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Development Process of the Second

Compact Agreement between

Government of Mongolia and the USA

Millennium Challenge Corporation

SODONTOGOS Erdenetsogt

Chief, National Secretariat for GoM-MCC Second

Compact Agreement

January 25, 2016

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The MCC - Mongolia

Compact Agreement

Goal: Reducing poverty through economic growth

Approach:

Country Ownership

Policies Matter

Evidence Based Approach

Focus on Results and Transparency

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MCC’s compact development process has changed

significantly since Mongolia’s first compact

• Well defined compact development process

— Economic constraints analysis up front

— Early assessment of social and gender issues and identification of beneficiaries

— Heavy focus on program logic

• Measured timeline for developing and appraising proposed project

— Early reaction to concept notes

— Strong focus on laws and institutions

— Requirement that preparatory studies completed

• Constrained funding environment

• Requirement that partner countries make significant contributions

New process

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Other functional criteria:

Core criteria:

The compact development process is geared to identify

projects that meet MCC’s investment criteria

Fundamental criteria:

Long term sustainability designed so that results can be

sustained over time

High economic impact estimated rate of return (ERR)

well above 10 percent

Strong program logic clear explanation of how project will

produce expected results

Full implement ability design, procurement and

implementation within five years

Impact on poor distribution of benefits favors

poorest households

Defined benefits project participants and benefits

clearly identified

Policy & Institutions projects tackle weaknesses in

policies, regulations and institutions

Alleviates key constraints projects comprehensively

address a binding constraint

Country ownership supports country’s development

plans and strategies

Promotes investment generates substantial

complementary private investment

Proper problem diagnosis linked to binding constraint through strong evidence

Manageable risk profile compliance with MCC’s social,

gender, environmental standards

Measureable metrics includes clear metrics for

measuring progress, results

Implementation-Ready structures, risks and mitigants

rigorously defined

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IMPLEMENTATION PREPARATION

NEGOTIATION PROJECT

DEVELOPMENT PROJECT

DEFINITION PRELIMINARY

ANALYSIS

MCC’s revised compact development process

takes place over five distinct phases

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• 609(g) Agreement

• Country Analysis reports (MCC: Memo on Findings)

Ac

tivit

ies

• Concept Notes (MCC: Opportunity Memo)

• Concept Papers (MCC: Concept Paper Assessment Memo)

• 609(g) Agreement

• Feasibility studies

• MCC: Investment Memo

• Compact

• Program Implementation Agreement

Do

cu

me

nts

• Compact development team created

• Data collected

• Economic, social and gender and business issues assessed

• Public consultations launched

• Compact development team expanded

• Root causes of critical problems identified

• Project concepts defined

• Projects selected and proposed

• Projects defined and TORs finalized

• Public procurements launched, consultants hired

• Feasibility and other studies undertaken

• MCC appraisal of projects finalized

• Technical, financial and legal terms of compact negotiated

• Implementation unit created, recruitment started

• MCC’s Board of Directors reviews

• Compact signed

MCC aims to reach a signed compact with each partner country within 24-27 months

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Constraints Analysis: Overview

• The CA identifies the key constraints to growth and

poverty reduction, which will help identify the focus of

MCC’s investment

• All countries have limited capacity and resources to

address constraints

• Focus on most binding constraints

• Uses Growth Diagnostics HRV methodology developed at

Harvard in 2005

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Summary of Binding Constraints

1. A weak and unstable macroeconomic environment

2. Inconsistent laws and policies, resulting in an unpredictable

business environment

3. Health impacts of air pollution in Ulaanbaatar

4. Costly access to water and sanitation in productive sectors

and poor communities

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Concept Notes

The Concept Note is the general outline of Government’s proposed

program that identifies the problem, summarizes the underlying issues or

conditions that cause the problem, describes efforts addressing the problems

that are linked to the goals of long-term economic growth and poverty

alleviation, establishes a range of potential, alternative approaches to

address the problem, and explains ongoing efforts to address the problem by

the eligible country.

• Based on the Constraints Analysis and additional feedback from relevant

Ministries, UB City government, and the Water Supply and Sewage

Authority of Mongolia.

• Reflects the results from the Root Cause Analysis Workshop (September

21-23, 2015)

• Created with partnership with MCC

• MCC’s Investment and Management Committee will review the Concept

Notes and give approval within 1-2 months

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Concept Note on UB’s Water Shortage and Treatment

• Problem Statement - Ulaanbaatar faces imminent water supply and

treatment shortages

• The proposed projects will allow Ulaanbaatar residents to receive clean,

reliable, affordable water and water treatment services.

• Theory of Changes - If the project can, in the long term, meet water

demand from industries and households, then water supply and treatment

shortages will no longer be a binding constraint

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Concept Note on Wastewater Collection and

Treatment in Ger Areas

• Problem Statement – Wastewater collection and treatment in the ger

districts is insufficient.

• About 60% of households in the ger areas are not connected to the central

systems. This has negative societal and health impacts.

- Needs to be resolved in tie with the city’s redevelopment strategy

• Theory of Change - By improving the quality and network of wastewater

systems and treatment facilities, the living environment in the ger areas will

improve.

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Concept Note on

Economic Diversification

• Problem Statement - The Mongolian economy depends on a narrow economic base and is

vulnerable to external shocks.

— Export concentrated in minerals

— Trade with a single partner

— Over-investment in domestic real estate

— Product space performance and low level of innovation

• The constraints will persist unless Mongolia reduces its dependence on the mineral sector

with strong determination to develop non-mining sectors that can produce competitive and

innovative export products.

• Theory of changes: Promote export oriented, more competitive economic activities under free

market principle by: (i) improving policy and regulatory environment, (ii) developing human

capital, and (iii) fueling capital investment to enhance weak infrastructure

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What Comes After the Project

Definition?

• National Secretariat /Core Team/ developed the Concept Notes to

submit to MCC in December, 2015 which outlines the central ideas

and themes for the areas and sectors where MCC’s funding would be

desirable.

• Once project proposals are finalized and accepted by MCC, the MCC

and the GoM shall start project identification and development stage,

which involves conduction of FSs. At the same time, the two parties

are envisaging organizing trade and investment roadshows to

promote FDI to Mongolia.

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IMPLEMENTATION PREPARATION

NEGOTIATION PROJECT

DEVELOPMENT PROJECT

DEFINITION PRELIMINARY

ANALYSIS

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