank was set out in a joint Memorandum of Understanding with the Government in April 2007. The MOU focused on the following four areas of support: (a) assessment of the infrastructure needed for the development of the mining sector; (b) development of mining regulations and capacity building in government agencies; (c) assistance in the legal and institutional establishment of Erdenes and (d) advisory services in relation to the selection of strategic investors for the development of the strategic deposits. At the time the Government was engaged in negotiating an investment agreement to govern the Oyu Tolgoi copper-gold mining project. 7. The scale and pace of mining development was beginning to reveal significant challenges in terms of the clarity of the mining investment framework and weaknesses in the institutional mandates and capacity to regulate a fast-developing sector. The Project Appraisal Document (p.24) referred to substantial risks if the “regulatory vacuum” that existed then was not developed in line with good international practice. MSISTAP was designed to step up the level of support to the Government so that it could weigh different policy options and begin to put in place the policy, fiscal, legal, regulatory and institutional framework needed to promote mining sector growth on a sustainable basis, meeting the needs of government, industry, and civil society. 8. MSISTAP was also consistent with the Country Assistance Strategy (CAS) for the period 2008-2011, of which a key pillar was “enhancing the development benefits of the mining economy.” The project’s focus on identifying international good practice and presenting options to strengthen sector governance and economic management, improve sector regulation, and promote effective and socially and environmentally sustainable sector activities was in line with this CAS pillar. Although mining was its focus, MSISTAP could be deployed to support petroleum sector regulatory development as well. At appraisal the upstream petroleum sector was quite limited, with exploration showing modest success, oil being produced only in small quantities and few opportunities to develop gas. The intention was to be able to employ MSISTAP to address petroleum sector development should the need arise. 9. In the months following Board approval of the project Mongolia underwent an especially severe economic crisis which underlined the high degree of exposure of the country to fluctuating commodity markets and the relevance of the reforms the project would try to support. The Government obtained emergency support from the International Financial Institutions, including a development policy loan from the World Bank. The Government’s stance towards many of the policy prescriptions associated with the emergency financing, including those supported through MSISTAP, was accommodating at this time. But, as will be discussed in Section 2.2, when economic fortunes rebounded on the back of the recovery in mineral prices, the Government’s stance changed, resulting in growing policy headwinds.

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Original Project Development Objective (PDO) and Key Indicators 10. The PDO, stated in the Financing Agreement, was: to establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry, and civil society. This includes the operation of Erdenes MGL LLC according to good international practice associated with a commercial entity. The version in the PAD was slightly different in stating that the objective was to “assist the Government to further establish …” and it referred to “… needs of the Government” rather than the public sector. 11. There were eight PDO Indicators which reflected a range of interventions necessary to achieve the PDO which spanned economy wide impacts of mining sector development, direct mining sector governance and management of state equity in mining. The original PDO and Intermediate Outcome Indicators are shown in Table 1. These were, for the most part, intended to relate to the progressive achievement of the core PDO Indicators. 1.3 Revised PDO and Key Indicators 12. MSISTAP underwent a Level 1 Restructuring in January 2014 in which the PDO was changed to be “to establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry and civil society” thereby omitting – “this includes the operation of Erdenes MGL LLC according to good international practice associated with a commercial entity”. This “corrective restructuring” was justified in the Restructuring Paper (Report No: RES12832) as such: 13. “The new PDO drops the objective of fully commercializing Erdenes, MGL. This part of the original PDO is assessed as overly ambitious and unlikely to be achieved within the project’s lifetime. The 2012 elections resulted in an increase of the state’s control over Erdenes MGL operations and strategy, which reflects its importance as a key government instrument to manage state equity in mineral development projects. This also makes commercialization a challenge in the short to medium run, given the complexities of updating Erdenes MGL’s roles, mandate, and financial structure. Despite the change in the PDO, the company’s importance to the mining sector and the regulatory framework is such that its inclusion in the project remains meaningful and relevant. It is acknowledged that MSISTAP as a technical assistance project is not a suitable instrument to influence this policy level decision.” 14. Corresponding to this change PDO Indicator 7 was dropped - “Establishment of good practice internal management systems and standard operating procedures for state equity holding company Erdenes MGL LLC”. Furthermore, the related legal covenant was dropped (see Section 1.7). However, an intermediate indicator was added relating to financial reporting of Erdenes MGL LLC. 15. The restructuring resulted in quite substantial additional changes to the Results Framework, as recorded in Table 1. This included dropping an Intermediate Outcome Indicator linked to the dropped sub-component of the project on artisanal and small scale mining (see Section 1.6). Several of the original PDO and Intermediate Indicators were redefined, target values revised and, where missing in the original documents, baseline values were added. In a number of cases indicators set out in different sections and tables in the PAD were found to be inconsistent, so greater clarity and consistency was achieved in the revised Results Framework. Table 1: Comparison of Indicators in the Original and Revised Results Framework

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PDO Components Original Indicators Revised Indicators Original To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry and civil society, this includes the operation of Erdenes MGL LLC according to good international practice associated with a commercial entity” Revised To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meets the needs of the public sector, industry and civil society

Strengthening the Capacity to Manage Mining Revenues, and Develop Economic and Sector Policies

PDO Indicators Annual Budget decisions to replenish or withdraw from newly established Sovereign Wealth Fund are made based on agreed macro-economic criteria Level of mining related transfers from national government to Aimag and Soum authorities is known and publicly disclosed Mining tax audits are completed and assessments raised

PDO Indicators The Fiscal Stability Fund is implemented in line with the Fiscal Stability Law with appropriate guidelines, procedures and organizational support No change No change

Intermediate Indicators Sovereign Wealth Fund or alternative revenue stabilization mechanism established Preparation, adoption and publication of a good practice policy statement on State equity participation in the mining sector Establishment of a policy “Think Tank” which produces good quality economic and mining sector policy issues and policy reports GDNT tax audit staff trained and competent to carry out mining company tax audits Income tax law on mining and supporting regulations drafted, enacted and implementation started Options study prepared based on Review of Double Taxation Treaties

No change Dropped Support establishment of mechanisms for preparation and dissemination of independent professional mining sector economic and policy reports No change Income tax law on mining and supporting regulations drafted No change

Improving Regulatory Capacity to Manage Mining Sector Development

PDO Indicators Clear authority and responsibilities for Government mining sector management institutions, especially regarding environmental and social aspects associated with mining activities Mineral licensing procedures streamlined and processing times reduced Geological information is digitized and published and readily available in user friendly digital formats

PDO Indicators No change Cadaster system in place and publicly accessible at the MRAM No change

Intermediate Indicators Preparation, adoption and publication of good practice Draft Model Mining Investment Agreement Modern Mining cadaster regulations are prepared, promulgated, implemented and monitored Modern company reporting requirements regulations are prepared, promulgated,

Intermediate Indicators Preparation of draft model Stabilization Agreement or equivalent for mining and draft model Production Sharing Agreement or equivalent for petroleum Ministry of Mining policies reviewed and revised (such as industrial development, coal, unconventional oil and gas, iron ore, and communications) No change No change

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implemented, and monitored Modern occupational health and safety regulations are prepared, promulgated, implemented and monitored Socio economic impact assessment and social mitigation provisions including resettlement and compensation regulations are prepared, promulgated, implemented and monitored Modern mine closure and post closure regulations are prepared, promulgated, implemented and monitored Increased number of outreach and education programs for artisanal and small scale miners on technology, safety and environmental issues

Modern occupational health and safety regulations are prepared and promulgated A strategic environmental and social assessment (SESA) undertaken, areas for improvement in social (including gender aspects) and environmental regulation are identified and recommendations made for updating laws and regulations Consultation with a range of stakeholders including civil society, community members and the private sector undertaken as part of a social and environmental strategic assessment process Modern mine closure and post closure regulations are prepared and promulgated Dropped as the related sub-component of the project was dropped

Developing the Capacity for Management of State Equity

PDO Indicators Establishment of good practice internal management systems and standard operating procedures for state equity holding company Erdenes MGL LLC

Dropped as the related element of the PDO was dropped

Intermediate Indicators Adoption of appropriate legal framework for Erdenes MGL including governance and oversight arrangements Provision of management-related and governance related training events to build capabilities needed within Erdenes MGL

Intermediate Indicators No change No change Erdenes MGL financial reports are provided quarterly to the Board of Directors

Cross Cutting PDO Indicator Companies and civil society participate in consultation for pieces of policy, legislation and regulation for mining sector thru public fora arranged by the government

PDO Indicator No change

1.4 Main Beneficiaries 16. The Project Appraisal Document defined a large number of government agencies as direct beneficiaries of the project based on the complexity of mining sector management and the need for cooperation among several regulatory institutions. Their identity and the nature of the benefits generated by the project are listed below. Since the government was restructured in 2012 elections, successor ministries and agencies (where applicable) are noted in brackets for ease of reference. 17. The Ministry of Finance (MoF); beneficiary of support for policy and legislative development and capacity building in the area of macro-economic management of a mineral-rich country and management of resource revenues;

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18. The General Department of National Taxation (GDNT); beneficiary of support for policy and legislative development and capacity building in the area of tax design, administration and audit; (General Department of Taxation at the end of the project) 19. The Ministry of Industry and Trade (MoIT), which then covered the mining and petroleum sectors (later the Ministry of Mining); beneficiary of policy and legislative development and capacity building in the area of mining and petroleum sector management; 20. The Mineral Resources and Petroleum Authority of Mongolia (MRPAM), which was later split in two; beneficiary of capacity building and institutional support for mineral rights management and compliance monitoring and management; (The Mineral Resource Authority of Mongolia at the end of the project) 21. The Ministry of Nature and Environment (MoNE); beneficiary of capacity building and institutional support for environmental permitting and compliance monitoring and enforcement; (The Ministry of Environment and Green Development at the end of the project) 22. Erdenes MGL LLC (Erdenes), the state mining holding company; beneficiary of capacity building and institutional development for the management of state equity interests in mining; (Erdenes Mongol at the end of the project) 23. The State Property Committee (SPC); beneficiary of policy and legislative development in the area of state enterprise development in the extractive sectors. 24. As noted above, in the course of implementing MSISTAP several changes in the titles of beneficiary agencies took place and, in some cases, agencies were dissolved or merged with others. These changes were accommodated by changing the composition of the Project Steering Committee to ensure that those agencies in receipt of support through the project continues to be represented on the PSC. These changes generated only limited administrative challenges and did not impede project implementation. 25. At the time of restructuring in January 2014 there was no need to change the beneficiaries of the project which was accommodated under the “successor” clause in the Financing Agreement. Even though the direct reference to Erdenes was dropped from the PDO it continued to the primary beneficiary of support provided through Component 3 of the project on the management of state equity until closing. 1.5 Original Components 26. The Project consisted of four components, one of which was on Project Management. The title, purpose and activities of the three substantive components are shown below as set out in the Project Appraisal Document. Component 1: Strengthening the Capacity to Manage Mining Revenues, and Develop Economic and Sector Policies 27. This component focused on strengthening the capacity of MoF, MoIT, GDNT, MRPAM and Erdenes, to:

• refine the economic and sector policy framework applicable to the mining sector, including, inter alia: (A) the development of new policies on exploration licensing, mineral taxation, state equity participation, sectoral sustainable development, mineral revenue sharing, and interagency

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cooperation; and (B) the establishment of an independent applied policy research institution (a policy think tank);

• provide strategic advice on high level mining policy, investment strategies, mining development

financing and optimal processes for engagement of strategic investors in the extractive industries sector;

• improve financial planning and forecasting, including, inter alia: (A) a review of the structure and

operation of the existing Human Development Fund and/or the formulation and implementation of new mechanisms to stabilize and smooth revenue flows from the mining sector, including the development of the relevant legal framework, operational guidelines and administrative arrangements; (B) the development of policies and fiscal instruments to address exchange-rate management challenges and macro-economic risks (Dutch disease); (C) the improvement of fiscal statistical data collection, reporting and sharing among governmental agencies; and (D) the provision of training in data analysis and forecasting;

• develop model contracts and investment agreements to foster the development of extractive

industries;

• design a dissemination strategy to communicate to the general public and the investment community the policies applicable to extractive industries and the public and private initiatives for the sector;

• review the existing governmental institutional structure for the mineral sector, and provide

recommendations for rationalization and consolidation for the sector management functions;

• assess/review the tax regimes currently applicable to the extractive industries (including double taxation treaties) in order to: (A) propose amendments to correct identified deficiencies in the fiscal framework for the sector; (B) evaluate their implications with respect to direct and indirect mining sector revenues and cost/benefit estimations; (C) address the challenges of international taxation and/or tax avoidance strategies, (D) provide training to staff on basic principles, practices and techniques for mineral taxation assessment and audit; and (E) carry out tax avoidance risk assessments and company audits; and

• training and human resources capacity building through formal and on-the-job training programs.

Component 2: Improving Regulatory Capacity to Manage Mining Sector Development 28. This component focused on strengthening the regulatory capacity of MoIT, MoNE and MRPAM, to enable them to:

• improve the existing legal framework for the mining sector through the development of best practices related to mineral licensing, environmental protection, social impact management and occupational health and safety; and (B) effectively implement, and improve compliance with, the extractive industries regulations;

• ensure compliance with environmental requirements for site rehabilitation after mine closure and

termination of exploration/mining operations;

• complete the establishment and operation of a fully computerized mineral licensing system;

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• support MRPAM’s Artisanal and Small-scale Mining Division and MoNE to: (A) develop

guidelines for the management of environmental, social and safety risks associated with artisanal and small-scale mining (ASM) operations; (B) formalize the ASM sectors through licensing and registration miners; and (C) establish a database of ASM miners including their GPS locations;

• support MRPAM’s Geology Department and Geological Information Center in: (A) managing

mineral deposit reserves and resources data and converting the categorization thereof into international classifications suitable for reporting to international stock exchanges; (B) establishing a national geological stratigraphic database; (C) establishing an information management and dissemination policy; (D) establishing systems for digitizing geological information and edge-matching geological maps; and (E) preparing a strategic plan for future geological mapping.

Component 3: Developing the Capacity for Management of State Equity 29. This component focused on strengthening MoF, MoIT, Erdenes and SPC’s institutional capacity in order to develop an appropriate institutional framework for the management of the Borrower’s participating interests in the mining sector, through the following specific activities:

• the alignment and development of Erdenes in accordance with the National Development Strategy;

• the design of the legal structure, financial and fiduciary arrangements for the establishment of a

holding company, consistent with the OECD Principles of Corporate Governance;

• the provision of training to Erdenes’s directors (including independent directors) and officers on international best practices in corporate financial management and reporting requirements;

• the assistance to Erdenes to prepare for listing on the Mongolian Stock Exchange;

• the provision of advice to Erdenes on investment strategies and project financing; and

• training of Erdenes’s staff on project evaluation, feasibility studies, and financial modeling.

1.6 Revised Components 30. The four MSISTAP Components remained throughout the entire project implementation period. However, at the time of Restructuring in January 2014, two sub-components of Component 2 were dropped and this was recorded in the Revised and Restated Financing Agreement of February 18, 2014. Sub-component 2 (iv) with respect to support for artisanal and small-scale mining sector reform was dropped to reflect that such support was to be provided by the Swiss Development Cooperation’s (SDC) dedicated Small Scale and Artisanal Mining (SAM) Project, implemented by the Ministry of Mining. SAM had been launched some years earlier and at the time of restructuring was being scaled up. It was agreed with the Recipient that in order to avoid duplication it would be better to drop this sub-component from MSISTAP. Sub-component 2 (ii) on mine site rehabilitation was also dropped, although there was no discussion of this in the Restructuring Paper. 1.7 Other significant changes

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(i) Project Restructuring 31. First Restructuring – July 2, 2012: Based on the recommendation of the Mid Term Review (MTR) which was concluded in April 2012, and formal request of the Recipient on May 29, 2012, a Level 2 restructuring extended the closing date of the project by one year, from December 31, 2012 to December 31, 2013. At the time the ISR rating for the project was Moderately Satisfactory. The justification for extending the closing date included to make up for the reduced lifetime of the project owing to delayed effectiveness and slow project start up. At the time the MTR recorded that the option of undertaking more far reaching project changes was considered given risks identified at the time of the MTR. However, it was decided, in light of impending elections, to proceed with an extension of the closing date only, while closely monitoring project performance1. 32. Second Restructuring – January 10, 2014: The project underwent a Level 1 restructuring after further review of project performance at the start of 2013 once a new Government was fully installed. This was a “corrective restructuring” to address weaknesses in the design revealed in the course of implementation. 33. The restructuring included the following key changes:

• Revising the Project Development Objective. For details, see Section 1.3. • Revising the Results Indicators. For details see Section 1.3. • Extending the Closing Date: The closing date was extended from December 31, 2013 to March

31, 2015.

Restructuring non-standard dated legal covenants in the Financing Agreement: The original project design included several legal covenants tied to Government policy actions. As part of the restructuring, these were modified to a set of more appropriate covenants in line with the updated PDO and agreement with the Government (see below). Updating the safeguards arrangements: The restructured Project updated safeguards arrangements in line with the Environmental Action Plan agreed with the Borrower (see section (iii) below). Change to project components: Formally dropping ASM sub-component (2 (iv)) and mine site rehabilitation sub-component (2(ii)). Third Restructuring – March 30, 2015: Under a Level 2 restructuring the closing date was extended for nine months from March 31st to December 31st 2015, to allow for completion of the Cumulative Impact Assessment agreed as part of the Environmental Action Plan (see section iii below and the Environmental Action Plan which distinguishes which activity would fall under MSISTAP and which under the parallel Mining Infrastructure Project, MINIS). At that stage (March 2015) all project activities had been already completed and the project was fully disbursed.

1 The MSISTAP Restructuring Paper of July 2012 stated: “The option of waiting to process the extension until after the elections and the installation of a new government was considered, as this could allow the extension to be grounded in a more robust project implementation plan together with possible project restructuring measures which cannot be specified now.”

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(ii) Change of Legal Covenants As part of the Level 1 Restructuring in January 2014 the dated legal covenants of the original Financing Agreement in relation to safeguards and model agreements were modified as described below. Revised Safeguards Covenant: The legal covenant on safeguards in the original Financing Agreement was modified by adding the portions italicized below. The date by which the modified safeguards covenant was to have been fulfilled was later amended to December 15, 2015 by formal notice of the Bank to the Borrower dated October 8, 2014. The documents were disclosed and this covenant is considered “complied with”.

For the purposes of Part 2(i) of the Project, the Recipient shall: No later than May 31, 2014: Carry out and publicly disclose (A) an assessment of compliance of ETT’s operation of the East T mine in form and substance acceptable to the Bank; and Prepare and publicly disclose a Resettlement Policy Framework and Resettlement Action Plan East Tsankhi mine in form and substance acceptable to the Bank. The Recipient shall ensure that the Project Reports referred to in Section II of this Schedule adequate information on the status of preparation and implementation of the instruments referre paragraph 1 above. The Recipient shall ensure that all terms of reference for any technical assistance, studies and an work under the Project are consistent with the Association’s environmental and social safe policies.

Source: Revised and Restated Financing Agreement, 2014 Revised Model Agreements Covenant: The dated legal covenant relating to model agreements was modified as follows: Original: Cause MOF and MRPAM to develop and furnish to the Association for comments, by no later than January 31, 2010, a set of draft model investment contracts for the extractive industries in Mongolia, in form and substance satisfactory to the Association. Thereafter, by no later than March 31, 2010, draw up final drafts of such model investment contracts, taking into consideration the comments provided by the Association. Revised: Recipient to cause MoF to develop and furnish to the Association for comments, by no later than June 30, 2014, a set of draft model stabilization agreement or equivalent for mining and draft model production sharing agreement or equivalent for petroleum, in form and substance satisfactory to the Association. The change was made to reflect the evolution of thinking on what forms of model contract were needed to supplement Mongolian investment and extractive sector legislation. The covenant was “partially complied with” in so far as the model petroleum PSC was prepared and subsequently employed by the Government to enter into an agreement with a petroleum investor. A

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“stabilization certificate” was designed by MoF under the Tax Law to govern stabilization rules for all large scale investment in Mongolia, including mining and petroleum. Revised Institutional Study Covenant: The date specified to fulfill the following legal covenant was changed as shown below: In carrying out Part 1(vi) of the Project, the Recipient shall (a) complete and furnish to the Association for discussion, by no later than June 30, 2010 (June 30, 2014), the mining sector institutional assessment study in form and substance satisfactory to the Association; and (b) thereafter, implement the study recommendations as discussed with the Association. Dropped Erdenes Covenant: The covenant below relating to the obligations to be fulfilled by Erdenes was dropped:2 The Recipient shall ensure that, by no later than June 30, 2010, Erdenes MGL LLC will have: (a) established/adopted corporate systems, legal framework and structure acceptable to the Association, consistent with those of a commercial entity operating under OECD Principles of Corporate Governance; (b) commenced, and thereafter continue, with the preparation and public disclosure of quarterly activity reports in a manner and substance acceptable to the Association; (c) commenced, and thereafter continue, with preparation and public disclosure of annual reports documenting the company’s activities and financial condition (including audited financial statements), detailing assets, liabilities, sources of income and uses of funds, in a manner and substance satisfactory to the Association and consistent with the reporting requirements prevailing for stock exchange listed companies in Mongolia; and (d) completed the preparation of a strategy and implementation plan, in a manner and substance satisfactory to the Association, for the listing of shares of the company on the Mongolian Stock Exchange. (iii) Safeguards At appraisal no Safeguard Policies were triggered. However, following conduct of a safeguards review of the project in 2013, OP/BP 4.12 (Involuntary Resettlement) was triggered retroactively as part of the Restructuring in January 2014. This was in respect of the earlier financing by MSISTAP of the pre-feasibility study for ETT’s East Tsankhi coal mine. The relocation of two winter shelters had taken place in 2010 in connection with development of this mine and more resettlements were anticipated to take place as ETT’s coal mining operations expanded (albeit notrelated to MSISTAP or the East Tsankhi pre-feasibility study). As part of the restructuring the Borrower committed to an Environmental and Social Safeguards Action Plan as set out below in Annex 9.

2 Although it was intended that the entire covenant would be dropped, the Restated Financing Agreement of February 18, 2014 contains a single section of the original covenant (at page 14), namely sub-clause (a). Whether this was intentional or not is unclear.

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2. Key Factors Affecting Implementation and Outcomes Project Preparation, Design and Quality at Entry Soundness of Background Analysis 34. At entry the project’s objectives were well aligned with the Government’s National Development Strategy (NDS) and the donor’s engagement strategy on mining. The NDS emphasized good governance, export-driven economic growth (focusing on sectors in which Mongolia had a comparative advantage such as mining), rural development, poverty reduction, and empowerment through human resource development, with priority on pro-poor expenditures. These priorities were a feature of successive Country Partnership Strategies. IEG chose to include Mongolia among four case study countries in its thematic investigation of World Bank programs in resource-rich developing countries in 2015.3 Although the report examined the Bank’s overall portfolio of operations, it praised the approach of the Bank as reflected in the FY2008-2012 CAS, and the FY2013-17 CPS to make sound management of the mineral-economy the cornerstone of Bank engagement. Moreover, in 2007 several donors had articulated a joint engagement approach on mining which the project sought to implement. 35. The project design drew on analytical underpinnings established through several background studies on a range of macro-fiscal, governance and sector specific challenges. For instance, the 2006 World Bank Investment Climate Survey results suggested that corruption in Mongolia may be a symptom of rising inequalities, stemming from perceptions of lack of transparency and accountability in the public sector. The survey results indicated that unofficial payments required for obtaining exploration and mining licenses were high, and estimated at around 40% of the official fees. The project design took into account the sector issues highlighted in such studies, as well as government strategies. For example, MSISTAP supported creation of a streamlined and computerized system at MRPAM (MRAM in the end of the project) for handling license applications and awards (“mining cadaster’), in order to limit discretion and increase transparency. Other aspects of mining sector management that were analyzed as a basis for project design included a thorough review of environmental and social aspects of existing regulations (from which the need for a Strategic Environmental and Social Assessment of mining sector was developed), deficiencies of taxation and tax administration (resulting in the General Department of Taxation being beneficiary of sizable support through MSISTAP) and deficiencies in the storage of and access to geological data. The project took into account weaknesses of fiduciary systems at the Ministry of Mines and placed project implementation in the Ministry of Finance to mitigate some of the risks. 36. A number of lessons of earlier operations were taken into account in designing the project. At the time of preparation there had been several projects executed by the World Bank in countries with high mineral resource potential and in similar circumstances. The PAD documented lessons which the team built into project design. These included: (a) the requirement to establish a sector-specific focus with clear delineation of authority and responsibility of various ministries and agencies involved in the project; (b) strong beneficiary participation in project preparation, organization, and coordination at the field level; (c) sustainability of project components built around institutional champions for different components; (d) strong ownership and political commitment to project objectives; and (e) effective

3 Mongolia Country Program Evaluation FY05-13, Independent Evaluation Group, 2015. “The Mongolia program recognized the centrality of mining to Mongolia’s economy and refocused its strategy to address mining-related challenges. This proved critical for forging the credibility of the Bank and positioning it as a strategic development partner of the government.” (p.73)

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communication of the project’s objectives and outcomes to civil society. In this respect the project benefitted from being designed in close consultation with officials in various ministries and government agencies, who had identified several key risks and development needs. Assessment of the Project Design 37. The project was designed to group activities into three major categories corresponding to what had been identified as three areas of reform needed to accomplish the PDO. These were respectively:

• Strengthening the Capacity to Manage Mining Revenues, and Develop Economic and Sector Policies

• Improving Regulatory Capacity to Manage Mining Sector Development • Developing the Capacity for Management of State Equity

38. This way of designing the project around key sets of reforms remained in place for the entire project and was found to be a useful way of obtaining and retaining the commitment of beneficiary institutions. For example, the Ministry of Finance was a principal beneficiary of support provided through the project’s first component. The Ministry of Mining and related regulatory agencies were principal beneficiaries of the second component. Erdenes, and to a lesser extent, the State Property Committee, were the main beneficiaries of the third project component. 39. Notwithstanding a suitable structure around which to deliver project activities, there was inherent complexity in the project design on account of its wide scope. Complexity manifested itself in the large number of project sub-components (19) and multiple activities planned under each. Given the total funding amount, the average activity size was quite small. Among the implications of this was heavy transaction costs borne by the PIU and the Project Steering Committee. 40. A further challenge for the project design was how to support lengthy and complex processes of policy formulation, endorsement and implementation. Many of the planned project activities delivered knowledge and expertise (through expert reports, benchmarking, etc.). These were in strong demand from policy-makers at entry yet the manner in which such inputs would be converted into policy decisions was less clear. The cross-cutting nature of many activities supported through the project (e.g. formulation of regulations to apply mineral royalty and verify payments or design of a compliance regime for environmental impact management in the mining sector) required there to be close cooperation among government agencies. The PIU, while well suited to administrative aspects of project management faced greater challenges in helping to navigate the policy making process. The Project Steering Committee was intended to fulfill this role by bringing all beneficiary institutions under one umbrella and providing strong policy leadership through the chairmanship of the State Secretary of the Ministry of Finance. The implementation experience with this arrangement is discussed in Section 2.2. 41. The project design envisaged that clear policy directions and regulatory mandates would pave the way for the building of institutional capacities in the three key project component areas within the limited life of the project. The project design was overly optimistic in terms of the institutional reforms and capacity building that could be realistically achieved in the planned project life of four years. At appraisal, there was an expectation that the project might be followed by a second project, although there was no guarantee of this taking place. This would have enabled reforms to be followed by a reasonable period of institution-building. Although successive extensions resulted in the project being implemented over six years, no second project followed. In this respect, when coupled with the preceding points highlighted in paragraphs 39 and 40, the original project design lacked realism. The

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three extensions of the project life (from December 31, 2012 to December 31, 2015) are in part attributable to this. Adequacy of Government Commitment 42. At entry there was evidence of a high level of government commitment to the kind of reforms the project would support. For example, the Government had demonstrated a high level of commitment to improved governance in the extractive sector. It had already taken significant steps to implement Extractive Industries Transparency Initiative (EITI) and prepared the first EITI Reconciliation Report on payments and receipts for the year 2006. The EITI Reconciliation Report, which was made public in 2008 was discussed by civil society and had identified a number of discrepancies and weaknesses in the recording and reporting of mining industry revenue receipts. This pointed to several areas for GoM to address to improve systems for future reconciliations. Further, in 2008 GoM had passed anti-corruption legislation, and the Implementation of the Asset and Income Declaration requirements for senior government officials and Parliamentarians. GoM had highlighted private-sector led mining sector development in the National Development Strategy and prepared a Private Sector Development Strategy, aimed at accelerating economic growth through export-oriented, private sector driven economic development. Moreover, GoM was at that time engaged in the negotiation of an investment agreement for the world-scale Oyu Tolgoi copper-gold project with majority private ownership, the terms of which were eventually settled in 2009.4 Assessment of Risks 43. At the time of preparation, the project team recognized that the project faced substantial risks and tried to develop suitable mitigation measures. The PAD identified risks ranging from high to moderate (but in no case low) as shown in Table 2. High risks were presented by the electoral implications for policy stability, lack of fiscal prudence in the face of commodity market volatility, state intervention that might inhibit private sector development and barriers that might limit the ability of Erdenes to reform its governance and move to a more commercialized operating model. 44. In assessing the source of project risks, the project team showed a high level of realism, yet the project design did not fully reflect this. Mitigation measures, for the most part, counted on the project deliverables continuing to be well aligned with Government priorities and capacity building activities helping to sustain commitment to reform measures critical to achieving the PDO. The project design was also underpinned by some legal covenants, requiring time-bound actions to be taken by the Borrower, which the World Bank found difficult to employ. As Section 2.2 highlights most of the high risks identified by the project team impacted significantly on project implementation, prompting a change in the PDO to remove the specific reference to the reform of Erdenes’ governance and dropping the related legal covenant. 45. In addition, a risk of currency fluctuation reducing the funds available to finance activities was not measured at appraisal. In the event some planned activities were not undertaken due to

4 Later on once the first phase of the mine was in operation differences arose between the Government and the private sector parties about the conditions for moving to the much larger second phase of the project. This problem was not isolated but linked to a number of other issues that arose over foreign direct investment in the mining sector. These were eventually resolved in 2015 and a settlement was reached that has allowed Oyu Tolgoi Phase 2 to proceed and put together financing that includes loans and risk coverage from IFC and MIGA.

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insufficient funding after currency changes. In hind-site, the project should have had stronger contingency provisions. Table 2: Risk Ratings, Mitigation and Assessment

Risk Risk Rating Mitigation Measure Planned at Appraisal ICR Assessment of the Risks

Commitment to reform by Government would be weakened by ad hoc policy and legislative changes at Parliamentary level.

S Project would support strong policy and legislative development program supported by independent think tank and communications program.

Risks were correctly identified but the proposed mitigation measures were insufficient. An independent think tank had not been tried and tested.

2008 General Election would result in new policy direction and policy instability reducing the relevance of the project development objective

H The critical importance of the mining sector to economic growth would not change with the election. Government priorities for assistance would change and the project would be responsive to these changes. Project components were designed to remain relevant as much as possible in that they dealt with long term issues and programs. The Project team would review the scope of the project with relevant officials following the establishment of the new government.

Risks were correctly identified but the proposed mitigation measures were insufficient.

The implementation champions for some project sub-components within government agencies may change with a new Government after the 2008 elections

M The Project team would continue to liaise with government counterparts concerning Project design and implementation and identify new champions as required for each Project component and sub-component

Risks were correctly assessed and proposed mitigation measures appropriate.

Corruption in mineral sector management posed a threat to implementation of modern licensing practices

S The Project would support regulatory development and the establishment of transparent systems for the management of mineral revenues and revenue sharing as well as transparent allocation of mineral rights through the Cadastre. The Project also supported ongoing development and implementation of EITI.

Risks were correctly assessed and support for strengthening transparency measures quite appropriate

Increasing adoption of populist policies including social transfers and subsidies posed threats to long term sustainability of public expenditures and investment in infrastructure and services, particularly during periods of low commodity prices.

H The Project supported development of a revenue stabilization scheme and informed macroeconomic policy formulation and would build capacity in revenue forecasting and public expenditure planning.

The risks were correctly assessed and the mitigation measures, which were part of the Bank’s wider macro-fiscal engagement, correctly identified

Increasing economic nationalism and rising State control over economic enterprises in the

H The Project supported policy and institutional development in the sector including support to establish the guiding principles and corporate governance arrangements for the State

Risks were correctly identified but the proposed mitigation measures were insufficient. At restructuring the reference to commercialization

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mining sector posed threats to private sector development and investment climate unless the state was able to mobilize its share of the funding for new investments and its activities were transparent, independently managed, and took place on a level playing field with private investors

nominee holding company Erdenes MGL LLC. The state equity participation policy would address the issue of how the government would raise the financing needed to fund its participation in new mining projects.

of the state equity holding company Erdenes was removed from the PDO.

State owned Mining Company Erdenes MGL LLC would pursue non-transparent corporate model and business plan contrary to good international practice

H The Project would support Erdenes MGL LLC to addresses both management and governance arrangements. Continuation of support would be conditioned on Erdenes making progress towards adopting international best practice with respect to corporate governance and public disclosure comparable to exchange listed companies. Failure to do so would result in disengagement with Erdenes by the Project (legal covenant).

The risks were correctly assessed and the mitigation measures suggested, including the contingency of disengagement, were appropriate.

Project implementation would be slow because the PIU was newly established and lacked financial management and procurement staff familiar with World Bank procedures.

M The PIU was being established within MoF, which has extensive experience with PIUs for Bank projects. MoF experience made up for any PIU inexperience. Capacity development of PIU was also supported by close liaison with the TTL, Project team, and GAP PCU. Early training was provided to PIU staff as necessary to ensure competence in their respective roles.

The risks were correctly assessed and the mitigation measures proposed suitable.

Some sections of civil society may oppose the Project and its outputs for lack of good understanding of its objectives and components.

M A communications strategy was developed and implemented under the Project to make sure that civil society and Parliamentarians were accurately informed about the Project, its objectives, and its expected outcomes.

The risks were correctly assessed and the mitigation measures proposed appropriate.

2.2 Implementation 46. The following key factors affected project implementation: Implementation Factors outside Government or Implementing Agency Control 47. Mongolia’s high level of economic dependence on mineral exports and exposure to fluctuating global commodity markets had an important bearing on how the project’s efficiency was measured. Indicators of project efficiency such as levels of mining investment and contribution of mining to the economy were all affected by factors outside the control of Government or implementing agency control. Section 3.3 of the ICR assesses project efficiency with these factors taken into account. Implementation Factors subject to Government Control 48. A combination of the four-year electoral cycle and the economy’s high level of exposure to fluctuating global commodity markets induced a high degree of macro-fiscal and mining sector policy instability. Due to its high level of dependence on commodity exports Mongolia was exposed to

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sharp changes in conditions through commodity cycles, impacting exports, GDP and government revenues. Following a rebound in mineral prices after the Global Financial Crisis in 2009, Mongolia underwent a mining boom and was one of the fastest growing economies in the world. In its wake policy positions, especially after the 2012 election, were more resource nationalist, indicated by a stand-off between the Government and the largest mining investor over the terms of expansion of the Oyu Tolgoi mine, a new more restrictive foreign investment regime, and reluctance to limit state intervention through its state-owned enterprises, including Erdenes. Moreover, the Government accessed global capital markets to finance rapid public expenditure growth and was able to sharply reduce its reliance on donor financing. Unfortunately these actions coincided with the onset of a multi-year decline in mineral prices and increasing scarcity of global mining capital. Towards the end of the project life, as economic growth fell sharply and external debt levels mounted, policies positions began to change once more, favoring more regulatory clarity and a more balanced stance on foreign investment. 49. The project was highly exposed to the changes that took place in the policy landscape, given its objective of assisting the Government put in place key pieces of the policy, legal, fiscal, regulatory and institutional framework for the mining sector. The mitigation measures built into the project design were insufficient to limit the impact of the changes described in paragraph 48. The project faced significant headwinds across the three areas of policy reform which it was seeking to support, as elaborated below. 50. Reforms to strengthen the capacity to manage mining revenues and develop economic and sector policies (Component 1) relied on the Government’s continuing commitment to address mineral dependence and exogenous shocks through prudent macro-fiscal policies and openness to foreign investment. By project effectiveness Mongolia was experiencing a sharp downturn due to the global financial crisis and was receptive to advice on measures which the project would support. But as indicated in paragraph 48, this situation changed and the project began to face increasing policy headwinds. 51. Reforms to improve regulatory capacity to manage mining sector development (Component 2) relied on an articulation of clear policy positions on matters such as state equity, local content, environmental and social protection and open access to geological data but so long as this did not take place reforms were hindered. At appraisal the Mining Law of 2006 was considered to provide a sufficient basis for elaborating detailed technical regulations, defining regulatory mandates and beginning to build capacity across the main regulatory agencies in areas such as mineral rights management and geological data management. However, a review of the Mining Law was launched in 2010 by the Office of the President and during its consideration it was decided to impose a moratorium on issuing new exploration licenses. In the course of conducting this review of the legislation the Government decided to consider defining an overarching mining policy. It therefore took from 2010 to 2014 for the State Policy on Mining to be prepared and only then were long-awaited amendments of the Mining Law of 2006 introduced and, thereafter, the moratorium on exploration licensing lifted. As a result, PDO Indicator targets relating to key sector policies, improvement of the mineral rights management system and improving the system for managing geological data were delayed or could not be achieved. Moreover, the technical regulations needed for effective monitoring of compliance and enforcement by MRAM and other agencies, which the project supported, were held up until after the Mining Law amendments were made and by project closing had not been promulgated. 52. Reforms to develop the capacity to manage state equity in mining (Component 3) by improving corporate governance standards of the state holding company and commercializing its operations faced the stiffest headwinds. At appraisal, Erdenes was just being set up and the Government had mandated it to participate in the development of strategic deposits through its subsidiaries. For this to take place, it would have to raise capital in international markets and demonstrate

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its commercial and technical capability. The project financed strategy advice, training and asset management tools in the early part of the project to assist Erdenes and its subsidiaries. Some of this included corporate governance training for senior management. The incoming Government after the 2012 elections opted to introduce closer political control over the Board of Erdenes, imposed quasi fiscal responsibilities on the company and sought alternative ways to raise capital which entailed less need for opening up to capital markets. In this case, a decision had to be made to drop the relevant PDO Indicator of governance reform at restructuring in January 2014 and the corresponding legal covenant. 53. Implementation of the project was hindered twice by elections causing reduced willingness to make commitments ahead of elections and the slow process of making appointments and reviewing policy positions in the wake of elections. This occurred in 2008-09 and again in 2012-13. Among the direct impacts felt was delayed project effectiveness. The project was approved by the Board on June 26, 2008 with an expected Effectiveness Date of November 3, 2008. However, the Financing Agreement needed parliamentary approval which was delayed, in part because of national elections in 2008, and MSISTAP became effective only on May 1, 2009. Project activities started after a delay of about six months. A further impact was on the operations of the Project Steering Committee which, because of a combination of newly configured government agencies and new appointments in each election, could either not meet or resolve to make decisions. The effect of this was both a slow-down in work plan approvals, procurement and disbursement and a reduced institutional knowledge of the project and its goals. 54. On a more positive note, the beneficiary institutions retained strong interest in capacity building, especially in skills development and exposure to examples of good practice globally. The strengthening of tax administration by the General Department of Taxation and the computerization and streamlining of mineral rights management by the Mineral Regulatory Agency of Mongolia project activities as well as technical assistance and training to Erdenes Mongol, were implemented with relatively few obstacles (while noting that at a policy level mineral licensing was under moratorium until 2015). Factors subject to Implementing Agency Control 55. Contrary to the intention that the Project Steering Committee would exercise strong policy leadership, thereby connecting the project with the policy making processes of Government, the PSC played only a limited role in this respect. Although the PSC’s composition was intended to ensure that all key government beneficiaries that were relevant to the sector reforms supported through the project were represented, this did not guarantee that policy matters would be raised and resolved in this venue. For the most part, the minutes of the PSC meetings demonstrate limited attention to collectively discussing policy directions which the project could support. Instead the PSC served as a venue to which different agencies could bring funding and training requests and introduce TORs for consulting assignments which needed the chairperson’s support to be given to the PIU to launch procurement. The Head of PIU was de facto in a position of having to explain the broader goals of the project and principles behind its design. The supervision team’s concerns about the effectiveness of the PSC were included among the findings of the MTR (April 2012) and also drawn to the attention of the PSC chairperson. 56. In an effort to improve the policy relevance and impact of the PSC a change in the composition of the PSC was made, widening participation to agencies key to implementation of reforms. The Ministry of Environment and Green Development (MoEGD) and the General Agency for Specialized Inspection (GASI) had been left out of the PSC because they were not direct beneficiaries in the project design. But, based on the recommendations of the MTR, they were included on the PSC. In due course this step was to yield dividends when MoM and MoEGD jointly-launch the Strategic Environmental and Social Assessment of the mining sector, which was financed by MSISTAP. Another

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change was to include Open Society Forum (OSF) as an observer of the PSC. OSF had established a reputation for its advocacy on extractive industry policy issues and for convening CSO. This was a quite progressive step for the Government to take. 57. Early procurement challenges needed to be overcome, although procurement was consistently rated as satisfactory. At the beginning of the project, the PIU experienced some challenges to set up and implement procurement, including coordination with beneficiaries, design of Terms of References and execution of the steps of each of the procurement methods. Once the PIU was up to full strength and with the benefit of training and guidance from Bank fiduciary officers, performance improved. The MTR in April 2012 identified a number of areas where there were still issues for the immediate focus of the PIU to ensure that project activities were procured and delivered more quickly during the proposed project extension of a year. Actions taken to address these challenges are described in Section 5.2. 58. As project implementation revealed new opportunities and challenges the World Bank team was able to selectively employ complementary technical assistance to support project objectives. In 2010 the Government decided to begin to review the Mining Law of 2006, which fell outside the approved MSISTAP Work Plan. The World Bank team was able to use an Externally Funded Output (EFO) from the Government of Australia to assist the President’s Office take leadership in the review and draft proposed amendments in 2010-11. In 2014, following amendment of the Mining Law, the Ministry of Mining requested support to prepare and conduct consultations on mining investment agreements and on community development agreements, for which the Ministry was obliged to spell out model contracts. Since MSISTAP was at that stage fully programmed for its last year of implementation, the World Bank agreed to provide such assistance through a small Bank-executed operation funded by the Extractive Industries – Technical Advisory Facility Multi-Donor Trust Fund. This work was completed in January 2016, shortly after MSISTAP was closed – both model agreements were successfully delivered to the Ministry of Mining following full scale consultations. 59. Although most of the project risks rated as high at entry were indeed triggered during implementation at the time of restructuring in January 2014 the overall rating of risk was maintained as substantial. However, by removing from the PDO the reference to the commercialization of the state equity holding company Erdenes and dropping the corresponding legal covenant, the project was less prone to the high reputational risks associated with this goal of the project. Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E design 60. The original Results Framework was organized in a logical manner corresponding to the PDO and the three project components grouping the reforms which project activities would support. Given the broad scope of reforms intended to be supported and large number of institutions involved in these there were originally eight PDO indicators, which were reduced to seven at restructuring in January 2014. There were 16 Intermediate Outcome Indicators spread fairly evenly across the three project components. Given that the project was weighted toward policy design and regulatory capacity building, the indicators were almost all qualitative (non-numeric), with particular emphasis on policy preparation and promulgation. The Results Framework provided progressive non-numeric target values by project years designed to enable progress to be tracked annually. 61. The Results Framework proved to be difficult to use to conduct M&E due to i) an absence of baseline values, ii) inconsistencies in the PAD definitions of indicators and iii) vague definitions of indicators and related target values, so that a substantial change was required at restructuring in

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January 2014. The revised Results Framework dropped the PDO Indicators relating to dropped element of the PDO, and an Intermediate Indicator relating to the dropped sub-component of artisanal and small-scale mining (refer to Table 1). Other changes focused on presenting clearer and more realistic indicators. In particular, where previously an indicator specified the preparation, promulgation and implementation of a piece of legislation, the relevant target was changed to focus only on preparation and promulgation. This more limited approach was based on a recognition that the project had only limited ability to assure that measures that were designed with inputs from the project would actually reach the stage of implementation. A second set of changes related to measurement. Several of the original indicators were to be verified by means of surveying stakeholders on whether or not the actions supported by the project were “good practice” or represented an improvement in a situation. In practice, how this would actually be carried out on a reliable and cost-effective way was never established. Such targets were changed to those more easily measured. M&E implementation and utilization 62. It took time for the PIU to implement M&E routinely. The Mid Term Review noted that only limited M&E implementation had taken place after project effectiveness, notwithstanding the guidance set out in the Project Implementation Manual (PIM). The PIU did not have a dedicated M&E officer until 2011. Although the PIM stated that the project would support capacity building to establish baselines and enhance the quality of future monitoring and evaluation it was only from 2011 that this took place. The MTR process was used by the Bank team to demonstrate the value of the Results Framework for monitoring project performance and the Bank team provided guidance on good M&E practice. Among other things, this led to the preparation and publication by the PIU, on behalf of the PSC, of the first MSISTAP Monitoring and Evaluation Report in October 2011 (as an input into the MTR of April 2012). Thereafter, the PIU more regularly collected information relevant to the indicators in the Results Framework and progress was recorded in ISRs. In addition, every year the PIU developed an M&E report, posted it on the MSISTAP website and sent it to the Bank. The reports consolidated information about all activities financed by MSISTAP, including summaries of activities and training financed by the project. 63. Notwithstanding improved M&E implementation, the use of the results to inform project planning and PSC deliberations was limited. The annual M&E reports tended to lack depth of the analysis of project performance based on the Results Framework. This is likely to have been in part a consequence of the weaknesses in the design of the Results Framework described in paragraph 61.

2.4 Safeguard and Fiduciary Compliance Safeguards Compliance 64. The project was categorized as B at preparation. The safeguard requirements at that stage did not include an EIA and EMPs on the basis that in a policy-orientated and institutional capacity building technical assistance project no location-specific activities would be financed that would justify an A categorization. 65. A safeguards review conducted as part of the preparations for the second project restructuring found that an activity already financed by the project by that time had been location-specific. Key findings of the review were as follows: 66. OP/BP 4.12 (Involuntary Resettlement) was not triggered at appraisal, but following the review of safeguards in 2013, this safeguard policy was triggered for having financed the pre-feasibility study by Erdenes Tavan Tolgoi (ETT), a subsidiary of Erdenes, of the East Tsankhi coal mine, where relocations

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of two winter shelters took place in 2010 and more resettlements were likely to take place as ETT operations expanded. 67. OP/BP 4.01 (Environmental Assessment) and Category B (partial assessment) classification assigned at appraisal remained relevant for both the earlier envisaged technical advice to improve the enabling environment for future investments in the mining sector, as well as for additional safeguards work to be completed in view of the East Tsankhi study. 68. To address the deficiency an Environmental Action Plan was designed, agreed with the Government and formed part of the January 2014 restructuring (see Section 1.7). The two EAP actions required to be performed under legal covenant in the Revised and Restated Financing Plan of February 18, 2014 had been completed and publicly disclosed by the end of 2014. The reports were of considerable value to ETT and were welcomed by both the company and the Ministry of Mines. 69. A third action (preparation of the Cumulative Impact Assessment (CIA)), not subject to legal covenant, and financed by MINIS (another IDA-funded project), was at the time of MSISTAP closing in December 2015 still under preparation. The closing date had been extended from March 31, 2015, through a third restructuring to allow for the time needed to complete the CIA. While a draft CIA was produced in 2015, at the time of completing the ICR in March 2017, the CIA report is still being finalized to comply with guidance of the Regional Safeguards Adviser. It will then be resubmitted for final review and authorization to disclose. The ICR deadline was extended twice in an attempt to be able to reflect on the final CIA in the ICR. After the last extension it was agreed that further extension of the deadlines to report on this compliance issue is not warranted and that the action is on its way to completion. 70. The Bank’s performance on safeguards matters had some deficiencies at entry but was overall proactive. It is acknowledged that revisions to safeguards arrangements were made retroactively at the time of Restructuring. The CIA is considered an important tool for the Government of Mongolia to employ in managing future impacts in the area from various proposed coal developments. While this activity was promised as part of MSISTAP Restructuring, as noted in the Restructuring Paper of December 2013, there was always a risk that MINIS’s different governance arrangements and different priorities could have impacted the speed and efficiency of CIA preparation. Since MSISTAP closed in December 2015, there has been no opportunity to engage the MSISTAP PIU and Project Steering Committee to influence progress of the CIA. Fiduciary Compliance 71. The project complied with fiduciary covenants during implementation. Internal control arrangements were in place, and adequate financial management systems, procurements, and disbursements were maintained. 72. The project maintained a financial management system that provided accurate and timely information on project implementation progress and on whether Bank loan proceeds were being used for the intended purposes. Minor shortcomings in financial management existed but did not prevent the timely and reliable provision of information required to manage and monitor the implementation of the project. The one case of the use of project funds for an ineligible expense resulted in prompt reimbursement upon notification. The disbursement plan was used to conduct variance analysis of budget vs actual on a quarterly basis. The PIU maintained its accounting records on a modified cash basis in dual currencies—USD and MNT using “Infosystem” accounting software. The PIU maintained a designated account (DA) in USD to receive the IDA funds and cover the main project costs to suppliers/contractors with approval from the MOF. The system generated quarterly IFRs in USD, which

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were submitted to the Bank regularly. The audited financial statements of the project were with clean opinions throughout the project lifetime. ISR Ratings for Financial Management were Satisfactory in eight of 10 ISR cycles, dropping to Moderately Satisfactory in June 2011 and March 2013. 73. Procurement was in accordance with the agreed procedures as stipulated in the legal agreement and Bank’s procurement guidelines, with no major deviations. Following a period of learning during project start up, procurement activities were generally well managed, though guidance was required from time to time on the execution of some selection methods. The Procurement Plan was updated on a regular basis to reflect the changing priorities of the project in line with Bank procedures. In a project of this kind, there will be multiple relatively small procurements to be conducted, which can be difficult to administer (for example in conducting and reporting on bid evaluations). This occasionally created bottlenecks which slowed down the overall procurement cycle. At the beginning of the project, some simple procurement methods such as CQS for selection of consultant, and shopping for procurement of goods were not followed properly, compromising the merits of these simple procurement methods. A dedicated mission by a senior procurement specialist was undertaken in March 2012, whereupon these challenges were overcome. The 2012 Procurement Plan was better presented than previous plans, which assisted in procurement monitoring, and, for the first time, was supported by Training Plans. Guidance on the conduct of various selection methods was stepped up, especially with regard to CQS and QCBS procurements. The 2013 Procurement Plan was an example of proactivity and realism, which led to more timely and efficient decision-making, with most of the activities planned for the extension period reaching pre-contract signing stages at this time (with signing pending approval of the January 2014 Restructuring). The ISR Ratings for Procurement were Satisfactory in all 10 ISR cycles (full discussion in Section 5.2 (b)). 2.5 Post-completion Sustainability Sustainability 74. Post completion sustainability will depend on the ability and willingness of the Government to continue and sustain the mining sector reforms which the project was designed to foster. Completion of the project was not followed by any further direct grant/credit support by the World Bank, notwithstanding the original assumptions at appraisal that there would be a flow up project. The Government’s ability and willingness to build on MSISTAP is subject to the same set of policy and institutional risks highlighted at appraisal and experienced during implementation. 75. Policy reform actions taken by the new Government provide some room for optimism. In terms of policy reforms, towards the end of the project timeframe the previous Government adopted the National Mining Policy, amended the mining and investment legislation and began to prepare new sector regulations and guidelines. Several issues that had been acting as impediments to foreign investment were being resolved as the project came to a close at the end of 2015, notably resolution of a dispute with the sponsor of the Oyu Tolgoi copper project which had prevented Phase 2 from being launched. The MPP-led Government established in July 2016 issued a policy program which included a heavy emphasis on promoting mining and mining-related infrastructure projects which had not been making sufficient progress. This implies an interest in attracting foreign direct investment and improving management of the sector. Finally, in January 2017 it committed to review and revise the Mining Law to better implement the National Mining Policy. 76. Institutional strengthening will take many more years to achieve, however, already during the project timeframe the Government began to address institutional weaknesses in directly managing the mining sector. Notable was establishment of a streamlined mineral rights licensing system

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(“mining cadaster”) under MRAM. Further institutional strengthening was examined with inputs financed by the project (both an institutional functional review and the SESA). As MSISTAP came to a close, decisions were made to introduce some changes, notably by creating a National Geological Survey, although the Government has since faced financing challenges to support this. In the areas of environmental and social impact monitoring and enforcement the SESA Action Plan included recommendations for specific regulation and measures to address twelve key issue areas several institutional reform measures, but similarly, implementing such reforms has been slow.5 77. All the project beneficiaries benefited from training programs enabling staff to acquire skills needed for management of the mining sector. This should contribute to sustainability of policy and institutional reforms. In addition, some benefits flowed from the exposure to implementing MSISTAP, especially through the use of the Project Focal Points in project beneficiary institutions, especially on procurement, financial management, project management and financial-technical aspects. Focal Points also gained experience in formulating requests for external assistance and TORs and managing external assistance. Follow-on project 78. Several of the beneficiaries of MSISTAP expressed interest in obtaining additional support (see MSISTAP Closing Workshop report, Annex 6), although GoM has made no formal request to draw on its IDA allocation for a follow-on project to the World Bank to date.6 The key areas of interest, which were identified included:

• continued support on legal and regulatory frameworks for both petroleum and mining, including licensing, license data management, and reports from license holders;

• new assistance for setting up and institutionalizing the National Geological Survey to combine all geological data on Mongolia and become a one-stop shop for investors and end users of geo-data, including consolidation of geo-data and maps, development of portals and setting up of core libraries for mineral and petroleum exploration;

• continued support to tax administration and auditors, including in-depth training on treatment of multinationals for taxation purposes;

• capacity building for inspectors and stakeholders to manage environmental and social impacts of mining and petroleum, including unconventional oil and gas;

• developing mechanisms and a regulatory framework for management of community issues around mining and petroleum projects;

• support for increased local procurement and employment; and • improved management of state owned mining enterprises including refinement of regulation of

such, potential IPOs, and support with attracting financing.

5 The Action Plan recommended actions to address water, land and pasture use, air quality, environmental management, artisanal and small scale mining, cultural heritage, human rights and community participation, health and safety, governance and revenue management, regional planning and transport infrastructure, employment and skills, and technology.

6 At the time of ICR writing, the World Bank is managing a US$450,000 Recipient Executed Grant to support continuing implementation of EITI.

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3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Relevance of Objectives 79. The original PDO was aligned to Mongolia’s economic development priorities, given the prominence of the mining sector and the potential benefits flowing from good sector governance. There was consistent alignment between the broad Government strategies of harnessing mining for economic development and the World Bank’s engagement strategy as reflected in the CPS of the time. When launched MSISTAP was the largest program of multi-lateral development assistance available to the Government in this sector and remained so during implementation. The relevance of the original PDO is rated High 80. Although that portion of the PDO relating specifically to the reform of the state mining enterprise Erdenes was dropped, that did not fundamentally change the nature and relevance of the PDO. Rather it responded to a situation in which it was recognized that MSISTAP was not the most effective tool for achieving this specific reform objective. The revised PDO remained aligned with the World Bank Group’s CPS (FY2013-17) and Mongolia’s Comprehensive National Development Strategy, which identified the mining sector as being front and center in the country’s development.7 The relevance of the revised PDO is rated as High. 81. The combined rating for the relevance of the original and revised PDO is High. Relevance of Design and Implementation 82. At entry the project design benefitted from analytical underpinnings provided by background studies, drew on lessons learned from similar operations in other mineral-rich countries and enjoyed government commitment. Overall the project structure was logical, grouping reforms that would be supported by the project under three components corresponding to lead policy making and implementation institutions. 83. However, the project design suffered from several weaknesses that would manifest themselves during implementation. These weaknesses, which are discussed in Section 2.1 of the ICR, included: i) inherent complexity due to its wide scope and multiple beneficiaries, ii) unrealistic expectations about the extent to which the project would be able to influence reforms through the challenging process of policy formulation, endorsement and implementation, iii) a lack of realism as to progress that could be made towards building capacity of regulatory institutions over the relatively short project timeframe when there was no assurance of a follow up project, iv) inadequate mitigation measures to address those risks identified as being high, including excessive reliance on legal covenants, and v) a Results Framework which lacked rigor and would prove hard to employ during implementation.

7 The CPS (Report No. 67567-MN) is entitled “A Country on the Verge of an Unprecedented Mineral-Led Transformation” and the first of three pillars of support is to “Enhance Mongolia’s Capacity to Manage the Mining Economy Sustainably and Transparently”, with two outcomes closely aligned with the MSISTAP component structure: i) “supported the country in developing a regulatory environment, institutional capacity, and infrastructure for world-class mining”; ii) “supported the Government in designing and implementing policies and systems for a more robust, equitable, and transparent management of public revenues and expenditures.”

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84. In the course of its implementation there were several points when project performance challenges were assessed and course corrections made. This included, in sequence, a delayed Mid Term Review (launched in mid-2011) leading initially to a one-year extension of the project life, and then, after delays caused by elections, a further review launched early in 2013 that led to the Level 1 restructuring in January 2014.8 The Mid Term Review identified several of the performance challenges that would subsequently be addressed by the Level 1 restructuring later on (at the time of MTR it was determined that with elections looming it would be difficult to get support for such action). 9 85. At restructuring design of the project was modified to address some of the shortcomings of the original design, especially to reduce the ambition of the project in areas at most risk. To achieve this the element of the PDO at highest risk was removed, while retaining the overarching goals of the project. In addition, legal covenants which were part of the project design at entry but had proven challenging to employ, were either dropped or re-cast. The ambition of several of the result indicators which had been tied to both introduction and implementation of policy reforms was scaled back. Weaknesses in the design of the Results Framework, which had contributed in some respects to limited M&E effectiveness, were addressed. Finally, the project was extended for a further 15 months and an earlier safeguards oversight was remedied. 86. In the course of implementation but outside formal restructurings, additional measures were taken to address project implementation challenges. These included modifications of the composition of the Project Steering Committee and, in selected areas, employment of parallel technical assistance interventions to progress the objectives of the project in the context of the World Bank’s wider engagement in Mongolia. 87. The course corrections made during implementation helped to achieve more realism even through the project remained inherently complex and continued to be exposed to risks of policy headwinds. In view of the efforts made to address the shortcomings of the original design and considerable pro-activity shown in employing reviews and restructurings, the overall relevance of project design and implementation is rated as Substantial. 88. The overall rating for relevance, given a high rating for relevance of the objectives and a substantial rating for relevance of design and implementation is Substantial. 3.2 Achievement of the Project Development Objective 89. As the original PDO was formally revised at the time of restructuring in January 2014, a split assessment has been conducted of the achievement of the PDO against both the original and revised project objectives. I. Period Prior to Restructuring

8 A final restructuring to extend the project life from March 31, 2015 to December 31, 2015 took place when all programmed project activities had been completed and had the narrow objective of allowing time for one action under the Environmental Action Plan to be completed (financed by MINIS not MSISTAP).

9 The Restructuring Paper made explicit reference to the pros and cons of proceeding with a Level 1 restructuring at that time.

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90. During the period from project effectiveness in May 2009 to project restructuring in January 2014, 78.5 per cent of the project grant/credit was disbursed. 91. The original PDO was “To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meet the needs of the public sector, industry, and civil society, including the operation of Erdenes MGL LLC according to international standards associated with commercial entities”. All but one PDO Indicator and three Intermediate Outcome Indicators linked to the operation of Erdenes, addressed achievement of the overarching objectives of the project. The assessment below looks at the overarching project objectives first and the specific objective relating to Erdenes second. 92. Progress towards achieving the PDO before restructuring was made mainly in the group of reforms to strengthen the capacity to manage mining revenues, and develop economic and sector policies (Component 1). There was, in particular, progress made to strengthen tax administration undertaken by the General Department of Taxation and to review and revise tax and other fiscal instruments used to regulate foreign mining investment. The project financed delivery of advice and training in specialist fields, such as international taxation (e.g. tax treaties), income tax, VAT and tax audit (PDO Indicator). On macro-fiscal issues, the Ministry of Finance employed advice financed by the project on prudent macro-fiscal policies including the use of sovereign wealth funds to support stabilization and savings objectives (PDO Indicator). By comparison, there was little progress made in developing mining sector policies, including preparation of a clear position on state equity participation in mining and setting up institution that could serve as a source of independent policy advice. 93. Limited progress was made before restructuring in the group of reforms to improve regulatory capacity to manage mining sector development (Component 2). The MTR noted that several aspects of the mining policy landscape remained uncertain in the run up to a national election in mid-2012. This provided an uncertain basis on which to embark on institutional capacity building since the mandates of several regulatory institutions remained unclear. As explained in Section 2.2(b) the protracted process of reviewing the Mining Law resulted in amendments only being considered by Parliament in 2014. This had a knock-on effect on the preparation of detailed regulations, which could not be concluded until after the changes to the Mining Law were in place, and on the clarification institutional mandates related to compliance monitoring and enforcement, especially of environmental and social requirements (PDO Indicator). Further, although significant progress was made to improve the cadastral system for managing of mineral rights by MRAM (PDO Indicator), mineral licensing remained under moratorium pending the changes to the Mining Law. In addition, the project was unable to proceed with support to develop a modern, digitized open access system for managing geological data (PDO Indicator) due to restrictions imposed by the National Security Council. 94. Progress towards meeting the objective of supporting the reform of Erdenes faced increasing headwinds, most especially following the 2012 elections. As explained in Section 2.2(b), Government policy was less supportive of governance reforms and commercialization of Erdenes which the project had been designed to support (PDO Indicator). This prompted the decision to change the PDO and to make consequential changes to legal covenants and the Results Framework. 95. Taking into account the uneven pattern of progress across project components towards meeting the original PDO in the period prior to restructuring, even after benefitting from a project extension, the outcome is rated as Modest.

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II. Period after Project Restructuring 96. During the period from project restructuring in January 2014 to project closing in December 2015, the remaining 21.5 per cent of the project grant/credit was disbursed. 97. The revised PDO was “To establish key pieces of the policy, fiscal, legal, regulatory and institutional framework for the mining and extractive sector that meet the needs of the public sector, industry, and civil society”. This retained the overarching objective of the original PDO but removed the specific objective linked to the performance of Erdenes. The corresponding PDO Indicator was dropped but seven other PDO Indicators remained, albeit revised in some cases as part of the redesign of the Results Framework (refer to Table 1). 98. Notwithstanding restructuring of the project to reduce the ambition of the project in selected areas at most risk progress after restructuring remained challenging. At project closing, four of the seven PDO Indicators in the revised Results Framework had been fully achieved, two had been partially achieved and one not achieved at all. In terms of intermediate outcome indicators, several of which had been revised at the time of restructuring, six of 16 were fully achieved, eight partly achieved and two not achieved at all. To help analyze these outcomes, Table 3 groups PDO and Intermediate Indicators by Component of the project, since the components correspond to the main groups of reforms which the project supported. It links each PDO indicator to the area of reform and explains the significance of the intended reforms. 99. The area of reform in which most progress was achieved by closing was strengthening the capacity to manage mining revenues, and develop economic and sector policies (Component 1). This is the aspect of the project that had already performed the best prior to restructuring. By closing one of three PDO Indicators was fully achieved relating to the tax audit of mining companies. The two other PDO Indicators were only partially achieved. However, this is because the progress achieved in the operations of the Fiscal Stability Fund and in public disclosure of mining revenues allocated sub-nationally was only indirectly attributable to MSISTAP financed activities. The World Bank was engaged in supporting macro-fiscal policy reforms through a number of instruments alongside other donors. MSISTAP contributed expert analysis and benchmarking which was supportive of these wider engagements. Two of the five Intermediate Outcome Indicators were fully achieved, two partially so and one not at all, the latter being relevant to the establishment of a source of independent policy advice. 100. Reforms to improve regulatory capacity to manage mining sector development (Component 2) continued to lag, although there was a notable easing of policy barriers towards the end of the project. By closing only one of three PDO Indicators had been fully achieved, one partially achieved and one not achieved at all. Only two of eight Intermediate Outcome Indicators were fully achieved, a further five partially achieved and one not at all (relating to regulations of company reporting). Two of those only partially achieved related to the preparation of detailed regulations which had had to be delayed until after adoption of the Mining Law amendments in 2014. This meant that by project closing there were regulations on mine closure, health and safety that had been prepared with support from the project but had yet to be promulgated. 101. In spite of the challenges faced by Component 2, some notable milestones achieved in the latter stages of the project. The project supported preparation of Mongolia’s mining sector Strategic Environmental and Social Assessment (a first of its kind), which was launched by the Ministry of Mining and the Ministry of Environment and Green Development. The Ministry of Mining also completed a comprehensive institutional assessment, in accordance with the relevant re-dated legal covenant. Since both these milestones occurred late on in project delivery the process of reviewing and endorsing recommendations was still in progress at project closing. As noted in Section 4 of the ICR, interest in

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obtaining support of a follow up project to support implementation of some of the recommendations has been shown by project beneficiaries. 102. Reforms to build state capacity to manage mining equity (Component 3) continued to be supported after restructuring, even though no longer measured by a PDO Indicator. The Intermediate Indicator added at restructuring, requiring quarterly corporate reporting to the Board, was fully achieved, whereas two others were only partially achieved. Although not tied to any outcome indicator, it should be noted that Erdenes was also supported through professional training and participation in the two safeguards actions required to be carried out under the Environmental Action Plan which contributed to the skills needed to better manage state owned mineral assets. 103. The final PDO Indicator, which was intended to measure the inclusiveness and stakeholder acceptance of the mining sector reforms generally, and was therefore cross-cutting, was fully achieved. Stakeholder consultations were undertaken by Government agencies for those pieces of legislation and regulation prepared with input from the project. Examples, include the consultations leading up to the SESA report of August 2014 and those carried out in preparing the institutional assessment conducted by the Ministry of Mining. Also worthy of note are the stakeholder consultations undertaken at the time of the Mid Term Review of the project and the Project Closing Workshop conducted in March 2015 in which a wide range of stakeholders participated to discuss their views on the outcomes of the project. The Workshop Report is presented in Annex 6. Table 3: Achievement of Project Outcomes at Closing

Area of Reform (Project

Component)

PDO & Intermediate Indicators

Achievement by Closing

Significance to Project Objectives

Strengthening the capacity to manage mining revenues, and develop economic and sector policies (Component 1)

PDO Indicator Mining tax audits are completed and assessments raised. (Original)

Fully achieved

Resource rents from non-renewable resource extraction are typically the major contribution of extractives to economic development so there is an onus on the Government to limit revenue leakages by conducting effective tax audits.

PDO Indicator The Fiscal Stability Fund is implemented in line with the Fiscal Stability Law with appropriate guidelines, procedures and organizational support. (Revised)

Fully achieved

Resource rents from non-renewable resource extraction need to be managed prudently to achieve fiscal stability and savings through suitable legislative and institutional instruments.

PDO Indicator Level of mining related transfers from national government to Aimag and Soum authorities is known and publicly disclosed. (Original)

Partially achieved

Transparency of revenue flows relating to non-renewable resource extraction is fundamental to stakeholder verification of the distribution of development benefits from extractives. 10

Intermediate Indicator GDNT tax audit staff trained and competent to carry out mining

Fully achieved

Resource rents from non-renewable resource extraction are typically the major contribution of extractives to economic

10 In parallel, but not attributable to MSISTAP, Mongolia maintained its compliant status with the Extractive Industries Transparency Initiative, through which public disclosures of this information have also taken place.

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company tax audits (Original)

development so there is an onus on the Government to limit revenue leakages by conducting effective tax audits.

Intermediate Indicator Options study prepared based on Review of Double Taxation Treaties. (Original)

Fully achieved

Resource rents from non-renewable resource extraction are typically the major contribution of extractives to economic development so there is an onus on the Government to limit revenue leakages by employing tax treaties with appropriate safeguards.

Intermediate Indicator Sovereign Wealth Fund or alternative revenue stabilization mechanism established. (Original)

Fully achieved

Resource rents from non-renewable resource extraction need to be managed prudently to achieve fiscal stability and savings through suitable legislative and institutional instruments.

Intermediate Indicator Income tax law on mining and supporting regulations drafted. (Revised)

Partially achieved

Resource rents from non-renewable resource extraction are typically the major contribution of extractives to economic development so there is an onus on the Government to limit revenue leakages by employing suitably tailored tax legislation.

Intermediate Indicator Support establishment of mechanisms for preparation and dissemination of independent professional mining sector economic and policy reports (Revised)

Not achieved Policy formulation by the Government on the economic, environmental and social aspects of mining sector development benefits from access to evidence driven and independent policy analysis and provides a channel through which public institutions can be held to account by the public.

Improve regulatory capacity to manage mining sector development (Component 2)

PDO Indicator Cadaster system in place and publicly accessible at the MRAM. (Revised)

Fully achieved

Modern cadastral systems assist the Government to manage the allocation of mineral rights transparently, fairly and efficiently.

PDO Indicator Clear authority and responsibilities for Government mining sector management institutions, especially regarding environmental and social aspects associated with mining activities. (Original)

Partially achieved

The management of extractive industries activity has to balance promotion of investment with protection of the environment and impacted communities, for which clear and effective institutional roles are essential.

PDO Indicator Geological information is digitized and published and readily available in user friendly digital formats. (Original)

Not achieved Open access to geological data assures a level playing field for users of data and forecloses arbitrary or corrupt dealings in data.

Intermediate Indicator Modern Mining cadaster regulations are prepared, promulgated, implemented and monitored (Original)

Fully achieved

Modern cadastral systems assist the Government to manage the allocation of mineral rights transparently, fairly and efficiently.

Intermediate Indicator A strategic environmental and social assessment (SESA) undertaken, areas for improvement in social (including gender aspects) and environmental regulation are identified and recommendations

Fully achieved

A SESA provides a basis on which environmental and social impacts and issues can be integrated into sector policy formulation and law making so that stakeholder interests, particularly at the local level can be better protected.

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made for updating laws and regulations. (Revised) Intermediate Indicator Ministry of Mining policies reviewed and revised (such as industrial development, coal, unconventional oil and gas, iron ore, and communications). (Added)

Partially achieved

The Government and other stakeholders benefit from having the basic policy objectives different aspect of mineral development set out in public policies as a basis for making law and being held to account by the public.

Intermediate Indicator Preparation of draft model Stabilization Agreement or equivalent for mining and draft model Production Sharing Agreement or equivalent for petroleum. (Revised)

Partially achieved

The Government and other stakeholders benefit from having the basic terms of legally binding commitments set out in model form ahead of negotiation.

Intermediate Indicator Consultation with a range of stakeholders including civil society, community members and the private sector undertaken as part of a social and environmental strategic assessment process. (Added)

Partially achieved

Stakeholder inclusion provides a sound basis for defining policies and ensuring representative institutions are held to account.

Intermediate Indicator Modern mine closure and post closure regulations are prepared and promulgated. (Revised)

Partially achieved

Implementation and enforcement of mining laws benefits from detailed technical regulations in covering a variety of regulatory areas, including mine closure requirements.

Intermediate Indicator Modern occupational health and safety regulations are prepared and promulgated. (Revised)

Partially achieved

Implementation and enforcement of mining laws benefits from detailed technical regulations in covering a variety of regulatory areas, including occupational health and safety requirements.

Intermediate Indicator Modern company reporting requirements regulations are prepared, promulgated, implemented, and monitored. (Original)

Not achieved Implementation and enforcement of mining laws benefits from detailed technical regulations in covering a variety of regulatory areas, including rigorous reporting requirements.

Build state capacity to manage mining equity (Component 3)

Intermediate Indicator Erdenes MGL financial reports are provided quarterly to the Board of Directors. (Added)

Fully achieved

Routine reporting of financial performance is an essential aspect of good corporate governance through which accountability to shareholders and other stakeholders is maintained. In an SOE it provides accountability for the use of public funds.

Intermediate Indicator Adoption of appropriate legal framework for Erdenes MGL including governance and oversight arrangements (Original)

Partially achieved

A robust legal framework and suitable oversight arrangements are essential aspects of good corporate governance through which accountability to shareholders and other stakeholders is maintained. In an SOE it provides accountability for the use of public funds.

Intermediate Indicator Provision of management-related and governance related training events to build capabilities needed within

Partially achieved

A professionally trained management, is an essential aspect of good corporate governance through which accountability to shareholders and other stakeholders is maintained. In an SOE it provides

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Erdenes MGL (Original)

accountability for the use of public funds.

Cross Cutting PDO Indicator Companies and civil society participate in consultation for pieces of policy, legislation and regulation for mining sector thru public fora arranged by the Government. (Revised)

Fully achieved

Stakeholder inclusion provides a sound basis for defining policies and ensuring representative institutions are held to account.

104. In summary, after project restructuring there were some important improvements in project outcomes, however, these were incremental and did not change the uneven pattern of progress that had characterized the period before restructuring across the three components of the project. The reforms supported through Component 1 progressed the most, but those supported through Component 2 continued to lag, even though the policy landscape became markedly more favorable. Consideration also needs to be given to the relatively limited availability of funds available to the project after restructuring (21.5% of project funds) and the short time available to make an impact – March 2015 was the last month of implementation, even though the project was extended to December 31, 2015. 105. In view of the preceding factors, in particular crediting the project with incremental improvements in outcomes as a result of restructuring, an overall rating of Substantial is considered appropriate for the period after restructuring. III. Overall Efficacy Rating 106. To assist in arriving at an overall PDO achievement rating, separate outcome ratings (against original and revised project objectives) have been weighted in proportion to the share of actual credit disbursements made in the periods before and after approval of the restructured project. Based on the determination shown below, the overall achievement of the PDO is rated Moderately Unsatisfactory. This Table 4: Calculation of Weighted PDO Rating

Against Original PDO

Against Revised PDO

Overall

1 Rating Moderately Unsatisfactory

Moderately Satisfactory

Improvement after restructuring, however restructuring was late and affected PDO rating

2 Rating value 3 4 3 Weight (%

disbursed before/after PDO change)

78% 22%

4 Weighted value (2 x 3)

2.34 0.88 3.22

5 Final rating Moderately

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(rounded) Unsatisfactory 3.3 Efficiency 107. The Project Appraisal Document identified three factors which could form the basis for an economic and financial assessment of the efficiency of the project. These were: The calculation of financial return on project investment based on the increased tax assessment resulting from tax audits supported by MSISTAP:

• Levels of investment in the mining sector in the period of MSISTAP, including that made in mineral exploration specifically;

• Several macro-economic indicators of the contribution of the mining sector to the economy in the period of MSISTAP.

• A summary of the analysis follows and full discussion is presented in Annex 3. 108. Tax Assessments: MSISTAP supported the General Department of Taxation to plan and undertake tax audits of major mining companies registered in Mongolia, as well as to finance relevant staff training and the preparation of audit manuals. The sector’s contribution to public finances are substantial. For example, US$30 million was paid in tax by Rio Tinto to the Government after resolution of a tax dispute triggered by tax audit, which would represent a high financial rate of return on the cost of supporting GDT through MSISTAP.11 109. Levels of Investment in the Mining Sector: Notwithstanding the negative trends in investment in the latter part of MSISTAP (especially 2013-14), several of the measures taken by the Government to clarify and strengthen the regulatory framework for mining sector development were either directly or indirectly supported by the project. Further, in the course of 2016 (after project closing) the Government reached settlement with Rio Tinto on the terms for launching the underground phase of Oyu Tolgoi, sending a positive signal to foreign investors and presaging a period of sharply higher investment in the mining sector (some USD1 billion of investment per year in OT Stage 2 for five years). 110. Macro-economic Indicators of the Contribution of Mining: At project appraisal the mining sector already contributed significantly to the national economy resulting in high levels of dependency and associated risks. Overall, mining has continued to make a significant contribution to the economy and high levels of dependency has entailed full exposure to the cyclical nature of global commodity markets and associated price volatility. Added to this is the “lumpy” nature of mining sector investment, in which the fortunes of the Oyu Tolgoi project alone have had a major impact on macro-economic performance. 111. Although directly attributable economic benefits of the project are hard to quantify, examination of a range of indicators suggests MSISTAP had an overall positive impact. Given the relatively low financial investment to achieve this the efficiency of the project is rated as Substantial. 3.4 Justification of Overall Outcome Rating 112. The final outcome rating is a function of the separate ratings for relevance, achievement of the PDO and efficiency. Relevance is rated Substantial, based on high relevance of objectives, and

11 With a project cost of approximately US$9 million the return exceeds three times. The outlay to support GDT specifically was less than US$1 million, implying an even stronger return on investment.

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substantial relevance of design and implementation, driven by shortcomings in the original project design even though the project objectives remained highly relevant to the Government and the World Bank’s engagement program. Achievement of the PDO is rated Modest, which is a reflection of some disconnect between the project’s high ambition and the inherent complexity and risk associated with policy-oriented technical assistance operations, especially when the period available for implementation is relatively short. Efficiency of the project, is nevertheless rated as Substantial since, for a modest outlay, some tangible positive economic impacts were generated. Based on IEG guidance on ICR ratings, the final outcome rating is Moderately Unsatisfactory. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 113. Poverty Impacts and Gender Aspects. MSISTAP, being a technical assistance loan, had very limited direct impacts on poverty alleviation and gender aspects. However, the broader framework for managing mineral and petroleum resources is now largely in place and if implemented in accordance with international good practices, and on a sustainable basis, there should be positive poverty and gender outcomes. The SESA was the first ever thorough examination of sector-wide social impacts and the SESA Action Plan contains measures to address the social sector issues including community benefits and gender aspects. 114. Social Development. During MSISTAP implementation companies and civil society participated in consultations during the preparation of key pieces of legislation and regulation for mining sector through public fora arranged by the government. The SESA was the first ever thorough examination of sector-wide social impacts and the SESA Action Plan contains measures to address the social sector issues including community benefits and gender aspects. Also, work conducted on model community development agreements and financed by the World Bank in parallel with MSISTAP (completed early in 2016) directly addresses the management of community benefits and impact mitigation. Social impact evaluation formed part of the support financed by MSISTAP for Erdenes to develop resettlement policies and plans. This was provided as part of the Environmental Action Plan agreed with the Borrower at the time of the Restructuring in January 2014.

(b) Institutional Change/Strengthening 115. MSISTAP was designed to support the definition of regulatory mandates and assist with capacity building of several institutions engaged in regulating the mining and extractives sectors. All beneficiaries received various training financed by MSISTAP. Particular capacity building highlights are:

• Strengthening the mineral licensing function at MRAM through development of a modern mining cadaster underpinned by improved regulations and processes and installation of a web-enabled cadastral system.

• Strengthening the mineral taxation function at GDT through institutional re-design, staff training and improvement of audit procedures and experience.

• Assisting in the definition of institutional mandates based on functional analysis which resulted, inter alia, in adoption of recommendations to strengthen geological data management by setting up a National Geological Survey.

• Supporting the technical and business skills of Erdenes staff through extensive training and provision of software tools, as well as advice on corporate strategy and technical evaluations of several of its mineral assets. Erdenes’ environmental performance was also addressed by financing preparation of the RPF and RAP, ESMF for the Tavan Tolgoi coal operations.

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• Building the capacity of the MSISTAP PIU in M&E, procurement, financial management and project management. Further, the project management capacity of Focal Points of each of the beneficiaries was strengthened because of the experience gained through the project. This included experience gained in formulating requests for external assistance and TORs and in managing external assistance.

(c) Other Unintended Outcomes and Impacts (positive or negative)

116. At the start of the project, the possible cooperation with IMF and US Treasury on tax administration was not envisaged, but once the project began, the emerging cooperation among the Bank, IMF, and US Treasury greatly enhanced MSISTAP outcomes of the support to GDT.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

117. A workshop of direct MSISTAP beneficiaries as well as other stakeholders was organized in March 2015 once all scheduled project activities had been completed. A full report is presented in Annex 6. Representatives of the beneficiaries presented the highlights of the benefits they had received during project implementation and expressed interest in receiving further World Bank support. There were also open fora to discuss mining sector development past and present and to identify ways forward. This covered a wide range of topics, only some of which were directly related to MSISTAP.

4. Assessment of Risk to the Development Outcome 118. Many of the risks to the development outcome which were identified at entry as substantial or high persist. Notwithstanding mitigation measures included at design, implementation of MSISTAP was impacted by periods during which the progress of foundational reforms identified at the outset stalled, especially in the run up to and after elections. Mongolia’s heavy exposure to commodity price cycles and macro-economic shocks contributed to strong policy shifts, which hindered progress in settling essential elements of the mineral resource regulatory framework. Capacity building aspects of the project were impacted by this unstable environment. 119. Although risks to the development outcome persist the policy landscape in Mongolia is more favorable than it had been for much of the project. Since project closing in December 2015, there has been a further election and Mongolia is facing the brunt of a prolonged downturn in commodity prices. Notwithstanding this, the new MPP-led Government, places particular emphasis on unblocking major mining and mining related infrastructure projects. Higher priority was being given to increasing benefits that flow to the local population from mine development and related infrastructure while mitigating negative impacts of mine development on the environment and communities. It has now proposed to revisit the Mining Law to provide a stronger foundation to meet these objectives. This review will benefit from much of the expert advice, global benchmarking and training financed by MSISTAP. For example, detailed technical regulations on mine health and safety, mine closure and company reporting requirements had been prepared before closing and can inform planned legislative measures. The SESA Action Plan and the Ministry of Mining’s institutional assessment, both financed by MSISTAP, can serve as a good basis on which to plan the Government’s program going forward. Finally, through MSISTAP, technical specialists such as geologists, mines inspectors and taxation specialists are better able to support implementation of legislation following training and exposure to day-to-day regulatory challenges. 120. While risks to the sustainability of mining sector reforms undoubtedly remain the present government’s stated intentions, inputs into Government planning that are now available due to project

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financed activities, as well as the larger pool of trained and competent staff, implies that the risks to the development outcomes of the project are Substantial rather than being high.

5. Assessment of Bank and Borrower Performance 5.1 Bank Performance Bank Performance in Ensuring Quality at Entry 121. Project preparation was carried out with an appropriate number of specialists who provided the technical skill mix necessary to address sector issues and deliver a project design drawing on what was considered then as good practice in this practice area. This included contributions from the Mining Adviser of the extractives department (COCPO at the time of appraisal). The Bank provided adequate resources in terms of staff weeks and funding to ensure quality preparation and appraisal work. A number of alternatives were considered for the project design. Further, Section 2.1 of the ICR notes strong analytical underpinnings and alignment with Government and CPS goals. Notwithstanding these positive features of quality at entry, Section 2.1 also stresses the high level of ambition of the project, shortcomings in risk mitigation measures and weaknesses in design of the Results Framework, which in the course of implementation posed significant challenges and resulted in a Level 1 restructuring. In light of these factors, the overall quality at entry is rated Moderately Unsatisfactory. Quality of Supervision 122. Implementation of the project presented significant challenges which called for intensive supervision and close monitoring of project performance, placing a strain on budget and staff resources. In addition to routine supervision the Bank team undertook a Mid Term Review, one Level 1 restructuring and two Level 2 restructurings. There were seven ISRs issued during the life of the project. These realistically rated the performance of the project both in terms of achievement of development objectives and project implementation, signaling to management when implementation challenges were being faced. 123. ISR ratings were initially Satisfactory (1st & 2nd ISRs), however, they were changed to Moderately Satisfactory on completing the Mid Term Review. This led to the project’s first extension.12

The ISR ratings were reduced to Moderately Unsatisfactory in the March 2013 ISR signaling a need for more substantial measures to address performance. The Bank and the Borrower agreed on the need for a Level 1 restructuring. The ISR ratings remained Moderately Unsatisfactory as the Restructuring Package went to the Board. Following the restructuring there was an improvement of the ISR ratings from Moderately Unsatisfactory to Moderately Satisfactory (May 5, 2014 ISR). Thereafter, until project closing the ratings remained Moderately Satisfactory in successive ISRs. 124. In retrospect there appears to have been a missed opportunity to address deteriorating project performance earlier on in the project on the basis of the findings of the MTR in early 2012. Instead the

12 In addition to the seven ISRs completed and archived during project implementation there were an additional three produced during the extension of the project from March 31, 2015 to December 31, 2015. In this period, there was no further implementation (see Section 1.7).

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Level 1 Restructuring only took place in January 2014 after a lengthy period of preparation. The MTR recommended immediate steps to extend the project and selected project administration changes rather than proposing a Level 1 restructuring. The MTR also recommended, after consulting the CMU, “that the situation after the June 2012 national elections be monitored and options for further action evaluated” (para 68), reflecting concerns that it would be difficult to prepare a complex restructuring in these circumstances. This became the basis for the Management Letter to the Borrower of July 2, 2012 recommending the first extension of the project. 125. In the initial years of the project the TTL was based in Ulaanbaatar. This was a novel arrangement for the World Bank’s extractives practice and enabled close supervision as the project got off the ground. Indeed, the decision of the country team to facilitate this arrangement was applauded by IEG in its 2015 report on the World Bank’s engagement in Mongolia (one of four case studies of engagement in resource rich countries). From 2011 onwards the project TTL was based at Headquarters. In order to sustain the closeness of supervision undertaken previously routine missions had to be undertaken and care was taken to carry out routine reporting. In addition, the Bank team engaged a respected local consultant to serve as a point of liaison from the Ulaanbaatar office, which strengthened supervision. 126. The Bank team monitored fiduciary compliance and made suitable adjustments to project arrangements when the need for these was recognized. Although procurement performance by the Borrower was satisfactory (see Section 5.2) frequent changes of the Bank’s procurement staff, with three different procurement specialists after 2010 (and a change in location each time, from Ulaanbaatar to Beijing and then to Washington D.C. respectively) delayed the completion of some procurement cycles. 127. The Bank team monitored safeguards compliance and made suitable adjustments to project arrangements when the need for these was recognized. In particular, this included recognition that the project had not put in place adequate provisions to address location specific impacts of activities financed by the project under Component 3. Section 1.7(iii) of the ICR details findings of the safeguards review conducted in 2013 and the subsequent agreement on a set of corrective actions under the Environmental Action Plan. 128. Over the course of the project the quality of supervision was generally high and a considerable amount of pro-activity was demonstrated so that overall supervision is rated as Satisfactory.

(c) Justification of Rating for Overall Bank Performance 129. With a moderately unsatisfactory rating for quality at entry and a satisfactory rating for quality of supervision, overall Bank performance is rated as Moderately Satisfactory in accordance with IEG’s harmonized rating criteria. 5.2 Borrower Performance (a) Government Performance

130. As mentioned in Section 2.1, the Government had shown its commitment to the objectives of the project at the time of project preparation. The Government consistently maintained its commitment to MSISTAP throughout its implementation, notwithstanding the shifting policy landscape. By appointing the State Secretary of Finance to chair the Project Steering Committee, the project was visible at a high level in Government. A high degree of interest and commitment was shown from senior officials of the beneficiary agencies, such as the Minister of Mining / Mineral Resources and Energy, the CEO of Erdenes and the Head of GDT.

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131. While having the State Secretary of Finance chair the PSC anchored the project at a very senior public service level, it did imply some challenges in terms of convening meetings routinely and obtaining his/her attention among competing priorities. As highlighted in Section 2.2(c), contrary to the intention that the PSC would exercise strong policy leadership, thereby connecting the project with the policy making processes of Government, the PSC played only a limited role in this respect. 132. Appropriate levels of review and approval were usually in place; financial accountability and follow-up was observed, and expenditures were duly authorized before they were incurred; and documentation was maintained properly for periodic review. The project did not suffer from any counterpart funding problems, as GoM took timely corrective measures and made appropriate budget provisions. 133. While the Borrower’s commitment levels were high and the project benefitted from good levels of collaboration, project implementation did not benefit from the degree of mining policy leadership that would have enabled better progress in achieving the PDO. In light of these factors, the overall Government performance is rated as Moderately Satisfactory.

(b) Implementing Agency Performance

134. The PIU, which was established as a unit of the Ministry of Finance, along with several other PIU’s managing donor programs, was strongly committed to MSISTAP and over a period of time developed good project management capacity. It was effective in carrying out all fiduciary aspects of project management, such as financial management, and procurement arrangements. An assessment of how fiduciary responsibilities were conducted is contained in Section 2.2 of the ICR. The PIU took some time to develop M&E capabilities which may have been due, in part, to weaknesses in the design of the original Results Framework. The PIU tried very hard to foster consultation and coordination between the relevant Ministries and benefitted from the appointment of MSISTAP Focal Points at each beneficiary agency. 135. Overall, the performance of the PIU is rated as Satisfactory.

(c) Justification of Rating for Overall Borrower Performance

136. With a moderately satisfactory rating for Government performance and a satisfactory rating for Implementing Agency performance, overall Borrower performance is rated as Moderately Satisfactory in accordance with IEG’s harmonized rating criteria. 6. Lessons Learned 137. An important lesson from implementation is that a project such as MSISTAP, which involved supporting the creation of a regulatory and legal framework, should be planned to take place over a more realistic period, in order for critical and sustainable reforms to take place and institutional capacity developed. Factors to be considered include institutional capacity base lines, the adequacy and stability of the governance environment and exposure to a changing policy landscape. At the time of design the Bank team did consider that a second follow up project would be needed to achieve sustainable results. This was reflected in the PDO which made explicit reference to MSISTAP as the “first phase of support”. Over the course of two restructurings, with no additional finance and no change

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to the project component structure, the total project duration was increased from four years to six years.13 Indeed, a project implementation period of six to seven years is increasingly the norm in projects of this kind in the global extractives portfolio. 138. A further important lesson is that if project objectives are to be set which are based on the outcome of a complex multi-stage process of policy formulation, endorsement and implementation then the project design must be explicit as to how inputs financed by the project will be used and, if necessary supported through consultation and policy deliberation. The project design relied principally on continuing government commitment, alignment of goals and effective policy leadership of the PSC. As a backstop, in case this could not be relied upon, certain legal covenants were put in place to require policy action by the Government, notably with respect to the operations of Erdenes. The latter mitigation measures proved to be largely ineffectual as the policy landscape shifted on more than one occasion. There may have been a missed opportunity to employ political economy analysis to gain better insight into what approaches would have been needed to gain more traction in difficult policy areas.

139. A related lesson is that the impact of policy-oriented technical assistance may be enhanced if combined with other financing instruments available to the World Bank. For example, when conditions allow, it is possible to combine policy actions supported through Development Policy Loans with technical assistance interventions to support key agencies advance policy reforms. Another option may be to combine traditional TA with more flexible instruments like P4R. 140. Where a project is intended to support build capacity of regulatory institutions then care must be taken to assure that this support is founded on an enabling regulatory framework with clear institutional mandates. If the latter conditions are not present capacity building goals may not be easily achieved. If the project is designed to support the latter conditions to be established, then any delays in achievement of these conditions, will have a knock-on effect on achieving capacity building goals. There was a strong contrast between the capacity building achieved at the General Department of Taxation in areas of tax administration and tax audit, where mandates were strong, with that achieved at the Mineral Regulatory Authority of Mongolia, where mandates were weak and unclear. 141. Although project procurement was consistently rated as satisfactory, a great deal of supervision effort and PIU pro-activity was required to achieve this. Lessons learned from this include the following:

• It is important to provide training on the Bank’s procurement procedures and policies not only to PIU staff but also for government officials who may play an important role in the conduct of procurements, as in the case of preparing draft TORs and conducting bid evaluations.

• In order to avoid administrative complexity and bottlenecks resulting from numerous small separate contracts in TA of this kind, and ensure consistency and quality, it would be better to consolidate them in bigger packages wherever possible.

• PIU staff should be given training in contract management in order to be able to deal effectively with individuals and consulting firms during the performance of contracts. There should also be

13 In the PAD the Expected Effectiveness Date was November 8, 2008 with closing December 31, 2012. The project became effective in May 2009 and eventually closed on December 31, 2015. However, the project was fully disbursed by March 31, 2015, some six years after effectiveness.

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more clarity as to the authority of the PIU in managing contracts, vis a vis the representatives of the beneficiary agencies.

142. There is a possibility that the disappointing outcome of MSISTAP and other projects of its kind, especially in challenging sectors like extractives, will lead to a conclusion that policy-orientated TA is too risky for the World Bank to support – that conclusion would be unjustified in our view. Drawing on the lessons discussed here it should be possible to better tailor project design to be more realistic and more flexible and therefore more effective.

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7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

Not applicable (b) Co-Financiers

Not applicable (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)

Not applicable

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD millions)

Percentage of Appraisal

Strengthening the Capacity to Develop and Refine Revenue Management, Economic and Sector Policies

3.74 4.82 129%

Improving Regulatory Capacity to Manage Mining Sector Development 2.70 1.34 50%

Developing the Capacity for Management of State Equity 1.27 1.41 111%

Project Management 0.74 0.97 131% Total Baseline Cost 8.45 8.54 100% Physical Contingencies 0.40 Price Contingencies 0.45 Total Project Costs 9.30 8.55 92% Front-end fee PPF - - Front-end fee IBRD - - Total Financing Required 9.30 8.55 92% (b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD millions)

Percentage of Appraisal

Borrower None - - - International Development Association (IDA) 9.30 8.75 94%

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Annex 2. Project Components Table A2.1: Consultancies Financed by MSISTAP - Listed by Beneficiary Description Client Contract Date Economic Advisor to Ministry of Finance on Sovereign Wealth Funds/Stabilization Funds

Ministry of Finance 16-Apr-13

Economic Advisor - Formulation of Benchmark Price for Minerals

Ministry of Finance 16-Mar-12

Local consultant for Formulation of Benchmark Price for Minerals

Ministry of Finance 1-Apr-13

Preparation of Model Double Tax Treaty Ministry of Finance 11-May-11 Preparation of Model Double Tax Treaty and Corporate Income Tax Law

Ministry of Finance 1-Jul-12

Technical Adviser on Management and Planning of Mining Sector Technical Assistance

Ministry of Finance 2-Jul-12

VAT advisor Ministry of Finance 13-Apr-10 Shivee-Ovoo Mine, Power Plant Complex Project Ministry of Finance 11-Jan-11 Development of a Model Petroleum Production Sharing Contact Ministry of Finance 01-Oct-13 Professional Services for Strategic Advice to Structure State Assets in Preparation for Public Listing

Ministry of Finance & Erdenes 11-Jan-10

Training "Auditing Methodology on Mining Sector Taxation" for Tax inspectors of all cities, aimags and soums in Mongolia

General Department of Taxation 9-Sep-11

Petroleum Tax Audit General Department of Taxation 9-Oct-12 Establishing Taxation Units for Strategic Deposits under General Department of Taxation

General Department of Taxation 7-May-10

Consultant Services - International Aspects of Mining Tax Audit General Departments of Taxation 1-Jul-12 Developing manual for using International Financial Reporting Standards, tax audit manual and on-the-job training

General Department of Taxation 06-Mar-14

Strategic Advice to the Government of Mongolia on Opportunities for Industrialization based on Mongolia’s Strategic Mineral Deposits

Ministry of Mining 26-May-10

Preparation of Responsible Coal Development Policy Ministry of Mining 15-May-13 Assist in Preparation of Mining Regulations for: 1. Submission and Approval of Mining Feasibility Studies; 2. Mine Closure Planning

Ministry of Mining 29-Oct-10

Development of Responsible mining criteria Ministry of Mining 30-Oct-11 Public Service Pilot Project: Ministry for Mineral Resources and Energy

Ministry of Mining 25-Jul-10

International Consultant for Functional Review of Institutions engaged in the Management and Regulation of the Mining Sector

Ministry of Mining 16-Apr-13

Preparation of Think Tank Ministry of Mining 12-Apr-10 Local Consultant for Assisting in Facilitation and Supervision of the Mining Sector Strategic Environmental and Social Assessment (SESA)

Ministry of Mining 21-Jan-13

Local Consultant for Assisting in Mining Sector Policy Development


Preparation of Mineral and Mining Sector Investment Guide for Foreign Investors


Consultant Services to Review and Advise on Unconventional Oil and Gas Resource Development Potential and Policy

Ministry of Mining 05-Feb-14

Capacity Strengthening Project for “Mongolian Development Study Center” for Global Economic and Financial Market Research

Ministry of Mining 06-Mar-14

Consulting Services for Strategic Environmental and Social Assessment of the Mining Sector

Ministry of Mining 01-Oct-13

Communications Strategy and Capacity Development Ministry of Mining 23-Jul-13 Conversion of FSU resource data to JORC and 43-101 compliant reserve and resource statements for Strat Deps

Ministry of Mining 11-Apr-11

Preparation of “Management and Monitoring System to Simplify the Mineral Export Procedure of Border Points and Large Mine

Ministry of Mining 10-Feb-14

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Sites Gold Program Ministry of Mining 10-Sep-13 Development of Model Agreement on Development of Strategically Significant Deposits

Ministry of Mining & Erdenes 25-Sep-10

Legal (Tavan Tolgoi Deposit) Ministry of Mining & Erdenes 10-Sep-10 Establishment of an independent web server at MRAM and implementation of online application for the Geology and Mining Cadastre

MRAM 26-Mar-12

Professional services to support Erdenes MGL LLC in preparing for the sale of Tavan tolgoi assets

Erdenes 20-Oct-09

Consulting Services to Establish Erdenes MGL Corporate Structure

Erdenes 14-Feb-11

Feasibility Study for product export through international sea and railway ports

Erdenes 22-Apr-11

Mining Advisor to support Erdenes MGL LLC Erdenes 15-Jul-10 Legal Advisor for Erdenes Oyu Tolgoi LLC on the Project Financing of Oyu Tolgoi

Erdenes 3/3/2014

Geology Consulting Services Erdenes 1-Nov-13 Hydrogeology Consulting Services Erdenes 1-Nov-13 Consulting Services for Strategic Planning and Development Erdenes 06-Mar-14 Resettlement Action Plan and Resettlement Policy Framework for in Mongolia

Erdenes 01-Aug-14

Review of the Erdenes Tavan Tolgoi Environmental and Social Management System in Mongolia

Erdenes 07-Aug-14

Table A2.2: Training Financed by MSISTAP Year Number of

Training Events Expenses (US$ ‘000)

No. of Beneficiaries

2009 12 112 79 2010 30 565 407 2011 34 560 158 2012 15 258 71 2013 28 290 124 2014 5 87 391 124 1872 1230 Table A2.3: Total Financing (US$ ‘000) Consultancies 6093 Training 1974 Goods 383 Incremental Operating Costs 270 Total 8720

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Annex 3. Economic and Financial Analysis The MSISTAP Project Appraisal Document identified several macroeconomic indicators that could be used to appraise the economic and financial impact of the project. In particular, it proposed that the amount by which tax assessments were increased as a result of tax audits undertaken with support of MSISTAP could be compared with the investment made through the project to arrive at a rough financial rate of return. The relevant section of the PAD is set out below: “The proposed Project provides technical assistance and, as such, does not lend itself easily to quantitative investment analysis or to the calculation of net present value (NPV) or economic rate of return. However, some macroeconomic indicators can be projected and compared with present performance, in particular (a) annual investment for exploration by mining companies; and (b) increased fiscal revenues from the expected increase in sector exploration and development activities, increased ASM production, and increased tax assessments from tax audits. While any figure must be considered highly speculative, an estimate of US$5-10 million per year seems a feasible range from the audits alone, which would result in a financial rate of return from the proposed Project of 65-125 percent. There are no major financial issues under the proposed Project.” The sections below provide the information relating to the time of project completion (2015) that can form the basis for economic and financial analysis of the project during its implementation. This covers:

• The calculation of financial return on project investment based on the increased tax assessment resulting from tax audits supported by MSISTAP;

• Levels of investment in the mining sector in the period of MSISTAP implementation, including that made in mineral exploration specifically;

• Several macro-economic indicators of the contribution of the mining sector to the economy in the period of MSISTAP implementation;

• Selected indicators of wider social and economic impacts on the populations of mining regions of Mongolia.

Tax Assessments Under Component 1(vii) MSISTAP supported the General Department of Taxation to plan and undertake tax audits of major mining companies registered in Mongolia, as well as to finance relevant GDT staff training and the preparation of audit manuals. At the time of project appraisal this capacity did not exist. During the course of the project GDT undertook the audit of two major mining companies (PDO Indicator 3), which were conducted in 2014. Records of government revenue receipts are available for the years 2010 to 2015 in annual reports issued by Mongolia Extractive Industries Transparency Initiative. These show (Table A3.1) that over this period total receipts increased from MNT1.1 to MNT1.7 Trillion before falling to MNT 1.4 Trillion in 2015 (approximately US$750 million). Most of the changes can be attributed to i) the start of construction and then beginning of full scale production operations of the Oyu Tolgoi mine in 2010 and 2014 respectively and ii) the evolution of copper, gold and coal prices over the period. Disaggregated data shows that corporate income tax paid by mining companies in 2015 amounted to MNT217 billion of total revenues. Other substantial sources were mineral royalties, import duties and payroll taxes. The largest payers of corporate income tax are Oyu Tolgoi LLC and state-owned Erdenet Mining Corporation LLC. These are the companies that were subject to GDT tax audit in 2014.

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Table A3.1: Tax Receipts from Mining, 2009-2015 (bnMNT) 2010 2011 2012 2013 2014 2015

Mining Tax Receiptsa

1137 1380 1344 1594 1706 1422

Mining Share of Tax Receiptsb

36% 31% 27% 27% 26% 24%

a. EITI Report, 2015; includes both mining and petroleum related taxes b. Ministry of Finance; includes both mining and petroleum related taxes It would be inappropriate to directly attribute the size of corporate income tax payments to those audits, nonetheless, the data does provide an indirect indication of the sums of money at stake when conducting audit. Of particular note is that the assessment of income tax in 2014 in relation to Oyu Tolgoi by GDT resulted in a tax dispute, with Government seeking to enforce an assessment of US$130 million. That tax dispute was finally settled in September 2016 with an award by the tax court of US$30 million of taxes due. These amounts are large in relation to the investment made through MSISTAP as a whole, and, in particular, the financing to support GDT, implying a very high financial rate of return. Levels of Investment in the Mining Sector During the course of the project the mining sector underwent substantial cycles in which investment rose and fell sharply. The most significant increase took place between 2010 and 2012 after the launch of the Oyu Tolgoi copper-gold mine construction coupled with rapid expansion of coal supply. But there was a sharp contraction between 2013 and 2015, as capital outlays by Oyu Tolgoi fell, Chinese coal demand declined, commodity markets slumped and foreign investor sentiment turned bearish. FDI peaked at US$4.5 billion in 2012 but in 2014 was less than US$0.5 billion. By the time that MSISTAP closed, the mining industry globally had endured four consecutive years of price declines and severely scaled back its investment commitments. In the case of Mongolia, the challenging global environment was compounded by a dispute with the Oyu Tolgoi project owners over the conditions for moving from the initial and relatively short-lived open pit phase of the mine to the long-life underground phase of the mine. Rio Tinto put the project on hold, thereby deferring capital expenditures of the order of US$1 billion per year over five years. Notwithstanding the negative trends in investment in the latter part of MSISTAP, several of the measures taken by the Government to clarify and strengthen the regulatory framework for mining sector development were either directly or indirectly supported by the project. These have been documented in the ICR and in ICR Annex 9. Of note was the completion of the country’s first national mining policy, amendment of the mining law and the lifting of a moratorium on mineral licensing, all of which took place in 2014-15. Further, in the course of 2016 (after project closing) the Government reached settlement with Rio Tinto on the terms for launching the underground phase of Oyu Tolgoi, sending a positive signal to foreign investors and presaging a period of higher investment in the mining sector. Mineral exploration precedes the development of mines and is typically highly sensitive to market and policy signals. During the course of the project mineral exploration activity remained well below potential, not only for the reasons cited above in relation to investment generally, but also because from 2010 to 2014 the Government implemented a moratorium on issuing new exploration licenses. This, coupled with confusion generated by the “law with the long name” on conducting exploration in certain environmentally sensitive areas, meant that exploration work took place at a subdued level during most of the project life. This is demonstrated by the data in Table A3.2 on exploration licenses issued and exploration expenditure. The moratorium was lifted in 2014 and licenses began to be issued again in 2015. Pent up demand is reflected in the large number of awards made in 2015, and rising expenditures would

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be expected to show up in 2016 data. MRAM reports that the surface area of country under license increased to 9.5% by the end of the first quarter of 2016. Table A3.2: Selected Indicators of Mineral Exploration Activity, 2009 – 2015

2009 2010 2011 2012 2013 2014 2015 Exploration Licenses Issued

550 145 0 0 0 2 697

Exploration Expenditure (MNT bn)

n/a 173 300 326 150 160 105

Macro-economic Indicators of the Contribution of Mining At project appraisal the mining sector already contributed significantly to the national economy resulting in high levels of dependency and associated risks. Table A3.3 shows how that contribution evolved from 2009 when the project was appraised to 2015 when it closed. Overall, mining has continued to make a significant contribution to the economy and high levels of dependent have entailed full exposure to the cyclical nature of global commodity markets and associated price volatility. Added to this is the “lumpy” nature of mining sector investment, in which the fortunes of the Oyu Tolgoi project alone have had a major impact on macro-economic performance. Table A3.3: Selected Indicators of the Contribution of the Mining Sector to the Economy, 2009 - 2015

2009 2010 2011 2012 2013 2014 2015 % of GDPa 19.5 21.5 19.3 16.4 14.9 17.1 17 % of Industrial Outputb

59 58 64 63

% of Exportsc

81 90 91 88 89 88

% of Domestic Revenue

36 31 27 27 26 24

% of Foreign Direct Investment

71

% of Formal Employment

3.5 3.3 4.3 4.4 4.6 3.7 4

a. Mongolian Statistical Yearbook b. Mongolian Statistical Yearbook c. Ministry of Finance; includes petroleum exports By project closing, mining was responsible for the lion’s share of the extractives contribution to the economy. Mining dominated exports, industrial production and foreign direct investment and constituted an important share of government revenues. It is notable that the revenue contribution of the sector (in percentage terms) peaked early in the project life and thereafter was more subdued due to falling commodity prices. This was reflected in lower valuations for royalty and lower profits resulting in smaller income tax payments. Nevertheless the Ministry of Finance projects a rising revenue contribution in 2017 and beyond.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Allison Berg Senior Operations Officer GEEDR

Bryan Christopher Land Lead Specialist /Team Leader (2010-2012 and 2015 thru completion) GEEDR

Graeme Hancock Senior Specialist/Team Leader (preparation and early supervision) GEEDR

Ekaterina Mikhaylova Senior Specialist/Team Leader (2013-2014) GEEDR

Helen Ba Thanh Nguyen Program Assistant GEEDR Claire Louise Greer Operations Analyst GEEDR Genevieve F. Boyreau Senior Economist SACBT Giovanna Dore Environmental Specialist EASRE - HIS Feng Ji Safeguards Specialist GENDR Songlig Yao Safeguards Specialist GENDR Jianjun Guo Senior Procurement Specialist GGODR Peishen Wang Safeguards Specialist GENDR Youxuan Zhu Safeguards Specialist GWADR Gantuya Paniga Senior Program Assistant EACMF Dulguun Byambatsoo Consultant GGODR Enkhzaya Chuluunbaatar Consultant SEGOM Sudarshan Gooptu Lead Economist GMFDR Charles A. Husband Consultant GEEDR Lhagvasuren Ochir Operations Officer EACMF Maria Lourdes Pardo De La Pena Senior Counsel LEGCF Giovanni Bo Counsel LEGES Gerelgua Tserendagva Procurement Specialist GGODR David I Sr Financial Management Specialist GGODR Haixia Li Sr Financial Management Specialist GGODR Lhagvasuren Ochir Operations Officer EACMF Gerelgua Tserendagva Procurement Specialist GGODR

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(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY08 26.76 203,320 FY09 4.45 21,802

Supervision FY10 11.65 86,046 FY11 11.43 98,791 FY12 10.28 77,839 FY13 12.03 89,620 FY14 21.94 98,253 FY15 22.73 145,682 FY16 9.90 43,674

Total: 131.17 865,027 Supervision/ICR

Total: 131.17 865,027

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Annex 5. Beneficiary Survey Results

Not Available

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Annex 6. Stakeholder Workshop Report and Results

MINING SECTOR INSTITUIONAL STRENGTHING TECHNICAL ASSISTANCE PROJECT: Closing workshop minutes

The closing workshop was held in March 2015. Main objectives were: 1. To get feedback from the participants on MSISTAP performance; and

2. To take stock of the participants’ views of the main challenges still facing mining sector

development in Mongolia and what is needed to address them. 24 attendees from direct beneficiaries of MSISTAP such as Ministry of Finance, Ministry of Mining, General Department of National taxation, MRAM and Erdenes, 14 attendees from the international donor organizations as well as 26 representatives of mining sector non-governmental organizations and private entities attended.

The workshop was moderated by Mr. Enkhbayar - Head of Division for Economics and Investment, Ministry of Mining. Opening speeches were from:

• Mr. Dorjsembed - Head of Development Finance and Debt Management Dept, MoF. • Mr.Nergui - Head of Division for Mining Policy, Ministry of Mining introduced “Role of Mining

Sector in Mongolia’s development” • Mr.James Anderson - World Bank Country manager introduced Workshop objectives. • Mr.Bryan Land - Task Team Leader, WB presented MSISTAP overall performance. • Head of PIU M.Enkhbat presented MSISTAP objectives and results.

Panel: Feedback of beneficiaries. What benefits did the project bring to your organization?

Presenters from beneficiaries:

1 B.Telmuun Officer of MoF

2 G.Tamir Senior officer of MoM

3 B.Badral State inspector of GDNT 4 E.Аmartuvshin Specialist of MRAM 5 J.Tumurpurev Deputy Director of Erdenes Infrastructure, Production and

Technology Division 6 S.Аshidmunkh Deputy Director of Erdenes OT company

Open Forum

Director of Erdenes Oyu Tolgoi LLC Da.Ganbold expressed his personal opinion. I would like to express my gratitude to the World Bank for its support rendered for performance of activities within a short period of time. We had number issues we were not aware. Such projects are highly required for our

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country for a certain period of time. Let’s talk with regard to Oyu Tolgoi project, which is one of the mega projects in Mongolia. It’s already been 4-5 years since signing of agreement for this project and 1 year since operations are stabilized. Therefore, we have number of items to learn, remedy and modify. We have number of issues to consider for implementation of subsequent mega projects. Agreement for Oyu Tolgoi at initial stage had more than 2,000 pages; while, deposit agreement for a deposit which requires investment of more than US$ 10 billion with total mine-life of 100-150 years consists from an agreement with more than 100 pages. We developed it with intention to agree principles to apply on few pages. Erdenes Mongolia LLC and respective ministries should develop sample agreement and standard. The World Bank is highly experienced on this matter and we will need cooperation. ТАN coalition

• 3 foreign citizens who supposed to repay tax were pardoned and released from prison. • We have purchased 11tn of gold in 2013 and 14tn in 2014. What percentage in total gold

exported? • Is bonus mechanism for tax inspectors still exist?

G.Tamir (MoM) replied: Prior to amendment to the Minerals Law in 2014, extraction of gold has declined as well long-named law has affected on it. Approximately 5t of gold were sold in 2013 and 13,5t in 2014 which is caused by changes to the royalty. We cannot provide you data on gold export. The Bank of Mongolia purchases all extracted gold in compliance with applicable laws and procedures. B.Badral (GDNT) replied: SGS company shall repay its taxes. With regard to bonus to tax inspectors, local tax authorities execute an agreement with their local governors and get bonus if they over fulfill collection of tax income. It does not infringe any effective law. The GDNT does not interfere in such issues. It is carried out under full power of local authorities. The auditing organization shall present its conclusion to the Parliament. You should refer to this information. Exporters’ Association NGO 1/ Who initiated closure of MSISTA Project? Was it Ministry of Finance or World Bank? When we accessed the website of the project, it says that investment is not completed yet. Mostly, foreign consultants were recruited to provide service for the project. There was little opportunity to engage local specialized organizations and business entities. Were they selected in accordance with requirements of the World Bank? 2/ Income plan of the state budget cannot be implemented. The project to study benchmarking price was implemented at the Ministry of Finance which intended to enhance planning of budget income. Project might be implemented properly. It cannot be realized on practice. Plan issued by the Ministry of Finance is not fulfilled during last 3 years due to reasons such as coal and etc. Who monitors performance of the project? M.Enkhbat (Project Coordinator) replied. The project was commenced for a specified duration at specific funds. The project shall complete on March 31, 2015. Total expenditure of the project is 97% to present. With regard to selection of consultants, it is discussed at the Steering Committee. In accordance with a request of the client and applicable TOR, one of the main requirements was to select foreign and national joint consortium. We encouraged engagement of national consultants. We provided opportunities for national consultants to improve their qualification as result of cooperation with foreign experts. B.Telmuun (MoF) replied: With regard to benchmarking price, companies are willing to pay taxes imposed on sales income. Prior to consulting services, price for copper, coal and molybdenum was highly discrepant. It became efficient upon benchmark price was applied.

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Mr. Enkhbayar (Head of Division for Economics and Investment, Ministry of Mining) presented “Mining policy and Government Strategies” Open Forum Its topic was “What challenges still face mining sector development and how should they be addressed” Representatives P.Оchirbat - Adviser of Geology and Mining School, Technical University D. Tsogbaatar - President of Mongolian National Union of Certified professional, consulting engineers of Mining Industry: B. Chinzorig - Dean of Geology and Mining school of Technical University M.Davga – Senior lecturer of Geology and Mining school of Technical University М.Enkhbat – PIU coordinator Bryan Christopher Land – Task Team Leader, World Bank

P.Ochirbat - Consultant of Geology and Mining School, Technical University (former president of Mongolia): We need to discuss mining policies together. It is one of leading sectors of Mongolia; however, are we looking forward to develop it or prohibit it? We have issued state policy on minerals. 80% of activities to enforce this policy is comprised of mechanisms to monitor and prohibit actions. Is mining policy proposed by the Government a development strategy or restriction strategy? Foreign and national investors don’t understand it. The state policy should be explicit for citizens, formulated in more supportive form and accepted. Despite permanent operation of the Government, it cannot ensure proper enforcement of policies due to phases with total duration of 4, 2 or 1 year. We need to have a firm base. Engagement of NGOs is highly activated. We should not ignore their activities and regard as an opposition. We should discuss discrepancy in understanding to come to common one. We should announce to our investors that we have common position. When license-holders get a license and make investment, they are not allowed to conduct operation at local area. We should enhance our legal frame which incurs risk to foreign investors of Mongolia to make investment and are kicked off bearing their risk. We should have a single and transparent rule with high ethics accepted at international level and understood by stakeholders. Once we start a game, rules should not be modified. We should carefully review whether a given region has infrastructure and if local communities have interest, if there are any market or not prior to make selection of a region. We need some policies to consider knowledge of miners. There should be some incentive mechanisms from the state М.Davga (Geology and mining school of Technical University): Situation of miners is quite difficult. We have lost a peak time to gain some income from mineral export. We have advantages when peak of mining development is passed and started to settle down. The state started to listen to voices of miners. NGOs are at position to have some understanding and speak out at certain level. The miners were considering that they could gain money despite legal framework; however, they started to review legal framework when profits and income are declining despite their enormous efforts. It is our advantage to see it in more appropriate way. I am not satisfied as MSISTA Project is closing, this project spends funds and engaged researchers to develop mining institution. Disorder at mining sector is over and new era of professionalism started. Currently, the ministries have already made their policy decision. With regard to policy, could we ensure its performance 100%? To my personal opinion, several environmental regulations are missing with regard to mine closure. If the Ministry of Mining and World Bank work together on development of this institution further, we need to formulate a legal framework within 1-2 years as per policy. The Mining Policy Council established makes some alleged decisions. We just focus

53

on current issues only. We should establish a single institution with purpose to resolve issues for a term of 10-20 years. D.Tsogbaatar-Head of Mongolian National Union of Certified professional, consulting engineers of Mining Industry: The World Bank provides high contribution through its recommendations and assistance to a specific sector. MSISTAP has been successfully implemented; however, no priority issues of our country were included. Probably, it was inefficient due to restructure took place at some ministries and agencies. The mining sector in Mongolia has been developing for more than 90 years. We have a number of highly qualified and experienced staff equivalent to expatriate employees or some who can teach to foreigners. However, we cannot engage them. I request the World Bank to engage national experts and employees in its subsequent projects. We have more than 30 independent associations engaged in mining issues. Our association was established to ensure integrity of these organizations from which 20 associations joined us as a member organization. Our association has more than 400 member experts and consulting engineers who have experience of 15-50 years in the mining sector. We could mobilize them as they have proper knowledge on conditions of Mongolia, they will provide appropriate recommendations in line with the practice. The associations will focus on provision of appropriate understanding to people about mining through its joint efforts. We expect to sign cooperation agreements with respective ministries. Main Guideline on Mining Sector till 2020 is adopted. I propose to provide consulting service on how to spend funds elicited from the mining sector for beneficial sectors jointly with the World Bank. B.Chinzorig-Dean of Geology and Mining school, Technical University: Priority projects including mine closure, benchmark price etc., have been implemented in the framework of this project. Information about implementation of the project was not accessible for public. We should enhance dissemination of information with purpose to conduct subsequent surveys properly and avoid spending funds and resources in overlapped way. It shall be appropriate to provide information about forthcoming projects in advance. Attention was paid to training and upgrading qualification of employees in the framework of the project. It is important to select appropriate trainees. Some attendants cannot provide information about training due to lack of knowledge after their attendance to training. The World Bank is not willing to ensure participation of national research institutions in its projects. Please pay attention to ensure their engagement in the future. Engagement of the GDNT in the project enabled enhancement of tax environment in the mining sector. The Mining Tax Department with 4-5 staff was established. It shall engage in conducting survey on sustainable development of mining sector, ensure appropriate monitoring, appropriate extraction of resources and performance of standard reclamation activities etc. Mr. Sreeshankar Sivasankaran Nair - World Bank ICR Consultant summed up workshop discussions. PIU coordinator M.Enkhbat made a closing speech.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

Not available

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Annex 8. Comments of Co-financiers and Other Partners/Stakeholders

Not Available

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Annex 9. Environmental Action Plan

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Annex 10. List of Supporting Documents Financing Agreement October 7, 2008 Restated Financing Agreement February 18, 2014 Project Appraisal Document May 28, 2008 (Report No: 43857-MN) Restructuring Paper July 2012 Restructuring Paper December 18, 2013 (Report No. RES12832) Restructuring Paper March 30, 2015 (Report No: RES18555) Aide Memoire May 17, 2011 Aide Memoire October 4, 2011 Aide Memoire December 7, 2011 Aide Memoire June 19, 2012 Aide Memoire December 6, 2012 Aide Memoire March 11, 2013 Aide Memoire May 17, 2013 Aide Memoire December 10, 2013 Aide Memoire March 6, 2014 Aide Memoire October 6, 2014 Aide Memoire April 9, 2015 Archived ISRs 7 cycles Mid Term Review Report April 2012 Management Letter to GoM on MTR May 3, 2012 ESSMA (disclosed) E1862 Master Procurement Plan April 16, 2009 Project Implementation Manual February 2009 Financial Management Manual February 2009 Resolution to Create Project Steering Committee

March 16, 2009

Declaration of Effectiveness May 1, 2009

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Annex 11. MAP

New Document of The World Bank · 2017. 3. 31. · i . CURRENCY EQUIVALENTS (Exchange Rate...

Documents

Transcript of New Document of The World Bank · 2017. 3. 31. · i . CURRENCY EQUIVALENTS (Exchange Rate...